Simple, clear, pricing structures are the key to ensuring that the premium rate industry is successful and earns the trust of the public. However, it has a poor record in this area.

From ringtone subscriptions to DQ services and chat services, pricing has been a constant source of public anger and mistrust. Much has already been written about these types of services. However, the practice of regularly changing the price of a premium rate service is an area which gets little attention from either the media or the regulator. At first glance this doesn’t appear to be a problem. Often, it is presented as a promotion with the consumers ‘benefiting’ because they are getting discounts on the headline price. In the high street this is a common promotional tool. However, in the mobile world it is not quite so straight forward as it can confuse the customer and hide the true price.

What is changing the price?

There are a number of ways that companies confuse customers by changing the price.

At its simplest level a service is promoted at a reduced price for a period of time and then the price is raised back to the original price. An alternative is to give away free texts on a promotion run over several weeks eg “Your first text is £1, all subsequent texts today are free”

Of course, all companies have the right to change the price of their service. However, in the premium rate mobile industry this causes some unique problems that need to be addressed.

What is the problem with changing the price?

When someone uses their mobile to make a call or text they don’t always have visibility of the price of that service. It is impractical and not technically possible to have prompts on the phone each and every time someone makes a purchase. For that reason it is imperative that the customer has a reasonable expectation of the price of the service before they press the send button or make the call. In these instances the best reasonable estimate is the last price they paid for the service or the price at which they last saw it advertised. If the price changes every few weeks what hope do they have the knowing the price?

Despite the best will in the world it is not possible to inform the customer of the price each and every time they use a premium rate service. Yes, you can advertise prices on the website and marketing literature but, by its very nature, a phone is used at all times not just when you see the advert. Unlike a shop purchase you don’t have a price tag on premium rate calls and customers on a monthly contract don’t see their bill until several weeks later. Therefore, greater regulation is required in the premium rate industry to protect the customer.

This issue of constantly changing the pricing is not addressed within the PhonePayPlus Code of Practice or any of their subsequent help notes. Therefore, a company can quite legitimately change its premium rate pricing on a regular basis and, as long as it is “displayed prominently in their associated promotion and on the website” in accordance with the Code of Practice, each time it is changed then the company has technically done nothing wrong in the eyes of the regulator.

Our proposals

It is never possible to completely solve the problem of notifying the customer of price changes. However, it should be possible to put in place a few more mechanisms to make it easier for the customer. We therefore put forward four proposals for the industry to consider;

1. Reducing the price of a service for short periods should not be allowed. Permanent price reductions can of course still be entertained. However, we suggest that any price promotion for periods less than 3 months should not be allowed.

2. Where the price is going to increase this should be noted on the website in a prominent position at least 2 weeks before the price is increased.  

3. The price should always be displayed prominently on the website. This should be clear on the first page of the website of any premium texting service and a change in pricing should be given equal prominence for at least 2 weeks after the price change.

4. PhonePayPlus should have a central database of prices for all services which is made available to the public through its website. It should be the responsibility of each service provider to update the pricing and ensure it is correct. This database could show the history of price changes over the previous 2 years.

We want to stop the price lottery, where a customer dials up a number and suddenly faces a bill of which they had no knowledge or reasonable expectation of receiving. The industry needs to work very hard to regain the trust of the consumer and we believe this could be one  step in the right direction.

What have tinned tomatoes got to do with mobile phones services? Everything, and here is why.

In pretty much any industry you know the cost of a product before you commit to buying it. When you buy an admittedly expensive £1 tin of tomatoes at the supermarket you go to the checkout, hand over the money and the transaction is completed. You don’t go home, wait a month and then receive a bill explaining that you have actually spent £20 on tomatoes this month. Yet, if this was the mobile industry you could expect a conversation along the lines of,

 “Yes I know it said £1 for the tomatoes but that was a daily subscription service, entitling you to credits for £1 of tomatoes every day. Didn’t you realise tinned tomatoes were a product sold as a subscription service? If you didn’t want tomatoes everyday, then all you had to do was send STOP. You will of course lose your outstanding credits for tomatoes not yet consumed”

I like tomatoes but not every day of my life. A bolognese addict might be interested in this sort of offer but me, no. I buy tomatoes when I want them and I only have pasta once a week, if that.

I definitely don’t buy my tomatoes on “subscription credits”. It is inappropriate for the product. Subscriptions are about receiving something on a regular basis, like a magazine, or they are used as a convenient way of paying membership fees. Subscriptions are not credits to buy something that you lose when you cancel the subscription.

So why is buying tomatoes relevant to mobile phones services?

Well they are both sold to consumers. However, that is sadly where the comparison ends. The mobile industry has a different approach to pricing that is seemingly accepted by the authorities and which does much to damage the consumer trust in the industry as a whole.

88888 Mobile ringtone/wallpaper subscription

Take, as an example, some recent TV adverts where you are urged to text 88888 and a pre-fix in order to download one of the advertised wallpapers. They also offer ringtones.

My immediate reaction was that ringtones are an old problem that had now been cleaned up but then I checked out the terms and conditions on the 88888 website. Here it says,

You’ll get these 3 ringtones for just £4.50 per week. The weekly payment is conveniently taken from your phone bill automatically. You then receive coupons to redeem against the items of content that you want. We have a huge selection to choose from and the coupons for each club are outlined below. Don’t worry if you don’t use all your credits, any left over credits will roll over to the following week. By joining one of the clubs you will make a big saving on all your downloads. Your club will renew each week but you can stop your club at anytime by texting stop to 88 888 or ringing our customer service line on 0870 1213186 (national rate). Make sure you don’t waste your credits by cancelling though.

Since when did this service fit the normal and accepted criteria of a subscription service?

If you subscribe to something you should get something each week. Not credits. The credits described here are just a form of vouchers. In any other industry you pay for a set number of vouchers upfront. Fair enough they may be time limited but you don’t get automatically charged for them each and every week and then lose them if you cancel future subscriptions.

Just a case of rotten tomatoes?

It is little wonder that a large proportion of the public do not trust subscription services in the mobile industry when you see promotions of this sort, apparently endorsed by the regulators?

There is no way this sort of promotion would be accepted in the supermarket industry and it should therefore not be acceptable in the mobile industry either. We would like to see PhonePayPlus ban  these type of subscription services.

“Have you ever thought about including an advert with your text answer?”

This is a question we get asked a lot. However, we do not believe that it is good business to include adverts in our text question and answer service.

The idea behind this business model is that an advert would be inserted after the answer we send to our customers and, so the theory goes, we can then generate additional revenue on every text. If we can generate enough advertising revenue on each text it might even be possible to reduce the amount we charge customers, perhaps even giving away answers for free. In this virtuous circle we could then attract even greater advertising revenue because of our larger user base.

It is not an unusual concept. Newspapers have for years sold their papers for a cover price and also generated advertising income on top. However, it is the internet world that has witnessed an explosion of ad-funded models, only a few of which have actually been successful. Websites and whole businesses have been funded on the concept of giving away information for free in the expectation of generating web traffic measured in millions of users. Whilst some companies have achieved spectacular web-traffic, many have also racked up spectacular losses.

So why doesn’t it add up?

Mobile is different to the web

Probably the single most important business feature in the mobile arena is the presence of a micropayment mechanism. i.e. customers have an account with a network operator. In the UK, premium rate services worth close to £1bn a year (appendix C of the PhonePayPlus business plan) have been developed on the back of this payment mechanism. This means, unlike the internet, it is possible to build a business where the consumer pays a small fee every time they use the service.

Despite the emergence of paypal etc, the lack of a credible and simple micropayment mechanism on the internet has hindered the development of such services on the web and has thus encouraged the ad-funded model approach. In contrast, in the mobile arena, it means you can make money on a service without the need to include advertising. An error many companies make has been to assume that the ad-funded models they have seen on the internet can be transferred to the mobile world.

Mobiles are personal

Mobiles are personal devices which customers have with them at most times of the day. We are in a privileged position where the customer asks us a question and allows us to send the answer to their phone. It is important to respect the customer’s personal space. This is why we never spam our customers. However, it goes further than that. When a customer texts us a question they know they are getting the best answer we can find. They know we are not pushing a product and we have not been “bought”.  When they ask for a restaurant in their town we give them an independent recommendation rather than pushing a company that has paid us to recommend their chain or one that is paying us for an advertising campaign.

Ultimately, we believe that we provide more than £1 of value in our answers. Texts only allow us around 160 characters to answer any question. We have a policy of using as many of those characters as possible in our replies and supplement many of our answers with extra information. The inclusion of an advert in any SMS text inevitably reduces the quality of that answer.

Economic considerations

Despite all the arguments against using adverts, some companies still believe they are acceptable within their text answers. It is therefore worth looking at the whole economics of setting up and running an ad-funded model.

The best way to look at this is to consider the cost base. Any business has to cover its costs and then some extra to make a profit. In the text question and answer business there are two costs that must be covered each and every time a question is answered. The first is the human cost of answering a question. At 63336, we pay our researchers 30p for each question they answer. This allows us to attract highly competent researchers who are based at home and primarily in the UK. We also have to pay a ‘bulk’ charge of around 3p-5p to send the answers back via text. So, to break-even on each and every text we answer we need to generate 35p. This is before marketing costs, central management salaries, IT infrastructure and the cost of supporting this blog.

Therefore, running an ad-funded model where the questions are free whilst achieving bottom line profitability requires in excess of 50p for each and every answer we send out. Is this really possible?

Advertising rates vary depending on the type of advert and how well an explicit consumer group can be targeted. For example, an insurance advert sent in an answer to someone who asked a question about insurance companies will command a high premium and it may be possible to do this through keyword identification. The problem is that we send out of 1,000’s of texts every day and only a fraction will appeal to category specific companies. 

Higher advertising rates are also achievable on “click-through” advertising (where someone not only sees the advert but also clicks on it, taking them to a website). However, such high payments are only made when a customer clicks on the advert. The average payment across all the adverts sent works out much lower because in many cases the customer doesn’t click through.

Finally, there is traditional banner type advertising seen by everyone. However, as it is not targeted, it commands very low rates per text sent out.

So what do other companies do ?

Despite the apparent unattractive economics of the ad-funded text question and answer model, there are examples of companies who have tried to adopt it. AskMeNow operated in America and were listed on the US stock market. Their results are available here. The company offered a free text question and answer service, relying on advertising as its primary source of revenue. It even tried to reduce the cost of answering the questions by employing researchers from the lower wage economy of Philippines. In the 12 months to 31 December 2007, its last full year of trading, AskMeNow managed to generate an income of USD60,000 whilst incurring expenses of USD20,980,000.

There are of course a number of reasons why the AskMeNow business model failed. However, it does demonstrate that it is unlikely to be possible to generate enough income from advertising to operate a totally free text question and answer service at a profit. It may be possible to generate some income from advertising but the customer will end up paying for an answer, the value of which is then diminished by the inclusion of an advert.

I recently came across a new service run by an American company Gogii to give away free texts through an iPhone App. It is discussed in this article here. Whilst they have raised VC funding of USD5.2million, the CEO freely admits that “advertising revenue does not come near the cost of running the service”.

It is quite easy to get a lot of customers by giving everything away for free. The real test is making money. At 63336 we were profitable after 18 months and have used those profits to grow the business. Customers can depend on us to keep delivering a good service because they know we are commercially successful.

Would we ever consider advertising?

There are clearly some forms of less intrusive advertising that are suited to mobile business models. A more obvious example is advertising within applications. This would work much like banner advertising on the web. We have developed the 63336 app that makes it easier to ask a question as well as providing insight into the questions our customers are currently asking on a daily basis here as well as our Top 5 Q&A and your question history.  If we get sufficient usage of the app there may be an argument to cover some of cost of supporting it through advertising. However, unlike the text question and answer service, the customer hasn’t paid £1 for a specific answer. Rather, they are browsing for news and information, a situation much like newspapers where advertising is less intrusive and more acceptable.

Conclusion

Given the current technology and the space available in a text the economics just don’t stack up to make it viable to run an ad-funded model. With the micropayment mechanisms in place on mobile phones it isn’t necessary either to support a viable business. The extra income we could potentially generate might enable us to perhaps reduce the cost of the text for customers but it is marginal and doesn’t offset the concerns about independent answers and not invading our customers’ personal space with advertising they did not solicit.

This success has continued, with 35,000 apps and 1 billion downloads by 23 April 2009. Latest figures (from 27 October 2009) are 100,000 apps and over 2 billion downloads. An AdMob study of 1,000 mobile phone users suggests that iPhone users download 10 apps per month and that iTouch users download 18 apps per month. Such figures are simply stunning and suggest that a completely new market is in the making.

While many of these apps are free, they are often commercial in purpose. For example, at 63336 we have been developing a Java ME app for the 63336 service, which we are launching today. An iPhone app is on the way and should be available by early December. The app allows a customer to ask a question of 63336, to see their question history, to see our daily top 5 questions & answers and to see what we call the 63336 Buzz. 63336 Buzz is made up of short articles highlighting the questions customers of the 63336 service are asking each day. It lets you see what’s on the mind of the nation.

New App Stores proliferate

Unsurprisingly, the result of Apple’s success has been a flurry of App Stores launched by the rest of the mobile phone industry. For example, network operators: Orange, O2 and Vodafone; software platform providers: Symbian with Symbian OS, Sun with Java ME, Google with Android and Microsoft with Windows Mobile; mobile phone manufacturers: Samsung, Sony Ericsson, LG, RIM, Palm and Nokia. And still more to come.

The problem with all of this is that none of these App Stores are really addressing the needs of the app developers. As commercial organisations, developers want to address the largest possible market for the least cost. The target demographic is customers of all the network operators using any mobile phone.

One increasing problem is the proliferation of software platforms: iPhone/iTouch with a special version of Mac OS X, Windows Mobile, Android, Symbian and Java ME, amongst others. However, Java ME has significant market penetration, probably well in excess of 50% of all UK mobile phones. With iPhone sales approaching 3 million in the UK, the market for Java ME apps is at least 10 times bigger. This represents a terrific market opportunity that exists right now.

It’s marketing, stupid

Currently, if a developer wants to market their Java ME application to the widest possible demographic, they would have to make it available on the O2, Orange and Vodafone App Stores at the very least. As Three and T-Mobile do not have App Stores, it would probably be necessary to do Nokia’s Ovi App Store and RIM’s App Store as well. So that would be five different submissions, and then, every time the App was updated, another five submissions. Very costly in time and effort, especially in maintaining a commercial relationship with five App Stores.

However, just making your application available on App Stores is not even a tenth of the battle. To paraphrase Bill Clinton’s campaign slogan, “it’s marketing, stupid”. That’s right, you now have to market the application. As the iPhone app developers are finding, it is not much fun when there are 100,000 applications listed. With so many apps available, there are typically 10 or 20 variants for every kind of app and the volume of apps is still growing steadily. You will need marketing to persuade customers to download and use your application.

Marketing is already terrifically expensive, without being made more so by the proliferation of App Stores. It is hard enough developing a single marketing campaign without having to target it to 5 different App Stores. Even if you run national marketing campaigns, it will still be expensive, because you are paying to reach a much broader audience than your target demographic.

A single App Store for Java ME apps

What developers require is a single App Store providing Java ME apps that will reach all the customers of all network operators using a mobile phone that can run Java ME. Developers would have a single marketplace from which to promote their applications, and a single commercial relationship. Customers would need only to go to one location to find and download applications. All of which would reduce friction in developing a substantial Java ME app market that could potentially dwarf the Apple App Store.

This situation is very similar to when SMS was first available. Initially, each network operator restricted SMS traffic to its own network, limiting the market for their customers to communicate with mobile phone users on other networks. Again network operators were focused on their own requirements and not on the requirements of the wider market. As soon as the agreements were made which allowed cross-network SMS traffic, SMS took off and has not stopped growing since.

The mobile industry has an excellent track record of working together to create and grow markets. GSM and SMS are good examples of that cooperation. There is a great opportunity for the mobile market to work together to produce a single App Store. In particular we are looking to Virgin, Three, TMobile, Orange, Vodafone and O2 to all get together and create a single App Store for Java ME applications.

There is more to this story on applications. Look out for further instalments, which will be on dealing with the complexities of multiple mobile phone form factors, and why the network operators didn’t really want their customers to run applications on their phones.

63336 has become one of the most successful and widely used 5 digit short-codes in the country. Yet we work in an industry that is associated with bad consumer experiences. From expensive ring tone downloads, to telephone voting rip offs, to plain old spamming. All of these abuses have severely dented the public trust in the premium rate industry.  At 63336 we have chosen to behave well and it is exasperating to see the abuses that go on in the industry and the sometimes feeble efforts to stop them.

So why is the premium rate industry a good place to be?

Premium rate mobile phone services offer a route to market for lots of innovative companies who can prosper because of the highly successful micropayment mechanism. Consumers can purchase small value items using their mobile phone. No need for credit card details every time you purchase; no need to remember your mother’s maiden name and the date of your daughter’s birthday every time you spend 25p; it is all done for you on the phone.

However, with such a simple and easily accessible payment mechanism there is always a risk of abuse since a company can simply charge your bill just by sending a text to your number. To reduce this risk we rely on regulation. The regulator has an important role in protecting the consumer and policing the system.

You can normally judge the success of the regulator by the trust the consumer has in the system and in some key areas this trust is missing.

So what are regulators doing?

The key player in the regulation of mobile services is PhonePayPlus. This is an offshoot of Ofcom dedicated to regulating the premium rate goods and services that you can buy by charging the cost to your phone bill and pre-pay account. That means they regulate us at 63336 and they also regulate the television voting lines, directory enquiries and various subscription and chat services.

First it is worth making clear that PhonePayPlus has started to tackle the problems. The year 2008/09 was a wake-up call. Their annual report for that year shows that they received 21,401 mobile related complaints, a huge number. This prompted them to undertake strategic actions set out in the PhonePayPlus Mobile Review which reported in July 2009. There were many good things in this document with new measures covering subscription services and promotional texts. PhonePayPlus can also point to a dramatic fall in complaints in Q1 of this year compared to last year, although how much of that can be linked to falling usage of premium rate services as a whole due to the recession is not clear. Yet is all this enough? PhonePayPlus reported that there were still 3,119 complaints in the mobile sector in the 3 months to 30 June 2009.

I would like to look at just one area of ongoing weak regulation in order to highlight the problem. Over the coming months we will highlight others but today I want to focus on spam.

Spamming

Spam on your mobile is tantamount to an invasion of your personal space. We all know what spam is and that feeling of anger when we receive a spam. It is an unsolicited message sent to your phone. It comes out of the blue. You never ticked a box saying text me. It is spam.

There are government laws covering spam. Under Section 22 of the Privacy and Electronic Communications (EC Directive) Regulations 2003, “it is an offence to send unsolicited promotions using electronic mail (including text messages) for direct marketing purposes, either where the recipient has not specifically consented to receiving such promotions, or where the recipient’s details were not obtained whilst purchasing a similar or related product or service to that being promoted. Even where such consent or details have been obtained, recipients must be given the opportunity, within each promotion, to opt out (without charge) of using their details for such promotions”.

That seems pretty conclusive. Indeed, the regulator of the Mobile Industry, PhonePayPlus, has its own code of practice and supporting fact sheet, “Unsolicited Promotions” which states “service providers should note that senders of automated direct text messages must have the prior consent of the recipient before the message is sent”. PhonePayPlus

So if you get a message out of the blue, perhaps from a company you used a few months ago, complain and PhonePayPlus will take appropriate action perhaps fining the service or even stopping it…….

Er, well no.

You see, PhonePayPlus has a different take on this. They have come up with concept of an “implied opt-in”. Somehow by texting a service, providing the terms and conditions of that service say somewhere that you have agreed to receive marketing text, you have implicitly opted in. The fact those T&Cs are on the web somewhere and were not visible when you made your purchase of a service on the phone is deemed irrelevant.

I’m not a lawyer but I don’t see any implied opt-in. When you go to a sweet shop and buy a chocolate bar you don’t implicitly tell the sweet shop owner to bombard you with marketing literature offering great deals on sweets. Yet in the mobile world because your personal phone details are captured at the point of purchase you have somehow miraculously agreed to be spammed.

It is wrong and an example of where lax regulation allows ongoing abuses of the rules.

Good behaviour is good for us and good for our customers

At 63336 we have chosen to behave well. This doesn’t mean we will never make a mistake or that we won’t ever interpret the industry code of conduct incorrectly. However, it does mean that we are genuinely trying to do the right thing for the consumers and our customers. This goes beyond the letter of the law. It means interpreting the laws from the perspective of the consumer. We believe you can succeed by doing the right thing and that customers will ultimately reward those companies that do so. However, we also need to ensure that the “premium rate mobile environment” is not trashed by other, irresponsible companies thus destroying the market for everyone.

We have over 2.2million unique customers who have used our service. Perhaps there is a loophole that means we could spam some or all of them, under the pretext of an offer or a survey. However, it wouldn’t be the right thing; we know it, the big companies know it and the regulator ought to know it.