So here’s my attempt at a wooden stake through the heart. I know my stake won’t work. I know entrepreneurs will keep trying it. But this is at least a reference point I can point them to, rather than re-stating the same arguments again and again and again.

By the way, the reason I know this is because I’ve also been sucked in to this kind of thinking. So it’s the voice of experience, rather than my little pet theory.

Just to set the context here, I’m specifically talking about Permission Based Marketing (PBM), though the points may well apply to other models too.

1. You don’t need to

If you think citizens need paying to see advertising, you’re on the wrong track. It’s the wrong way of thinking about the messages you’ll be sending out.

Instead, you need to think about the content in the same way as an editor of an old skool newspaper thinks about her editorial. Will this be of interest to the reader? Will it add value to their lives? Will it be welcomed as part of the ongoing communication? If you can honestly answer “yes” to this, you can send it. if it doesn’t pass this test, don’t. Simple as that.

5 years ago, I wrote a post about what constitutes value and it’s probably worth a look if you’re interested in this area. But the basic point was that adding value was about providing the user with an IDEA – or Information, Deals, Engagement or Advertainment. More detail in the original post or in my White Paper on LBS, which I’ll send you if you email me russell AT mobhappy DOT com.

2. The Consumer Won’t Earn Enough

Once you start crunching through the numbers, no matter how you slice and dice it, it’s hard to find a scenario that earns a person a (very) maximum of $10 a month. Why? Because advertising is about scale. You have to deliver ads in very large volumes to make money or earn money.

Let’s do some basic maths. If you charge the advertiser $50 CPM (by the way – approximately 5 times the going rate) and give say 10% of that to the consumer, that would seem reasonable, right? So, every 1000 ads the consumer sees, earns them $5, which equates to 2000 in a month to earn $10.

Don’t forget we’re talking PBM here, so that’s 2000 messages (think SMS or email) over a month or 66 a day. It’s just not going to work.

Now, people will say. Yes, but this is a new form of marketing. It’s post-advertising advertising. Maybe it is, but with inflated cost you get minimal advertisements to sell, which means the consumer earns less than ever.

Of course, I can’t cover every scenario here. It maybe that providing the value in some other form of currency with a high perceived cost, but low actual cost is possible. But if you heed my first point above, you don’t need to worry about this element at all.

3. Contingent Liability

When you issue your user the right to claim money from you, from an accounting perspective (this may depend on where you’re based), you have to make provision on your balance sheet that you will pay them. Even when it’s perfectly clear (like 5 years later) that you won’t be paying them.

This can create a huge liability for a small business, hogging increasingly large amounts of precious cash.

Of course, there are ways to get round this, like having an expiry date, but this makes it less attractive for the consumer. Back to Point 1 again.

4. The Wrong Users

If you do pay people and they are really doing it to get their grubby little hands on $10 a month, how attractive do you think this audience is going to be to an advertiser? If they really need money that badly, are they going to be able to afford anything that the advertiser wants to sell?

Even if they really are a great audience, you’re going to find it hard to overcome this widely held belief among agencies, especially. It’s just another reason not to try your groovy channel out.

5. The Nick Syndrome

Apologies if you’ve read this little story before.

I had a friend I shall call Nick, because that’s his name. When he gets very drunk and happens to be in a restaurant, he calls the waiter over and asks for 15 eggs and 15 wine glasses. The bemused waiter normally brings them and Nick spends about 20 minutes building a complicated pyramid of eggs and glasses. By this time, most of the restaurant are watching in suspense.

Nick then announces that he’s going to pull the table cloth out and all the eggs will break and fall neatly into their corresponding glasses. The suspense is palpable as it would be truly amazing if he managed to pull this trick off. With much theatre, Nicks grasps the table cloth, (even the kitchen staff are watching now) and with a flourish, he yanks it hard.

Glasses and egg fly everywhere, coating the immediate vicinity in broken glass and yolk. It’s also noticeable that not one egg has broken cleanly into one glass. The restaurant is hushed in shock and Nick stares at the wreckage. He then shakes his head and says, after a 4 second pause:

“It never works….”

Paying consumers doesn’t either.

Happy for a startup out there to prove me wrong and maybe it is possible. But I doubt it.

I closed that last post by saying the black-and-white choice many operators have presented — if we have flat-rate (ie cheap) data plans, the networks are rendered useless; if we have usage-based (ie more expensive) pricing, everything will be dandy — is a false dilemma. Since I wrote that, you might have noticed that Apple announced the iPad. I bring that up only because of the connectivity plan El Jobso announced along with it: $30 per month for unlimited data in the US on AT&T, with no contract required.

You might also remember that AT&T was one of the operators talking about the need to go back to usage-based pricing to save their network. So it’s only natural they’d come in with another unlimited plan on a device that’s largely designed for web surfing, which should deliver another decent bump in data traffic on their already strained network. But I digress…

So what’s driving this data traffic? That’s pretty simple, really: smartphones and 3G dongles for PCs, making operators’ networks victims of their own success, to some extent. But that rise in traffic doesn’t necessarily explain the congestion issue, which involves network capacity as well. Then there are several different capacity factors to consider, as Dean Bubley points out: downlink capacity, uplink capacity, backhaul capacity, even parts of the core network.

The default assumption (which operators do little to counter) is that network capacity is finite. This is true to some extent, as the amount of data that can be carried in a fixed amount of bandwidth is finite. But short of this limit, the constraining factors are essentially built into the network, which is to say that operators can increase capacity (by upgrading backhaul, adding cell sites, etc.). So when it is said that “networks weren’t built to handle this level of traffic”, it’s worth questioning whether that means the network itself wasn’t built to handle the traffic, or, as is often assumed, the level of traffic is beyond the theoretical capacity of a certain type of network in a given amount of spectrum.

Of course, increasing capacity isn’t free, and that’s the rub. In order to increase capital expenditures and maintain a desired level of profitability, revenues have to increase as well, hence the desire for price increases. Part of the issue is that these capacity problems are recent. It seems unlikely that so many operators would have leapt into the mobile broadband market so wholeheartedly if they saw it was going to so quickly lead to a need for increased capex. So in that sense, you could say that operators underbuilt their networks, and deferred the spending necessary for today’s (or tomorrow’s) needed level of traffic, and now it’s time to pay the piper. (I should stress that such a course of action is reasonable from a financial sense.)

So what’s the solution? Add more capacity — either in the physical sense of adding more infrastructure, or by implementing other solutions. In Dean’s post that I linked above, he lists 10 different types of offloading solutions available to operators. There’s really no magic sauce that’s going to solve this problem easily and cheaply for operators, and that includes going back to usage-based pricing, which holds far more downside potential (by holding back usage) than it offers revenue upside.

Returning to usage-based pricing, or even tiers of usage, would certainly help from a traffic perspective, but then it will also kill revenues. The mental transaction cost incurred by the “what is looking at this page/video/map going to cost me?” will put a lid on usage, and kill the goose as well as its golden eggs.

In the short term, a solution is to build out more WiFi hotspots, particularly in areas of heavy usage. I’d venture that much of the heavy bandwidth usage (such as from dongle-connected laptops) comes from “nomadic” rather than truly mobile users — people who are on the go, but stop and use their device while stationary. So if you’re an operator, you figure out your heavy usage areas, then get as much WiFi as you can in public areas and coffee shops and libraries and the like. If you have a fixed-line network, I think you could build a credible case for giving away DSL and WiFi routers, or offering them at cut-rate prices, in these zones, giving up some fixed-line profit for the value of offloading traffic.

If operators want to introduce differentiated pricing, they’re going to have to go about it cleverly. The default option would likely be peak/off-peak rates, but that’s hardly a solution, and the overhead of such tariffs probably make them unattractive for introduction to end users. They could be easier for connected devices vendors. Just as an example to illustrate, take Sprint’s arrangement with Amazon for data service on the Kindle: delivering content to the devices at off-peak hours (when networks aren’t as congested) could be priced much lower than doing so during data-traffic rush hour. Content such as audio or video could be downloaded overnight and stored locally for on-demand use. My DirecTV satellite service already uses such a model, in which certain pay-per-view movies are automatically pushed to my set-top box and stored on a reserved portion of its hard drive, from where I can watch them any time I want (and I’m only charged if I do so).

Obviously that model doesn’t work with every type of device or content, but it’s an example of how operators will have to do more than simply raise prices to deal with this issue. None of the solutions are perfectly simple or completely inexpensive, but that’s a reality that will need to be swallowed. But expecting these solutions, or additional network capacity, to be paid for by a return to usage-based pricing, is unrealistic.

These comments from operator execs often focus on one aspect of the situation: flat-rate pricing plans. Like many of their colleagues at fixed broadband carriers, they talk up a bandwidth crunch as a segue into talk about the need for some form of usage-based pricing, typically either capped plans or per-unit charges. Things are made that black and white — if we have flat-rate (ie cheap) data plans, the networks are rendered useless; if we have usage-based (ie more expensive) pricing, everything will be dandy.

To understand the thinking here, let’s go back to the first day of Economics 101, when the prof introduced the demand curve (as skillfully illustrated here). The vertical axis is price, the horizontal axis is quantity demanded. As you can see, the law of demand says that all other things equal, as price decreases, quantity demanded increases, giving the demand curve a nice downward slope. For every price of a good, there’s a corresponding quantity of that good demanded. In our graph here, you can see that at price P1, quantity Q1 is demanded.

This makes intuitive sense for most people: if something gets cheaper, people will buy more of it. A good example of it could be affordable flat-rate data plans. As they became more widely available and decreased the price of using mobile data, consumption increased. An important, and often overlooked part of the law of demand is that “all other things equal” bit, or, as economists like to say, ceteris paribus. Holding everything else equal, price changes simply force movement along the same demand curve. If something else changes — consumer preference, consumer income, prices of related goods, and so on — the demand curve shifts.

It’s easy to see that over the last few years, all other things aren’t equal when it comes to mobile data. Consumer tastes and preferences have definitely changed as usage has become more pervasive. Related goods — ie smartphones — have become cheaper, either in real or relative terms. The demand curve has shifted, as shown in green here. This shift to the right means that at every price level, the quantity demanded has increased. Keep in mind that price times quantity demanded equals total revenue. So if price stays constant and quantity increases, revenues increase.

But what operators are more interested in is the change shown in red on our third graph, a change in which the quantity demanded remains the same, but price increases. Price times quantity equals revenue. When there’s movement along a demand curve, both price and quantity change, and the effect on total revenue depends on the slope of the curve, or the price elasticity of demand. But if the demand curve has shifted, and an operator can now sell the same amount of goods for a higher price, total revenue will increase.

So now, after seeing the demand curve shift resulting in selling more data services and plans at constant prices (which, of course, also increases total revenue), operators are eyeing a shift in which they can raise prices but keep quantity demanded constant. The thinking is that by raising prices, they’ll be able to reign in the small number of heavy users (AT&T’s CEO says just 3 percent of its smartphone users account for 40 percent of its data traffic) without significantly hurting demand overall — because we’ve all grown so accustomed to checking our email and Facebook and whatnot on our phones, using our 3G dongles and downloading books to our Kindles.

They’re betting that the overall effect on aggregate demand will be small, but the price increases will deliver a nice big bump in revenues. The idea is to take advantage of all other things not being equal, that a shift in consumer tastes and preferences means they can now wring higher prices out of their customers. But the operators don’t get to choose which other things are equal; they don’t operate in a vacuum. There’s pricing pressure from other operators, for one thing. For instance, in the US, from operators like MetroPCS which offer unlimited voice, text and data for $40 per month, including all taxes and fees.

But the biggest question is whether customers will just swallow the price increase, that their need to stay connected on their mobile can support increased data prices, even as the price of voice and text falls. That’s a risky proposition, given that it can be argued that lower prices led to increased uptake. (As an aside, this sort of use-low-price-to-get-them-hooked-then-jack-em-up business model brings to mind a great scene from the TV show The Wire, in which Stringer Bell, the number 2 of a Baltimore drug gang learns about elasticity and spreads the knowledge throughout his organization.)

The black-and-white choice we’re presented with is a false dilemma, one the cynics among us might say is designed to help us swallow price increases: you can choose between cheap data, on a useless network, or paying higher prices for the same great service you’ve come to expect. But as the name indicates, it’s a false dilemma. There’s more than one way (or in this case, two ways) to skin the mobile data cat. My next post will take a look at what’s driving the huge increase in mobile data use, and how operators can deal with it.

Yeah, I mean, shame on us if the mobile internet actually became something useful, enriching, ubiquitous and valuable, supporting a plethora of business models on an open platform where content providers and users have lots of choices of how do do things without lots of unnecessary barriers.

Basically, Ryan, who (of course) used to run AT&T’s data services, contends the web taught us “some bad habits”, in particular that ad-supported business models work, and that consumers shouldn’t be paying for more content. Ignoring for the moment that the cat’s already out of the bag, it’s a little disheartening to hear these comments at the end of 2009. They bring to mind the statement from 3 UK’s then-COO in 2004 that “Anyone in their right mind who tries to do anything on the Internet with a screen that size has to be nuts.”

Ryan then picks probably the worst possible way to try and support his argument: by using news as an example.

Ryan says they should be charging, especially on mobile where the service can be more personalized and tailored to a interests and habits. “People will be more than willing to pay,” he said. “I want to pay for a news service that will deliver the top 10-15 stories that matter to me the most. I want them to be researched and well-written. I will pay money for that.”

Maybe Jim will pay, but it’s doubtful many others will. Jeff Porter of Mobilepeople has a great piece at Mobile Marketer about Why paying for news content does not make sense that’s well worth a read. The first reason he lists is that “news is largely a commodity”. Ryan doesn’t seem to get this: this wonderful paid service he envisions is already one that’s provided for free by any number of content providers (Google News, Mippin, etc.).

The idea that “people will be more than willing to pay” is only correct in an environment of scarcity. But we’re past that point in the internet space, either wired or wireless. Any scarcity has to be contrived and manufactured, with things like walled gardens — which, of course, didn’t (and don’t) work. There’s always lots of talk about operators building a “smart pipe” that adds value to content, value for which the operators can expect some compensation. But it really sounds that the pipe dream for people like Ryan is simply to contrive an environment in which simply being accessible by end users is that value for which operators (or their vendors, like Motricity) should be compensated.

The idea that simply because something is available on mobile makes it worth paying for doesn’t hold. Availability on its own no longer creates value; again, in a world of ever-increasing abundance, as opposed to scarcity, this will not be the case (a lesson Garmin and TomTom learned recently when Google announced its navigation app).

That “poof!” sound you just heard was the SMS content and marketing business in the US vanishing in a cloud of stupidity.

RCR reports “Verizon Wireless representative Brenda Raney said the new fee was necessary to cover the carrier’s overhead in delivering MT messages.” She also added this is the first increase levied by Verizon since 2003 — but what’s changed at Verizon that this huge increase is necessary to “align with [its] costs”? Per-message charges would naturally generate higher revenues as usage grows. It’s hard to see how Verizon’s cost for processing inbound messages could suddenly leap so high that it would have to raise the fee to “align” it.

Also keep in mind that Verizon subscribers get charged for incoming messages, whether on a per-message basis, or as a part of their bundle.

If this charge sticks, it will decimate the commercial SMS business in the United States. Content providers will have to try and suck up the charges, or decide to cut off customers of the country’s second-biggest operator. Neither choice is appealing, and it’s doubtful that very many business plans can adapt to either one. Are many people making more than 3 cents per sent message in revenue?

I’m optimistic that perhaps this new fee won’t stick. Aggregators and content providers will certainly push back, and I think that we may have reached a point where the user bases of services that send SMS messages, like Facebook and Twitter, would raise a tremendous stink should those services say something along the lines of “Verizon jacked up the prices, so we can’t send you messages any more.” That might, just might, help Verizon understand that all these companies sending SMS content to its subscribers actually make its service more useful and more valuable to its subscribers. Sticking the 3-cent fee on to these messages will kill them, in one way or another, leaving Verizon without the fee revenue, but also without the benefits these services bring to it. It has to realize that these services aren’t just red ink, and that they have a value that justifies their cost.

But should the charge stick, I certainly hope other US operators don’t fall in behind Verizon and jack up their charges as well. That, of course, is exactly what they did with the a la carte messaging fees they charge their users, which have jumped from 10 cents per message to 20 cents across the board. That “uncoordinated” action attracted some class-action lawsuits as well as the interest of some regulators and legislators, and a similar action here could (and hopefully would) attract more attention.

Anyhow, what are your thoughts? How badly is Verizon cutting off its nose to spite its face? And if you’re in this space, as a content provider, marketer or aggregator, how — if you can — will you cope?

You can quibble with a few things: the fact that they’re calling it “unlimited” access, then saying “subject to a fair usage policy of 500MB / per month”, which ain’t unlimited. But for most folks it should be fine. You could also take exception to the statement “Since launching the internet on mobiles last summer”, but we’ll leave those out for the time being, and just say nice one Vodafone.

So, for those of you in the UK, would this offer convince you to switch to/stay with Vodafone?

From Vero at Taptu and James Whatley at SMS Text News comes word that O2 in the UK is capping downstream 3G speeds for most of its users at 128 Kbps.

Oh, but it gets better.

Some O2 PR rep mistakenly called a reporter from El Reg while still discussing how to respond to its story with a colleague. He referred to those wanting faster speeds as “a bunch of techie nerds”, and called anybody who’d want to leave the network a “muppet”.

Nice one. But there’s more.

As Vero and Whatley point out, somebody did a speed test on O2′s network and got these results:

GPRS 44kbit/sec
EDGE 145kbit/sec
3G 112kbit/sec
HSDPA 124kbit/sec

No, that’s not a mistake — O2′s EDGE network is faster than its HSDPA one, thanks to its ridiculous cap. Guess those billions O2 spent on 3G spectrum were really worth it, just so people could make video calls.

As the review says, the overall premise is really straightforward: customers generally seek service from a company only when something’s wrong. Get those things right the first time, and people won’t want, or need customer service. Then, once things are going along well, resources you might have had to devote to extensive customer service and support — to fix things that are broken — you can devote to other areas where they’ll improve your products and make you more money.

One of the authors used to be a VP of global customer services at Amazon. I order a lot of stuff from Amazon, and I’m hard pressed to think if I’ve ever had to contact them directly about an order. Either I’ve had no problems, or all my questions have been handled by their web site. In any case, they use a metric called CPO — contacts per customer order. They’ve managed to slice this by 90 percent by figuring out why people need to contact them, what’s not working, and fixing it.

Think about this in terms of the mobile industry, in particular operators. I’m going to go out on a limb and posit that nearly all the service calls they receive are a result of something breaking or an error (whether it’s a technical problem or billing issue, and so on), or because customers can’t find adequate information about something on their own. From the review:

According to the authors’ research, customer contacts have four broad causes. About one in seven is triggered by basic quality defects (“It doesn’t work”). These must be addressed by underlying quality improvements. About a quarter take the form of “How do I?” questions. Here, the company has failed to communicate properly or its processes are confusing to customers, so it must identify and deal with these defects.

About 40 per cent of customer contacts are “Where can I get?” queries. Customers should be able to answer most such questions for themselves via a website or other self-service option that is easy to use.

The final 20 per cent of contacts are from customers wanting to buy stuff.

Think about the amount of resources that go to dealing with the non-sales contacts; then think about how many of those contacts have a positive financial result for the operator. Not very many of them. By employing some pre-service — that is, making sure things work as they should, and by providing customers with the information they need in an effective manner — operators could redirect their resources towards those cases where service contacts do require some human intervention, and on things like improved sales process that really benefit the business.

This sounds fairly obvious, but it bears repeating in this age of confusing tariffs, poor web sites and undertrained sales staff. And of course, solving these issues is much more difficult than it sounds. In any case, this book sounds like it’s worth picking up, especially if you’re in a customer care role at a mobile operator

First, Ed Moore from Openwave, the vendor of the Sprint transcoder, stops by in the comments to say that the company is working to “get the exclusion lists up to strength and introduce OpenWeb 5.7 which automates mobile web site detection and lets through the phone user agent.”

Second, developers are working to create some guidelines for friendly transcoding. Tom Hume has some suggestions — including one to create an aggregated whitelist vendors could look to — while WURFL creator Luca Passani has come up with a “Manifesto for Responsible Reformatting”.

More discussion at WAP Review and Mike Rowehl.

Then you’ve got Verizon announcing some details on its “open” Any App, Any Device program. Device developers will have to build their devices to some specs, then submit their products to the operator for testing and certification. These specs include not just adherence to CDMA standard, but additional “supplemental requirements” to “secure our network and our customers,” says the operator’s CTO.

So you could go to all this trouble, jump through Verizon’s hoops and pay to develop and create a device, then cross your fingers that they approve it and allow you to try and make a business.

Or, you could do what you’ve been able to do for quite some time, and just make a GSM/UMTS device, and pop a SIM in from one of Verizon’s US rivals like AT&T or T-Mobile — or any other GSM operator, for that matter. You won’t get an operator subsidy, but you won’t with your special Verizon CDMA device, either.

So just to keep track: for Sprint, “open” means viewing web pages only in the format they choose. For Verizon, “open” means only using devices they certify and approve. For me, neither of those really jive with my definition of open.