Ringtone Shakeup - Part 1 and Part 2

Ringtone Shakeup - Part 1
by Editor

http://www.dmconfidential.com/blogs/column/Marketing/1506/

If asked what an unknown article in the DMConfidential might cover, longtime readers as well as significant others to writers of this publication might guess any of the following - a) Google, b) search arbitrage, or c) the ringtone market. Call this one predictable then, but it covers two of the three directly, Google and ringtones. More than that though, call this the story we knew would happen, but we didn't know when. What we're about to report is not good news. We discuss what amounts to nothing short of a dramatic change in the way much of the ringtone market works. From a performance marketing standpoint, if you did email you ran the various subprime offers - credit cards, pay day loans, and other financial services. If you did paid search, you ran ringtones. Like the subprime offers, they appealed to a broad audience, had a relatively high cost per acquisition, and converted well, a part of which was due to the flexibility allowed to affiliates to customize the look and feel. Unlike many other offers, ringtone offers cost money. And, when there's money involved, especially when it's perceived as easy money, there comes scrutiny. It has happened with secured credit cards (a company was even briefly raided and shut down) and it has begun with ringtones.

Current State:
No different from Columbia House, ringtone offers revolve around a subscription service. Consumers sign up for the service because of an incentive, and the end advertisers monitor the length of their stay to determine what they will pay for a new user. When it comes to ringtones, the end buyers - companies that have structured deals with both the cell phone carriers, i.e., Verizon, T-Mobile, at&t, etc., and the content providers, i.e. Universal Music, generally charge a fee of $9.99 per month to the user. The subscription service providers, referred to as "off deck" marketers because users purchase content via the web as opposed to the built in menu on their phone, split almost 50% of the billable amount with carrier. Let's say you bought a ringtone through your phone. You would pay 1.99 per tune. These services entice you to sign up by offering you the equivalent of 10 to 15 tunes for the price of five tunes. It's not a bad deal if you like your music and stay active in the service. Unfortunately, many users, or at least those on the side opposed to the current marketing methods, would argue users sign up without a clear understanding of the service or the price. As a result, many will leave after the first month. If all users stayed on the service for six months, then a company would make (6 * (.5 * 9.99)) or roughly $30 per user. That isn't the case though. Like a radioactive isotope, users fall off each month.

For a company to pay $15 for a new user means that all users must stay a little more than three months for the company to break even. As mentioned, though, that doesn't happen. Because users constantly fall off, in order to simply break even at a $15 payout, a company usually must wait six or more months. Given that they must pay the marketing company / cpa network a few dollars on top of that, all of the sudden they often must wait close to a year before breaking even. And to think affiliates complain when they get paid longer than fifteen days after the month. Imagine spending millions each month only to receive a fraction of it at a time. That said, these companies have made it work, and so too have affiliates. Of all ringtone subscriptions generated online, upwards of 60% come from affiliates (via the CPA networks such as Azoogle Ads, CPA Empire, Primary Ads, etc.) as opposed to the direct to consumer marketing by the subscription providers. And, when it comes to affiliates, they've signed up new users on the companies' behalf not by promoting the brands directly but generally starting users off at what has become known as carrier pages.

The ringtone subscription providers, companies such as Dada Mobile, Blinko, Playphone, and Thumbplay to name a few, much like any company, excel in certain areas more than others. One company might know how to monetize users from at&t better than the other, whereas one might not even accept users from T-Mobile. Over time affiliates realized the strengths and weaknesses of a particular provider and started to adjust their traffic accordingly. They paid per click, so it was in the affiliate's best interest to route the traffic to the most effective buyer. This method worked well for affiliates but didn't always sit well with the end buyer who might have preferred an even mix of users instead of a mix based on their particular strengths. The buyers made differing amounts based on the user mix, and if a company sent them only certain types of buyers, that threw off their new customer acquisition formula. This has led to a back and forth between those wanting new customers and those driving them.

Despite what might seem like saturation in the market, new contenders on the user generation side continue to emerge. The vast majority of companies leveraged search, where given the carrier landing page approach, a new site could spring up almost daily. Those buying traffic could, and would, constantly tweak their pages or come up with new ones to try and maximize search. This meant users had a lower likelihood of knowing from whom they subscribed. The real issue, though, came prior to this when fewer restrictions existed governing the languages companies - both end providers and their affiliates - could use in marketing to potential customers. Prior to June or so of this year, a company could market to users saying get "free ringtones." As a user though, the ringtone didn't come free of charge; it came by joining a subscription service. Not that there was any misleading taking place; it was simply a new market, unsure what it could and couldn't say - constantly adjusting and ideally self-regulating.

The ringtone market though, has fallen victim to its own success. Throughout its growth, it has tried to correct its issues, e.g. the banning of the word free, but not quite fast enough. The "free" issue and attempts to ban the use of the word and related words led to a level of scrutiny on the entire process, including an inquiry by the Florida Attorney General. In their eyes, the current method is flawed, and they want changes. Which brings us to where we are today - upwards of a hundred thousand new subscribers daily, almost no barriers to entry from the affiliate side, a large reliance on Google, carriers seeing increased complaints from users, the off deck providers seeing higher costs and lower returns, and everybody wanting a say in how the business operates going forward all at once. It's the perfect storm for a business that was frothy, ripe for change, but not necessarily for what it's about to get.

Ready to know more? Join us now in Part 2 of the Ringtone Shakeup

If you read Part 1, you see the makings for an industry ripe for change. It's a market that relies heavily on affiliates to drive new sign-ups and has little to low barrier to entry. Few offers have the breadth of reach, the run of network quality found in mortgages and online education, but unlike those two popular and widely run verticals, there is no cost to the user. Ringtones, though, cost money, but there's no credit card transaction. Users simply enter their phone number onto the site, wait for a text message to their phone, then enter the PIN received in the text on the web to confirm sign up. Do that, and your phone bill receives charges of $9.99 per month. It's a process that, despite its double opt-in nature, still leaves room for a user to not truly understand the nature of the product being received, especially in our instant gratification world. There is nothing illegal going on today, no FTC related inquiries into the ringtone market, but there is an incentive that piques the users interest, and when there is an incentive, especially one where money changes hands, you will have issues. In the grand scheme, those facing the ringtone space aren't major - no lawsuits - but there is too much room for error and a system that has given affiliate marketers too much control. Now, all major stakeholders are pushing for change, and all at once - the off deck ringtone providers, Google, and the carriers - and what they want.

Off Deck Ringtone providers
At the heart of the business sit those that created a compelling product, one that has relationships with the carriers and the content and has turned that into a service for users. They have found a good working relationship with the CPA networks, and outside of slightly decreasing returns (users not staying on board long enough), they have one major focus - compliance. They belong to the Mobile Marketing Association which has taken the lead on setting the standards for marketing. It's not an official regulatory board but a trade association looking out for the best interest of the users and the companies. Compliance today revolves around disclosures and language - display of terms and conditions, price, and the proper use of phrases such as complimentary or lack of use of certain phrases such as free.

With direct marketing, especially in a competitive traffic acquisition landscape where affiliates bare the cost of media, this means pushing the envelope. It's a cat and mouse game all too familiar to those in the space, that is generally benign, but work nonetheless to make sure they push enough, but not too much. When it comes to ringtones though, the process got thrown off towards the end of last year when the Florida Attorney General started to look at the practices of certain players. Then, the "free" issue, and the combination of the complexity involved in search marketing along with a few bad apples has kept the industry in catchup mode. The providers have tolerated the carrier page method to date, tolerated certain networks and traffic providers having the ability to do what the lead gen world refers to as host and post - two things that have played an integral role in the ability of marketers to drive users in scale profitably. Whether pressured by financial or legal reasons, the major lead buyers have changed their stance and issued, jointly, new guidelines to "ensure that consumers have a great experience and are treated fairly." As they say, "We believe that these guidelines combined with strong policing will enable our industry to successfully utilize the online affiliate channel the way major brands such as Netflix, Ebay and Blockbuster have been doing so for years." "We (Buongiorno, Dada, Flycell, Jamster, Playphone, and Thumbplay) encourage every company selling content off-deck to join this initiative and agree to follow and enforce the practices outlined in this document."

What does this agreement say? Namely that, "As of September 11th, 2007, affiliates/partners will not host or control the pages in the sign-up flow. This means that the following pages will only be hosted by the Advertiser - Phone # entry page and PIN/Password entry page." And, "As of October 1, 2007, affiliates will not be permitted to host a “choose your carrier page.” All advertising must point to a page hosted by the Advertiser by October 1, 2007." This is big stuff if you are a ringtone marketer. The timeline is a little too aggressive but once implemented it's, on the surface, a landmark change. It accompanies other specific rules regarding their desires for search marketing and other traffic channels. Speaking on search, Government Google has decided to make some changes of its own.

Google
Some have estimated that as much as 5% of their revenues comes from ringtone marketers. The rise of carrier pages has lead to the most efficient user generation, but there are so many that it was almost inevitable that Google would bring up the user experience card. Whether these often changing, rarely branded, pages are an effective user experience is debatable but in the end irrelevant. From Google's perspective, it simply allows too many people to market the same thing, which in their eyes is always a problem. It's in their eyes a form of double listing. In this case, ringtones became a victim of its own success - converting too well, running too successfully that Google saw them as a threat to their brand and mission - super relevance not broadcast marketing. The marketing of ringtones continues to get more refined, but Google has decided to speed up the process in two ways - requiring their own changes to the pages their users see and in quality score. As for the physical changes, Google wants greater upfront disclosure of pricing and the subscription nature, which they feel is best done with the addition of a check box explicitly stating those two things prior to submitting the phone number. The backup policing comes from quality score changes which they announced on September 18th. That announcement is a whole other subject as it seems, for lack of a better phrase, to put the smack down on some of their biggest advertisers. From the post on Inside AdWords, "The following types of websites are likely to merit low landing page quality scores and may be difficult to advertise affordably." They list four, two of which are "Comparison shopping sites" and "Travel aggregators." To top it off, Google "will no longer post advance notice of upcoming updates." Nice.

Carriers
Last and absolutely not least come the carriers, the ones with the billing relationship to the consumer. Those in favor of ringtone marketing like to point out how much the carriers make - especially given their almost 50% take off any subscription price. On the flip side though, losing a customer costs them much more than they could make on ringtones. Think of what they will do to get one - free phones, high CPA's, and what they do once they have them - long contracts, high penalties, big incentives to renew. If not the most complex, theirs is certainly the least nimble piece in the equation, especially as cooperation among them isn't a high priority. Two things have started to emerge, nothing quite as formal as the agreement between off deck marketers, but still changes that could impact conversions significantly. The first is price. $9.99 has been the standard charge. Some carriers allowed more, but now it seems as though $9.99 will be the max. The second is more significant. Currently, the text the users receive is not just initiated by the off deck marketers but controlled by them too, i.e., what the users actually read. At least one carrier has started the process to change that, where instead of the users receiving a PIN code couched in marketer speak, they would receive a carrier written message to which instead of entering numbers on a website they must reply with a sign of their understanding. It would presumably lower conversions, but perhaps as much a monkey wrench, it makes tracking difficult, removing the cookie / pixel process and all the benefits that come from web based conversion tracking.

Like incentive promotion, ringtones is too big to go away, but like incentive promotion, it was ripe for change. I'm not sure if any would have expected quite as many changes from as many parties. There are some loopholes, so while these sound severe, it won't hit like a stock market crash. It will come in waves. Stay tuned.