Is Cell Phone Spam a Reality?

Source: Red Herring

Brand-name companies have caught on to the interactive power of mobile phone marketing. Is it a new advertising medium, or just glorified spam?

Buy a Coke bottle in Germany this June and there’s a good chance that a 16-digit code underneath the cap will lure you into the realm of mobile marketing. Starting this month, Coke drinkers in Germany can use their cell phones to text message codes found under the caps of 800 million bottles created for the campaign this year. In return, Coca-Cola, with the help of mobile marketing company 12snap, will reply with a java-based cell phone game branded heavily with Coke’s logo.

Those that take the bait can use the keypad to send the game’s coke-swilling rock star character diving off a Coke-branded stage and surfing on a crowd of red-clad concertgoers—not exactly subtle marketing. But as the cellular advertising industry begins to grow from a nascent market to hundreds of millions of dollars in worldwide revenues this year, big brands are launching similar mobile ad campaigns in countries across the globe in an effort to extend their reach and attract a growing base of customers from all walks of life.

Even though companies have just started to use mobile phones to schlock everything from toothpaste to TV shows, they use the latest in rich digital content to couch flashy ad campaigns for countries with advanced cellular markets, including Germany, the United Kingdom, Japan, and South Korea. At the same time, low-cost basic text-messaging campaigns allow them to tap emerging countries in Asia, South America, and the Middle East. In these markets, mobile is fast becoming the de facto method to reach consumers, and anti-spam regulations haven’t always caught up with the rate of handset sales—the perfect avenue for an eager brand to reach the next frontier of consumers.

The DoCoMo Directive

In downtown Tokyo, wireless subscribers only have to point to Japan’s bright red “Cmode” Coca-Cola vending machines to prove the lucrative union between cellular services and branded products in the most advanced markets. Subscribers to NTT DoCoMo’s mobile Internet service, i-mode, can pay an extra fee for the ability to wave their cell phones in front of one of the thousands of Cmode vending machines and purchase not only Coca-Cola beverages, but i-mode ring tones and other digital cell phone content. Cmode is just one of the thousands of branded cellular services available over i-mode, which helped contribute to NTT DoCoMo’s $48 billion in revenue last year.

Because the mobile marketing industry tends to overlap with mobile commerce and the sale of mobile content services, market forecasts are hard to find. According to one estimate by the Yankee Group, the mobile marketing industries in Japan and South Korea—which are the most advanced—will see combined revenues of just $300 million this year. That includes promotional text messages and emails sent to mobile inboxes, banner ads housed on mobile Internet sites, and direct requests and subscription services from customers responding to print and broadcast media.

But those markets are still set to double over the next four years, creating a combined $748 million by 2009. Japan and South Korea’s largest wireless operators have already joined forces with ad agencies to commit millions to marketing-over-mobile, with Japan’s NTT DoCoMo forming a mobile ad agency, D2 Communications, and South Korea’s SK Telecom partnering with ad agency AirCROSS.

In Western Europe, London-based Flytxt recently offered what the company calls “the first video advertising campaign on the mobile portal.” Over the carrier 3’s service, subscribers can download a 30-second movie trailer clip to preview the film. For the campaign, Flytxt produced a banner on the home page of 3’s portal and generated tens of thousands of downloads in just a few days. The company was founded in 2000, with $8 million from Herald Ventures, IVC, and Mars Capital, and has built up a customer list that includes giant brands like Coca-Cola, Bacardi, and Panasonic.

Subscribers in many markets already use cell phones to access web sites, and marketing companies are developing campaigns designed to leverage the mobile Internet. Since establishing an Internet connection over the carrier’s portal generally guarantees the carrier can get paid for it, coaxing customers to download rich digital media is a business plan that pays for itself. “Eventually, the distinctions between the fixed Internet and mobile models will blur,” says Yankee Group analyst Farid Yunus. “Any kind of ad you encounter on the Internet will be available over mobile.”

Sold on SMS

Unlike Japan, South Korea, and Western Europe, most countries do not maintain the third-generation (3G) cellular infrastructure to carry the rich-media mobile marketing services, or have access to the proliferation of advanced Internet-enabled handsets. But because of the low cost of simple text message campaigns—which can cost less than $0.01 per message—combined with the massive population size of emerging markets like China and India, big-name brands have started to look toward developing markets.

According to the Yankee Group, Asian countries outside of South Korea and Japan will generate over $2 billion in mobile marketing revenues by 2009. Japan and South Korea comprised more than half of the revenues in the Asia-Pacific region last year, but by 2009, countries like China, India, Singapore, and Thailand will account for almost 75 percent.

In developing regions, where wired communications remain either unreliable or too expensive to deploy, the number of mobile phones exceeds the number of Internet connections, and, often, landlines. Short message service (SMS) in particular has been embraced across developing countries, even playing large roles in political and social movements, such as the SMS-overthrow of a Filipino government official and the SMS-exposure of the Chinese government’s cover-up of the SARS epidemic. “In terms of direct communication channels in some of these markets, the mobile is the only interactive platform that is a reality,” says Gartner analyst Daren Siddall. Cell phones appear to the best way to access emerging markets.

Enpocket, a New York City-based mobile content company with clients like Nike, Levi’s, and Intel, says that its biggest growth markets are India, China, Brazil, and Russia, along with the United States. Backed by Nokia Venture Partners, GrandBanks Capital, Dolphin Equity, and Straumur Investment Bank, the company says it reached profitability in 2003. Mike Baker, president of Enpocket and board member of the global Mobile Marketing Association, says that India interests his company the most, and that Enpocket is currently “building a business on the growth of the [Indian] middle class.” Mr. Baker says that the company plans to partner with a media advertising company in Mumbai to do mobile marketing, and will develop the technology infrastructure in the near future.

Even with advanced campaigns launched across Europe and €49.5 million ($90 million) in VC funding, 12Snap is looking for new revenue sources in emerging markets. The company’s managing director in Germany, Ulrich Pietsch, says that the company will likely open an office in China sometime this year if a brand like McDonald’s or Coca-Cola will commit to launching a campaign with the company. Mr. Pietsch also points to the Turkish market as a surprising example of a booming mobile ad market. “A Coca-Cola campaign conducted by another mobile marketing company in Turkey had a higher response rate than any single one I’ve ever seen before,” says Mr. Pietsch. “Nobody would expect a country like Turkey to be that successful.”

In China, 21Communications, Linktone, and Mobile Factor (recently purchased by Irish mobile company Puca) have created businesses that help brands advertise over the country’s national carriers, China Mobile and China Unicom. Last year, 21Communications launched a campaign to market Kentucky Fried Chicken’s new burrito called the ‘Dragon Twist’ throughout the Jiangsu province in China. Customers that responded to in-store ads text-messaged “KFC” to an assigned phone number and received a mobile coupon in reply. After a month, 20,000 people had downloaded the mobile coupon. David Turchetti, CEO of 21Communications, says that the company’s campaigns generally cost $20,000 to $50,000 in fees for the brand, plus a monthly maintenance charge—a relatively small sum for a mobile coupon campaign that coaxed 63 percent of participants to return to the store to buy more. Mr. Turchetti founded 21Communications in 1999 and says the company is profitable.

The Yankee Group’s Mr. Yunus says that some operators in emerging markets like Indonesia and the Philippines offer brands low-cost, bulk-messaging options. He points to wireless carrier Maxis in Malaysia as an example of a progressive operator in the mobile marketing space, since the company offers brands a hosted mobile ad solution, including web services to upload phone numbers and monitor customer responses.

Walking a Fine Line

To succeed, the mobile marketing industry must straddle the line between permissive marketing and mobile spam. Advertisers and carriers agree on the surface that any unsolicited message is bad for business. Mobile spam in many forms already affects subscribers across all markets, especially those where cell phones connect to the Internet. In emerging markets, a lack of guidelines and established spam laws encourages mobile advertising of all kinds, spam included.

Although regulation and legal directives surrounding mobile marketing differ across countries, industries and governments in developing markets often take a more relaxed attitude toward unsolicited mobile marketing campaigns. The result can be an encouragement and a proliferation of aggressive campaigns. Pamir Gelenbe, founder and director of corporate development for Flytxt, calls the phenomenon “cowboy-style mobile marketing.” Though his company does not have clients in emerging markets, he explains, “Advertisers tend to take a fairly liberal view of what they can do with text-messaging in these countries. Supposedly the carriers play a large role in that as well, and rent their databases to brands.”

Gartner’s Mr. Siddall says that emerging markets have a higher tolerance for more aggressive mobile marketing, since the populations in these countries are generally not exposed to as much everyday advertising as, say, residents of the U.S.

Although carriers and brands are relatively quiet on the topic of mobile spam, analysts like Mr. Yunus agree with Mr. Gelenbe that the mobile marketing industry in emerging markets has more of a cowboy mentality—though he prefers the terms “entrepreneurial” or “opportunistic.” Mr. Yunus also adds that regulators in these regions are moving to enact anti-spam legislation that will encompass mobile spam. “It is in their interest to have happy customers, and a mobile network that gains a reputation for unfettered spam is going to lose customers fast.”

The European Union and the U.S., as well as a variety of other countries, already have anti-spam laws in place and best-practices guidelines for carriers and brands that are designed to ensure that campaigns allow consumers to opt out. Mobile marketers must take into account their audience when conceiving campaigns; Europeans have a higher tolerance for receiving direct messages from marketers than Americans. According to Empower Interactive, a London-based company that provides data services to operators, 84 percent of European wireless users are open to the prospect of receiving SMS-promotions on their cell phones. In contrast, studies show that a much smaller proportion of Americans feel that way. According to the Yankee Group, only a “fraction” of the 20 percent of U.S. mobile phone users that received an ad or commercial message on their handsets in 2004 (up from 13 percent in 2003) found the messages relevant; the rest found them annoying and/or deleted them.

Early Days

The mobile marketing industry is still relatively nascent compared to other mobile data services like games and ring tones. “We’ve been in this business for five years now and I feel that we are just on the cusp of mobile marketing being big,” says Flytxt’s Mr. Gelenbe. “It is certainly not big yet and I give it another five years to grow into something more meaningful.”

Industry insiders and analysts say that when carriers realize the potential of their position as media companies, mobile marketing will really take off. Today, operators in most countries don’t actively promote marketing campaigns for brands, and miss out on a potential windfall of revenues that they could get from a media sales-style business. “I haven’t seen many moves by operators to create their business as an ad sales-type model, but that is a couple of years away,” says Mr. Siddall.

While the mobile marketing industry in advanced cellular markets develops more complex digital campaigns at a rapid rate, the future growth of the industry will give brands access to the fastest-growing markets in the world. Thanks to the cell phone, people in developing countries can start craving products they can’t afford before they even see them in a TV commercial.

This story was previously published in Red Herring magazine under the title: Marketing Goes Mobile.