Mobile Innovation

Nokia, the world’s largest maker of mobile phones, said profits dropped sharply in 2008 and predicted the tough times would continue this year.

The Finnish company said operating profit for the year dropped from €7.98bn in 2007 to €4.96bn ($6.4bn) last year, while its closely watched operating margin fell from 15.6 per cent in 2007 to 9.8 per cent last year.

Nokia controls around 40 per cent of the world’s market for mobile phones and is regarded as a bellwether for the state of global consumer sentiment.

“In recent weeks the macroeconomic environment has deteriorated rapidly, with even weaker consumer confidence, unprecedented currency volatility and credit tightness continuing to impact the mobile communications industry,” said Olli-Pekka Kallasvuo, Nokia chief executive.

One particular area of weakness was China, which had previously been an engine of growth as its economy boomed, but where sales of its phones dropped 36.1 per cent in the fourth quarter of last year compared with a year earlier.

Mr Kallasvuo admitted emerging markets were being “hit hard” as consumers delayed upgrading to better phones.

But he insisted that the company was better placed than its competitors to ride over the rough ground.

“Companies in a relatively weak position in given markets are withdrawing and focusing on their so-called strongholds,” he said, mentioning large emerging markets as an example.

Rival handset manufacturers such as Sony Ericsson, Motorola and Samsung are all suffering amid the downturn, but Mr Kallasvuo said he believed Nokia’s economies of scale put it in a relatively stronger position.

He added that the phone maker hoped to gain market share during the crisis.

Nevertheless, Nokia said fourth-quarter operating profit fell 80 per cent to €492m compared with €2.5bn in the fourth quarter of 2007, underlining the accelerating impact of the financial crisis towards the end of last year.

Net sales dropped in the quarter 19 per cent year on year to €12.7bn, while its closely monitored average selling price was €71, down from €83 in the fourth quarter of 2007.

Looking forwards, there were few signs of the pressure alleviating, the company said.

Nokia said it expected 2009 industry-wide mobile phone sales to drop by twice as much as it had first thought, down 10 per cent from 2008 levels compared with an earlier estimate of 5 per cent.

It added its profit margin would also drop compared with earlier forecasts.

Its operating margin in devices and services will now be more than 10 per cent in the first half of 2009 and in the teens for the second half of 2009, rather than in the teens for the full year 2009 as previously targeted.

Nokia’s shares fell 9.1 per cent to €9.30.

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Users are increasingly choosing dead simple SMS mobile payments for micro-transactions on social network applications and gaming sites (it fills the void while they wait for more direct options), but super-high transaction fees are limiting growth.

The problem is that legacy transactions - specifically scams that give users a “free” ring tone with the fine print mentioning a monthly charge as high as $20 - have brought in so much cash to the carriers that they’ve gotten used to taking 50% or more of the total payment in fees. For the market to grow to encompass legitimate transactions, those fees have to drop dramatically. For that to happen, the social networks need to get involved directly in carrier negotiations.

Two companies, both headquartered in Europe, are already targeting mobile payments for apps - Mobillcash http://www.mobillcash.com/ (UK) and Zong zong (Switzerland).

When you buy a virtual shotgun on Mobwars, for example (and they are selling a lot of them, up to $1 million per month) you have to pay real cash. You can choose to pay via a number of services (Facebook doesn’t offer a direct payment solution yet), including either Mobillcash or Zong.

If you choose Zong, you enter your phone number on the site, get a text message with a four digit code, enter the code on the site and you’re done. It’s by far the easiest way to charge a transaction online outside of Amazon one-click.

Zong’s fees aren’t transparent, but Mobillcash’s are. Mobillcash has a clunkier interface (you have to choose your carrier and go through extra steps), but they show what their fees are because to get, say, $1 into the Facebook app you have to pay $1.50 on most carriers. That implies a 33% transaction cost, almost all of which goes to the carrier. Many of Mobillcash’s payments are way beyond 33%. Zong says they pay an average of a 40% transaction fee to U.S. carriers.

Those transaction fees are severely limiting the size of the market. Lots of merchants and application developers would love to take mobile payments, but paying 40% or more of the transaction to the carriers is a non-starter.

Zong argues that the fees are actually much lower than they seem because conversion rates (when chance that money will change hands once a payment button is pressed) are more than 50%. If that seems low, compare it to PayPal conversion rates that are reported to be a fraction of that.

Regardless, though, any merchant selling an item with actual marginal cost (virtual items are by definition free to produce, so higher payment fees can be tolerated) aren’t going to allow mobile payments via SMS. If the carriers were to lower those fees (or if they were forced to by market forces or the government), a very rich ecosystem could blossom, and the carriers would get the majority of the value created.

What Happens If Carriers Ignore the Opportunity

Chances are the carriers won’t lower their exorbitant payment fees anytime soon. What I’m guessing will happen is that services like Zong and MobillCash, as they add valuable users who like to pay via SMS, will simply offer to move those users to credit card payments. Users still pay by just entering in their phone number and then typing in a 4 digit code they receive via SMS, but the charge would go to their credit card instead of their phone. The difference in fees is so large that customers can be offered a very large incentive to simply store their credit card and use that instead of having the charge go to their phone bill. And checking out is still much, much simpler than typing in your name, address and credit card details.

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European Myspace competitor Netlog, which has over 33 million users, has released its native iPhone app. Users can get a feed of friends updates, see pictures, upload content and add pictures. Unusually, it is also GPS-enabled, something Facebook has so far steered clear of. It’s TechCrunch’s general view that if Facebook added true, location-based mobile social networking to its iPhone app, it would probably kill off a lot of the startups in that arena fairly swiftly. But it has yet to do so, leaving the way open for sites like Netlog.

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First, Microsoft wins a mobile search and advertising deal that enables them to be the exclusive provider on Verizon Wireless’s entire mobile network, and now it is bulking up on inventory and ad-serving technologies. Quattro Wireless, a Waltham, Mass-based mobile ad network, has entered a strategic relationship with Microsoft Advertising to help advertisers and agencies plan, buy and execute mobile ads as part of their overall campaign.

Going forward, Quattro’s platform will be able to accept traffic from Microsoft Advertising’s Atlas Media Console buy-side ad serving technology. Quattro manages ad inventory for mobile sites, such as Hachette Filipacchi Media, Gawker Media, Cox Newspapers, Def Jam Music, and also gained recognition after working on Barack Obama’s presidential campaign. Now ads from Microsoft’s network will be able to be served across any publisher in Quattro’s network.

Steven Rosenblatt, Quattro’s VP of Advertising Sales: “We view our relationship with Microsoft as a watershed moment for the mobile advertising industry…We are seeing unprecedented demand for buying mobile advertising inventory and this critical solution will simplify the process for the advertisers and agencies and revolutionize how they buy, manage and measure their media campaigns.” From Microsoft’s view, Ryan Mackle, director of Display Sales Product Management for Microsoft Advertising, said: “Advertisers are eager to track and measure their digital advertising campaigns holistically, across the PC, mobile devices and other emerging technologies.”

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Microsoft has finalized a mutli-million deal with Verizon Wireless for the right to provide the country’s largest carrier with portal, local, Internet search and mobile advertising services. The announcement is expected to take place during Microsoft’s Steve Ballmer’s opening keynote at CES tonight, starting at 6:30 p.m., although Verizon spilled the beans earlier at an investor conference. The search deal was hard fought and lasted nearly two years, in which all three Internet giants Yahoo, Google and Microsoft were first involved, and then more recently, only Google and Microsoft were left. During the negotiations, the WSJ reported that the deal size ranged between $550 and $650 million, making it a significant coup for the emerging mobile search and advertising industry that is just getting off its feet.

The decision by Verizon Wireless is important for a number of reasons. First off, it gives Microsoft a foot in the door, which had been rapidly closing—the other U.S. carriers were already locked up. If the deal went to Google, it would have owned half the market between Verizon and Sprint. If it had gone to Yahoo, it would have been a landslide victory for the Sunnydale company, which already works with AT&T and T-Mobile USA. With Microsoft also in the game, the mobile search industry—especially in the U.S.—is still completely up in the air.

The second thing to point out is the vote of confidence on Microsoft’s behalf that they believe the mobile search and advertising market could be of significant value over a five year period, which is the length of their contract with Verizon. Perhaps it is just buying marketshare, but Medio Systems’ CEO Brian Lent, who provides white-label search services, and to Verizon Wireless specifically, believes differently. “I would suspect that it would be recoupable. Why would anyone would bid that amount?...I think these are not completely unreasonable numbers, given the size of the space. My industry expertise says that over a period of five-ish year period, one should be able to make those types of revenues.”

—Some more details: The deal will last for five years and the first devices are supposed to launch in the first half. Searches will integrate voice commands and location-based services, and results will include maps, directions, traffic information, local business information; movie show times, gas prices and weather. In addition, users will be able to search for full-track songs, videos and games. Microsoft’s Live Search will be available on a device’s home screen, by downloading an app. The company did not say what the financial terms of the agreement were, or whether it also included a side deal in which Verizon committed to selling more Windows Mobile devices.

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The Japanese government is looking into new guidelines on the country’s mobile phone system that could see connections fees between carriers reduced as early as next year, Reuters reports, citing local newspaper Asahi. Currently, connection fees between Japanese mobile operators, which are unregulated, are seven times those of landline carriers. At around 35 yen ($0.38) per three minutes, the connection charges have been blamed for the high cost of domestic mobile phone calls.

A communications ministry official told Reuters that the government has not yet decided to reduce connection charges, and is in fact, still gearing up to gather opinions on how to better the Japanese mobile phone system. At this stage, it’s unclear how this will impact operators and consumers. If connection fees are reduced across the board for all operators, Daiwa Institute of Research analyst Naoto Osugi told Reuters there shouldn’t be much of an impact on earnings. But if operators are obliged to pass savings on to consumers, it could be “negative” for carriers. Japan’s three main carriers include NTT Docomo, KDDI and Softbank.

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Advertisers are going to spend a lot of money mobile media this year, but it pales to the amount of cash they’ll be spending in just a few years. According to a new Strategy Analytics report, “Global Mobile Advertising Update: Outlook Bright as Inventory Expands,” advertisers may spend $1.4 billion on mobile media this year, and the firm predicts that mobile media advertising could account for a fifth of global spending on Internet advertising by 2011, to the tune of $14.4 billion.

“The outlook for mobile advertising spend has significantly advanced in the past 12 months,” says Phil Taylor, director of Global Wireless Practice. “The supply of advertising inventory is rapidly increasing as mobile publishers look to develop advertising as a revenue stream. Major mobile network operators like SprintNextel, Verizon Wireless and Vodafone have all accelerated plans to sell advertising within their mobile media channels and advertisers appear to be responding positively.”

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—MobiTV Adds CBS: MobiTV will offer a CBS channel as part of its $10/month services, offering full episodes of hits such as CSI: Crime Scene Investigation, Numb3rs, CSI: NY, and The Young and the Restless. The shows will be available on AT&T and Sprint Nextel the day after they appear on TV. It will also include video-on-demand news sport and comedy clips from CBS Mobile.

—Player X, Admob Team Up: UK-based Player X and mobile advertising company Admob to offer integrated marketing campaigns that include advertising across AdMob’s global network. The main centre will be the portal Player X runs for O2 UK, and the service will allow content partners to track conversions from their ad campaigns’ right through to download. (release)

More after the jump...

—T-Mobile Launches G1 YouTube Channel: T-Mobile has launched a YouTube channel to teach people how to use the G1, with customers able to post questions and receive written and video answers from T-Mobile’s experts and other customers. I’m not sure how much use it will get, but it’s likely cheap and the video part makes demonstrations easy. (Mobile Market Magazine)

—Kenya Bans Ringtones: Some African news sites are reporting that Kenya’s new Kenya Communications (Amendment) Act not only restricts media and gives the postal service strong powers to invade private communications searching for “obscene” content also makes it illegal to personalize a mobile phone: “Mobile phone owners are not allowed to change the facial appearance of their handsets or customise the phone features to their convenience. The law declares reprogramming of mobile phones illegal. You cannot even install fancy ringtones!” One commenter argued that the law is merely stating that “you cannot change the IMEI number or reprogam it”. I haven’t read the legislation, but wouldn’t be surprised if it was just incredibly poorly written. (The Citizen and Daily Nation)

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