Telcos' Role in Advertising: Some Critical Dos and Don'ts for Operators
We are currently finishing off our report Telcos Role in the Advertising Value Chain with support from Alan Patrick at Broadsight. It has been fascinating looking at the relatively new, but fast-growing, on-line advertising market and the nascent mobile advertising industry.
We have taken a telco-oriented approach to these markets and explored how operators might add value to what already exists (what problems do the Content and Advertising communities face that the telcos could address?) and what strategies they need to adopt to be successful in a 2-sided marketplace.
Telcos & Advertising: A First Step into a 2-sided Marketplace
In a previous post on this blog we defined the Advertising market for Telcos as being one where they could either act as enablers of better digital advertising distribution or one where they themselves provide services and content that are funded by advertising (and thus cheaper for consumers). In another recent post we also explained how Telcos could potentially become all, or part, of a platform bringing Advertisers and Consumers together. Just to clarify how new and different this role is for Telcos, take a look at the chart below:
In the Telco 1.0 world, operators had a simple customer-supplier relationship with their end users and value moved left-to-right with costs on the left and revenue (from customers) on the right. But in a Telco 2.0 world operators will be serving 2 customer groups who want to interact THROUGH operators with each other:
- Advertisers who wish to use operators as a channel for their advertising and receive customer information and ad performance metrics
- End Users who wish to consume content and respond to advertising as well as use traditional operator services. Operator services may or may not be subsidised by the advertising. Operators can choose to provide value to consumers for other people's products and services (e.g. discounted meals) or their own products and services (e.g. discounted/free voice and messaging services) as with Blyk.
Value is created on the right AND left (cost and revenue are found on BOTH sides) and operators have to manage the commercial relationships with two distinct customer groups. Thus far, the closest Telcos have got to a 2-sided market is in distributing content on behalf of content owners for which they receive a margin. But even here it is really a 1-sided market because Telcos pay the content owner (their supplier) for content and receive revenue from their customers. Also, most commentators would agree that this has not been a great success for a number of reasons. Some of these are structural (the market is not hugely attractive for Telcos because the supply-side is very consolidated and consumers have alternative free distribution channels such as the internet). Another reason why Telcos have not succeeded as content distribution channels, even when the market is fragmented such as for games, is poor strategy and execution:
- Too high pricing to content owners making it unattractive for applications developers and content owners to use them as a distribution channel
- Too high pricing to consumers so little content is bought through them
- Lack of an open, standardised content management platform making it expensive to create content for Telcos (especially mobile ones)
The 2-sided advertising market is substantially more complex than simple content distribution because the Advertisers will require substantially more information back from the operators and advertisers will pay operators for access to the platform - they are customers not suppliers. In return for payment, they will seek customer data and ad performance information from Telcos as well as ad-serving capabilities. But if Operators can get the Advertising model right, it could provide the impetus to grow the content market itself by increasing the volume and reducing the cost of content.
5 Strategic Questions
In our new report, Telcos Role in the Advertising Value Chain, we have identified 5 critical questions that operators must answer if they wish to carve out a successful and sustainable platform position:
- What sort of platform is needed to bring advertisers and consumers together - proprietary vs open, make vs buy/partner?
- What products/services/activities to provide in the platform - ad-serving only or a wider range of ancillary services?
- Whether to subsidise Telco products with advertising (ad-funded services) OR help others to reach consumers more effectively (enable others to subsidise their products/services) OR do both?
- How to price services for both sides of the market?
- How to avoid being enveloped by rival platforms?
We will be debating these and other issues at a workshop on 29th March in London as part of the Telco 2.0™ Industry Brainstorm event.
The Advertising day is invitation-only, as we want to get the right people along from operators, internet players and the advertising world. I have sent invitations out to a number of people, together with a link for registering.
If I have missed you out and you would like to attend, then contact me and I will send you the link to the registration page.
What sort of platform - proprietary vs open, make vs buy/partner?
I am not going to give you the STL Telco 2.0 response to all the questions - you can buy the report and/or attend the workshop for that. But let's take a look at the kind of platform that operators might want to develop or participate in.
The first thing to be aware of is that in a platform world scale is king (see chart below). If operators can't develop or participate in a platform that brings together large numbers of uses and advertisers then they will fail (either individually as a company or collectively as an industry).
Scale is particularly important in the on-line and mobile advertising markets for 3 reasons:
- The cost to users and advertisers of having relationships with multiple platforms is relatively high:
- Advertisers cannot justify developing multiple advertising solutions for different platforms, they want a single standard platform which will enable them to maximise reach cost effectively
- Most users will not have multiple telco accounts for broadband or mobile services in order to extract the best ad-funded deals
- The effect of 'The Virtuous Circle of Scale' is strong in this market:
- The biggest platform(s) can offer the best economic incentive to advertisers and users so there is little incentive to go to a smaller platform
- There is little evidence of a strong preference for unique platform features:
- To date, there has been limited evidence that specific users or advertisers have discrete needs that can be served with smaller, differentiated platforms (though this may develop over time with, for example, specific business traveller advertiser platforms springing up)
- Having said this, Google was not first to market with its on-line search platform BUT developed scale by meeting the needs of searchers more effectively than its rivals
We believe that operators have 4 strategic options for developing a Telco advertising platform:
So which is the right one? Well in the report we have a set of structured evaluation criteria and I am not taking you through them all here. But, suffice to say, our view is that if the Telco communities want to go down a proprietary route, then they need to partner with an existing big platform player. We have identified a number of risks with this approach and suggest that if this is the chosen option then Telcos execute this partnership very carefully to avoid being marginalised. Caveat emptor applies when partnering with the internet players in this space.
If operators elect for an open platform and develop a shared set of standards then we believe the upside is potentially higher for them - a bigger slice of a big pie. But the execution risks of this approach are probably higher as delays in developing the standard platform could mean they miss the boat altogether.
I am looking forward to feedback, discussion and debate when we present our research on this at the workshop.