The Mobile TV Wars
The mobile TV shakeout has begun: Modeo, a subsidiary of cellular tower operator Crown Castle International (CCI), has shut down its one broadcast network in the New York City area, leaving the emerging business of delivering live TV programs to just a handful of players.
For months, Modeo had stubbornly clung to life as it searched for a carrier willing to share its network development costs and subscribe to its service. Having already lost out on a potential customer in Verizon Wireless, which signed on last year with a rival venture backed by Qualcomm, Modeo suffered a second major blow in early 2007 when AT&T (T) also decided to go with MediaFlo. Verizon (VZ) now offers MediaFlo's eight-channel service on cell phones in 32 markets, and AT&T plans to go live in the fall. "It's full steam ahead for us," says Gina Lombardi, president of MediaFlo USA.
Other carriers, including Sprint Nextel (S), have reaffirmed their ties to MobiTV, a pioneer in this new market. MobiTV streams video channels over a carrier's cellular network instead of a separate, dedicated network of wireless towers like those planned by Modeo and being built by MediaFlo.
Modeo insisted there was still a business to be built in delivering TV to laptops, iPods, and other mobile devices. But with three of the nation's four national cell carriers divided between MediaFlo and MobiTV, there was truly little market opportunity left for Modeo.
So on July 23, Crown Castle announced that it had reached a deal with the investment firms Telecom Ventures and Columbia Capital to lease Modeo's spectrum licenses to use certain portions of the airwaves in markets around the country. The venture capital firms will pay $13 million a year for six years, after which they'll have the option of renewing the lease or buying the spectrum for $130 million.
For Crown Castle, which originally paid $13 million for the licenses, "it was a very profitable outcome," says Jay Brown, Crown Castle's treasurer. The company won't say, however, how much it invested in developing Modeo, building the New York network, or running that trial.
Even with Modeo out of the way, it's not clear how easily the remaining competitors will recoup their investments in this unproven market. Though many have scoffed at the notion of squinting at videos on a tiny screen, cell-phone users are showing an appetite for mobile TV just as consumers have come to love watching scratchy amateur videos from Google's (GOOG) YouTube on their computers. By the end of March, the number of U.S. mobile subscribers watching video on their phones had more than doubled, to 8.4 million people, compared with 12 months earlier, according to the research firm Telephia. Still, that number represents just 3.5% of all U.S. wireless users, and the vast majority of them are downloading short prerecorded clips rather than watching live TV channels like MediaFlo's.
One key question is how much consumers will be willing to spend on mobile TV. While some users may spend $4 or $5 a month to download video clips to their cell phones, the more robust mobile TV services with live channels are typically priced at $10 to $20 a month. Kanishka Agarwal, an analyst at Telephia, estimates that mobile TV revenues totaled $146 million in the first quarter, approaching the $168 million generated by mobile video games. "The mobile video business is catching up to businesses that have been around a while," he says.
To make it a profitable business, though, those revenues will have to grow much higher to pay back the investment required to build a network like MediaFlo. By the end of 2007, Qualcomm (QCOM) may have nearly 300,000 MediaFlo subscribers through Verizon and AT&T, according to consultancy In-Stat. Making a hypothetical calculation, let's assume Qualcomm receives $10 a month per user (two-thirds of the fee Verizon collects from its MediaFlo subscribers), and that each of these customers pays for a full year. That would add up to just $36 million for the year.
By contrast, Qualcomm plans to spend $800 million just to build its nationwide network. And in terms of operating costs, Qualcomm reported July 25 that it spent $95 million in its just-ended quarter to deliver MediaFlo in just 32 of those planned markets. The bottom line: Getting a dedicated mobile TV network to pay for itself without a surge in subscribers will be tough.
But for now, it appears that few wireless users are eager to pay for a mobile TV service. In June an In-Stat survey of some 1,000 U.S. households found that while 35% of the respondents were interested in free mobile video, fewer than 7% said they'd pay $15 a month. "People like those cool things, they just don't want to pay for them," sums up David Chamberlain, principal analyst with In-Stat. That means low-priced or free mobile video services that rely on ads to recoup their costs may prove more popular.
MediaFlo faces a cost disadvantage against some of those rivals. A service like MobiTV is cheaper for both carriers and users. While MediaFlo requires the purchase of special handsets that can pick up both cellular and TV broadcast signals—so far, Verizon Wireless only offers two—MobiTV works on some 175 cell-phone models. It also streams programs over the same network a carrier uses to connect wireless calls, cutting out the cost of a separate infrastructure. Initially, that also means MobiTV can offer wider coverage than does MediaFlo, a network that's still being built. On the downside, a cellular-based TV service could potentially clog a carrier's network if too many users are tuning in at the same time.
Cellular-based video services also can offer more TV channels and a wider selection of video downloads. Mywaves, introduced to Alltel (AT) subscribers on July 25, offers thousands of channels or recorded content to suit highly specific interests such as cooking shows on preparing spicy foods. The outfit, launched last December and already serving more than 1 million users, is adding new customers at a rate of 25,000 a day—a rate far greater than MediaFlo's—says Rajeev Raman, founder and CEO of mywaves. Alltel will only charge $3.99 a month for the service.
Testing the Water
Another source of competition for MediaFlo may be Internet video companies, which are just starting to dip their toes into the mobile TV waters. YouTube was introduced on Verizon Wireless' VCast service late last year and is now available on Apple's (AAPL) new iPhone device on the AT&T network. Also in July, YouTube teamed up with handset maker LG to design phones for viewing, shooting, and sharing user-generated videos.
There's also the possibility of new mobile video services being launched on the wireless spectrum that the government plans to auction next year. Google has said it might bid in the auction, a move that would enable it to potentially stream YouTube videos over its own network.
With so many competitive pressures percolating, industry insiders believe that Telecom Ventures and Columbia Capital won't seek to enter the mobile TV business with the Modeo spectrum. Columbia declined to comment, but the VC firms could be planning to use the spectrum to set up a wireless broadband network offering Web access, phone calls, and video services, suggests Scott Wills, president of Hiwire, a venture that just launched a mobile TV service trial in Las Vegas. Since Columbia's investments include satellite properties such as XM Satellite Radio (XMSR), Wills believes the firms may use the leased spectrum to enable XM or another satellite provider to deliver wireless broadband services.
Hiwire is conducting its mobile TV trial with T-Mobile USA, the one national cell carrier that hasn't yet put down its chips on mobile TV. Hiwire says it's simply trying to determine whether there's demand for the service—and a business model to support it. "The industry jargon is," says Wills, "Will the dog eat the dog food?"