I was fortunate enough to be a panelist at the VentureWire Wireless Ventures 2006 conference today. The main focus of the event was consumer applications and services. Since most of my focus lately is on Web 2.0 services and apps, it was a nice chance to see what's going on in the wireless world and compare it to what's going on in the Internet.
After sitting in 10 presentations and talking to entrepreneurs, two things became painfully clear:
1) The ultimate winners are the wireless carriers.
2) There will be a lot of VC money lost, especially money invested since 2005.
The wireless carriers are the ultimate winners because they still control the pipe, by virtue of owning your phone number, the billing relationship and the software that shows up on your phone. The wireline carries have long become a dumb pipe and have no such power, the IETF took care of that. In the wireless world, if you have an app and you want it to be featured on the carrier deck, you have to pay them 30-40% off the top. If you want to go off deck and sell a ringtone, you can do that, but premium SMS is the preferred and maybe only feasible way to pay for it, so again the carrier gets its 30-40% cut right off the top. Even if there were no transaction fees, and the app was free and ad supported, if you want to be on the deck, you have to share advertising revenues. So no matter what you do, the wireless carriers, get their pound of flesh.
Let's take a classic casual arcade game, Boulder Dash (which is a classic, and one of my favorites, I played it when I was a kid, now my daughters play it), and compare the experience of buying it for your PC to buying it for your handheld. Type the word in Google and it will tell you where to buy it. Their web site takes credit cards and probably paypal, and you are done. To get the wireless version, there is no good way to find it, and if you are lucky enough to find it then you have to pay through the carrier and they get their cut. Carriers have a lot of power in the wireless world and they know it.
Why do I think VC's will lose money? I heard there are some 10,000 wireless apps all trying to get the top 5s slot in a carrier deck. Not to mention they have to give a cut to aggregators. These infrastructure players are gettting bigger and stronger too. They are carrying hundreds of titles and have now, long-lasting relationships with carriers. Verisign recently bought M-Qube for example. So even if you invested in a application publisher, or infrastructure company, you have serious competition and taxes to pay.
If you were a VC investing in mobile apps 2-4 years ago, you did the right thing. There was a lot more open space. Jamdat, Mobile 365, M-qube, all got funded at that time, two of them exited. If you were investing in 2005 onwards, I think you have a tough time ahead of you. Whether you are an app or infrastructure company, you are now facing powerful carriers, big publishers and big infrastructure players. Small publishers, however strong a niche they think they've carved for themselves, will have a hard time getting their titles to sell. It's simple, you are one of many trying to sell to a few customers.
So what's left? Where are the opportunities? The one place where I see room for innovation is in ad supported, free, off-deck applications. In this case, there is no carrier tax paid. Aggregators could be avoided too. All this is good but the big question is, how you acquire customers. For the ad supported model to work you need to have a lot of subscribers, viewing lots of ads (and don't count on $30 CPM ads either, that's temporary due to lack of supply, assume $1-3 CPM ads realistically). You can't get subs using search marketing unfortunately. So it's up to the smart entrepreneur to innovate in business development and marketing. What kind of partners can bring me the most users? What kind of features will make my app distribute virally? Companies that can crack these questions are interesting. Best of all, there were a few such companies at this show, but I can't tell which ones.