Remember when the carriers mattered? I don’t mean to be dismissive of the big fat pipes on which all of this modern mobile goodness flows. But there was a time when the content and marketing ecosystem here lived and died by carrier edict. Getting onto the carrier “deck” with a game or “downloadable application” or being featured on the “portal page” was coveted so highly that every provider I knew clamored to get in front of these guys. Now, most of the U.S. Tier 1s can barely get a credible pool of apps in front of their own customers. When the history of mobile media gets written, I trust there will be a chapter just on how quickly and thoroughly the network operators got cut out of the mobile media equation with the rise of smartphones and apps.
As CNN/Money reports this week in anticipation of earnings reports, the smartphone revolution has been dubious for Verizon, Sprint and AT&T in the U.S. -- as these phones, especially the iPhone, require massive and unprecedented subsidization by the networks. The phenomenon presses their margin in an uneven way throughout the quarterly earnings such that the earnings reports look like a rollercoaster ride.
And irony of ironies, their margins get hit most during the quarters of greatest success. AT&T added 10.2 million devices in the last quarter, the company said last week, and in the next breath warned of reduced margins. Verizon said it activated 9.8 million smartphones -- most of them iPhones -- but the company needs to make up about $400 in net costs for each of those units it sells.
And continuing in the weird reverse reality of the wireless world, the “good news” for carriers and their earnings volatility is that smartphones in the U.S. are likely peaking, financial analysts say. Which, for the rest of the ecosystem, translates into less good news as content and marketing can no longer count on organic expansion. In fact, as the smartphone platforms mature, and improvements become more incremental, carriers are less inclined to encourage upgrading.
While the iOS and Android app platforms and richer mobile Web browsing did effectively cut carriers out of the loop five years or so, it was an easy ball to intercept. I have covered the evolution of this medium since about 2004. Network operators always seemed uncomfortable around the idea of becoming media companies. They tended to outsource a great deal of the early downloadable content and portal tasks to third parties. Their reticence about mobile advertising was legion. And they always tended to see media as a backwater of marginal revenues. In the mid 2000s, I remember asking the head of mobile games at one of the most content-focused of the carriers about his mobile content “team.” He chuckled and said: “You mean me and my colleague in the next cubicle?” Carriers were not really invested in the notion that they might be media companies. And to be sure, in the larger scheme of things, the revenue streams represented by the voice and data channels are so massive that in comparison, media and marketing seem puny to these guys.
But what was true then is still true today. The networks are sitting both on the biggest and most granular sets of user data of anyone. They also have maintained a level of trust with the consumer that few others in the mobile content supply chain can rival. We see that leveraged again in recent marketing efforts by Verizon and AT&T, in which users are asked to exchange their data for targeted offers. And there is still an attempt to stay in the content game. Verizon, for instance, has exclusive rights to live stream the Super Bowl via its own app.
But as the smartphone channel matures we may well see the carriers look again at the multiple revenue streams they can cultivate from the new economy that Apple and Google built on the carriers’ infrastructure. All of these Tier 1 companies have enormous marketing relationships across sports teams, celebrities, event sponsorships, etc. They have their fingers in the content world, but they use them to push their core products.
None of them, however, seems ready to make the kind of pivot that a company like Comcast made in acquiring the content channels to ensure they didn’t become just big, fat pipes. I am not convinced that in the long run they will stay on the margins of mobile content as it becomes clearer that their “wireless” voice and data channels may become the most popular and used media platform since TV.