When wireless carriers issue their quarterly earnings reports, the percentage of their revenue that comes from data and content applications isn't a figure they mention right away. Instead, it's something they hold back until the point where they need some good news to fall back on. That's because data applications still represent nothing but good news — 7% or 8% of total revenue that continues to grow quarter by quarter.

At some point soon — perhaps when those revenue percentages enter the double digits on a consistent, industrywide basis — wireless carriers are going to have to get much more serious about data applications, zeroing in on the applications, user behavioral trends and demographic segments that can best increase their competitiveness and revenue.

In this issue of Wireless Review, we look at the applications and application categories that have defined the wireless data business thus far and may continue to fuel its future growth. In this special report, we are publishing exclusive market research data supplied by M:Metrics, the Seattle-based wireless market research firm, that is built on surveys the firm conducted this summer of 41,446 wireless users. M:Metrics uses the survey results to provide data on projected usage by the total U.S. wireless market of more than 196 million users.

The M:Metrics research re-affirms some widely held beliefs about specific applications, while providing hints on where they might be going: Ringtones continue to be among the most popular content applications; gaming interest continues to boom; news and information applications are broadly appealing; enterprise e-mail usage is spreading beyond executive suites; and short message service (SMS) usage is finally taking hold in the U.S.

But, the research results also pose many questions: Has the ringtone business peaked, and will the music industry force an extreme makeover? How can the wireless industry make more money from gaming? Is there an informational killer app? When will mobile messaging service (MMS) usage explode? What will it take to create enterprise e-mail ubiquity?

Wireless users have supplied their opinions, Wireless Review and M:Metrics are presenting them and now it's up to the industry to provide some of the answers to these questions.

Gaming Applications: Game Faces On

For the first generation of video games, making money was easy; quarters poured in every slot. But for the newest generation — mobile game — monetizing a mass market of gamers is a trickier puzzle than Tetris. Despite the growing adoption of mobile video games, a sizable gap still exists between the number of mobile users who play games each month and the number who pay for the pleasure, according to M:Metrics, posing a clear challenge for anyone hoping to make money in the sector.

In M:Metrics' summer survey, about a third of respondents said they play games at least once a month, but less than 9% said they played downloaded games or had any games on their handset. More than 80% said they were either somewhat (15%) or very (65%) unlikely to download a game in the coming year.

“It may be that we need new business models to expand the revenue that's being taken in the game space,” said Mark Donovan, M:Metrics' vice president and senior analyst.

Part of the problem is that most mobile gamers don't want anything more from the experience other than a brief distraction while they're waiting for a plane or bus. That's changing, though. Juniper Research expects downloads to represent almost two-thirds of the $18.5 billion mobile gaming market in 2009. Subscription-based models will become more popular, Juniper said, but won't surpass downloading in terms of revenue.

Women may represent a particularly untapped segment of the mobile gaming market, Donovan said. Although women play more puzzle games on the PC than men do (the simplicity of puzzle games making them a natural fit for mobile phones), men are still 71% more likely than women to download a game in any given month. The industry is still learning how to reach women and is occasionally surprised. For instance, when a host of games, ringtones and wallpaper accompanied the release of the medieval action flick “Kingdom of Heaven” (a ready-made vehicle with which to target the Dungeons & Dragons crowd), the top seller was a wallpaper image of the film's hunky star, Orlando Bloom, shirtless.

Some say technological advancements on the phones themselves, such as location awareness, will help spawn a new generation of more compelling games, citing the bump in downloads seen when phones with faster processing and color screens hit the market last Christmas. In a speech at the Nokia Research Center's Game Day in June, game designer and consultant Greg Costikyan exhorted the mobile industry to enable games to incorporate the unique properties of the mobile phone into gaming. For example, why not let users converse vocally with their opponents in the game? Why not let users challenge a friend to a game by selecting the friend's name from their handset phonebook — and even, if need be, buying a download and sending it to the friend's phone?

“From a user perspective, [mobile phones] are primarily social devices,” Costikyan wrote in a blog recounting the speech. “The ‘mobile game’ [should] depend ultimately on the differences between mobile devices and PCs rather than attempting to simply imitate the video game.”

However, the logistical barriers to Costikyan's vision are enormous, requiring different carriers and game and handset-makers to synchronize billing and user experiences. What's more, many say technological innovation isn't the way to reach a broader mass market because the masses are the last to buy new, gee-whiz phones.

“When you develop a game, you try to get it onto as many handsets as possible,” said Robert Nashak, senior vice president of production for mobile game publisher Glu (formerly Sorrent). “The problem of distribution and handset fragmentation makes innovation more challenging.”

In addition, though a surge of game downloads followed last Christmas' release of more sophisticated phones, those numbers soon settled back into consistency, M:Metrics' data revealed.

Some say the best hope for increasing mobile-gaming revenue will come from improvements in marketing, not machinery. According to M:Metrics' survey, users most typically learn about a game from seeing it on a carrier's game deck, a suffocatingly small space from which to pitch a sale. That should change as carriers follow Cingular's lead, allowing more and more “off-portal” content. In turn, game-makers will have to get creative in how they find eyeballs. For example, to increase the visibility of a stable of games based on Cartoon Network shows, Glu enabled the channel's fans to purchase mobile games on the Cartoon Network Web site. So instead of fighting for attention on a crowded carrier deck, Glu is meeting its audience elsewhere.

“The whole purchase and discovery of mobile content — and games in particular — leaves an awful lot to be desired,” Donovan said. “There's latent growth here for the industry if we can solve this issue in a way that's elegant and easy for consumers.”
— ED GUBBINS

News & Info Applications: The Price of Free Press

News and information services were expected to be early leaders in the wireless data realm to meet consumers' desire for on-the-second sports scores, stock quotes and weather information.

In one respect, news and information services have lived up to those expectations but in another crucial area — revenue generation — they haven't.

“If you look at the number of people that access news and information every month, it's around 19%,” said Mark Donovan, vice president and senior analyst for M:Metrics. “That number is bit surprising because when you look at ringtone purchases and you look at games — you see news and information being more popular than those things combined.”

The catch is that most of the news and information services being used are free, and it's likely those services would decline in popularity if they suddenly carried a price tag, he said.

“Access to information has been the traditional thing we've been looking at for some time — it was almost the foundation of non-voice services,” said David Chamberlain, analyst with Reed Business. “But it has also never really been much of a revenue generator. In fact, it was probably part of why we started realizing that WAP rhymes with crap. Access to basic fundamental information became a commodity — something people came to expect — and there wasn't a great deal of value associated with it.”

To begin associating more value with basic information, service providers and content distributors must provide information that is location-specific and consumer-targeted, Donovan said.

“The experiences that you want to give people on a mobile phone are ones that are not easily duplicated elsewhere, like on your PC or TV set,” he said.

One example of such a service is WeatherBug Mobile, which allows a consumer to type in a ZIP code and receive a menu of the closest weather stations from which to get a real-time feed of current weather and forecast information, including a live video picture. Sprint introduced the Java-based WeatherBug feature in June, delivering specific real-time weather for $2.99 per month.

“People spend a lot of time figuring out what they are going to do and how they are doing to spend their money based on what the weather is going to be,” said Andy Jedynak, senior vice president and general manager of WeatherBug's consumer division.

That explains why weather is the No. 1 type of news and information accessed in the M:Metrics study, with 11.4% of respondents accessing weather information in a given month.

But the key is not to just provide text of a weather forecast, Chamberlain said, because that is information easily found in a newspaper or during a TV broadcast.

WeatherBug has weather stations deployed nationwide, many on the top of local schools, to provide a very localized picture, said Chris Brozenick, director and general manager of WeatherBug Mobile, which also offers WAP-based service through Verizon and SMS text weather alerts through most major cellular providers.

“We are working now to add in what we call location-based technology that will detect where you are, but right now it's based on entering a ZIP code,” Brozenick said. “We are working with Sprint Nextel to do that.”

The more localized and specific the information is, the more it's valued, Chamberlain said.

“You need to give consumers stuff they want to act on — the more specific to that person, their interests and their location at that time, the better,” he said. “Do I want to read a review of ‘A 40-Year-Old Virgin?’ That's interesting, but can I make the next show at the theatre I want to go to? That is far more interesting information. Or how close is the next theater? Those sorts of things are becoming more available.”

WeatherBug Mobile has taken off sharply in the last six months, Brozenick said, in part because wireless service providers have been more aggressively marketing advanced phones that can display the video picture that make the service more interesting.

Hurricane Katrina only heightened that interest, Jedynak said.

“People are getting more and more sensitive to weather alerts and severe alerts — Amber alerts, terrorist alerts,” he said. “They all come through that channel — the design of our brand is to make that ubiquitous.”
— Carol Wilson

Enterprise Applications: On the Trail of E-mail

It may not be exciting, but e-mail is definitely the prize application for the mobilized enterprise. What's more, it's growing out of executive suites to the middle-management ranks.

There's no question that e-mail revolutionized the office desktop. The question is when mobile e-mail will do the same away from the office. All indications, however, point to that revolution beginning as mobile e-mail starts to percolate its way down from the C-level ranks of the enterprise into the hands of regular white-collar workers.

According to M:Metrics' survey, 10.5 million people used a wireless device to access work e-mail at least once in a month. While 10.5 million isn't an earth-shattering figure compared with a service like SMS, which M:Metrics clocked at 67.5 million users, it represents a significant percentage of workers with work e-mail accounts. What's more, the way workers used mobile e-mail is encouraging. Nearly half of those polled accessed e-mail for business every day, and another quarter at least once a week.

While SMS generates a few cents or at most a quarter of revenue for a carrier per use, mobile e-mail, especially consumed on a daily basis, can be a windfall for carriers looking to establish their enterprise offerings, said Mark Donovan, vice president and senior analyst for M:Metrics. He said polling data found that if a customer has a bill of more than $100 per month he's 81% likely to be a mobile e-mail subscriber. People who use their phones as extensions of their desktop e-mail clients are quite simply consuming a lot of data services — even if they're not footing the bill.

“The dirty little secret of the mobile content world is that content is often paid for by someone else, either from a family plan or from your boss,” Donovan said.

One of the key drivers to broader and more frequent mobile e-mail adoption has been the proliferation of push e-mail outside of the high-end corporate ranks. RIM's monopoly on push e-mail has loosened in the last two years, and a dozen companies are now pushing solutions that vary from full network operations center-supported client server gateway platforms to Java-based clients fed by e-mail forwarding. The overall effect has been a lowering of costs for both handsets and service, and it's beginning to become apparent in the amount of devices shipping with push e-mail supported. M:Metrics found a 50% jump between February and July in the number of users accessing push e-mail from a solution that is either native to the device or came with an embedded software client. That's a total of 1.3 million users. Coupled with the 1.8 million accessing e-mail from either push e-mail from a client downloaded after the device was purchased, and that total push e-mail users number 2.1 million.

Sanjay Kamble, Visto vice president of marketing, said that embedding the client software in the device before its ships is critical to uptake in the service. Only with an embedded client can you bill the device as a true push e-mail phone at the point of sale. Visto recently won a major push e-mail contract with Nextel (before Sprint acquired it). Its Java-based client can potentially bring the service to any Java-enabled iDen phone — roughly 7 million of the 15 million handsets Nextel has in service. Nextel is now handling service upgrades through over-the-air synchronization and downloads, and although he claims the e-mail service is doing well today, Kamble said the real sales will begin once Motorola begins shipping the phones with the Visto client embedded.

“Most carriers insist on embedded e-mail clients right out of the box for that reason,” Kamble said.

Those more inexpensive solutions have also created a problem for enterprises, though, said Monica Basso, Gartner analyst. Enterprises formerly passed out BlackBerrys to top executives, controlling every aspect of the mobile e-mail service. Now employees, seeing the benefits of push e-mail from their bosses, have started adopting solutions that bypass the company firewall and send messages without encryption, Basso said.

“There's a growing trend of adoption of wireless e-mail outside the control of companies' IT organizations, driven by increasing demand from mid-tier and low-tier employees,” Basso said. “Most enterprises aren't prepared to extend those capabilities on a mass scale. But a few larger companies are trying to address the problem. They're offering, say, 200 BlackBerrys to the top-tier executives and then offering a not-so-high-end solution to other employees.”
— Kevin Fitchard

SMS and MMS Applications: Media With a Message

After a torrid launch in Europe, followed by a tepid start in the U.S., SMS appears to have finally gone mainstream, particularly with consumers in the 18- to 34-year-old demographic. Those hoping that MMS will follow the same adoption curve may be disappointed.

According to data from M:Metrics, about 37% of U.S. mobile phone subscribers used text messaging in the past month and 45% are likely to use SMS in the next year. However, the numbers drop fairly rapidly for MMS because of a number of factors, particularly interoperability, said Mark Donovan, vice president and senior analyst for M:Metrics. At the same time, as SMS has achieved near-mass-market status because of its interoperability, carriers' brands are quickly fading as a differentiator.

“That's the tradeoff for networks technologies,” Donovan said. “Part of the reason you don't see strong carrier skews is that it's a technology that after many years, interoperability finally has been achieved. From a consumer point of view, when things are interoperable, it just means they work. That opens the door to mainstream acceptance.”

At the same time, many consumers tend to view text messaging as squarely in the domain of communications, while most users still see MMS as something of a cutting-edge service. There's also the issue of handset choices, Donovan said.

“Every kid that gets their first phone is going to be an SMS user,” he said, noting that only about one-fifth of all handsets currently in users' hands are equipped with a camera.

In some ways, though, the lack of MMS interoperability plays into the hands of carriers that want to offer branded service, Donovan said. In addition, as MMS is rolled out, it is being adopted along a slightly different demographic line than SMS with young males more likely to use MMS than females.

“One of the things that's fairly striking with SMS is you don't see really strong gender skews, and you don't see carrier skews,” he said. “SMS is clearly the one that is the most mainstream. You do see some of those skews when it comes to MMS.”

As MMS becomes more interoperable — and users become more comfortable with picture messaging and the like — the market is expected to ramp up quickly, according to John White, business development director at U.K. analyst firm Portio Research. In a recent report, the company predicted that overall messaging revenue would hit $50 billion by 2010 with 2.38 trillion message sent. In the U.S., the company is expecting mobile instant messaging to surpass SMS in both revenue and messages by 2009 or 2010.

“MMS is set to grow everywhere, though never reaching the kind of volumes SMS has reached,” he said. “But as a premium service, MMS should generate substantial revenues in the next few years.”

Helping SMS maintain its status as the most popular messaging form will be a slew of information retrieval services that already have started taking hold in Europe and will migrate to the U.S. Web portals such as Yahoo and Google already have started to take advantage of their vast area of data to create retrieval services. In addition, text voting is quickly becoming mainstream. According to the M:Metrics study, 11.7% of all users have participated in a TV/radio poll in the previous month with a slightly higher male skew.

“When you think about the great work that AT&T and Mobius did with ‘American Idol,’ they're very educative,” Donovan said. “There the only resistance is whether people really want to pay the money for the text message.”

The ancillary applications with MMS haven't quite taken hold just yet, he added.

“In the near term, I see the [SMS and MMS] trends as complementary,” Donovan said. “MMS has a broad set of things you can do with it. What we're predominantly seeing it used for is sending pictures. With regard to text messaging, we're not going to see anything but an increase.”
— Vince Vittore

Ringtone Applications: Peeking Over the Peak

The good news for mobile ringtone applications is that they are among the few early, clear successes across all mobile application categories. The bad news — well, there might not be any bad news for now, but there is general feeling of uncertainty about the future of this market segment. Many industry observers who predicted ringtone downloads would peak long ago may finally be seeing those forecasts come to fruition. Meanwhile, ringtone business models may be set to undergo great change, as traditional application providers are being pressured by music industry giants on one end and by creative do-it-yourselfers on the other.

First, there is the issue of ongoing growth in ringtone revenue. Ringtones have come to be seen as the little application that could, a concept carriers seemed unsure about, but which has become increasingly popular and gained a solid foothold for the fledgling wireless data business. Now, that business is flattening out, according to Mark Donovan, vice president and senior analyst for M:Metrics. “We've seen a relative flatness in the middle part of the year that could be a seasonal effect,” he said. “Has the market peaked? It's one of the most mature applications markets, but there's still some room for growth.”

Wayne Siefried, vice president of marketing for content distributor Tira Wireless, agrees. “We've seen some cooling of the hype around this market but not in the actual continued pick-up of applications,” he said.

Ringtone applications are largely thought of as a youth-focused market segment, and according to M:Metrics' research, subscribers in the 18- to 24-year-old range and the 25- to 34-year-old range are responsible for most of the ringtone downloads. It's not expected that many older subscribers will contribute to the market's growth anytime soon, but the breadth of available applications and the marketing attention paid to ringtones could begin to grow dramatically behind more investment from the music industry.

“For the music industry, ringtones can be a cash cow,” Donovan said, but he noted that even with the introduction of more mobile handsets capable of storing music files, technical and licensing issues remain to be resolved. “Will the industry allow you to move a ringtone from iTune into your phone or will they block that practice?” (The new iTunes-enabled ROKR phone, announced as this story was going to press, doesn't allow ringtone transfers.)

But, Sunjay Guleria, CEO of 411-SONG, a mobile song identification service and ringtone provider, thinks devices like the ROKR will dramatically change the ringtone market. “The more that phones become multimedia devices, the more that music becomes the killer app,” he said.

While the music industry's impact on the ringtone market has yet to play out, traditional providers of ringtones soon could be affected by the growing popularity of do-it-yourself ringtones, Donovan said.

“It may still be clunky, but it's becoming increasingly easy to use software to make your own ringtone,” he said.
— Dan O'Shea