KEY POINTS
Carrier billing allows mobile users to buy digital goods like ring tones, music, apps, e-books, and in-app purchases by adding the cost of the purchase directly to their mobile bills. While carrier billing is very simple and seamless from the consumer's perspective, it depends on a complex set of relationships between wireless carriers, app stores, platform vendors, and app developers. Those relationships also vary substantially country by country, depending on each market's mobile ecosystem.
Though it's often associated with emerging markets, carrier billing companies actually make most of their money in developed markets like North America and Europe. The reason users like it in developed tech markets is that it's an extremely low-friction way to pay. Since your carrier already has all your payment information, there's no need to create a new account or deal with layers of authorizations.
But carrier billing's huge opportunity is to help carriers and developers monetize mobile users in the developing world. In emerging markets like India, mobile penetration is high, but hundreds of millions of people lack credit cards or bank accounts, carrier billing has especially big potential as a way to get more people paying for apps, music, and in-app purchases on mobile devices.
How big is the opportunity? We speak to executives from four leading companies to get a feel for the market. In terms of numbers, we estimate carrier billing powers $3 billion in mobile transactions, or 12% of the global market for mobile digital content. In 2017, we think carrier billing will up this share to 22%, for $13 billion in mobile transactions. Carrier billing is seeking to handle a bigger and bigger slice of this market, much of which is funneled through credit card purchases on the main app stores, Google Play and Apple's App Store. Carrier billing can work within the app stores and outside of them, but so far only Google Play has shown an interest in working with carrier billing.
Carriers are beginning to lower their once-prohibitive fees for powering carrier billing transactions, in the hopes of seeing revenue explode as more people adopt it as a payment method. Mobile operators charge fees between 25% and 40% over the total cost of purchased goods. But as carriers struggle to maintain revenue, and realize they are missing out on a big opportunity in digital goods, they are beginning to compromise on their rates in hopes that they will see a higher volume of carrier billing sales.
The holy grail for carrier billing is to reduce rates low enough so that people adopt it as a method for purchasing physical goods via e-commerce sites and apps. If this happens, as it has in South Korea, the carrier billing opportunity would be truly massive, as it would begin to compete head to head with credit cards as a payment method.
INTRODUCTION
Carrier billing allows consumers to make phone-based purchases, primarily for digital content, by adding the cost of a purchase directly to their mobile bill. It's similar to the way your purchase of an on-demand movie via your cable box is automatically charged to your cable bill.
Carrier billing is not mentioned often in the tech press. Perhaps that's because venture capital firms and traditional payment players have shown more interest in software-centric payment tools, like Square and Stripe. These two companies have helped vendors of physical goods adapt to the rise of mobile payments and e-commerce, respectively.
Carrier billing, by contrast, is controlled by the carriers, and is still very much rooted in the telecommunications industry. It's also primarily used to buy and sell digital goods: apps, music, virtual products like emojis, etc.
Carrier billing is actually an umbrella term that envelops two main technologies, which we explain in our report:
Direct carrier billing, which involves in-app or app store purchases debited directly from a smartphone user's cell bill.
Then there's premium SMS, which is an older technology associated with feature phones.
The two technologies have one thing in common: The wireless carrier is at the center. That has earned carrier billing a reputation as a has-been technology.
"Mobile operators are often considered somewhat old-school, and not associated with technology disruption," says Richard Leyland, vice president of marketing communications at Bango, which offers carrier billing services. "This is probably unfair. Direct carrier billing is connecting millions to digital commerce today, often for the first time."
As a method of payment, direct carrier billing boasts one clear advantage over the credit card-driven alternative.
1. To begin with, there's the obvious but often overlooked fact that some of the largest emerging technology markets have serious deficiencies in credit card penetration.
Millions of active mobile consumers in countries like Russia, Brazil, and India do not have credit cards. However, since mobile penetration is relatively high, carrier billing is available to most people.For app developers who want to make money off their apps in these markets, carrier billing is often the best way to make purchasing accessible to consumers.
2. Perhaps more importantly in the longer term, carrier billing is very low-friction.
This is carrier billing's primary appeal in developed markets. Purchases can be completed with a few clicks. Users do not have to arduously enter information like billing addresses and credit cards numbers as they might have to for other mobile commerce transactions, because the mobile carrier will already have the payment and personal information at their disposal.
But competition over control of all mobile transactions is fierce, since billions of dollars in fees are at stake.
Carrier billing has a few deficits that it will have to overcome if it's going to truly take off, whether it's in developed or emerging markets.
The high fees charged by mobile operators are a major disadvantage.
Additionally, direct carrier billing will never account for a huge share of revenue unless it's adopted for the purchase of physical goods, as well as digital goods.
As we'll discuss in the report, there are signs that direct carrier billing companies are working to overcome these obstacles.
The stakes are high. In developed markets, carrier billing is perhaps wireless operators' last shot at a major new revenue stream after losing SMS text, voice, and data revenue to over-the-top messaging and calling apps, as well as Wi-Fi.
In the report, we size the market for direct carrier billing, then unpack the direct carrier billing process to understand how different players are involved in every direct carrier billing transaction. We look at the way carrier billing has evolved since the days when SMS powered all transactions, and predict where carrier billing has the greatest potential going forward.
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The Carrier Billing Process Explained
The carrier billing value chain typically has three or four players: mobile carriers, app developers, app stores, and platform providers.
1. Mobile carriers have the mobile subscribers and their billing information so they carry a lot of power. They are equivalent to the Visa or MasterCard of the carrier billing value chain. They also have a vested interest in carving out a piece of the mobile commerce pie before it's too late.
Carriers either offer carrier billing for apps that are distributed outside of the app store or negotiate terms with an app store for providing carrier billing. When an app store decides that it will offer carrier billing, the responsibility of providing the payment technology falls on the carrier and carriers often source this technology from carrier billing platform providers.
2. Carrier billing platform providers are equivalent to merchant service providers in the context of the credit card-processing industry, which we covered in a recent report. They provide the technology that allows wireless carriers, app publishers, and app stores to offer carrier billing options to their customers. On an ongoing basis, platform providers can also help troubleshoot technical glitches, and manage compliance with local tax and payment regulations.
3. App developers play the role of merchants in the direct carrier billing ecosystem, since they produce the digital content and services that consumers want to purchase. Developers then partner with direct carrier billing platform providers — or with carriers and app stores that already have a platform in place — to offer carrier billing as a payment option.
What kinds of apps use carrier billing?
"Fortumo payment solutions are used by game companies like Rovio, Electronic Arts, Zeptolab and Vostu, as well as social networks and streaming services like BoxTV," says Mattias Liivak, head of marketing at Fortumo, an Estonia-based direct carrier billing company. "Merchants see around 10 to 20% uplift in revenues in Western European markets and 40 to 60% in Eastern Europe, Latin America and Asia."
4. App stores act as distributors for app developers and get a cut of the transaction when audiences purchase apps or buy in-app digital goods. Some app stores, notably Apple's App Store, shun carrier billing. But others, like Google Play, have shown a willingness to partner with carriers in order to provide users with the option to pay for apps and in-app purchases on their mobile bills.
Google Play provides users the option to pay with carrier billing in over 20 markets, including the U.S., U.K., France, and Germany. (See table, above.)
In some of these markets, including Australia, Bango has partnered with Google as its carrier billing platform provider. Google sees carrier billing as advantageous and even gives preference to carrier billing over other payment methods in some markets because it drives such high conversion rates, says Leyland of Bango.
Because of all the layers potentially involved, the carrier billing ecosystem can get complex.
The terms of each deal tend to vary greatly, but the carrier is the ultimate gatekeeper.
Wireless carriers wield a lot of clout in terms of the apps and internal software they can pre-load on phones, before they're sold to customers. Wireless carriers don't always need the cooperation of the main app stores in order to make carrier billing an option on the phones and apps they distribute.
We'll go through an example to illustrate the typical value chain in a direct carrier billing transaction.
The transaction is also illustrated in the screen shots to the right.
Jerry in Australia wants to play Angry Birds Star Wars HD on his mobile phone and wants to pay 2.87 in Australian dollars for the game.
He clicks on the screen to make the purchase and a prompt from Bango appears asking him to select his billing method.
He chooses "Bill My Telstra Account," and confirms the transaction.
AU$2.87 is added to Jerry's mobile bill.
At the end of the month, Jerry pays his mobile bill.
After Jerry pays, Telstra takes a percentage of the sale. This percentage differs from market to market and tends to be higher in emerging markets, but for this example we'll say 30%, or $.0.86.
If an app store published the app then it gets a cut of the AU$0.86 the carrier collects, which depends on the prenegotiated terms the app store has struck with the mobile carrier.
Regardless, the carrier then wires $2.01 to the carrier billing platform provider — in this case, Bango.
Bango takes a percentage of the original transaction. We don't know how much, but let's say for the sake of argument that it's 2%.
After Bango takes the $0.06 cut, it wires the remaining $1.95 to the developer.
Typically, the developer and the app store, if one is involved, receive payment after the end user has paid the phone bill to the mobile operator. The developer carries some risk here, because if there's a dispute over the charge, the carrier might decide in favor of the customer, and the app developer might never see a payment. Arguably, though, that's no different from a credit card charge, which may also be disputed. And, because the amounts involved are typically small, fraud and non-payment aren't typically a problem.
Clearly there's one major disadvantage to carrier billing. It is more expensive for app stores and app developers than direct credit card-powered transactions.
Some carriers take up to 40% of carrier billing transactions, so there's a major disincentive for app stores and developers to use direct carrier billing, since they have to compete over fees with an extra middle-man.
But as we'll discuss, mobile carriers are beginning to lower their fees, and developers and app stores are embracing direct carrier billing because of the ease it brings to in-app purchases.
Sizing The Direct Carrier Billing Market On Mobile
We believe the global market for digital goods purchased on mobile devices reached $28 billion in 2013, and expect it to increase by 160%, to $73 billion by 2017.
This the core market for carrier billing, but the data suggests that carrier billing accounted for only a 12% share of mobile digital content purchases in 2013.
One reason is that Apple doesn't allow carrier billing in volume as a payment method on the App Store or iTunes.
This is significant considering that the App Store generated $10 billion in revenue in 2012.
Still, carrier billing will grow quickly from $3 billion in 2013, and rise 333% to $13 billion by 2017.
That growth rate will push carrier billing's share of mobile digital goods purchases to 22% by 2017.
The primary driver of growth will be the huge number of mobile phone owners in developing markets whom we believe will choose to adopt carrier billing as a method of payment, because of its simplicity and because many will lack other payment methods.
A secondary driver of growth will be an increasing preference for carrier billing by app stores in general, and Google Play in particular.
Google Play has lots of room for growth internationally, as Android establishes platform dominance globally. As we mentioned, Google has established numerous carrier billing partnerships with carriers worldwide.
Carrier Billing For E-Commerce?
For carrier billing platform providers, the holy grail is getting into e-commerce.
If carrier billing is to expand its reach as a payment method and become a truly massive business, it will have to expand into the market for physical goods.
In a few markets, including South Korea, carrier billing is already widely used to complete e-commerce transactions on mobile.
But regularly, hurdles have held up this expansion in many markets, says Ray Ramillosa, vice president of marketing at Boku.
In other markets, the only real barrier is the stiff fee that's still demanded by many mobile carriers, which means that e-commerce paid via carrier billing would be too expensive for consumers.
"The good news for us is that the rate charged by carrier has certainly gone down, but it is one of the things that is still a hurdle to getting into a broader physical goods environment," adds Ramillosa.
For now, most carrier billing vendors companies are focusing on more modest ambitions. They're working to establish carrier billing in certain niches were small payments make sense, including digital music streaming and real-world services such as parking fees and vending machines.
"We see some development in the monetization of low-value services or items," says Ludovic Maupain, head of marketing and strategy at Netsize."Typical cases include parking, ticking vending … we see these as strong areas for growth."
Where There Is A Big Market For Carrier Billing
As we've noted, carrier billing's main advantage is that it is a low-friction mobile transaction method.
But online commerce and payment services — including PayPal and Amazon — have developed their own low-friction mobile commerce methods. These require an Amazon or PayPal account to be linked to a credit card or checking account, but they are fairly hassle-free.
Still, consumers seem to consider carrier billing a marginally more convenient payment method, even in the markets where Amazon, PayPal, and the Apple App Store's quick-billing options are available. Carrier billing does not require users to leave whatever app they're using (sometimes, no password is required to authorize the purchase).
In contrast, Apple, PayPal and Amazon ask users to create a new merchant-customer relationship, enter in their payment details, and require the punching in of passwords.
Carrier billing allows people to pay in an instant via a pre-established relationship, and one that already bills them for what they do on their phones.
"We have a very strong foothold in Europe. That's our historic base," says Maupain of Netsize.
"Most of Bango’s business today comes from developed markets such as those in the U.S., Western Europe, and Northern Europe," says Leyland. "Going forward we have a big opportunity to be the dominant direct carrier billing provider in emerging developing markets."
The next big opportunity is in developing economies that have a relatively high percentage of people who are "unbanked," or lack access to basic services like checking accounts and credit cards. In these countries, carriers are rolling out both direct carrier billing for app and in-app purchases, as well as premium SMS for those who do not have data plans.
Carrier billing options allow carriers, developers, and app stores to collect payments from the hundreds of millions of people who lack credit cards and otherwise would be left out of the modern mobile economy.
Looking at the three key BRIC markets in the chart to the right (India, Russia, and China) it's clear that the percentage of people who own mobile phones is many times greater than the number of credit cards issued in those regions.
In India, for example, mobile penetration is at 81%, while credit card penetration is just 2%. This is in a country of 1.2 billion people.
That means there is a huge opportunity for premium SMS carrier billing in particular.
"Premium SMS works in cases where the user doesn't have data connectivity," says Liivak, of Fortumo. "So it may not be an issue in the U.S. or the U.K., but if we go to Nigeria, Brazil, or India, users may not have a data connection. Text messages always work, which means that a user is always able to make a payment. So we use a mix-and-match of the two solutions."
The disparity between mobile users and credit card owners in these markets is what prompted Boku to acquire Quebecell — a well-established carrier billing company in India — in late 2013.
"India is a market that has such tremendous potential, and we were driven by the fact that Quebecell already had direct connections into most of the [carriers] in India. With the connections that they have, they have access to about 75% of that market," says Ramillosa, of Boku.
Even just looking at smartphones, there are still significantly more of these in China, Russia, and India than there are credit cards.
This suggests that the opportunity in developing markets isn't only in premium SMS but in direct carrier billing as well, especially among smartphone users who have data plans, but lack credit cards.
The one caveat is that while credit card numbers are low, the number of debit cards in these markets is much higher.
But the debit card market in emerging markets is fragmented. And in any case, there isn't a consumer or merchant culture around small purchases on cards. For emerging market consumers, carrier billing is more convenient because it's built on the foundation of the most important customer-business relationship in many of their lives — their tie to a local mobile carrier.
Why Mobile Carriers Globally Are Embracing Direct Carrier Billing And Beginning To Lower Fees
Mobile carriers are desperate for new revenue streams. They are losing voice revenue to over-the-top calling services like Skype, and SMS text revenues to third-party messaging apps like LINE and WhatsApp.
Data is their last reliable source of revenue, but it's expensive to support that infrastructure, and margins on data revenue are fairly thin — or at least not as fat as they were on SMS, which for many years was many carriers' cash cow.
SMS text revenues are expected to fall to $97 billion in 2018 from $120 billion in 2013, according to Informa Telecoms & Media.
Carrier billing services offer carriers another way to stay relevant on mobile, and develop a new source of revenue.
Whereas previously mobile operators treated direct carrier billing as an add-on service for which they charged heavy fees, the growing size of the economy for digital goods means that they are able to make the difference up in volume if they drop their fees to be more competitive. Many carriers are doing just that.
Carrier Billing Is Good For App Stores And Developers, Too
What is the app developer getting out of carrier billing?
Isn't he or she giving away a substantial share of revenue, despite creating the lion's share of value for the end user? Isn't the mobile operator getting a lot for doing not very much at all?
While it's true that there is a very high cost to the developer, we also have to put that into context.
The bottom line is that carrier billing expands the pool of paying customers and improves conversions. So, even if it compresses margins, it's still worthwhile.
Again, let's review why users like it:
Carrier billing does not require you to have a credit card or bank account.
Carrier billing doesn't require transferring sensitive payment information. In most cases, users don't even have to sign up for an account or leave the app that they are using to make a payment, because their mobile operator already has all the information necessary to complete their purchase.
So even if developers and app stores makes less per sale, they make more overall from the increased volume of sales, due to usage from unbanked customers and higher conversions.
"What we see in the more developed market is ... people who don't have access to credit cards and banks. But there are also a large number of card users and bank users who are also using our service for other reasons," says Ramillosa of Boku. "One is convenience — just because it's easier and faster to complete purchases. The second one is a security component. Some folks have concerns about entering their card details online — they can use their phone number instead."
Carriers are beginning to take smaller cuts in many countries because they are beginning to realize that their revenue potential is much higher if developers actually want to include carrier billing in their apps.
Developers and app stores are much more inclined to do this when carriers lower their cut.
The reason rates were so high at first is that carriers needed to make some money for powering the transactions when people were spending cents to pay for ringtones and wallpapers, says Ramillosa of Boku. But now there's an opportunity in higher-priced goods.
"I think operators are realizing that in order to take this to more places the rates need to go down so merchants can tolerate it, " he says.
THE BOTTOM LINE
Carrier billing allows mobile users to buy digital goods like ring tones, music, apps, e-books, and in-app purchases by adding the cost of the purchase directly to their mobile bills.
Thought it's often associated with emerging markets, carrier billing companies actually make most of their money in developed markets like North America and Europe.
But carrier billing's huge opportunity is to help carriers and developers monetize mobile users in the developing world.
How big is the opportunity? Right now, we estimate that carrier billing powers $3 billion in mobile transactions, which accounts for about 12% of the global market for mobile digital content. In 2017, we think carrier billing will up this share to 22%, for $13 billion in mobile transactions.
Carriers are beginning to lower their once-prohibitive fees for powering carrier billing transactions in the hopes of seeing revenue explode as more people adopt it as a payment method.
The holy grail for carrier billing is to reduce rates low enough so that people adopt it as a method for purchasing physical goods via e-commerce sites and apps.
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