Part 3: Revenue scalability: Taking mobile advertising from a multi-million dollar to a multi-billion dollar business, and jumpstarting virtual items and mobile payment

As described in a previous blogpost, we need

– Usage scalability

– Revenue scalability and

– Truly mobile services

to unlock the full potential of the mobile device for consumers and to turn cell phones into the massive interactive platform opportunity for developers that exists.

Today’s topic: revenue scalability.

Mobile advertising is happening, despite popular opinion that it is not. Millions of dollars are poured into mobile advertising already today, and billions of impressions are delivered every month (e.g. for Coca-Cola, P&G, McDonald’s, Dunkin’ Donuts, IKEA, travel sites, …). However, what is not happening is billions of mobile ad dollars, despite cell phones being the medium that allows true “1-to-1 mass marketing” – something that used to be a contradiction in itself – and “cross-platform integration,” as the cell phone the only medium consumers carry with them while they are using other media platforms, from TV to outdoor to radio.

So why not billions? Advertisers need three things in order to shift substantial amounts to mobile: Simplicity, scale, and score.

Simplicity – mobile advertising has traditionally been too difficult to buy for agencies – one phone call needs to be enough for them to buy. The rest is our industry’s problem, not theirs.

Scale – the largest advertisers want to be able to reach 20, 30, 50 million people (uniques, not repeats) before they commit millions of dollars. The iPhone is likely to soon emerge as the first big platform that allows smooth and media-rich integrations into apps and mobile sites with massive scale.

Score – mobile is by definition a highly individual and therefore measurable device, even more so than the internet, as cell phones are rarely handed from person to person (at least in the developed countries where most of the ad dollars are spent), the return path is hard to change, the localization is added. However, only recently, with the mobile web and iPhone app explosion, have good measurement technologies emerged. Now they need to become accepted; that is the real challenge. To advertisers it matters more WHO measures the ROI than the granularity of the measurements.  That is no different from the online and TV worlds.  Very few online research institutes are accepted as the common “media currency” providers that provide a stamp of approval on media data.  In TV broadcasting, it is even fewer (one ;).  In mobile, the current situation is still in the chicken and egg phase: Without large-scale advertiser demand, an undisputed currency provider is hard to create; without clear currency providers, advertisers are hesitant to scale their ad investments.  The way to cut this knot is once again with a highly attractive platform like the iPhone, which can attract substantial ad spending despite a lack of clear currencies for CPM and branding effects etc, because of the obvious user engagement proven by (easily measurable) direct responses from apps and mobile sites.

Virtual items. Virtual items have been a soaring market in Korea and Japan, both online and mobile.  That success has yet to be transferred to the U.S. and other Western markets, but the new, media-richer mobile games on smartphones will offer lots of opportunities to open that revenue stream.  This could be a more significant market than one-time mobile game download revenue.

Mobile payment. For developing countries, the question is not “if,” but simply “when will it be really large.”  Traditional banking is used much less there, and most people do not have PC-based web access, so their cell phone will be their banking and electronic payment terminal.  The more interesting question is developed countries.  Here, the question is “how.”  Mobile payment will only be a serious replacement for cash or credit cards in instances when it is a) simpler, or b) safer, to use.  Paying the taxi with a cell phone will be the less likely use case; cash and credit cards will likely remain easier when you can just hand either one over to the cab driver in a hurry.  But for example,

– on e-commerce players’ mobile sites (think Amazon, travel sites, train tickets), the hassle of typing in the same credit card number again and again is one key holdback for consumers to use their cell phone to buy;

– premium text messaging is a very costly way of buying mobile content (steep charges);

– and online classifieds can be pretty unsafe when you meet your seller in person holding a bundle of cash in your hand.

In other words, to unlock new revenue streams like mobile payment and virtual items, the use cases have to be…  truly mobile.

So in one of the upcoming blog posts, we’ll talk about what creating “truly mobile services” means and why they hold such potential for new startups.

Part 2: Usage scalability: How to reach billions of cell phone users beyond the millions of iPhone users

As described in a previous blogpost, we need

– Usage scalability

– Revenue scalability and

– Truly mobile services

to unlock the full potential of the mobile device for consumers and to turn cell phones into the massive interactive platform opportunity for developers that exists.

In other words, we need rapid growth of open platforms for usage growth; mobile advertising, virtual items and mobile payments for revenue growth; and creative thinking around new services that goes beyond the cell phone as an extension of online platforms.

These three factors combined, will unlock the full potential of the mobile device for consumers.

The good news is, each of the three factors can be driven to at least a significant extent by developers themselves.

Today, let’s talk about usage scalability.

The world has 3.3 billion cell phone users; the U.S. has 263 million subscribers, i.e. less than 10{81781303be4a7739bcc0f23d28564cf924b01b9db0e7a9d8691660072a4e6fc5} of the world; and the most recent numbers showed about 12 million iPhone users globally, and maybe about 7 million in the U.S. (there maybe a few million more now).

What about all the others? The opportunity is tremendous, if we “unlock” it right. On a recent trip I took to some developing countries such as India, Nepal, Bhutan, South Africa and Brazil, I saw in daily life how cell phones are used as the no. 1 interactive platform globally, far above the use of the PC.

Take India. About 60 million people use online PC’s, less than 4 million have broadband access. But 300 million use a cell phone. Every month, 7-8 million new subscribers sign up. That’s 80-90 million new users per year. Up to 600 million more customers could be connected in India in the next few years, in a country of 1.1 billion (assuming a group of 200 million people that won’t be able to afford it). The majority of them use Nokia phones. The iPhone remains a luxury item.

And yet – the floodgates for “open mobile” have been opened by the iPhone. 300 million iPhone app downloads in under 150 days eliminate the old (and popular) discussions about whether or not mobile users really want to do anything else but talking and texting on cell phones.

– Speed of open standards deployment and a few platforms to focus on. Now the next question is how fast the open standards will become more widespread, beyond the iPhone. How quickly will Google’s Android mobile operating system gain traction? The carriers’ biggest power still is in their decision making about which cell phones with which operating systems they sell and promote in their retail stores, which is where most consumers choose their device. In other words, how many Android phones will make it to the stores of the major carriers around the world and how quickly? And how quickly will Symbian (Nokia) phones be truly open? And when will all the other proprietary systems go away? The developer community needs 2-3 platforms they can focus their development efforts on – not 20.

– Powerful browsers for low-end handsets. The next step needs to be the move from “smartphone apps” to “anyphone services.” Good browsers on low-end handsets will be a key to unlock the huge latent demand in developing nations around the world for mobile web services – given that online web services are hardly mainstream due to the lack of PC’s.  Handset makers may want to consider subsidizing powerful browsers in low-end handsets, and open revenues streams on the services side.  This is especially useful in developing countries where some handset makers hold large market shares, but carriers have less control in the market.

In one of the upcoming blog posts, we’ll cover revenue scalability.

Cyriac Roeding joined Kleiner Perkins Caufield & Byers in 2008 as Entrepreneur-in-Residence, to focus on next-generation cross-platform mobile and online venture concepts. Previously, Cyriac was EVP of CBS Mobile, CBS Interactive. He launched CBS Corporation’s (NYSE: CBS) mobile businesses across CBS Entertainment, CBS Sports, CBS News and The CW. In partnerships with technology start-ups, he created U.S. industry firsts such as location-based mobile advertising, mobile video breaking news and sports alerts, and avatar-based mobile games tied to major TV shows. He grew CBS Sports Mobile into one of the Top Ten highest traffic ad-supported mobile websites in the U.S.; created the first virtual reality video gaming experience across TV, online and mobile with “CSI: NY”; and launched the first Alternate Reality Game with full primetime TV drama episode (Numb3rs) and outdoor billboard integration.

Is the iPhone the answer to all prayers and complaints in the mobile startup world?

No, it is not. One phone alone cannot deliver that.

But it is the kickoff to a tectonic shift. Away from an industry structure based on structural and size advantages to an industry structure driven by innovation, consumer choice and software developers. To date, the players owning the customer billing relationship and the infrastructure have been favored (carriers/operators). The iPhone AppStore and its ease of web browsing kick off the shift to an industry structure that unbundles billing and infrastructure from the services running on top of those.

Part 1: The independent developer community for the first time is becoming the mobile innovation powerhouse

Let’s be clear, we are certainly a long way from the form of perfect competition found on the internet, where the best one (or the one kicking off the network effect first) wins, regardless of size. But for the first time, we are truly on our way.

The Silicon Valley developer community is quickly becoming a center of innovation for mobile. That is nothing new for the online world, but it is completely new for the mobile world. In the last decade, mobile innovations came mostly from Europe (especially Finland), Korea, Japan and Taiwan, and some large U.S. companies outside Silicon Valley. The Valley didn’t get into the game because Silicon Valley developers did not have a platform to work with that allowed them to fairly compete against large sized players. The iPhone AppStore changes that dramatically. While an approval process for new apps still exists on the iPhone, the time to deploy apps went from about 18 months to a few weeks. Consumers are responding to the ease of use as well. 200 million downloads occurred in little over 100 days. Suddenly, we are past the (previously very popular) discussion “Do consumers really want to do anything else besides calling and texting on their cell phones?”  The mobile web is also becoming significant. Apple has only been on the mobile market for 16 months, and the iPhone’s web traffic is already exceeding that of the most established smartphone makers.

This is all good. But there are more key steps that need to happen. We need

– Usage scalability

– Revenue scalability

– Truly mobile services.

In other words, we need rapid growth of open platforms for usage growth; mobile advertising and mobile payments for revenue growth; and creative thinking around new services that goes beyond the cell phone as an extension of online platforms.

These three factors combined, will unlock the full potential of the mobile device for consumers.

So, the kickoff to the tectonic shift in mobile has already happened with the iPhone; now it’s about accelerating the shift further.

More on each of the three factors above in upcoming blogposts here.