Peter Miles, CEO at SubTV, focused on the student community where SubTV provides ad-funded TV offerings to 2.2 million students in the UK (more here). He revealed a few snippets of his deep knowledge about students based on annual qualitative and quantitative research. Of particularly note was the fact that:

1. 90% access the internet daily in 2006 (up from 82% in 2005 and 65% in 2004)
2. 51% of students visit social networking sites each week
3. 99% own a mobile (and 74% ‘would lose their mind if they lost their mobile’)
4. They are VERY good at multi-tasking and filtering - normal marketing messages may not get through

He reiterated Norman’s point about the need to engage with this ‘alien’ culture or risk being swallowed by them.

Concerned that things were getting a bit gloomy, I was relieved that Nick Bassett, Market Research Manager at Vodafone UK did not paint a similar picture of the ‘Youth Tsunami’ coming to wipe out operators. He presented some behavioural segmentation analysis of Vodafone UK’s customer base and demonstrated that an important youth segment, the ‘Tireless Texter’, has the following behavioural and demographic attributes:

• Typically young & single
• Living at home with parents or guardians
• Students or minimum wage employees
• Restricted disposable income
• Spontaneous & fun loving
• Still a bit immature
• Disorganised
• ‘Generation iPod’
• Heavily skewed toward prepay

As their name suggests, they are also obsessive SMS users because this keeps them connected to their ‘tribe’ 24 hours a day (yes, they will happily be woken up in the middle of the night by a text) at a very low cost. In keeping with a trendy and price sensitive segment, they have specific device requirements:

• Modern. Yup, the device must be cool ‘n’ funky.
• Have good quality camera. To capture those young fun-lovin’ moments…
• Include Bluetooth. So those pics and games can be exchanged with friends for free.
• Have lots of memory. To store those illegal music and video downloads.
• An MP3 player. To play those (still) illegal downloads

Nick’s data-driven segmentation of today’s users was, in fact, consistent with Peter and Norman’s message that the youth are demanding new (web-based) propositions and business models that are at odds with operators’ subscription services. He clearly demonstrated that Tireless Texters do all they can to avoid paying and, judging by the size of the bubble presumably representing the segment’s revenue, it is not generating a large proportion of Vodafone UK’s total turnover.

This begged one big question: will the Youth carry this behaviour into their adulthood and, if so, what would the implications for operators? And the answer from panellists and delegates was…we’re not sure…only time will tell…but some changes are clearly afoot. Sorry, can’t be more helpful here.

New Business Models

Ian Henderson, Senior Director of European Digital Business at Sony BMG Music Entertainment, showed how the company is starting to monetise the 6 million (mainly youth) users it gets each month to its various websites through a new service: Musicbox. He explained that Musicbox was designed to:

1. Convert promotional artist web sites into a large music web destination and network
2. Generate new revenue from advertising and commerce
3. Create an important direct-to-consumer communication channel
4. Capture and monetise the internet value created by the popularity of Sony BMG artists and their music

Musicbox consists of a video player for the artist together with content and promotions/advertisements. It also has ‘social networking’ functionality by managing artist-based communities and allowing for user interaction through such things as reviews and voting. Advertisements form the main money-spinner with pre-roll, banners etc. being core pieces of the business model. Currently, Musicbox in Europe receives 4.5 unique visitors a week and 12.4 million page views. It was not clear how much revenue the advertising is currently generating but Ian was bullish about he prospects for the service.

Delegate questions showed wide-ranging views about advertising from sceptical (Advertising sounds great for an internet company but how can an operator cover its costs? Blyk is heading for oblivion surely) to supportive (Not so fast - ringback advertising works in several countries (waiting for an answer is dead time anyway) and listening to ads, e.g. when not communicating, works in both Africa and the USA.)

Alfie Dennen, Co-founder of Moblog UK (a mobile blogging site), also pointed out that advertising and sponsorship were a core part of his company’s business model. But he also explained how, by building a community of users, Moblog UK has successfully managed to charge 3% of its users £5 a month for premium services (higher storage limits for pics and no advertising).

I had asked Alfie to be controversial and he did not disappoint. He listed many things that operators were getting wrong in the Web 2.0-world and things they should do to address this. Observations such as “Your business models need to converge with Internet business models” riled some Delegates who made the point that operators continued to be substantially more successful than 99.9% of internet companies. This was a great way to stir up the debate and Alfie had strong views on how operators could take advantage of the youth-fuelled Web 2.0 phenomenon:

1. Revenue share with network-agnostic services like moblogUK
2. User Generated Content-friendly handsets and packages (e.g. X-series)
3. Subscription to Instant Messaging packages
4. Advertising-supported content
5. Advertising-supported services/portals/platforms
6. Subscription-based platforms (free, but higher tier model)
7. You’re good at connecting people, become the hub

He felt that flat-rate data plans (such as found at 3 and T-Mobile in the UK) were the best way of driving mobile data usage up amongst all customer segments. At STL Partners we agree with this BUT believe that there also needs to be a corresponding variable, value-based revenue stream coming from upstream (from advertisers and content players seeking to distribute their wares via the Telco network) if operators are to cover their substantial variable network costs. Without this, the Broadband Incentive Problem which is becoming an increasing issue on the fixed internet will eventually become a problem for mobile: act now to avoid future problems.

Chris Lennartz, Marketing Director at LogicaCMG, brought the discussion back to operators’ core business: voice and messaging. He explored how messaging is (still) driving mobile data usage - SMS, MMS, email, SMS/MMS alerts and Instant Messaging being the top 5 services for mobile data. He explained how much of this growth would come from Instant Messaging going forward but that SMS would continue to exist since it served a different purpose to Instant Messaging:

• SMS messages - public messaging (available to all and regulated), do not require immediate response (or any at all), for information only
• Instant messages - community-based (available to some only), conversational, require immediate response

He envisaged a world of ‘Intuitive Messaging’ where these and other messaging forms are combined in a single, simple user interface which would allow users to pick when and how they read and respond to messages. He felt that operators should offer a one-stop shop for both forms of messaging but focus on innovating in, and making money out of, public messaging services. Very sensible stuff and one we concur with, although we believe that there are additional opportunities to generate value through the integration of public (Telco-based) messaging with the community (internet-based) services. As one Delegate put it:
“Let’s reserve the name IM for the Internet brands and use the IM technology benefits for enhancing the SMS/MMS offering by introducing SMS 2.0, where seamless interoperability with SMS and MMS is CRUCIAL.”

The Cupboard is NOT Bare

As if to prove that operators are not starved of ideas and creativity regarding new propositions and business models, Martin Duval, Global Director Business Development & Partnerships for Start-Ups & VCs at France Telecom, outlined no less than 5 new Web 2.0 projects that he is driving. This was a whirlwind tour indeed and we all wished that Martin could have had 45 minutes (not the 10-15 minutes we allot to speakers).
One interesting point is that France Telecom is now actively seeking development of new services from start-ups as well as doing this in-house (the old model). Martin recognises that much of the entrepreneurial flair exists…well, with entrepreneurs. His role is to actively develop France Telecom’s relationships with this (VC-funded) group. He outlined 2 ‘made-in’ Orange services - Pikeo and SoundTribes and 3 being developed with start-ups - SMS Jukebox (with ycd.net); Blackmamba.net (with SongSong); and Groundsurf (with Ratleads):

• Pikeo. In beta. A community website for managing and sharing pictures (like Flickr) using mobiles and for mapping their location (like Google Maps). A critical feature here is simplicity and usability: users can upload tagged pictures to Pikeo from their mobile with 1 click.
  (The business model here was not 100% clear but appeared to be increased data usage and stimulation of core voice and messaging services (people want to talk about the pictures). Clearly, there is also the opportunity for advertising.)

• SoundTribes. A music community to allow the long-tail of bands to broadcast their work. Advanced social networking features to enable SMS voting, chat etc.
  (The benefit to Orange is increased use of core messaging services and high customer stickiness.)

• SMS Jukebox. User goes to participating restaurant and can select a song from the menu on their mobile via SMS. User told when song will play and, when played, is charged €1.
  (A niche service but potentially important as it introduces the concept of the mobile as a remote control or hub for managing other services.)
• Blackmamba.net. A community website based around hip-hop and Rap R&B (you can’t get more youthful than that).
  (This looks like pre-release marketing for a Blackmamba.net album due out in September 2007. For Orange this is looking to build customer loyalty and allegiance in the youth segment.)
• Groundsurf. A mobile-controlled skateboard (yes, you did read that right).
  (This has must be a brand-building exercise for Orange, I am sure they don’t expect revenue from this!)

Phil Guest, Managing Director at Habbo Hotel UK, talked about the success Sulake (the parent company) has experienced with Habbo over the last couple of years. Habbo, (for those not up on their Web 2.0 sites) is a community site for the young (13-16 year olds) where users create their own personalised hotel room. They pay Sulake for furniture and other content for their rooms (music etc.) and this, together with advertising, generates the majority of Habbo’s income. Phil put the success of Habbo down to three things:

1. A unique business focus. They don’t try and do hundreds of things but stick to developing the core proposition for their target market.
2. Product Leadership. Strong value-for-money proposition (it is possible to decorate your room for around £3) and focus on providing broad and deep product range within the hotel environment (casual games + instant messaging + social networking + MMORGs)
3. Operational Excellence. Centralised product development means that costs for developing new products are kept to a minimum and they can be rolled out fast across Habbo’s 29 country hotels.

Staggeringly, when Phil announced the launch of Pocket Habbo (for the mobile) there was a muted reception from Delegates. If ever there was an opportunity to explore opportunities in the Web 2.0 space with a leading player looking to leverage the mobile channel this was it…

David Springall, Founder of Yospace the company behind 3UK’s SeeMeTV and O2’s Look at Me service (click here for more on this), talked about the things that have made their platform so successful (and attractive to media players - they were recently bought by Emap). Contributors make videos with their mobile and upload them via MMS to the Yospace platform where they are moderated (by humans) before being posted on the portal. 3 and O2 users can then download and watch the clips.

The service has been enormously successful with Yospace paying out £250,000 to contributors for their content. Dave said that paying contributors has been a critical driver of content volume and quality - contributors can earn several hundred pounds each month for good content which they receive via Paypal. Popular clips automatically rise to the top of the menu, introducing an element of competition from contributors to see who can get the top slots. Another key success factor has been pricing: the clips are very cheap - they start at 10p (which includes data charges) - which makes them a simple ‘impulse purchase’ for users.

Everybody’s Doing It … Operators Can Do It Too

In the last session we had Tomi Ahonen, 3G Author and consultant, and Ronald Klingebiel, Director at the Centre for Strategic Studies of Ashcroft International Business School, talking about where the sources of value lie for operators and how they should take advantage of the youth opportunity. Tomi covered some of the case studies from his latest book, Digital Korea, including Cyworld (a virtual world similar to Second Life and Habbo which was acquired a few years back by SK Telecom). His presentation was packed full of interesting facts about Cyworld:

1. Korean CyWorld used by 95% of the 20 year olds
2. 43% of the Korean population as users
3. Not only kids, adults too, even leading politicians etc
4. The miniroom is an online living space for the minime
5. Music sales 200,000 songs per day, 50 cents each = $109 million annually
6. 30,000 businesses active in CyWorld, offer 500,000 items of content for sale. 40% revenue-share. Not all content created by SK Telecom.

There were many discussions about how relevant Cyworld is to the European and US markets with some delegates arguing that cultural differences made comparisons impossible. This elicited a great response from another Delegate: “Too many people blame some kind of “cultural” difference between Japan/Korea and the West. Rubbish. Kids on Japan/Korea buy the same brands of sneakers, jeans, etc that European and American kids do. Cultural differences are NOT the reason.”

The intense discussions showed that operator management DO believe there is a clear opportunity for Web 2.0 offerings but that execution remains the issue. This led to another hot debate about how to bring these services to market - make or buy (as SK Telekom did with Cyworld) and the branding required for Web 2.0 offerings. Conclusions? Probably that a mixed approach of make-and-buy (per France Telecom) is best and that discrete service branding (similar to KPN’s many brands in the Netherlands) is required as the incumbent Telco brand cannot credibly stretch into these new areas.

But Tomi also reiterated the point made by Nick Bassett at the start of the day that the youth, for all their Web 2.0 activity, are really defined by their SMS activity. They send a receive texts all day (including, apparently, texting through their clothes while in lessons at schools).

Operators have enjoyed the fruits of this SMS growth but in future need to harness SMS and MMS further to support growing user interaction, content creation and digital purchasing:

1. For uploading content - Yospace, moblog
2. For voting - SMS shortcodes
3. For payments - Habbo content
4. For promotions - SMS barcodes and semacodes to redeem digital (and off-line content)

Makin’ Da Money

The potential sources of value available to operators from the Youth segment that recurred during the day were:

• Advertising and sponsorship. We covered this in the advertising workshop on the following day.
• Voice and, in particular, messaging services. Via integration with internet messaging products (like IM) and the use of messaging as a tool for managing content, interaction and payments
• Partnerships and acquisitions. With/of creative start-ups and internet players.
• Continuous innovation. Easier said than done but the need to foster a culture of innovation in the product and customer marketing areas with Operators.

Realising these sources of value involves new business models, new products and services, new customers (for advertising) and new partners. Delegates summarised what operators need to ‘stop doing’, ‘start doing’ and ‘do more of’, as follows:
STOP DOING…

• Being so risk averse
• `Not invented here` syndrome
• Stop talking about unwillingness to invest ahead of demand - if you want to generate equity style returns and ratings you need to behave as an equity investor would.

START DOING…

• Focus on identifying business models that are attractive for investors
• Cooperating with all stakeholders in the field
• Being more confident in your ability to deploy scale to business advantage

DO MORE OF…

• More experimentation
• Standards-based cooperation and standards setting. Need to bang vendor heads together.
• More awareness of how national to markets are radically different in terms of maturity and penetration

We’ll be exploring the Digital Youth segment in more detail at the next Telco 2.0 event on 16-19 October in London. Please contact us if you have case study examples we should cover at the event…