How Free = More Money
Patrick and I spent a few months in 2006 visiting every Mobile Operator in the Netherlands to see if we could convince them to start selling us Location Based Services. We told them that we wanted to be their first customers and that we would love to resell their services for them.
The reasoning was that they wouldn’t be able to sell it themselves because clients wouldn’t be interested unless every operator would offer those services. So we wanted to be the party in the middle who would buy Location Based Services from every operator in the Netherlands and resell those services to companies who needed them. Very similar to SMS wholesale companies.
The main problem we faced was that every operator wanted to make money on Location Based Services right from the start. In fact, they told us that implementing Location Based Services would cost them 1 million and they were happy to start building it for us as long as we would guarantee 1 million in profit (not revenue) within a year.
Since we were talking with 5 operators at the time this meant we would have to guarantee up to 5 million in profit in total. That turned out to be too much of a gamble even for us.
Last week I spoke to someone at a party who told me about how he introduced Voicemail in the Netherlands. It is hard to imagine today but there was a time when we didn’t have voicemail. The operator told him to build and introduce these services within 12 months. Their plan was to offer Voicemail for €2 or €3 a month.
He told them that it would be possible to build the technical back-end but impossible to tie it into accounting within 12 months. The only way to introduce this service within 12 months was to build it and give it away free.
Management was appalled at the thought of giving such a valuable service away for free! They figured they could charge a huge percentage of their millions of users a few euros per month which would mean millions in extra revenue.
But then he made them a simple calculation: if everybody would have voicemail for free then nobody would ever get a busy tone. They would spent longer on the phone leaving a message resulting in a lot more phone calls. Then people receiving the voicemail would have to listen to their voicemail over the phone (more calls) and call back (more calls). And giving it away for free would save a lot of development costs too!
They did a simple calculation and found out that they would make a lot more money if they gave away voicemail for free so they did just that.
The moral of this story is that not every service or project makes a profit right from the start or in the way that you would expect it at first. Giving stuff away for free could actually make you more money than charging for it.
Other obvious examples are Free salty snacks to encourage beer consumption, Free windshield cleaning tools at the gas station and Free newspapers.
Maybe some day the Mobile Operators will come to the same conclusion and implement Location Based Services after all.
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Roy S said,
June 27, 2007 @ 1:44 pm (13:44)
Maybe users aren’t interested in LBS with the taste of advertising?….people are interested in people….and let’s get rid of unwanted advertising, because I’m getting fed up with it. Why do I need LBS in a city? To find the nearest restaurant…that’s just around the corner? Or do I have to be informed that I can buy a pair of jeans with a $/euro 10 discount? In what form do I use LBS today in an UNPLANNED situation? In my case to find the nearest petrol station with help of my navigation system, because my car depends on petrol unfortunately and I depend on my car to get to my destination. What I would like is a location tagging service…a modern form of graffiti….e.g. geo tagging of pictures/notes.
June 27, 2007 @ 1:55 pm (13:55)
Hi Roy, it is always difficult to imagine how any new technology will be used. When TV was introduced they figured its main use would be as a way for people to study. Remote schooling and lectures. Nobody figured it would be used for entertainment or how they could make money on it.
Same for SMS and voice. When mobile phones were first introduced in the US the operators thought there would be a market for 5% of all fixed telephone users.
You just don’t know until you try…
June 27, 2007 @ 6:08 pm (18:08)
I get the salty snacks and beer consumption but what makes the free windshield cleaning tools at the gas station make you do? drive faster? ^_^
June 27, 2007 @ 8:11 pm (20:11)
Mark: The gas station gives away free cleaning tools so you feel better about stopping there which means they get more business. If a mobile operator would start a gas station they would charge you for parking, entry to the shop and cleaning your windshield.
Roy S said,
June 27, 2007 @ 8:43 pm (20:43)
Hi Boris,
what I tried to point out is that every LBS case you read/hear about is based on targeting consumers with a marketing message. What was your plan with LBS?
Can you compare it with marketing messages on the internet or in you mailbox?….the google ads you see after a search on their searchengine are mostly context-aware and sometimes because of that even helpful. The e-mails with a marketing message you receive can be either wanted or unwanted….but when are they unwanted (SPAM)? In my opinion the less the sender knows about you as a person and/or about your state of mind…the more annoying they are.
The problem I have with most webservices being developed is that they mostly want to make money from advertising. I’m a ” trained” ( is that bad?) internet user and 95% of the advertising I don’t notice.
By the way…in 3 years you don’t need the operator to offer LBS because most phones will have GPS.
JeroenvanVelzen said,
June 27, 2007 @ 10:29 pm (22:29)
We have had a LBS server for Vodafone until about 18 months ago. Pricing started out quite ok; 6-12 cents for a location readout. It was used by only one client (www.waarbenje.nl).
12 months ago they increased readouts tenfold to 1 Euro I believe. That putted the client out of business.
Twitter with an automatic location attached could be interesting.
June 28, 2007 @ 6:46 am (6:46)
We are working in the same space in New Zealand. We provide maps and directions to and from anywhere in New Zealand on Vodafone Live. The main problem that we have in this space is that only about 6% of mobile phones in NZ are compatible. As to other services,we want to develop things like web to MMS for maps and directions but are struggling with getting access to that technology through our telco’s.
Personally I’m really excited about the concepts of well managed proximity based marketing and social networking as LBS.
June 28, 2007 @ 10:00 am (10:00)
>The problem I have with most webservices being developed is that they mostly want to make money from advertising.
hear hear, that’s exactly my problem with most ideas. I have a hard time taking anything seriously that, in 2007, still comes up with advertising as their only revenue. I mean, how innovative is that? :-) Next to that, I’m totally fed up with every form of webadvertising, and I guess I’m not the only one. Just two days ago I went to reddit.com for instance of which I thought was quite a respectable webservice. (a project of mine was linked there, as it seemed). Until my browserwindow closed (FF 2.0) and I got a pop-up for a ‘registry cleaning scan’ (I was on a Mac btw). Well, I’m still pissed of about that and I’m telling it to everyone who wants to hear it. Imho there’s no justice in making money if that’s what you do to the people who visit you.
>If a mobile operator would start a gas station they would charge you for parking, entry to the shop and cleaning your windshield.
Well, imho, webadvertising is exactly that. For visiting someone’s site, I get awarded with all kinds of spam. Not a nice way to treat someone. ^_^
(I guess I’m making friends now, right? ^_^)
July 1, 2007 @ 1:21 pm (13:21)
Very interesting post and discussion.
My thoughts:
1) Good analogy. I believe the use of LBS (commercial as well as non-commercial) will drive mobile internet/flat fee usage packages as well as drive up the phone call volumes. As a result, the ARPU will be higher in the end. I do believe the most value is in non-commercial, social networking LBS services. Examples: Crunkie, Twitter/Jaiku, Socialight, Dodgeball, Patholog etc. And these services with integrate fully with all key code vendors using AR technology, QR codes (Kaywa), barcodes, YellowArrows, ShotCodes, infrared barcodes etc.
However, the commercial LBS will be there and accepted as can be seen already as we speak around the world (Korea, Japan, Italy and especially UK). E.g., mobile LBS couponing…..opt-in, permission based, targeted and the dosage/frequency is limited.
2) Cell ID, GPS and LBS. There was a comment on GPS and LBS. I don’t get that point. The location technology is independent of the value of LBS (services!). Both GPS and cell ID (and aGPS, Cambridge Positioning Systems/CPS) are important but it is about the services.
In sum, I agree totally with the points made by Boris.
Roy S. said,
July 1, 2007 @ 2:01 pm (14:01)
@yuri; comment 2)
to offer LBS to the masses you need a technology that is available and can deliver the message to the masses. In this point of time you need the co-operation of the operators to achieve that…..so service you want to offer and the technology used aren’t indpendent. ARPU….such a nice telco term. Augmented Reality isn’t a way to link data to a code, but to integrate artificial objects (computer generated data) and the real world.