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Telcos in Advertising Value Chain - Threat or Opportunity?

We’re delighted to be working with Alan Patrick of niche consultancy Broadsight on our Ad-Funded Services programme, which we’re running with the GSM Association. (Alan will also be ‘analyst in residence’ in the Digital Home stream at the Telco 2.0 event in March). Alan has been exploring developments in online advertising for many years based on his experience of working with companies like BBC, British Telecom (OpenWorld and Ignite), AOL Time Warner, ntl and UPC and consulting at McKinsey.

Below he gives us ‘Some thoughts on the impact of Online Advertising on the Telco 2.0 Landscape’. He says:

As we know, over the last few years, the penetration of broadband internet has risen rapidly across much of the world (see here for stats). China and India have recently started to catch up, with China predicted to overtake the US about now.

There is a link between Internet pentration, e-Commerce, and Online Advertising which I have described here. As broadband connections have risen, online shopping and e-Commerce have rapidly followed, due to the ease of use. The rise of online advertising has also risen with the rise of online shopping and e-Commerce, up from a very low percentage of all global advertising in 2002 to c 6% by 2006.

This “rush to online advertising” has also had a knock-on impact on online mobile advertising - SMS advertising has been around for quite a while and has grown respectably, but the rise of 3G services has led to a plethora of partnerships (Yahoo / Vodafone for example) in 2006 between Telcos and Search Engines to gain search engine advertising revenues from mobile portals.

However, the sheer scale of online advertising is also potentially a risk for Telcos of all stripes, for two main reasons:

Firstly, a number of new services that Telcos are looking to launch (IPTV, various Mobile multimedia services for example) are finding that competing solutions are using advertising revenue to subsidise the services, thus impacting many of the subscription based business cases that they were often predicated on.

Secondly, a number of non Telco players are adding Telco services as a free (or at least heavily subsidised) adjunct to increase stickiness to their existing businesses (eg Skype / eBay, Yahoo and Google Mobile services, and Apple (no longer an IT company)

The risk for Telcos is clear - outside players will give away for free the services that Telcos need to make money from, as that is their main revenue - and the scale of subsidy now possible from online advertising makes the problem material - and it will only get worse.

So what is a Telco to do?

We will be adressing the overall issues around online advertising in more detail in our upcoming report which we’re producing in partnership with the GSM Association, ‘Ad-Funded Services and Role of Telco in Advertising Value chain’, and which is being jointly written by STL and us Broadsight (available to order now). However, one very interesting area to examine, which we thought would be very fruitful to blog about and get people’s comments on, is the issue of online metrics.

The online advertising media has dramatically changed the need for metrics to measure and understand advertising ROI.

Pre internet it was all so very simple - media was sold to mass audience blocs that were fairly predictable, and Ad pricing was faily simple as well - audience reached, prime (or otherwise) position on the piece of media and standardised targeting data allowed marketers to get fairly predictable results, and relatively unsophiticated feedback methods were good enough.

The early internet took off on the same lines with banner ads, classifieds and those annoying popups kicking it all off. The Cost per Thousand reached (CPM) pricing was a simple yet “good enough” metric. As online experience increased, Cost Per Click (CPC) pricing became the new approach, with advertisers only paying when the customer clicked on the Ad. Click Through Rates (CTR) were initially very high (c 10%) but dropped as customers became more inured to them.

Where it all changed was when search engines, especially Google, started to match the Ad served to what the customer was searching for, with increasingly discrete targeting - the first real low cost, mass production “pull” advertising systems. Differential pricing and then auctions, detailed analysis of the user’s digital footprint all emerged in rapid profusion, until the measures started to move to Cost Per Action (CPA) pricing approaches, such as Cost per Sale made (CPS), and now Cost per Revenue obtained (CPR). Microsoft has now started to trial a next generation system that makes use of user identity demographic data to increase accuracy even more. Add to that the impact of Web 2.0 technologies such as RSS that make established online metrics such as pageviews increasingly inaccurate. See notes here, here and here or even here for commentary on these issues.

Mobile went a slightly different route, via text based sms and (much less so) mms adverts, and as 3G increased penetration there was an increasing focus on internet style search based ads. In 2005 / 6 there has been a large rise in trialling advertising approaches for mobile multimedia, including Mobile TV - but the result is much the same - the increased targeting requires far more discrete metrics

This may be an excellent opportunity for Telcos to create some further value from online advertising.

To run these sort of metrics and services effectively requires large amounts of discrete data, some of which these players do not have at present. Telcos however, because they hold billable user identities (ie detailed demographics) and have been provisioning the end services and measuring their usage, so have a wealth of some of this detailed data. Mobile Telcos can add moving location and on-the-move service usage data.

The first step is to understand its value. The next question is what to do with it. How best to maximise the potential benefit - sell, partner, procure - or something else? We’ll be exploring these issues in our new online survey (live later tonight) and at the Ad-Funded Services Workshop at the Telco 2.0 event in March.

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IMHO, it's a huge opportunity for telcos, and here in the U.S. the most untapped asset has been Yellow-Page publishing business units, and more importantly the telco's long relationship with small local merchants and service providers.

Also, we know that consumers hate irrelevant advertising, and one way to incorporate ad relevance is to use targeting -- utilizing interest-based context, physical proximity, and opt-in permission to contact.

Back in June of 2004 I wrote a column for Telephony on this very topic, relative to Wi-Fi hotspots, and to my surprise the only people who wanted to learn more about my ideas were from Google -- not one single telco contacted me.

Here's the link to the column, and see for yourself that the seed of this notion was planted long ago.

BTW, I trust that you don't mind me sharing my very opinionated comments here.

You see, I've had a deep passion for the Telco 2.0 revival process, and your site is one of the few places where I can engage others who share my interest.

However, telecoms is a tough place to be an agent of change -- there tends to be more ridicule of new ideas, and less encouragement. I tolerate the scorn because I truly love this business (not to mention, after 25 years it's hard to establish deep domain knowledge in another field).

Regardless, people like me aren't welcome at the typical telco, because I'm 'different', and so I'm beginning to accept that my future will likely take a different path as a result.

David - what of course fascinates me is so many Telcos old ofYellow pages just as it started to become extremely valuable - shows a fundamental misunderstanding of how networked media works today.

Being an agent of change is always tough, Machiavelli said it in the 16th century:

"It must be remembered that there is nothing more difficult to plan, more doubtful of success, nor more dangerous to manage than the creation of a new system. For the initiator has the enmity of all who would profit by the preservation of the old institution and merely lukewarm defenders in those who would gain by the new ones."

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