Opening M-Commerce to Physical Goods
By Justin Pearse, Tue Mar 29 08:30:00 GMT 2005

A new interpretation of an EC directive makes it possible to pay for physical goods with premium SMS. But while the regulatory environment may be changed, operators' revenue-share demands may stall the growth of m-payments.

Picture this. On the way to work, you're reading a review of your favourite band's latest album. At the foot of the review, it says "to have this album delivered to your home 'text U2 to 80222' to bill the CD to your phone bill". The next morning you open your CD to find an invitation on the sleeve to go online to watch the band's latest video by texting 'U2 video' to 80222. You're then sent a pin code via SMS, again billed to your account, which you enter on the Web site to watch the video.

Almost since the birth of the commercial Internet, the search has been on for an effective micro-billing mechanic. Easy to use and available to anyone regardless of age, reverse billed, or premium, SMS enables all this and more.

However, for the last few years there's been an awkward fly in the ointment: The European Commission E-Money Directive. In the UK, under the current Financial Services Authority (FSA) interpretation of the e-money legislation, prepaid airtime is viewed as e-money for anything not delivered and consumed on a phone, for which operators would need to apply for a licence. Operators have therefore required content providers to cease taking payments for content and goods via reverse-billed SMS from pre-pay users. The difficulty in dividing up consumers in this way has effectively meant a ban on this form of m-commerce.

While the few existing services continued to run, large numbers of companies ranging from retailers to media companies had to slam the brakes on planned launches. Now, though, a new Guidance Note issued by the EC will allow the FSA to reverse its position on the issue. Although the FSA has to formally issue new guidance, the position is clear enough for Vodafone to have begun contacting aggregators to tell them the party is on once again.

So, how long till we're all living out the fantasy outlined at the start? Most in the industry expect the use of premium SMS to pay for digital content to rocket. UK TV channel Five last week launched the first service enabling users to download TV programmes on a pay as you go basis, using reverse-billed SMS.

But many believe it will be a long time before we go a stage further, moving into physical goods like CDs.

"I've got lots of clients with great potential uses that, due to the e-money directive, weren't possible before," said iTAGG CEO Steve Procter. "The big barrier is the payout from the operators on premium SMS. Anything with a real cost like physical goods just doesn't work out. If the payouts changed it really is the killer app of all time."

Universal Music is one company that has experimented in the past with using premium SMS for digital content, but is unlikely to go much further until this situation changes.

"The operators take such a huge share that we're being held back, even though it's a great mechanic for the sub-credit card age group," said new media director Rob Wells. "We're pleased we can still use it, but we're not going to focus on any more or less activity."

This revenue share issue has been burning along for so long now it's hard to see it ever getting resolved. Yet, some believe the potential revenue opportunity m-commerce represents could be an important catalyst.

At WIN, commercial director Peter Norman points out that currently one of the big concerns within operators is that, although premium SMS is one of the largest growth areas, it is also one generating its fair share of bad press, with adult and subscription services. M-commerce holds the ability to move it away from the stigma that's been attached to the IVR industry for so long. Which could make the operators more receptive to a change.

"There may need to be a different model for m-commerce," he said. "So if there are a lot of opportunities where the economics don't make sense we go to the operators and ask for a new pricing model."

There is some hope to be found talking to Mike Short, an O2 vice president and chairman of the Mobile Data Association, which represents all UK operators. Today, he says that given how much responsibility for services is held by the operators, rather than merchants, the outpayments could be viewed as pretty good, especially when compared with the rest of Europe.

"But if people take on new responsibilities currently held by the operators in relation to risks and costs of charges, payouts may differ," he said. "Payments will change when responsibilities and volumes change."

There's also the issue of Simpay. Backed by Orange, T-Mobile, Vodafone and Telefónica Móviles, it's being launched later this year with the intention of becoming the Visa of m-commerce, also enabling consumers to charge content and services to their phone bill. However, although promising to provide an easier, less clunky m-commerce experience than premium SMS, without multiple billing messages for instance, it will be offering almost identical payout rates.

"We're working on behalf of the operators so we don't want to undermine the existing market," said CEO David Taylor.

Adult entertainment giant Private Media Group was one of the first to report success selling DVDs from newspaper ads using premium SMS as the billing mechanic. Private of course does have the many inherent advantages of any adult company. But it's shown it can be done. Perhaps it's time for the mobile industry to stop using excuses and start finding more ways to overcome the hurdles in the path of such an ideal payment mechanic for so much.