Mobile payments: most solution providers will go to the wall

by Jens Cornelissen | posted on 23 February 2003

You have content, and you want to sell it. It may be as trivial as a ring-tone, or as complex as a movie; the problem is, how do you get the money out of the grasp of the people who want the content, and into your own bank account? The danger for content providers is to get stuck with the "wrong" system - one of the many that are likely to disappear in a few years' time.

To lead the pack or lag behind - choosing the right payment solution is essential to the future of online and mobile content providers.

Content businesses that wish to sell directly to consumers face the challenge of opting for the right payment solution provider (PSPs) or losing clients through providing the wrong payment platform.

The amount of digital content being sold over the internet and mobile applications is rising. European content providers moving into the sector are facing a number of challenges.

Some of the decisions are in their own hands - when setting up their content strategy, providers have to decide whether they want to attract a regular subscriber base or impulse buyers. They must either seek distribution partners, or target online or mobile customers. But another major decision is one they might want to farm out: how to handle the payment processing and what payment platforms to offer their customers.

There is a wide choice: cross Europe, hundreds of payment solutions battle against each other for a stake in the sales completed through alternative payment systems.

Payment solution providers support content providers with all requirements for payment processing. Depending on the flexibility of the payment system and the needs of the content provider, this can be an entire hardware and software infrastructure, or a relatively simple software solution.

It's necessary to know who are the most important players in the European market and also to know the most critical aspects of choosing the right payment solution provider. Being stuck with a billing solution that is not accepted by the majority of users could result in painful losses for content providers.

Our report shows that while large international companies such as Tiscali, Vodafone and Arcor can afford to design and implement their own billing solutions, many small- and medium-sized companies have to rely on third-party operators for content billing systems. They must select from a large number of different payment solution providers, of payment channels and of accounting methods.

There are good deals available. Now the bubble has burst, many online businesses have lost faith in the economy and are treading carefully when it comes to new investments. It is thus the PSPs who have to convince content providers to accept their payment solution by offering special introduction rates, or co-operation.

As a result, content providers are currently being approached by payment solution providers with attractive offers for cooperation. PSPs need customers: they face the problem of building up an extensive customer base whilst having to convince content providers of the viability of their service.

The problem facing the PSPs is that they need a substantial customer base in order to establish themselves as quasi-standard in their respective fields. They are trying to achieve this by going for the star products. They want to secure the most attractive and most exclusive content providers.

Tiscali, for example, provides the billing infrastructure and also pays for streaming content delivered by Motograndprix. This left Dorna Sport, owner of Motograndprix, requiring hardly any extra up-front investment and minimal risk for setting up a content sales system.

Many PSPs operate on a commission basis. They have to; while content providers are generally happy with sharing their revenues with a third party billing operator, only few are willing to make heavy up front investments or pay monthly subscription costs. Commission rates vary, with PSPs charging between 14 and 40 per cent of generated sales, depending on the kind of service and the fixed subscription costs.

Some who did attempt subscription charges, have had to pull back from the idea: Firstgate was forced to scrap its five Euro per month subscription rate for content providers in order to penetrate the Dutch market. Even for smaller content parties, like The Nederlandse Dagblad, credit card processing costs can be too expensive - the fixed monthly fee of 200 Euros was too high compared to the sales revenue per month, and was subsequently cancelled.

The first choice content providers have to make is whether to implement an online payment solution or to opt for mobile technologies. This choice isn't as obvious as it might seem.

Sales of online content can be handled online, but they don't have to be; they can also be handled by mobile phone. Customers are generally more willing to use their mobile phone as a payment device, mainly because they are familiar with paying for the use of the phone itself. Online services delivered via a fixed line are not interrupted when paying via a mobile device. By contrast, customers using the alternative and unpopular dialler system must disconnect their line and dial in via a premium rate phone number to pay for the content downloaded.

Online payment methods are also often perceived as less secure, although the success of companies like Firstgate with over 800,000 registered customers shows that consumers' trust is growing. Many German publications online, such as Stiftung Warentest (the German consumer association publication), Playboy and Spiegel Online have opted for Firstgate's click-and-buy solution, giving the PSP a solid customer basis.

Many mobile payment solutions operate in a similar manner to online solutions, protecting sensitive user data with a personal pin or password. The short transmission time does not allow hackers to "listen in" and gain access to transmissions via external receivers.

There's a third choice: a hybrid between online and mobile payment devices - pre-pay cards. Companies such as Paysafecard and Deutsche Telekom issue their own cards, which can be used for online and also offline payments. The cards are available in amounts up to 100 Euros, and can sometimes be combined to enable more expensive purchases.

These are not widely accepted yet. These pre-pay systems do offer security in the form of password protection and the potential loss of only a small amount of money, they are still a novelty to most buyers. But things may be changing: by the end of the year 2002, Paysafecard had sold 600,000 cards and attracted 8,100 sales partners in Germany and Austria, lifting hopes for 2003.

At present the market for content billing solutions is wide open and unregulated. No standard has been set, although several committees and working groups are pushing towards standardisation.

There is much going on, though. The European Union has just announced its support of a 6million Euro project to roll out SafePay's Secure Mobile Payment Service (Semops) across Europe by 2006.

The SafePay system is an alternative to credit cards and is supported by 15 companies and banks across Europe. So this decision might push the mobile content billing market into ex ante standardisation and could easily push out independent mobile billing solution providers.

Kevin Dorton, Co-Chair of the Business Enabling Working Group, Paycircle, explains his organisation's efforts to establish an open standard for mobile payment solutions: "The m-commerce market doesn't need 'new' payment methods, nor new security features or proprietary payment solutions." To this end, the organisation says "the m-commerce market needs an open payment standard for 'roaming of content.'"

Cross-border delivery of content, however, bears many problems which are not likely to be solved in the near future, even with a mobile payment standard in place. The main issues here are the billing implications between different systems, as well as the settlement of disputes between the involved parties.

It's also important to understand that this is, still, a very small part of the overall payment market. Content billing in the mobile and online sector is a growing and promising market - but the present situation clearly stimulates tough competition between the many solution providers.

And despite the repeatedly stated willingness of customers to use alternative payment solutions in the digital environment, only 1 per cent of users actually do so. In Germany, for example, alternative payment systems make up only 3 per cent of online transactions, while the remaining 97 per cent are processed through direct debit, invoicing and credit card payments.

The danger for content providers is to get stuck with the "wrong" system - one of the many that are likely to disappear in a few years time.

Standardisation, through free market forces or government regulations, will eliminate the majority of payment systems and leave only a small number that consumers either prefer or adapt to. Many PSPs struggle with the low margins and uncertain volumes of micro-payments.

The first prominent example of this is the Austrian/German paybox system that in January 2003 announced its withdrawal from the C2B market. Companies need to specialise in the provision of micro-payment solutions and generate a large customer base from the beginning on. As Anja Stolz, speaker for paybox stated, Firstgate has covered the micro-payment market in Germany very well and at the moment there is little space for other players.

A new solution to this problem comes from payment aggregators. Whether internationally or locally, these portals and providers specialise in combining as many payment services as possible and featuring them on one platform for either mobile or online content distribution. Middleware systems even allow the combination of online and mobile payment systems, but usually require higher initial investments.

Many international providers like CSG systems and Highdeal focus on larger enterprises that provide their own network infrastructure. Newer providers, like the Finish ePoletti from Net People Oy, the Dutch Mobiview, or Digipay focus on aggregating micro-payments for small- and medium-sized businesses.

These companies implement middleware platforms, usually incorporating distribution, payment and content management services in one product. The advantages from the content providers' side are that no heavy network infrastructure needs to be installed and no extra software developed, drastically cutting costs. If the business fails or the content provider wants to move to another PSP, the lease of the software is simply terminated.

The future of content billing is likely to develop in two ways. On the one hand there are the large international PSPs, who offer flexible and scalable full service packages. Their focus, however, lies more in the provision of the entire billing infrastructure, leaving small content providers with too high up-front investments.

On the other hand, smaller PSPs with individual payment systems based on mobile or fixed, post or pre paid systems stand a chance on a national level. Given the increase of micro payments in a still comparably small market, those providers have the upper hand over more expensive credit card systems which are based on higher turnovers.

The remaining question is whether the micro-payment market will pick up enough to make content provision and payment processing a viable enterprise. Large numbers of customers are needed in order to generate high turnovers.

Summarising: the time for profitable content billing is arriving. However, viability can still not be sustained by most pure content billing concepts. Subscriber numbers are too low and production costs for good quality content are too high. What prevail are niche market operators and successful spin-offs, like FT.com and Motograndprix. PSPs are securing the most lucrative businesses and content areas for future exploitation. More and more users are willing to pay for online content and services, and businesses will have to charge for their service in order to remain viable.

And in time, certain standards will be set and those who initially bet on the wrong horse will be left behind.

Van Dusseldorp and Partners' latest report, 'Guide to European Content Payment Solutions', explores premium content billing initiatives in Europe and provides important strategic information about the business considerations of charging consumers and corporate clients for content. The report also provides case studies of successful business-to-business and business-to-consumer content billing initiatives. It is available from February 9th and costs Euro 950 as pdf document.

This analysis is an edited summary of a longer report by Jens Cornelisson from Van Dusseldorp and Partners, examining the European market.