By Brian Wieser, CFA (from April's RBR/TVBR Solutions Magazine)

Mobile video represents a tremendous opportunity for the telecommunications, broadcasting and advertising industries around the world if it is successfully deployed. How the industry participants move forward will have a significant impact in affecting the growth of this medium. We anticipate that advertisers' active involvement will ultimately drive new revenue opportunities for broadcasters and carriers alike. Carriers and broadcasters will need to work together to identify optimal business models and support the availability of content consumers will demand in the future.

Among the hundreds of millions of consumers around the world with access to mobile video, relatively few actually watch it today. There are several reasons behind this fact, including relatively limited content options, expensive handsets capable of playing video and associated subscription fees.

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In a survey of British 3G subscribers (which represents approximately 8% of the total UK market), consultancy M:Metrics has found that 13% viewed short video clips during the fourth quarter of 2005, while in Germany (where approximately 3% of subscribers have 3G services) the amount was 8%. Not surprisingly, these figures are much higher when compared to 2G subscribers, given the higher quality images associated with 3G networks and relative ease of accessing this content on 3G phones.

Importantly, studies such as these are strong reminders that mobile video in its present form is far less important than text messaging and ringtones. SMS and music-related services remain the "killer apps" of the mobile phone.

These figures would likely be very different if live video from popular television stations were widely available. Traditional cellular networks were never designed to serve as "broadcast" networks, where many pieces of content are distributed to everyone on the network regardless of whether or not they are watching it. Instead they were designed as one-to-one networks, which is much more efficient for transmitting cellular communications. MobiTV's service offers live programming over cellular networks today, but only delivers 15 frames per second (half the number of frames of a standard broadcast video) in order to save bandwidth.

The impact of today's infrastructure is that the quality of the video service may be affected by choppy images (when video is delivered at 15 frames per second), latency (delays between channel changes or clip selections) or network congestion (too many users accessing the network at the same time). These limitations primarily impact live content, which may ultimately represent the greatest opportunity for mobile video to become a widely used medium.

Consequently, mobile operators around the world are experimenting with different broadcast technologies, each of which has advantages and disadvantages. DVB-H (or Digital Video Broadcasting - Handheld) has become the most frequently tested mobile video technology. Commercial services are expected in Italy during 2006, where carriers 3 and Telecom Italia Mobile will launch on DVB-H. DVB-H is also being tested in the United States in a trial in Pittsburgh, PA with Crown Castle subsidiary Modeo (this service is expected to launch commercially during 2006, although no carrier partners have been announced as yet).

Qualcomm has established a competing platform called FLO (Forward Link Only) and operationalized it as MediaFLO. In December 2005, Qualcomm announced that it will be working with Verizon Wireless to launch its service during 2006.

DMB (Digital Mobile Video, also referred to as DMB-S or DMB-T for satellite or terrestrial delivered variations) represents a final group of mobile video technologies based around standards originally established for digital radio services called DAB (or Digital Audio Broadcast)). The commercial mobile video services launched in South Korea by SK Telecom in the past year are based upon this technology.

Although the relative pros and cons of these standards are generally unimportant for consumers, a large number of competing platforms in any one marketplace will have real consequences because of higher upfront costs (fewer manufacturers supporting any one platform), service-switching costs (a handset made for one platform will not work on another platform) and general marketplace confusion (as consumers may be deterred by the need to research the pros and cons of different technologies associated with a purchase). Further complicating these factors, the various services may turn out to be sold in partnership with a mobile carrier and/or on a standalone basis, whereby a consumer could choose to get mobile video as part of a cellular phone service or have it delivered to a standalone terminal.

Fortunately, the results of trials based around these different platforms have at proven to be promising, and offer evidence that a wide range of consumers will actually want to watch a significant amount of video content on their mobile devices, although with increasingly levels of resistance to increasingly high subscription fees. European trials indicate willingness to pay for these services, although we note that with relatively low multichannel penetration in most of these countries, extrapolating results to the US marketplace are imperfect.

Despite the promising macro-environment for mobile video over cellular telephones, we believe three factors will limit consumer interest in mobile video services in markets around the world, including service quality, limited content, the cost of handsets and subscription fees.

As noted earlier, a number of technological factors, including latency, choppy video and network congestion negatively affect service quality. All of these factors can all be resolved with technological improvements to the underlying network or the inclusion of additional hardware. Service quality will also be affected by the radio frequencies associated with a specific technology.

In markets where live mobile video is available, consumers are offered limited content. This is both because of technical limitations (offering more channels requires the use of scarce radio spectrum) and because of business issues (content packagers such as television stations or cable networks may choose to offer their content to one of a market's many platforms on an exclusive basis rather than another).

The cost of handsets is more of a near-term issue than a long-term issue. Devices capable of handling video services are generally much more expensive than conventional consumer electronics devices, because of the more advanced requirements in terms of displays and chipsets. In addition, the relatively smaller scale of production means that unit costs are generally higher.

The subscription fee associated with providing a robust content offering is likely to be the most important factor limiting consumer appeal. The European DAB and DVB trials have indicated that anywhere from 20% to 50% of subscribers might pay between €5 and €10 per month for 16 channels. However, consumers will not necessarily do in practice what they indicate they will do in a trial, as expectations of a final commercial product may materially differ from reality.

The solutions to these problems are mostly straightforward - on paper - but will involve complex business and technical issues. Service quality issues for legacy networks can almost always be improved by network upgrades or by shifting to new technology platforms. Content availability can improve through negotiations between carriers and content packagers, regulatory constraints and bandwidth constraints. Handset prices can fall with improvements in the cost and quality of chipsets, displays and batteries, especially as the scale of production improves. Subscription fees are a common component of early-stage media business plans, as they pay for content and assist the carriers in recouping investments in their networks.

To some degree, any individual carrier could choose to buy their way out of these problems, but the more realistic long-term solution will be to introduce advertising to the business model.

However, a number of issues will limit the role of advertising for the near future, which we explore in the following section of this report. As these obstacles and others are eventually overcome, we expect mobile video advertising will ultimately proliferate, and subsequently lead to rapid growth of the medium.

Building an advertiser-friendly medium - whether mobile video or any other new technology - requires that advertising suppliers incorporate a number of design features into that medium.

The most important issue affecting advertisers' interest in mobile video is achieving a critical mass of unduplicated reach among any subset or target audience. For example, if only 15% of American consumers accessed mobile video content on a monthly basis, and 80% of these consumers could also be reached through conventional television, brand-based mass marketers would have a difficult time realizing much benefit from this channel. However, if further analysis found that this subset included 80% of all adults between 18 and 24 years of age, and half of those consumers did not regularly watch conventional television, we would have a medium with more than sufficient unduplicated reach for many advertisers. As a result, the product-mix of clips to live video and the relative price point will need to be sufficiently valuable to a given audience to achieve sufficient scale among target groups.

Uniform standards within any one marketplace facilitate the rapid adoption of any new technology, because of cost advantages (handsets and network equipment are cheaper when manufacturers do not need to produce two or three different versions of the same device) less confusion in the marketplace. However, there are many different ways to get video content to a mobile device, and no one way has proven itself as "the best". Although a consumer should never need to know the difference between DVB-H, DAB or FLO, they invariably will come to learn that different devices are incompatible with different networks and many will be held back from making purchases (something that anyone who hesitated in buying a VHS-VCR until the Beta system was all-but-dead can relate to). To some degree this issue is mitigated by the turnover of mobile devices every couple of years.

Advertisers will also need to experiment to identify optimal creative formats (wrap-around/pervasive branding, banners, rich media or branded entertainment), the optimal mix of advertising relative to core content and consumer reception to these formats need to be assessed. Creative format standardization also allows advertisers to better benchmark the value of a new medium against the value of an older medium.

With many different places to allocate budgets, it is important that a new medium like mobile video support the needs of agencies and marketers in executing their media buys. This includes the timely provision of data associated with a buy, ease of delivery and management of commercial assets, a responsive and creative sales force, alignment with campaign management goals (for example by allowing for dynamic insertion of creative content) and assurances of category exclusivity within commercial pods.

Data is critical to advertisers, as they are increasingly held accountable for how budgets are allocated and whether or not it is effectively reaching their target audience, especially in situations where there is only an indirect relationship between marketing exposure and the purchase of a good. To this end, while recognizing the need for customer-specific confidentiality, advertisers will require mobile carriers to provide a count of the universe of a service's users by zip or postal code, times and dates of ad-serving actions, third party verification of delivery and reporting on trick-play behavior such as fast-forward or rewind.

The advertising product itself must maintain a high standard. From a technical perspective, it will be critical that latency and network congestion are indistinguishable from conventional broadcast or cable television. Advertisers will also require this, lest their products be associated with a consumer's frustration at their mobile carrier. In addition, most advertisers will require that the mobile video service meets certain "community standards" (for example, in the United States ad-supported content will need to be placed in a different "location" than premium adult content).

The market for mobile video is nascent, with business models still under development and market participants unsure of its intermediate direction. However, we reiterate that the long-term future of the medium is one of the most promising types on a global basis for both carriers and advertisers as long as they work together. With a potential audience in the billions, as infrastructure is deployed to meet advertisers' needs, we believe this vast untapped market will ultimately emerge as one of the most important of the early 21st century.

Brian Wieser is VP/Director of Industry Analysis at MAGNA Global USA.