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Ringtone Lawsuit Highlights Revenue Assurance Challenges
by Jill Morgan
In mid-January, music publisher EMI Entertainment World filed a $100 million lawsuit against InfoSpace Inc. It alleges that InfoSpace, a third-party content provider for the mobile industry, has been underpaying royalties and selling ringtones without proper licensing rights. The suit also accuses InfoSpace and its subsidiaries Moviso and Premium Wireless Services of breaching two ringtone license agreements by fraudulently reporting the amount of royalties owed and infringing on EMI’s copyrights. EMI further claims that it did not have adequate access to InfoSpace’s records regarding royalty payments. What information it was able to gather was turned over to an auditing firm.
This has not been the only setback for InfoSpace. Last year it lost a major contract with Cingular Wireless, which said it would now deal directly with music companies for ringtones.
As a result, InfoSpace is now exiting the third-party content space and will focus on other aspects of its business, such as its mobile and online search capabilities.
From a billing and revenue assurance perspective, InfoSpace had some form of settlement infrastructure in place; to what degree it was operating properly is conjecture, and whether EMI’s claims have merit is for a court to decide.
“While I can’t speak to InfoSpace’s specific processes, I would imagine that they do have an infrastructure in place to track the types of transactions in question.” says Carl Geppert, partner and U.S. industry sector leader in the communications and media practice at KPMG. In a larger perspective, he says, this lawsuit brings several issues to light, and “this is probably not the last time we will see disagreements of this nature. The mobile content space is in its early stages.”
Third Parties Can Go Home Now
With any new business opportunity, there are always going to be plenty of companies wanting a piece of the action.
“The various participants in the content delivery chain are in a bit of a land grab at the moment. Currently there are many, many players, but as time goes on and this space matures, you will begin to see various third-party players and middlemen get squeezed out,” Geppert says. Already, he says, “service providers and content owners alike don’t necessarily see a big reason why multitudes of vendors are needed in the delivery chain.” The more participants, the more complication, in their minds. There is also the issue of tight profit margins. With consumers unwilling to pay high prices for a song or other offerings, there is not lot of room for middlemen.
“What you will see and continue to see is the carriers attempting to own more of the content and more of the relationships directly with those that provide them the content. I don’t think there is any doubt about that,” says Geppert. Aside from the revenues at stake, he says, “in an environment where definitive standards are lacking in terms of content and content delivery and measurements, it is very difficult to obtain accurate records of these transactions.” Given these technical shortcomings, service providers will work to own as much of the process as they can as a way to mitigate this complexity.
Managing Relationships
It will be a challenge for service providers to manage these relationships on their own. As Geppert points out, you can’t just look at these relationships in a vacuum. Take, for example, the music industry. Service providers can strike deals directly with the top recording companies—EMI, Sony, Universal and Warner Music. With even a relatively small number of contracts, they could provide customers with a large selection of music. And up until this point, the content business has been largely ringtones. But with each different service come new competitors within that space, and “the numbers of different contracts are going to multiply far faster than service providers realize,” Geppert says.
We’re in the beginning stages of songs, games, movies and mobile TV; none of these have been large-scale to date, and each will present its own challenges. The revenue models will be different, the provision and billing of each product is different, and the various contracts will all have their own unique needs. “When you add all of these new offerings, new models, new players and new devices,” Geppert says, “service providers underestimate the complexity of handling this on their own. … That will be the top challenge moving forward.”
“The process to date has been a bit underwhelmed,” he says. “Historically the revenue streams haven’t necessarily been there, so revenue assurance hasn’t necessarily been front and center. But based on industry projections, it is a much bigger deal today, and it is going to be a huge deal in the future.”
Service providers have had revenue assurance issues for years, even with something as simple as voice; measuring content consumption is completely different. There is a lot of new risk that content brings with it—”not just the obvious stuff like DRM, but process and systems risk. DRM and service quality are of course going to be right up there,” says Geppert. “The revenue settlements and revenue sharing are very complex, in and of themselves.”
More Dimensions
Content will be offered through models based on ads, subscriptions, usage, transactions and so on. “If you try to handle the models though an existing or historical billing system and process, it is probably not going to go very well,” says Geppert.
For example, if a consumer downloads a TV episode with a built-in advertiser over a mobile device, that transaction is going to involve several parties. Maybe the carrier has the contract with the content provider, and the content provider has a contract with an advertiser. “Any combination of those three or even many more parties will add complications,” Geppert says. “If there is a problem with quality—a download failing, or what have you—determining who is at fault and then who shares the pain won’t be easy.”
It all comes back to price of service, says Geppert; in the above case scenario, an advertiser is embedded in the TV episode to help offset the cost of providing the service. KPMG, as well as others in the industry, have done studies concluding that consumers are only going to pay so much for these services, so “it won’t be uncommon to have advertisers offset prices,” he says.
With this expanded complexity will come a lot of contract management and compliance issues, as well as expansions of complex relationships already in place.
“What we are beginning to see is a lot more auditing activity or compliance auditing taking place. The content providers are starting to go in and audit the carriers. Up until now, it has been more of a self-reporting model,” says Geppert.
As evidenced by the EMI-InfoSpace lawsuit, self-reporting is not going to hold up for much longer. Currently, though, the auditing infrastructure is something being built by service providers. “Whether a carrier or distribution channel, they know they need to provide a level of comfort to the content owner customers. … Like with anything else, if you do something more proactive and up front, it will be cheaper than having to go back and do detective work,” says Geppert.
Still, challenges remain. From the standpoint of content provisioning and billing, Geppert says, “the fact that there are no definable standards is a having a very significant impact on the process today. It really impacts auditing; there are no standards in place to audit against or to review against.” Here he is referring to everything from standard record formats to metadata formats, and even more broadly to standards of measurement.
At least from a revenue assurance perspective, Geppert says, “the industry has certainty sat up and taken notice. I think there is a greater sensitivity to these issues today than even six months ago.”
(KPMG will be speaking at the TeleStrategies Revenue Assurance show in New Orleans on March 13.)
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