SendMe: Watch Out, iPhone App Makers

Readers of a certain age will remember TV commercials aimed at showing that Kellogg's Frosted Mini Wheats appeal to both the adult and the kid in all of us. In the 30-second spot, grownups who crow about the cereal's nutritious value suddenly morph into younger versions of themselves who plug the cereal's sweet frosted side.

I'm a bit like that when it comes to mobile startups. The consumer in me welcomes the explosion of fun, useful, and innovative games, activities, and tools on smartphones. I'll admit that I've livened up many a dull train commute with rounds of Flight Control on my iPod touch.

On the other hand, the business reporter in me is getting bored by endless press releases and pitches from companies whose entire business model involves running an app on the Apple (AAPL) iPhone. We get it—the iPhone is awesome. On a recent visit to China, I was stunned at how many expats from the U.S. and Europe have flocked to the country and are spending their time developing iPhone games—this in a country that doesn't officially have the iPhone yet. Many said they were attracted not just by the large market opportunity but also the low-cost talent for designing casual games there. Fair enough.

Under the Radar

But I'm highly doubtful about the prospects of building a lasting business dependent on people like me who will pay at most $1-a-pop to play a game until we get bored and then move on to a new, probably free alternative. And even while the iPhone is very popular, it's part of a niche that still accounts for a small slice of the larger mobile-phone market globally. Smartphones, including the iPhone and Research In Motion's (RIMM) BlackBerry, made up 13.5% of all cell-phone sales in the first quarter, according to Gartner (IT).

What gets the business reporter in me far more excited is the handful of companies designing content, games, or social networks that can run on the much larger pool of plain-Jane cell phones. Some are even making money.

A very under-the-radar case in point: SendMe. The San Francisco startup sells run-of-the-mill mobile content under three brands. SendMeMobile makes ringtones and wallpaper, mBuzzy is a mobile social network, and runs sweepstakes via cell phones.

Driven by Licensed Content

Thanks to its subscriber base of more than 1 million youngsters, mainly in their early teens, who pay an average of $9.99 a month, SendMeMobile is making $10 million a month in revenue and has reached profitability. And since sales are rising, it's not a stretch to expect the company to end the year in the range of about $150 million annually.

The company is just three years old. And unlike almost all Silicon Valley companies, SendMe started generating tens of thousands of dollars in revenue the day it launched, stunning investors. It's raised $35 million to date from True Ventures and Spark Capital, and doesn't expect to raise more—ever.

SendMe is hardly the only company selling mobile games and ringtones. But it's distinct for several reasons. For one thing it invested a ton of venture capital in building a huge portfolio of licensed content, such as music and celebrity images.

Price Transparency a Plus

The company has also capitalized on a structural change in the market, whereby software developers can build applications that will work on a variety of mobile operating systems; in the past you had to build an app on a system-by-system basis. And because it's downloadable via the Web, SendMe can market directly to consumers. It uses low-cost marketing vehicles such as search ads on Google (GOOG) and Microsoft's (MSFT) Bing, and partnerships with companies including imeem, Eventful, and Univision.

The company was started by Russell Klein and two former colleagues, Markus Mullarkey and Tom Santosusso, who met while they were working on the business side at Cnet Networks. Before starting SendMe, Klein handled corporate development at Hands-On Mobile, a maker of mobile games and entertainment, where he went on a spree acquiring media companies in Europe, Asia, and North America. Jon Callahan of True Ventures says far from being flashy, the group sets itself apart through hard work and attention to detail. "They're more than a little anal-retentive," Callahan says.

Consider their focus on price transparency. Klein says some mobile-content businesses lure subscribers through bait-and-switch tactics—say getting kids to sign up for software their parents would later have to pay for. SendMe is up-front about fees, requiring users to opt-in more than once to subscribe. It also staffs a 24-hour customer-service team in San Francisco that will cut refund checks if someone didn't mean to make the purchase.

Twitter Isn't Making Money

But the real gem of the business is SendMe's approach to tracking data such as customer usage patterns to improve how it attracts new users and how it markets new services to existing subscribers. Klein won't delve into the details, but says the company has "found a series of very interesting correlations between profitability of a (group of customers), vs. customer usage and engagement at very specific points in their tenure as a paying customer."

One notable investor is Bijan Sabet of Spark Capital. He's also on the board of Twitter. (Heard of it?) Twitter is, in some ways, also a mobile app that pulls its strength from an ability to run on any phone. But the two couldn't be more different. Twitter is a huge fad that even celebrities fawn over that's so far making no money; SendMeMobile is something only your 12-year-old would know, and boasts one of the better revenue streams among a startup.

I'd bet that Twitter will become the bigger company, not to mention continue to be the bigger brand. But with nine-figure revenues after just three years, profitability, and no need to raise more capital ever again, SendMeMobile is for now looking like the no-brainer investment.

    Before it's here, it's on the Bloomberg Terminal.