Keeping up and Profiting from the Digital Ecosystem

KEEPING UP AND PROFITING FROM THE DIGITAL ECOSYSTEM

A Fortumo white paper for carriers Introduction This white paper is aimed at carriers and is intended to give an Fortumo works together with merchants ranging from streaming overview of where the digital payments landscape is moving. Due to a services and app stores to digital wallets and mobile commerce shift in mobile growth from Western markets to emerging markets, companies. As such, we have a clear overview of what merchants digital and physical content merchants are turning their eyes to these expect from carriers and in this white paper, we share that feedback. regions. Also, the needs of such merchants are becoming more The topics covered in the white paper are: sophisticated from both business and technical standpoints.

Due to underdeveloped banking and credit card infrastructure in An overview of changes in the digital ecosystem that force carriers emerging markets, merchants need to rely on alternative payment to reassess their business lines methods to collect money from users. One of the most widespread models in emerging markets is mobile money. According to GSMA’s Partnerships with OTTs: a shift in strategy from indirect to direct industry report, mobile money solutions were used by merchants to monetization collect close to $3 billion1 in payments during 2015. Estimated revenue impact of implementing carrier billing in new For carriers, this opens up an opportunity to provide digital merchants digital segments with their own payment method, carrier billing. With close to 5 billion mobile phone owners, this payment method has the potential to reach Future potential of partnerships with financial technology providers more users than any other form of electronic payment. Universal presence of mobile devices makes carrier billing an attractive payment Technical and commercial requirements for entering new method for merchants. segments with carrier billing

At the same time, making carrier billing attractive and economically Fortumo’s role in helping carriers navigate the digital ecosystem feasible for new merchant segments requires carriers to adjust their technical capabilities and commercial terms to become more comparable to bank based infrastructure. But for carriers who are ready to innovate their offering, the reward can be significant. The top 3 credit card providers in the world process close to $6 trillion annually, so getting even small portion of this can create a sizeable benefit.

1 Page 47 - value of global merchant payments and bill payments processed by mobile money solutions.

KEEPING UP AND PROFITING FROM THE DIGITAL ECOSYSTEM A shiﬅ in the telco industry: broadening of services

The usage of OTT services (video and music streaming, app stores, social networks, IP-calling) is growing. As a result, mobile data consumption is in exponential growth, requiring carriers to invest heavily into their network infrastructure. At the same time, services such as Skype, WhatsApp and Facebook Messenger are eating into existing carrier revenue. In total, the global telecom industry’s ARPU declined by 4.5% in 2014 and 2.8% in 2015.

The consulting firm A.T. Kearney recently conducted a survey in 20 countries about the shifting needs of the telecom customer. The research shows that a majority of consumers see their carrier as a provider of data connectivity. At the same time, digital services and apps are taking over a lot of the functionality that only carriers used to provide.

With decline in existing business segments, carriers are looking at alternatives for growth. Many are attempting to shift focus from being the data provider to a digital innovator. So, instead of competing with OTTs, telcos look ways for collaborating with them by partnering in marketing, distribution, zero-rated data etc. Or in some cases even investing directly - such as Smart Philippines to Rocket Internet, or TeliaSonera to Spotify.

These initiatives serve the purpose of strengthening the carrier’s value proposition to their customers and positioning carriers as digital players. But they key challenge for carriers still remains how to ensure that the OTT offerings integrate into carrier value chain and form a deeper connection with the consumer.

KEEPING UP AND PROFITING FROM THE DIGITAL ECOSYSTEM A shiﬅ from indirect monetization to direct monetization

For most carriers, working together with digital content providers means Free trials don’t last forever. While users are motivated to stick to joint marketing and promotion activities: indirect monetization. The their network provider for the duration of the free trial, nothing keeps typical ways how carriers work together with digital merchants are the them from leaving after the promotion is over. In case of music and following: video streaming services, only 30% convert to a paid package. This means 70% of subscribers are still likely to leave to an alternative Offering free trials. The carrier partners with a merchant and offers network once the promotion ends. the merchant’s service free of charge for a limited time to their users. The benefit for the carrier is increased user acquisition and reduction Data traffic from digital content is overestimated. In markets of churn with existing subscribers by providing content to the user where streaming services have been available for a long time, paid that other carriers are unable to provide. video and music streaming generate less than 20% of total mobile traffic. In Europe and Asia, real-time entertainment accounts for less Offering free data. The carrier partners with a merchant and does than half of the total traffic while paid services only account for 2% of not charge users for data connectivity for the specific merchant’s mobile data traffic. VoIP services (voip calls use 300Kb - 800Kb per service. The benefit for the carrier is that in case of a popular minute) do not generate enough traffic to exceed a 2% threshold service, users will enable mobile data on their phones and become either. accustomed to using and paying for mobile data.

User verification. The carrier has significantly more information Direct monetization of users allows compensating for the weak sides of about users available than a merchant with their first-time user. For indirect monetization. Getting a temporary benefit (free trial or free data) example, merchants can use carrier subscriber data to verify users from their carrier reduces churn partially, but tying the user up into a and prevent fraud on e-commerce checkout pages. Helping billing relationship moves carriers up the value chain. Users are merchants verify users generates additional revenue for carriers by significantly less likely to switch to an alternative network if they lose the charging merchants for verification requests. following:

While indirect monetization has proven effective for carriers (a recent Capability to make payments on app stores survey says 96% of carriers find these partnerships beneficial), there are several aspects that speak in favor of adding direct monetization Access to their premium music and video streaming service strategy to it:

Direct monetization brings more revenue. As analyzed on the next page, implementing carrier billing in parallel to indirect monetization together with app stores and digital content merchants allows carriers to grow their average revenue per user by 25%, on average.

KEEPING UP AND PROFITING FROM THE DIGITAL ECOSYSTEM How big is the impact of direct monetization?

The mobile services available to consumers come from two sources: Assuming a carrier margin of 15% from end-user spend, adding direct carriers and 3rd party providers: monetization to app stores, music streaming and video streaming would contribute an additional $5.4 to a carrier in the UK per month. This is a 23% increase in ARPU. Data Calls Emerging Asia In Malaysia, the average ARPU of a mobile user is around $9 per Messaging month. Users also spend money on other services:

VAS App store spend: $5 per month Digital Music streaming (Deezer, Tidal, Apple, Spotify): $4.6 per month App stores Video streaming (Netflix, HOOQ, iflix): $7.9 per month

So in case a carrier decides to implement direct carrier billing for 3rd party providers, how much additional revenue can be generated? To Assuming a carrier margin of 15% from end-user spend, adding direct estimate this, let’s look at an average consumer in Western Markets monetization to app stores, music streaming and video streaming would (Europe) and Emerging Asia (Malaysia) and see how much money they contribute an additional $2.6 to a carrier in Malaysia per month. This is spend on average on various services: a 28% increase in ARPU.

Western Markets Based on the examples above, we can say that the average carrier is In the United Kingdom, the average ARPU of a mobile user is around able to increase ARPU by roughly 25% from their users who actively $24 per month. Users also spend money on other services: consume digital services. More importantly, revenue from these segments does not threaten the carrier’s own revenue: watching App store spend: $16 per month movies, playing games or listening to music does not reduce the amount of calls or messages that users send and actually increases Music streaming (Deezer, Tidal, Apple, Spotify) : $9.99 per month their data consumption. Video streaming (Netflix, Amazon Prime, Hulu Plus): $10 per month2

2 Price of one VOD service, many users use two or more services as content between services varies (e.g. movies and sports streaming).

KEEPING UP AND PROFITING FROM THE DIGITAL ECOSYSTEM What’s ahead aﬅer digital?

Every new segment will peak at some point: users will only make a finite Once digital content monetization has reached a peak for carriers, the amount of calls, app store activations and spending will reach a peak, mobile commerce segment becomes the next priority. Some examples digital services spending is limited by the dominant subscription-based of carriers that have entered this space include Vodafone in Germany business model. Looking into the future, beyond app stores and digital where users can top up their PayPal account with carrier billing or Smart content, what will be next for carriers? in the Philippines where MasterCard virtual card is connected directly to the subscriber’s phone bill. Users consume a lot of other services beside those described previously on their smartphones. For many of these segments, carrier But how big is the opportunity? The markets are very different in size. billing as a widely accessible and simple payment method can be The following estimate for current market sizes is based on 2014 data implemented as well: and a forecast for mobile commerce growth:

Telco services App stores: $24 billion (Apple + Google) Covered by all Digital music and video: $32 billion (video + music)

VAS Data Text Mobile commerce: $626 billion (source) Calls Mobile commerce is a 10x bigger market than app stores, music and video combined. Based on our experience working with app stores and streaming providers, carrier billing generates approximately 30% of revenues, while card-based payments bring in the other 70%3. Based on the 30% presence of carrier billing in existing segments, digital Digital commerce has the theoretical potential to generate $188 billion in commerce apps & additional volume through carrier billing annually. Digital app stores Ride-sharing & Services Covered by some Ticketing Transportation Covered by some (events, movies) At the same time, unlocking the mobile commerce segment involves the Digital music Delivery services and video (e.g. food) need to review commercial terms. In general, mobile commerce Insurance merchants are looking at payouts of 90%-95% and above. It is different for emerging markets where prepaid distribution costs limit the payouts - there it, can be solved by applying user surcharge.

3 This is varied by markets (generally higher credit card spending in Western markets due to better access to bank-based payments; higher carrier billing spending in emerging markets due to its better accessibility).

KEEPING UP AND PROFITING FROM THE DIGITAL ECOSYSTEM How to estimate the future growth potential?

But despite the higher payouts for merchants, carriers still stand to gain a significant amount of additional revenue compared to the app stores and digital content business:

$9.4 Billion Annually

Revenue $2.5 Billion Annually $2.4 Billion Annually

Growth potential

30% Margin 15% Margin 5% Margin Legacy segments, gaming & social networking

Enabling payments to the mobile commerce segments results in a significant increase in user stickiness for carriers. Enabling access to high-quality mobile commerce merchants reduces the pressure of pricing competition with carriers. Even if telecommunication service prices are higher with carrier A, they are unlikely to switch to carrier B if that means they are not able to order taxis, insure themselves or top up their virtual credit card any more.

KEEPING UP AND PROFITING FROM THE DIGITAL ECOSYSTEM How will the mobile commerce and carrier partnerships look like?

For carriers, enabling payments for mobile commerce merchants is a significant challenge due to several reasons:

Legislation and regulation: carriers are not financial services providers

Business development costs: carriers have not established partnerships with mobile commerce merchants

PCI compliance: mobile commerce merchants are used to credit-card grade compliance which direct carrier billing does not currently fit with

Spending limits management and fraud control

Higher amounts per transaction

But there is an alternative solution: instead of partnering directly with the mobile commerce merchants, carriers can work together with financial technology providers. For example, by partnering with a digital wallet provider, financial institution or regulated bank to enable payments for ridesharing or with a virtual credit card vendor in order to enable payments in an m-commerce marketplace.

KEEPING UP AND PROFITING FROM THE DIGITAL ECOSYSTEM How will the mobile commerce and carrier partnerships look like?

One of the key concerns that need to be resolved in order for such partnerships to happen is managing bad debt. While losing revenue due to a customer not paying their call, messaging and data bill is negative, bad debt becomes significantly more problematic in case delivery of physical goods or services is involved. But this challenge can be resolved by implementing the same spending limitations as with app stores and digital content:

Relying on the expertise of the chosen partners for the payments

Historical risk scoring of users when implementing their spending limits

Segmenting users to different spending limit categories

Adjusting spending limits based on real-time payment behavior

Using custom spending limits for different user categories ensures that who want to pay for mobile commerce services in large quantities. At the same time it allows avoiding potential problems with users in more risky segments and for example when their device is stolen or an underage person is making payments on someone else’s phone.

KEEPING UP AND PROFITING FROM THE DIGITAL ECOSYSTEM Merchant expectations for direct carrier billing technologies

Technologically, there is no difference in processing payments for app stores, digital content and mobile commerce. When building out a direct carrier billing platform and considering which features to implement, the following should be mandatory in order to make the platform future-proof:

Pure DCB API: stable platform

Merchant and trusted partner hosted flows (depending on segment, header enrichment or PIN flows): consumer trust and user experience based on what the merchants know about their users

2-step token-based charging: in order to support delayed and multiple purchases (such as ridesharing) and seamless user experience for trusted users

Dynamic & flexible pricing: business model of most digital and mobile commerce merchants, who also need to offer free trials for user acquisition

Recurring event management: business model of most digital content merchants

Reporting: ability to understand performance and make changes quickly on merchant side

Payment failure reporting: access to failure reasons and error codes allows merchants to suggest to users the best steps in order to complete the payments

Spending limits: ability to manage risk and reduce bad debt

User black- and whitelisting: ability to manage risk and reduce bad debt

Capability to distinguish prepaid and postpaid users: ability for merchants to segment their offering (e.g. higher ticket value items for postpaid users, lower ticket value items to prepaid users)

KEEPING UP AND PROFITING FROM THE DIGITAL ECOSYSTEM How does Fortumo help carriers launch app stores, digital content and mobile commerce?

Fortumo provides carriers with the most comprehensive payments platform in the industry. Our turnkey solution enables scale without additional overhead:

Scalable, clustered and cloud-based infrastructure

Fortumo Insight: an advanced carrier analytics dashboard

Fortumo Risk Management Engine for fraud and refund management

Constant platform development, carrier does not need to make any investments

One streamlined settlement flow for all segments

Merchant on-boarding and support

User churn & recurring event management

Access to the entire digital economy (app stores, gaming, social, music, VOD, software) and financial technology providers

KEEPING UP AND PROFITING FROM THE DIGITAL ECOSYSTEM Additional reading

Swisscom case study: how do mobile White paper: Six steps to guarantee a Carriers should not choose between app operators benefit from direct carrier billing? successful Google Play launch stores and digital content revenue Read now Read now Read now Pure DCB API: stable platform

Merchant and trusted partner hosted flows (depending on segment, header enrichment or PIN flows): consumer trust and user experience based on what the merchants know about their users

2-step token-based charging: in order to support delayed and multiple purchases (such as ridesharing) and seamless user experience for trusted users

Dynamic & flexible pricing: business model of most digital and mobile commerce merchants, who also need to offer free trials for user acquisition

Recurring event management: business model of most digital content merchants

Reporting: ability to understand performance and make changes quickly on merchant side

Payment failure reporting: access to failure reasons and error codes allows merchants to suggest to users the best steps in order to complete the payments

Spending limits: ability to manage risk and reduce bad debt

User black- and whitelisting: ability to manage risk and reduce bad debt

Capability to distinguish prepaid and postpaid users: ability for merchants to segment their offering (e.g. higher ticket value items for postpaid users, lower ticket value items to prepaid users)

Fortumo is a mobile payments company that enables direct carrier billing with more than 350 mobile operators in 90+ countries. Fortumo's payment products work across a wide range of platforms including desktop devices, smartphones, feature phones, tablets and smart TV-s. These products give end-users a simple, 1-click payment method to charge online purchases to their phone bill. For carriers, connecting to Fortumo enables additional revenue from leading app stores, game developers and digital media companies while Fortumo takes care of the technical infrastructure, taxation, merchant on-boarding and support in post-launch activities. Founded in 2007, Fortumo has offices in Estonia, San Francisco, Beijing, Delhi, Mumbai, Singapore and London and is backed by Intel Capital and Greycroft Partners.

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