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The Value of Targeting

In addition to driving up the number of impressions, the operator must also strive to increase the value of each impression. This can be achieved by improving the targeting and relevance of the advertising campaigns by employing analysis of detailed information about the subscriber base. Mobile operators know a lot about their subscribers and for many of their customers they know the name, age, sex, location, and calling patterns. This knowledge, and allowing the subscriber to volunteer to make this and other information available for advertising in return for a discount or promotion, will be the mobile operator’s most important asset in the mobile advertising business. By employing the knowledge of the customer, the mobile operator will be able to offer advertising that is more targeted and more relevant than has been possible previously. Delivering advertising that customers want and have volunteered for and being able to target the right advert to the right customer will ensure that the mobile advertising channel is able to drive higher CPM values than other media channels. 

Buying Subscriber Buy-In

The advertising revenue earned from the impressions and the responses from the subscriber is a new revenue stream but it must, in effect, be split with the subscriber. The subscriber must allow the advertisements onto their service so the operator must essentially buy their buy-in. How this is approached depends on many factors but, in general, an operator can either subsidise the subscriber’s voice and message costs – known as Ad Funded Telecom Services (AFTS), can offer a promotion such as free credit or upgrades, or can offer cheaper content. All of these have a cost to the operator that must be offset against the revenue earned from the advertising. 

The first of the options, subsidising the traffic with advertising revenue, is often the model chosen as a starting point by operators because the cost and revenue matching is clear. In this model there is a relationship between the CPM of the advertisement, how much of the market price of the telecom service can be subsidised, and the margin that the operator wishes to earn. If a CPM of $50 USD is appropriate for an SMS advertisement and the operator wishes to earn 30% Gross Margin then the remaining value for one thousand SMS advertisements is $35 USD. This is 3.5c per SMS which means that if the market rate for SMS messages is 7c then the operator can offer half price SMS messages whereas if the market rate for SMS messages is 3.5c then the operator can offer free SMS messages. By understanding the CPMs – and CPCs – that can be earned by advertisements delivered on different media, the operator can make judgements about which services can be offered free, which services can be subsidised, and on which services it is not sensible to implement this AFTS model. 

Further up the Supply Chain

There are other parties in this business are the advertisers and the agencies. The advertisers can be global brands or local merchandisers and they are, depending on their size, represented by creative agencies and media agencies. Some operators with sophisticated contacts and marketing networks may wish to establish relationships directly with the advertisers but more typically the media agency will buy advertising space directly from the operator. This makes sense because the mobile advertising campaign may be just one element of a wider, multi-channel campaign involving TV, radio, print, and the Internet. Furthermore, while the mobile operator sees the campaign as a single event or schedule of events, the media agency may be retained by the advertising brand for multiple campaigns and mobile advertising may figure in all of these campaigns or just a few of them.

Analysing the Return on Investment for the Operator

Through a worked example we will now show how mobile advertising can generate a sensible return on investment for an operator and can contribute additional ARPU. We are going to examine here a model where the adverts are inserted in peer-to-peer SMS and MMS messaging and delivered as a pre-play video once during each browsing session. The subscriber will receive a subsidy on each SMS or MMS that carries and advertisement. 

First we need to set the inputs to the example:

Secondly, we need to set the pricing of the three media channels being employed, set the level of subsidy on each, and determine the return to the operator for each. 

SMS

We will take $ 0.08 as the average SMS price so a reduction of $ 0.04 will be a half-price reduction for the customer. The advertisement price that gives 30% Gross Margin = $ 0.04 * 10/7 = $ 0.05714. So the advertiser would pay $ 0.057 per SMS advert and this represents a CPM = $ 57. 

MMS

We will take $ 0.25 as the average MMS price so a reduction of $ 0.125 is half price. The advertisement price that gives 30% Gross Margin = $ 0.125 * 10/8 = $ 0.15625. So the advertiser would pay $ 0.156 per MMS advert and this represents a CPM = $ 156. 

WAP / HTTP

There is no subsidy on the WAP/HTTP browsing which simply includes pre-play videos. We will set a price for those in the advertising market as CPM = $ 35.

Table 1: Example Inputs

	Market Rate	Subsidy	Gross Margin	Advert Price	CPM
SMS	$ 0.08	$ 0.040	30%	$ 0.057	$ 57
MMS	$ 0.25	$ 0.125	20%	$ 0.156	$ 156
WAP/ HTTP				$ 0.035	$ 35

Diagram 3: Subscriber Sign-up

In the graph we can see that by Q2 2009 we have about 300,000 subscribers opted into the mobile advertising service, with subscribers signing up in a straight line format.  This makes sense when you consider that 25,000 subscribers are assumed to be opting in each month. This is 12 x 25,000 = 300,000. 

Examining the revenues earned in the first operational quarter we have to estimate the average number of subscribers in the quarter. There were zero at the start however 75,000 have signed up by the end of the third month. The mean number of subscribers in the quarter then is 37,500. Taking this number we can work out the revenue earned and subsidy paid for SMS, MMS, and WAP/HTTP advertising for this number of subscribers in this first quarter.

Table 2: Revenue earned & subsidy paid for SMS, MMS, WAP/HTTP advertising

	Subs	Months	Adverts per Month	Advert Price	Advert Revenue
SMS	37,500	3	60	$ 0.057	$ 385 k
MMS	37,500	3	1	$ 0.156	$ 18 k
WAP /HTTP	37,500	3	5	$ 0.035	$ 20 k

	Subs	Months	Adverts per Month	Subsidy Cost	Subsidy Cost
SMS	37,500	3	60	$ 0.040	$ 270 k
MMS	37,500	3	1	$ 0.125	$ 14 k
WAP /HTTP	37,500	3	5	$ 0.000	$ 0 k

Table 3: First year of Advertising Cashflows

The first year of advertising cash flows, following the same pattern, look like this:

	Q2 2008	Q3 2008	Q4 2008	Q1 2009	Q2 2009
	$k	$k	$k	$k	$k
Ad Revenue – SMS	$0	$386	$1,157	$1,929	$2,700
Ad Revenue – MMS	$0	$18	$53	$88	$123
Ad Revenue – WAP/ HTTP	$0	$20	$59	$98	$138
Ad Cost of Discount – SMS	$0	-$270	-$810	-$1,350	-$1,890
Ad Cost of Discount – MMS	$0	-$14	-$42	-$70	-$98

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(from col. 1 • Understanding the Mobile...)

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Table 4: Net cash flows per quarter

The next figures included are those for the wages and salaries (taken as 6% of revenue) and sales and marketing (taken as 5% of revenue). Including these we can work out the net cash flows for each quarter.

	Q2 2008	Q3 2008	Q4 2008	Q1 2009	Q2 2009
	$k	$k	$k	$k	$k
Ad Revenue – SMS	$0	$386	$1,157	$1,929	$2,700
Ad Revenue – MMS	$0	$18	$53	$88	$123
Ad Revenue – WAP/HTTP	$0	$20	$59	$98	$138
Ad Cost of Discount – SMS	$0	-$270	-$810	-$1,350	-$1,890
Ad Cost of Discount – MMS	$0	-$14	-$42	-$70	-$98
Wages and Salaries	$0	-$25	-$76	-$127	-$178
Selling, Distribution and Marketing Expense	$0	-$21	-$63	-$106	-$148
Investment Cash Flow	$0	-$92	-$277	-$462	-$647

We have taken a discount factor of 10% and we will examine the Net Present Value (NPV) result when the investment timeframe is expanded to 36 months. The NPV over this period is $10.9m USD while the undiscounted cumulative net cash flow figure is $13.3m USD. 

In order to calculate the average improvement in the ARPU of the subscribers that have opted in we must take the average number of subscribers over the 36 month period, 450,000, and divide it into the undiscounted cumulative net cash flow figure. The result is $29 USD. This is the amount by which each subscriber’s revenue is increased over the 36 months. Averaging the amount over the 36 months we get $0.82 USD per subscriber per month. 

Table 5: Percentage impact of Mobile Advertising on ARPU

Comparing this figure against a variety of locations we can determine the percentage impact of mobile advertising on subscriber ARPUs.

Operator	Mean Blended ARPU – Q4 ’07 USD	Percentage
Vivo, Brazil	$ 16.10	5.1%
Telefonica, Mexico	$13.32	6.2%
Vodafone, Egypt	$ 11.94	6.8%
Celtel, Nigeria	$ 14.00	5,8%
Wind, Italy	$ 27.65	2.9%
O2, UK	$ 49.11	1.7%
Vodafone, India	$ 8.84	9.3%

Source: WCIS + Data

Here we can see that there is a significant and useful increase when compared against the blended ARPU of the operators in most cases. It is worth noting, however, that mobile advertising is probably going to be focused on those subscribers that would be interested in receiving advertising in return for a subsidy or promotion. These will tend to be the low ARPU subscribers on the operator’s network and they will largely tend to be pre-paid. If we take the above increase in ARPU of $ 0.82 USD and compare it against the prepaid ARPU of a UK prepaid subscriber rather than the blended ARPU figure for the UK that we took above then we see a different impact. The ARPU of a UK prepaid subscriber in 2006 was £ 8.92 [h] (= $17.51 USD) so the ARPU increase would then be 4.7%. Comparing this against the blended result for the UK above of 1.7% we can see that the percentage impact of mobile advertising on prepaid ARPUs is likely to be up to three times higher than on the blended result. So, rather than impacts of 5% and 6% as above, we are likely to have ARPU improvements of between 10% and 20%. 

Clearly this analysis is dependent on a wide range of assumptions but it is certainly worth noting the significant impact here of mobile advertising revenue on prepaid, low ARPU subscribers.

Steady Stream?

There is some discussion about whether this new revenue stream will be volatile in the face of soft economic conditions or whether it is a resilient source of future growth and earnings. The latter half of 2007 was a period in which high oil prices and tight credit conditions constrained business growth and subdued commercial optimism. Even so, while some traditional advertising spend fell during this period, Internet display advertising rose by 17.7% compared with a year previous [i]. Certainly, operators will be happy to have spread their risk by adding a revenue stream that is not dependent only on telecommunications spend and is actually tied to the marketing spend of all other sectors. 

Looking Forward

Vodafone have stated that their revenues from data, fixed location services, DSL, and mobile advertising will be 20% of their Group revenues by 2010 [j]. In addition many operators have already started earning significant revenues from mobile advertising with other operators, beginning trials, and starting to issue RFPs and RFIs. There is no doubt that the time has come for mobile operators to take advantage of this new revenue stream and to work with the advertising industry – the new customer base – to build a sustainable business for future growth. •

June 2008

If you would like to receive more information about Jinny Software or discuss how they can help you with mobile advertising, please contact them at: 

Jinny Software Ltd., 29 North Anne Street,
Dublin 7, Ireland.

Tel: +353 1 887 2626
Fax: +353 1 887 2692
Email: info@jinny.ie

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Footnotes

[h] Ofcom Report ‘The Communications Market 2007’

[i] TNS Media Intelligence, 4^th December 2007

[j] Vodafone Annual Report 2007

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