M-COMMERCE METHODOLOGY

M-commerce methodology

21 March 2005 Vincent Poulbere

Overview
This document presents the methodology used to assess the m-commerce market. There are great variations in m-commerce revenue forecasts, depending on the type of purchases included in the estimates and the revenue sources taken into account (purchases, traffic and commission on purchases). This document clarifies Ovums approach to forecasting m-commerce.

Forecast methodology
What is forecast
Scope of m-commerce revenues assessment

In our m-commerce forecast, we forecast the revenues generated by the following services: non-wireless content remote shopping m-ticketing retail shopping unattended points of sale (PoS)

We do not include wireless content in our m-commerce forecasts because we forecast this as a separate category.
Revenue types

M-commerce revenues come from two main sources: from the purchase of goods from the additional traffic generated in the cellular network by an m-payment transaction.

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We also extract the mobile operators share from the total market value. Operators only get a small share of the m-commerce market, based on the traffic generated and the commission (if any) perceived on the transactions. The rest of the revenues go mainly to the merchants, and possibly also to financial players (banks or credit-card companies) if they are involved in the service.

Definitions of the m-commerce market

Whats in and out of our m-commerce forecasts

We define m-commerce services as services providing a payment capability based on the use of a mobile device. We include in our forecasts any types of business-to-consumer purchases (nonwireless content, retail shopping, non-wireless services or physical products) based on the use of a mobile device in the payment process. However, we do not include: any service involving payments that are not based on the use of the mobile phone in the payment process even if the service is provided by a mobile player or if it enables payment for mobile content IVR services, for which the end-user can call either with a mobile phone or a fixed phone prepaid top-ups that are not purchased with an application embedded in the mobile device (for example with a scratch card, by ATM or through IVR). financial transactions such as person-to-person payments or bank transfers contactless payments provided by non-mobile players (for example, transport companies) even if the contactless card has been integrated into a mobile handset.

Service categories

We have segmented the market into seven service categories, as shown in Figure 1.

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Figure 1 Segmentation of m-commerce services

M-commerce categories Wireless content Non-wireless content Wireless access top-up Remote shopping Examples of purchases Phone personalisation (logos, ringtones) Games, news, horoscopes Digital content (music, video games) Internet premium content Prepaid top-ups WLAN access Physical goods (CDs, flowers, books) Bill payment (public utilities) Mobile gambling (lottery, betting) M-ticketing Retail shopping Unattended PoS Transports tickets Tickets for shows (sporting events, cinema) Traditional shops, restaurants, fast foods Mobile professionals: taxis, plumbers, pizza home delivery Cash-based vending machine (drinks, food, car wash) Credit-card based distributor (fuel, video tapes) Car parking Toll Source: Ovum

Wireless content and wireless top-up not included in m-commerce forecasts

We already have forecasts for wireless content, so these figures are not included in our m-commerce forecasts. Neither have we included wireless top-up categories. In Figure 2, the scope of m-commerce forecasts is described in terms of the scope of the mobile content market.

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Figure 2 Positioning of m-commerce forecasts

Types of purchase Non-mobile domain Data Non-wireless content Remote shopping M-ticketing Retail shopping Unattended PoS Mobile domain Voice

Payment process

Payment from the mobile handset

Mobile content

Mobile top-up

Payment from the Internet, IVR, scratch cards, etc.

Scope of m-commerce forecast Scope of wireless content forecasts (as published in Ovums wireless multimedia forecasts)
Source: Ovum

Methodology
Revenues from purchases

For each service category, we have assumed the number of active service users and the average spend per user. The total purchase value is then obtained by multiplying both values. Figure 3 shows the methodology used to estimate revenues from mcommerce purchases. Figure 3 Methodology to estimate m-commerce purchase revenues
Number of active mobile data users Number of active m-commerce users Assumption: % of active m-commerce users Assumption: average spending by m-commerce application

M-commerce purchase revenues by application type

Source: Ovum

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Revenues from traffic

For each service category, we have assumed the average purchase amount per transaction and the traffic revenues generated for each transaction. From the total purchase value, we calculate the total number of transactions generated and the traffic revenues. Figure 4 shows the methodology used to estimate m-commerce traffic revenues. Figure 4 Methodology to estimate m-commerce traffic revenues
M-commerce purchase revenues by application type Assumptions by application type: - Average amount per transaction - Average traffic revenues per transaction

M-commerce traffic revenues

Source: Ovum

Revenues for operators

For each service category, we have assumed the commission retained by operators on the purchase amounts. The operators revenues are then deduced by adding the traffic revenues and the resulting share of purchase revenues. Figure 5 shows the methodology used to estimate operators revenues from m-commerce. Figure 5 Methodology to estimate operators revenues from m-commerce
Assumptions by application type: operators share of m-commerce purchases M-commerce purchase revenues by application type M-commerce traffic revenues

Operators revenues from m-commerce purchases

Operators revenues from m-commerce

Source: Ovum

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Main assumptions
We categorise countries into six groups based on their level of adoption of mcommerce services, as shown in Figure 6. Figure 6 Country groups defined by m-commerce adoption
Category 1 Quick takeup, high consumer spending Category 2 Slow take-up but high potential consumer spending Canada, the US Category 3 Moderate ++ take-up, high potential consumer spending Advanced Western Europe: Austria, Finland, Germany, Norway, Denmark, Sweden, the UK Category 4 Moderate + take-up, high potential consumer spending Rest of Western Europe, Hong Kong, Australia, New Zealand, Singapore Category 5 Moderate take-up, low consumer spending Category 6 Slow takeup, very low consumer spending

Japan, South Korea

Eastern Europe, Malaysia, Philippines, Taiwan, Thailand, Israel, South Africa, Turkey

Latin America, China, India, Indonesia, Vietnam, rest of MiddleEast and Africa.

Source: Ovum

Main assumptions for levels of active users

Active users are assumed to be a percentage of the active mobile data users, as shown in Figure 7. The number of active mobile data users is an output from Ovums wireless multimedia forecasts. Figure 7 Assumptions of active users of m-commerce services, as a percentage of mobile data users
Country Category 1 Category 2 Category 3 Category 4 Category 5 Category 6 Source: Ovum 2004 8% 1% 5% 2% 1% 1% 2005 14% 3% 8% 5% 2% 1% 2006 20% 6% 13% 9% 4% 2% 2007 27% 10% 17% 14% 5% 2% 2008 33% 15% 22% 19% 7% 3% 2009 37% 19% 26% 23% 8% 4%

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Average spending

We make assumptions of average spend in each service category, for an active user of the services. We assume that the average spending for each service type is gradually increasing, as more goods become available for m-payments. A sample of our assumptions for a category 3 country is shown in Figure 8. Figure 8 Average spend per active m-commerce customer in category 3 countries
Service category Non-wireless content Remote shopping M-ticketing Retail shopping Unattended PoS Source: Ovum 2004 ($/year) 18 99 25 8 25 2009 ($/year) 18 133 21 24 36

Traffic revenues

We assume an average amount of traffic revenues generated for each m-commerce transaction. The traffic generated depends on the service type a sample of our assumptions for a category 3 country is provided in Figure 9. Figure 9 Traffic revenue assumptions for a category 3 country
Service category Average amount per transaction ($) 1.5 70 5 50 5 Average traffic revenues per transaction ($) 0.1 0.3 0.4 0.3 0.3

Non-wireless content Remote shopping M-ticketing Retail shopping Unattended PoS Source: Ovum

Operators share

Operators revenues are the sum of traffic revenues and a share of the purchase revenues. We assume an average fee retained by the operators on each m-payment transaction. This commission depends on the m-commerce service type a sample of our assumptions is shown in Figure 10.

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Figure 10 Traffic revenue assumptions for a category 3 country

Service category Non-wireless content Remote shopping M-ticketing Retail shopping Unattended PoS Source: Ovum Operators fee on each mpayment transaction 14% in 2004, 7% in 2009 2% 3.5% 1.5% 2.5%

Critique of the forecasts

There are still a number of uncertainties regarding the launch of m-commerce services. The main uncertainties are: the average amount of purchases made using the mobile handset: the volume of purchases is hard to assess as there is no history for mobile payments and the range of products offered to the customer is very large the commission levels for the players involved in the services: the main business model is known it is based on commission retained on each transaction but the level of the commission kept by operators is hard to assess. It will also largely depend on the extent to which operators get involved in the provision of mcommerce services.

Market development scenario

Overall scenario
20022004: launch

A large number of operators launch m-commerce services, in line with the (gradual) growth of the digital content market. In this period, developments are very fragmented as operators launch services without a strong focus on interoperability.
20052006: early growth

The digital content market is enjoying strong growth and constitutes a driver for mcommerce market development. Other m-commerce services have been introduced and develop as niche services.

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From 2007: extending possibilities

From 2007 m-payment solutions should be widespread, reaching the entire customer base, with a large number of customers using them. As people become more accustomed to mobile payments, more customers are using m-commerce outside digital content usage. Services such as m-ticketing or mobile top-up become popular.

Market development scenario: services

Figure 11 outlines our view of how m-commerce services will develop over 2003 2009. Figure 11 Market development scenario services
20032004 In most developed markets, mobile content is the only significant source of mcommerce revenues Services in other categories are just introduced in Western Europe. The main focus is on remote shopping, m-ticketing, mobile top-up and non-wireless content, but initiatives remain fragmented In Japan and South Korea a wider range of services is available though being used only by a small proportion of mobile subscribers. Operators are focusing on enabling proximity payments in shops and vending machines In the US, the focus remains only on mobile content 20052006 This is the early growth phase for m-commerce services outside mobile content. Still, mobile content remains the dominant mcommerce market In Western Europe, services such as m-parking, mticketing or mobile top-up develop as niche services. Players begin to focus on proximity payments in shops and vending machines. Interoperability is achieved in the mobile content space but it is limited for other services In Japan and South Korea, a large acceptance infrastructure is in place enabling proximity and remote payments. Usage growth remains slow as people gradually modify their habits In the US, the first services are available outside the mobile content space 20072009 The usage of the mobile as a payment device becomes a reality. For e-commerce, the adoption is very gradual and still limited when the mobile handset is used as a substitute for traditional payment methods The purchase of mobile content remains the larger source of m-commerce revenues

Source: Ovum

In Figure 12, we summarise our vision of the take-up of the different m-commerce service categories.

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Figure 12 Take-up of m-commerce service categories (20032009)

The launch The early growth Extending possibilities

Proximity payments Remote payments

Wireless content Non-wireless content Wireless access top-up Remote shopping M-ticketing Retail shopping Unattended PoS 2003 Launch 2004 2005 2006 2007 2008 2009

Low take-up

Medium take-up

High take-up

Source: Ovum

Market development scenario: regulation

Figure 13 outlines our view of how regulation may impact the development of mcommerce services over 20032009.

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Figure 13 Market development scenario: regulation

20032004 The banking regulations put constraints on the development of new mcommerce services outside digital content. As a result, operators partner with finance players to manage these services or build their own finance capabilities The mobile content market is not really affected by regulations In Europe, the application of the e-money regulation to mobile operators is under discussion 20052006 Operators go on defining their strategies to comply with banking regulations as they expand their m-commerce service portfolios. More decisions to partner with finance players or build a finance capability should be taken In Europe, e-money regulation limits the use of the operators prepay account as a settlement method in mcommerce services. As a result, operators progressively introduce new m-payment solutions for digital content payment or adapt the use of the mobile prepay account 20072009 As a result of banking regulations, some operators have decided to set-up a bank and begin to offer financial services to their subscribers In Europe, the new EU framework for banking regulations enters into force. It harmonises the use of the mobile account to pay for third-party goods, across the EU countries

Source: Ovum

Market development scenario: m-payment solutions

Figure 14 outlines our view of how m-payment solutions may develop over 2003 2009.

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Figure 14 Market development scenario: m-payment solutions

20032004 With the growth of the mobile content market, operators in developed markets get progressively equipped with an m-payment platform to handle digital content payments In Western Europe and the US, the dominant solutions are network-based, with operators managing the mcommerce application server in their network. User interfaces are mostly based on SMS or WAP In Japan and South Korea, both network-based and handset-based solutions (with embedded payment chips) are introduced. Handsets with short-range wireless technologies are available for proximity payments but their penetration remains too low to enable mass-market adoption Source: Ovum 20052006 Japan and South Korea continue the development of handset-based m-payment solutions. Many handsets on the market integrates a payment function (and in most cases also a mobile purse or a credit-card chipset) In Europe and the US, operators remain focused on network-based solutions, but investigate handset-based solutions to further develop the range of m-commerce services (in proximity payments). We can expect the launch of large operatorled initiatives to co-ordinate the developments in this area. The solutions to be chosen still remain unclear Overall, m-payment solutions will remain heterogeneous, with little interoperability provided 20072009 More efforts will be made to have an homogeneous framework of m-payment solutions between service providers During this period, a few mpayment solutions will emerge as candidates for a de-facto standard

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