Digital Content & Mobile Phones – a Look at Zong

by Carol Coye Benson on July 15, 2009

in Carol Coye Benson, Ecommerce Payments, Micropayments, Mobile Banking & Payments, Zong

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Editors Note: Glenbrook, along with the rest of the payments industry, has been watching developments in mobile payments closely.  A few weeks ago, our partner Carol Coye Benson profiled Boku and CashEdge products.  Today, she takes a look at Canada’s Zoompass, Zong (below), Billing Revolution, and Blaze Mobile. [UPDATE Aug 6th: Be sure to check out Carol’s latest installment on Obopay, one of the original mobile payment pioneers.]

Zong is a mobile payments product from Echovox which enables digital content purchases on mobile phones.  A few weeks ago, I profiled competitor Boku, and commented on some of the benefits they offer digital goods merchants.  Last week, I spoke with Zong’s CEO David Marcus.  Like Boku, Zong offers consumer ease of use (leading to higher purchase completion rates – a key problem solver for merchants), simplicity of merchant implementation, broad global carrier coverage, and a strong four-letter consumer brand.

From a payments system standpoint, Zong shares with Boku and others in this category the defining characteristic of using the carrier’s bill to the consumer as the means of payment.  Zong gets paid, and pays the merchant, only once the consumer has paid their mobile bill: there are different patterns depending on whether the underlying consumer phone account is prepaid or postpaid.  The carrier is an economic participant in the value chain, driving the total cost to the merchant, including Zong’s “slice”, to 30% to 50% of the gross purchase price.

David discussed some of the additional aspects of Zong’s service that he believes give Zong a competitive advantage.  In the key area of consumer convenience, Zong’s “pin code based flow” is, he believes, superior to a “reply to text message” based flow, and drives a claimed 15% higher payment conversion rate.

But the critical differentiating element of their product, they believe, is the nature of Echovox’s  relationship with global carriers.  Echovox has been working with carriers for over nine years.  Rather than using an aggregator model (aggregators, who evolved to enable the ring tone market, are intermediaries standing between digital content or service providers and the carriers), Zong is directly connected to the carriers.  There are a number of important advantages to this, according to David.

One advantage is that the payment from the carrier to Zong happens more quickly with these direct connections than with the aggregator model.  This enables Zong to pay the end merchant more quickly.  Secondly, simply having one fewer layer in the value chain means fewer parties to compensate, enabling Zong to charge lower rates to the merchant. Finally, digital content merchants working with aggregators are exposed to a number of financial and operational risks – aggregator failure is one.  Payments to merchants may also be delayed for sometimes staggering periods of times (many months).

Finally – and this is pretty intriguing – David believes that by avoiding the aggregator model, Zong may be on track to establish a different type of economic model with the carriers in the future.  Today, no carrier is going to tinker with the highly profitable ring tone model that the aggregators enable.  But some carriers, David says, are open to establishing a new business model to enable payments transactions – as long as it doesn’t threaten that ring tone model.  The long term payoff?  A separate transaction type, with much lower carrier “cuts”, could enable this model to greatly extend the market for mobile payment platforms.  Think of it this way.  Today, The New York Times (which has played with any number of digital content models) is not going to try a model where a subscription – or an article purchased – nets a carrier (or a payments service working with carriers) half of the consumer revenue.  But – who knows? – maybe they would if that cut were, for example, 10%.  More than a merchant discount rate, less than a digital content rate.

David summarized his comments on the aggregator model by saying that “it simply doesn’t scale” to match the market potential.  Aggregators, in his view, are a bottleneck limiting the growth of the market.

I asked David about the likelihood of Zong expanding into non-digital goods purchases, P2P payments, or funding sources other than carrier bills.  He thinks Zong has a “sweet spot in social networking and gaming”, but says “we do have broader ambitions”.

In my view, although it is interesting to look at the competition between Zong and its closest peers, such as Boku, the far larger question is how these types of services will compete with other types of payments, including cards and ACH type bank network payments.  Three years from now, will most mobile, low-value, digital content purchases be made through carrier billing arrangements, or through mobile-enabled card and bank account payments?  I’m not sure I know which side of that bet I’d take!

{ 2 comments… read them below or add one }

Steve Klebe July 15, 2009 at 2:09 pm

Agree that Zong’s model of getting direct connections is very important, especially related to issues like dispute resolution. Albeit today, for these kind of payments, there isn’t much disputing that takes place where the merchant ever wins but if these payment types are ever to become mainstream that will have to change. As with PayPal, who took a 4 party system and made it 5 and has had many issues around dispute resolution as a result, the same maturing process will need to take place around mobile payments.

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Cadillac September 3, 2009 at 11:26 am

30-50% Rev share?

~gulp~

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