Tug of wares

With billions at stake, congloms and carriers fight over the future of mobile content

The entertainment congloms and major wireless carriers may be entering the CTIA confab Wednesday still very much in the courtship phase.

But they’re already fighting over money like an old married couple.

At February’s 3GSM convention in Barcelona, Warner Bros. rocked the harmony of the mobile content biz — both domestically and abroad — when the conglom announced that it will start its own mobile Internet site to distribute TV, video and even films to mobile phone users — a move that lessens the company’s reliance on wireless carriers.

Warner officials plan to launch this site in time for the June release of “Superman Returns,” with games, ringtones, wallpaper and clips themed around the film on offer.

Other congloms are being coy about their off-portal plans. But they’re undoubtedly anticipating the outcome of Warner’s autonymous approach.

The biggest challenge to the fledgling U.S. mobile content market may come with a cultural and economic clash between mobile carriers and content providers.

Carriers are accustomed to receiving large chunks of a transaction; when you mainly traffic in voice, after all, there aren’t a lot of partners you usually need to share with.

But the game changes when content comes into the picture. Nets and studios incur costs from production, talent and rights clearances. And they generally have a sense of ownership. Many entertainment execs tend to believe that mobile carriers are essentially distributors, entitled to low double-digit fees but not much more.

So far, content companies have been acquiescing. The margins for carriers have been so prosperous that one major mobile company boasts that it earns $6 dollars in monthly mobile revenue per subscriber from downloadable content.

A typical business transaction looks something like this. Say a company sells a clip of a TV series or news program for a dollar. If a network is working with a carrier, that carrier will collect as much 60 to 70 cents.

That leaves a content company with only about 10 or 20 cents for the dollar transaction — not bad for a new business, but not thrilling when you’re used to new platforms, like DVD, which offer margins upward of 50%.

“If people are going to go to the phone instead of the cinema or DVD, we want to maintain a return on this,” said Justin Richardson, Warner’s director of European wireless business development.

For now, the studios and carriers are publicly maintaining civility; entertainment companies say they’re happy to have a new partner, and mobile carriers say they couldn’t sell any services without content.

Privately, though, they’re lining up their arguments.

Carriers say they merit the large chunk because it’s their expensive networks that shoulder increasingly bandwidth-heavy products like games and video. What’s more, without their phones and service, customers would have nowhere to watch these programs.

Carriers also say they bare more of the customer satisfaction burden. “U.S. customers tend to blame the carriers if it doesn’t work out,” notes Sprint director of data product marketing John Burris.

Content companies, meanwhile, say that if they’re building a nascent market using original entertainment and expensive production models, they can’t do it on threadbare margins. “There are a lot of thorny issues,” says one entertainment exec. The telcos “don’t always understand the investment (content creation) takes.”

And the content firms are doing more than just talking about it.

Increasingly, entertainment congloms are attempting end-runs through off-portal or direct-to-consumer efforts that will allow customers to buy content from independent portals instead of using the carriers’ portals, or decks.

These off-portal moves can take a number of forms — a credit card transaction off content providers’ own site, a purchase from a traditional Web aggregator like Yahoo, or so-called shortcodes that allow purchases directly from phones.

Whatever the method, the idea is the same: Let customers still use their phone to view content, but limit carriers’ involvement — and profit participation.

Congloms are buoyed by Asia — and to a lesser extent, Europe — where off-portal transactions are thought to account for nearly 75% of the market.

Of course, these end-runs have limits. Even startup off-portal plays like Zingy.com, which work directly with talent, use the carriers for billing purposes. (Execs say customers are more likely to buy content services if they appear as simple line items on their monthly carrier bill.)

And entertainment firms can widen their margins without going off-portal by simply keeping production costs lower. (This may explain why, unlike Europe and Asia, the U.S. has less original content, which tends to be more expensive.)

Meanwhile, some carriers are beginning to realize that off-portal deals may result in more business overall, even if they’re getting a smaller piece of every transaction. So the carriers are showing some flexibility of their own, setting up deals where customers can use outside sites, like a recent T-Mobile pact with Google.

There’s hope that, if nothing else, content providers and carriers will be united by a common enemy — apathy.

Last month, a depressing study by consulting firm KPMG found that, unlike in Europe and Asia, more than a third of North American consumers say they wouldn’t pay extra for mobile content, no matter what was on offer.

So congloms and carriers might be getting a little ahead of themselves in terms of worrying about U.S. market share when there isn’t yet much of a market.

“As we grow we’ll find we move together,” says Jim Noonan, senior veep and general manager for Warner Bros. Online. “What’s clear to both of us is that if it’s good for the consumer it will be good for both of us.”

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