By Sarah Lacy There's a hot new single in Britain. It beat out new releases by Cold Play and U2 on the singles charts for four weeks straight. It's just a few thousand sales away from going platinum. And it's coming to the States in the next two weeks.
Get ready for a decidedly different British Invasion: He's an annoying cartoon frog with a helmet, and he pretends he's riding a motorcycle and sings to the tune of Axel F, better known as the theme song from the 1984 movie Beverly Hills Cop. What's the marketing tagline? "Like it or not, I'm coming to America" (see BW Online, 07/25/05, "Jamba's Amphibious Assault").
The company behind Crazy Frog might surprise you. Far from a giant in animation, music, or entertainment, it's staid old VeriSign (VRSN), a Silicon Valley provider of esoteric infrastructure software for the Internet.
"NIGHT AND DAY." VeriSign is best known for verifying the legitimacy of e-commerce sites. And, as the keeper of .com and .net domain names, it connects Web browsers with the sites they're looking for some 14 billion times a day. But it's fast becoming a heavyweight in mobile entertainment, including games, sports and news updates, and, of course, lucrative ringtones (see BW Online, 07/13/05, "VeriSign's New Target: Consumers").
This is not your father's infrastructure company. Vernon Irvin, VeriSign executive vice-president of communication services, looks straight out of Silicon Valley, with khakis and a button-down shirt with the "VeriSign" logo stitched over the pocket. But he and his minions are busy throwing pre-Grammy parties for Clive Davis, attending the BET awards in Los Angeles, and having dinner at P. Diddy's house to discuss the promotion of his next ringtone.
"It's completely night and day," says analyst James Brehm with Frost and Sullivan, an industry research firm, of VeriSign's expansion into mobile media. "I don't think [the move into mobile content] was obvious or expected. It was a brilliant move."
CLICK, KA-CHING. How brilliant? Consider the numbers: When VeriSign first scouted German mobile-content company Jamba in 2003, it was on pace to make about $80 million that year by getting soon-to-be-released singles from record labels, cutting them into ringtones, and blasting European TV stations and teen magazines with advertising. It then split the profits with the music labels and mobile-phone companies.
Two years later -- just a year after VeriSign acquired Jamba -- the mobile-content division raked in $175 million in its most recent quarter alone, according to the company's second-quarter earnings, released on July 20. VeriSign releases content under the Jamba brand in Europe and Jamster in much of the rest of the world.
To be sure, Verisign's content business isn't all about ringtones, and it has other offerings. For instance, when a Sprint customer takes a picture on his or her camera phone and forwards it to another phone or an e-mail address, VeriSign is in the background, making the connection and taking a cut. Jamster and Jamba also sell sports updates, news updates, and games, along with more creative cell-phone applications. One program that's proven popular for teenage girls allows them to make digital voodoo dolls of, say, an ex-boyfriend, and pick different forms of torture before forwarding to a friend.
"IT SHOCKED FOLKS." But most of the ka-ching VeriSign hears is from sales of ringtones, says Mahi De Silva, VeriSign's senior vice-president of content services and one of the architects of the push into this business. The division is projected to make up 30% of VeriSign's expected $1.7 billion in revenues this year and is growing by between 20% and 70% quarter-over-quarter.
That range shows just how unpredictable the business can be, and makes managing Wall Street's expectations a challenge. After 70% sequential growth in the first quarter, analysts were dismayed to see growth of just 21% in the content business when VeriSign reported earnings. Growth rates can depend on a host of factors, such as whether it had a hit ringtone that quarter or how fast VeriSign adds new carriers around the world.
"I think it shocked folks a little bit, but the first quarter did so well it was tough to compare to," says VeriSign Chief Executive Stratton Sclavos. "Quarter-over-quarter will fluctuate fairly dramatically."
TURF STRUGGLES. How did VeriSign get into mobile content? It all started when Irvin was hired to run VeriSign's communication services two years ago. VeriSign had purchased several companies to help connect cellular and regular phone calls between carriers. Other business lines helped translate and transmit text messages between carriers.
The company connects about 3 billion calls a day, making money each time. It's similar to VeriSign's Internet business: By managing all .com and .net domain names, when someone types in, say, www.ebay.com, it routs them to eBay (EBAY). With all the hype around voice-over-Internet, Sclavos says he thought VeriSign had better get into that business before competitors edged into its turf.
But the businesses were run like fiefdoms and were struggling. Sclavos hired Irvin to fix the problem. Irvin looked at VeriSign's communications group and saw several lines of businesses that solved technical problems for carriers, but VeriSign's services were expensive. As technology matured, they might get squeezed out by an easier-to-use solution or a lower-cost rival. That's where the idea to get into content came in.
KEEPING IT HIP. Now, VeriSign generates millions of dollars a year in revenue for mobile carriers, and in many cases, handles the back-office billing for the carriers from people ordering games, ringtones, and news or sports updates. "People talk about ringtones, and they kind of crinkle their noses and say, 'Who would want that?'" Sclavos says. "It's not about ringtones. It's about mobile entertainment. It just happens the first thing we can do is ringtones and graphics. But there will be full downloaded songs, video demand, TV, and multiplayer gaming."
The key sending VeriSign on this path was acquiring Jamba. De Silva spent months on planes visiting some 120 small content companies before recommending that VeriSign acquire Jamba. Like VeriSign, Jamba had built up a rapport with carriers and labels, but had also mastered how to market to customers -- something with which VeriSign had little experience. Anxious to keep Jamba's younger, hipper management, VeriSign has integrated both slowly and carefully, leaving the operation in Berlin. So far, it has retained most of the management team.
Since the Jamba acquisition in May, 2004, VeriSign has launched ringtones in 18 other countries and has plans for another five pending. It has built a team of 200 people who evaluate, market, and create original content. For every person animating a dancing frog, others are schmoozing the record labels, while still others are doing teen focus groups in hopes of finding the next Crazy Frog.
REAL-TIME TUNING. VeriSign runs more than 500 ads a week on MTV in the U.S. alone. It also advertising heavily on BET, VH1, and Spike TV; online on sites like Yahoo! (YHOO); and in magazines from Cosmo Girl to GQ. It monitors these ads in real time to evaluate how much the company is paying in marketing for each customer it captures -- and then adjusts its spending accordingly. As a result, some countries may barely break even, but none lose money, De Silva says.
Adapting its marketing campaign to consumer demand in real time is the key innovation that sets VeriSign apart from other content players, says Patrick Parodi, chairman of the Mobile Entertainment Forum and the head of mobile video and music for Alcatel. On its own, Jamba wouldn't have had the financial wherewithal for that kind of media buying or have been able to expand into so many countries so fast.
"It has been the most successful in exploiting this particular business model," says Michael Nash, senior vice-president of digital strategy and business development at Warner Music Group (WMG), which partners with several mobile-content companies, including Jamba. "[VeriSign is] the 1,000-pound gorilla when it comes to direct-to-consumer mobile content," says Nash.
STOCK SWOON. Despite the accolades, VeriSign has its share of challenges growing this market. While it's true that no one competitor can do everything VeriSign does for carriers, it has many competitors for its different business lines. And many are leaner, more nimble, and more focused. And keeping a finger on the ever-changing pulse of what's hip in more than 20 countries would be a challenge for any company, let alone one that has spent its entire life virtually unknown to consumers.
Dealing with Wall Street's expectations will be a different test. Overall, VeriSign's revenues grew by more than 70% in the second quarter. But the 21% sales growth from the first quarter for the mobile-content division was lower than the 70% growth between the previous two quarters. Coming off a big holiday season and the Crazy Frog success, VeriSign lost more European customers than it anticipated.
Wall Street booed loudly, and the stock price tanked nearly 16%, closing at $24.47 on July 21, the day after the earnings announcement. Sclavos says the next quarter won't be much better, as Europeans typically go on vacation and talks to sign up other U.S. carriers continue. But, he adds, by the end of the year business should be on the upswing again. The message from investors is clear: Now that Crazy Frog has proven how big a ringtone can get, VeriSign's next challenge will be proving it wasn't a fluke. Lacy is a reporter for BusinessWeek Online in the Silicon Valley bureau