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Cell Phone Ads that Consumers Love

Cell spam? No one wants the bother. But London-based Flytxt has convinced users to give personal information in exchange for direct marketing pitches to their phones. A Strategy & Innovation case study.

Cell phone use in Europe has long outstripped that in North America. Indeed, by 2000, text messaging averaged about 40 messages per European subscriber per month—over 10 times U.S. levels.

The success of "texting" in Europe has been explained by the viral nature of the medium, its relatively low pricing, and its large, easily accessible network. But the traction that texting gained within the advertising industry, in the form of mobile marketing, can only be attributed to the forces of disruption. And one London-based firm, Flytxt—with its pioneering take on how texting could enhance the art of advertising—provides the perfect example of how innovative thinking and nimble reflexes, plus a little perseverance, can help a company stay successful.

In search of the right business model
By 2000, several European companies sought ways to use the cell phone as a direct marketing tool. The device seemed ideal—it was highly targetable, it was interactive, and its small size and immediacy allowed quick response to changes in market conditions.

At that time, most industry pundits imagined a scenario like this: A potential customer walks by a coffee shop and receives a message on her phone beckoning her inside for a free cappuccino with any pastry purchase. The company most rigorously pursuing this model was the London-based ZagMe.

Even though ZagMe signed up thousands of teens for the service it offered in conjunction with a leading U.K. shopping mall, the company quickly failed. Not surprisingly, it turned out that adults did not want ads constantly popping up on their phones, and stores didn't see much value in offering discount promotions to teens, with their more limited expendable incomes. In addition, retailers were used to making communication decisions centrally, through their advertising agencies, and this newer business model required store managers to lead the marketing effort.

It was a classic case of an aggressively pursued new business model with little flexibility encountering unforeseen difficulties, then rapidly disintegrating.

Several firms focused on WAP (wireless application protocol), the service then being hyped as providing an Internet-like experience on a cell phone, enabling users to do such things as check their e-mail and shop online. Sweden's Mediatude, for instance, created an ad server to produce Internet-like banners, while Britain's Saverfone focused on a service allowing users to find a list of retail special offers in a particular location.

Mediatude found, however, that banners on the cell phone were so small as to have little meaning or attractiveness on what, at the time, were small black-and-white screens. Saverfone ran up against retailers' fear of debasing their brand by being lumped with other discounters. WAP technology encountered a tepid response among consumers, and practitioner firms were forced to cast about for alternative ways to exploit the cell phone's highly personal and immediate marketing characteristics.

Firms quickly grasped the potential of sending "spam" to mobile phones, aping the e-mail business model. However, mobile spam generated fierce consumer resistance. Players in the industry rapidly formed a Wireless Marketing Association that set an industry code of conduct banning unsolicited approaches via text message, fearing that the medium would lose legitimacy in advertisers' eyes. Within this context, Flytxt hit upon a winning business model.

A low-end disruption in advertising
Flytxt, founded in 2000, was one of the initial practitioners of mobile marketing and an early advocate of permission-based communication. The company was formed by three friends drawn from the venture capital, consulting, and technology industries.

As Flytxt's cofounder and director of corporate development, Pamir Gelenbe, formerly of Morgan Stanley, explains it, "We were involved in the IPO of a company providing content for the 'mobile Internet.' Morgan Stanley invested in Iobox, a portal with a valuation of $25 million that offered free messaging to its members. The company was sold six months later to the Spanish telecom firm Terra for $200 million. That convinced us that messaging was the way to go. However, given the money flowing to start-ups at the time, the company faced a competitive landscape." But Flytxt's founders had a novel idea.

Flytxt's take on the business proposed that consumers would be most interested in joining text-based "clubs" affiliated with certain brands. At first the company had difficulty convincing potential clients that permission-based marketing was both a viable and an effective model. The founders spent months working to secure a November 2000 assignment from EMAP Publishing's music magazine Smash Hits. Flytxt's marketing program for the magazine asked readers to text-message biographical details such as age and gender to a special number, thus enabling the magazine to alert them to news about album releases, celebrity goings-on, and other facts of specific interest to the individual. The goal was to build reader loyalty while compiling a database about their tastes through interactive dialogue.

Flytxt's take on the business proposed that consumers would be more interested in joining text-based 'clubs' affiliated with certain brands.

Once potential advertisers saw the company's marketing model operating successfully, clients as well as competitive start-ups recognized its power. Mobile marketing offered a new, extremely potent means of building affiliation with the users of a given product. And it could easily garner vast amounts of data about the product's audience. This was a super-targeted effort that couldn't possibly be anything other than successful.

Best of all, it was extraordinarily cost-effective: each mobile message cost approximately five U.S. cents to send, versus 10 times that amount for a first-class, regular mail solicitation. Response rates tended to run about 10 percent, compared with 0.5 percent for a well-executed direct mail campaign. Creative costs were miniscule, and production costs negligible. Mobile marketing was better, faster, and much, much cheaper.

Other clients followed EMAP's lead. Flytxt quickly signed such firms as Cadbury, Sony, and Deutsche Bank.

As the popularity of mobile marketing expanded, the complexity of ad campaigns grew. For instance, the U.K.'s leading cellular carrier, Orange, recently sought to build the association of its brand with the film industry. It launched "Orange Wednesdays," a three-year program offering Orange customers a two-for-one deal on any movie ticket purchased midweek. Flytxt delivers vouchers to customers via text message, tracks vouchers requested, handles voucher redemption at the box office, and provides segmentation data in real time, allowing Orange to build its understanding of its customers and their movie-going habits.

Incumbents finally respond
Mobile marketing's business model was hailed by clients across a spectrum of industries. But many ad agencies reacted coolly. Ad agencies make much of their money through two concurrent revenue streams. First, agencies charge creative fees to develop glossy, meticulously crafted ad campaigns, then tack on more fees to produce them. Agencies also charge a commission on media purchasing, which places these campaigns in appropriate venues. Not only did mobile marketing not increase agency clients' advertising budgets, it also directly threatened the agencies' traditionally lucrative business models. Plus, the potential market was seen as too small to be bothered with. So agencies attempted to ignore mobile marketing, and start-ups continued to dominate the niche.

As the popularity of mobile marketing steadily grew, however, corporate marketing executives began asking for a mobile component to the campaigns their primary agencies were developing. Some agencies attempted to clumsily co-opt the business model. They recommended unsolicited mobile contact, pushing products just as e-mail or direct mail might. As earlier advocates of mobile spamming had already discovered, that approach proved far less effective than the model Flytxt pioneered—after all, Flytxt was producing advertising that users wanted to receive, not pushing something they were forced to endure.

By 2001, traditional ad agencies fell in line behind their clients' dictates. They contracted out the mobile portion of their marketing campaigns to firms such as Flytxt and Germany's 12snap that had already successfully spearheaded the creation of mobile marketing campaigns and had developed the technical infrastructure to run them.

Because of their status, ad agencies could charge a premium on top of start-ups' fees, and they did not have to suffer the long sales cycle of convincing a large client to try a start-up firm's services. Given the challenging economic environment that had emerged by 2001, and the difficulty of creating direct relationships with corporate marketing departments, Flytxt gladly embraced the security of frequently being the firm that powered the mobile campaigns put together by far better-known advertising houses.

Disrupting the winner
Within just two years, dozens of firms were using mobile messaging as an integral part of their marketing mix. Revenues in the segment might have been very small compared with those for the advertising industry as a whole, but they were significant for firms that weren't burdened with such traditional agency cost centers as legions of copywriters, creative directors, and swanky offices.

Mobile marketing's move to the mainstream created further opportunities for disruption. In 2002 the British firm Brainstorm, which had acquired WAP pioneer Saverfone the previous year, recognized that some agencies disliked working with outsiders to create mobile campaigns. Such alliances sometimes produced conflicts surrounding the coordination of creative visions, and outsiders could not always generate campaigns as quickly as larger agencies would like. Brainstorm—more a software company than an aspiring advertising firm—developed a Web-based tool called M-Brand that allowed ad agencies to design and run mobile campaigns from their own desktops. As an additional service, it also consulted on the formulation of these campaigns.

For most ad agencies, the cost of leasing access to such a tool was far less than paying a mobile specialist to create the same campaign. For Brainstorm, the cost of creating the software was fixed, with each additional lease only adding to the bottom line. Therefore, it set about leveraging its investment by selling access to M-Brand to the broadest firm base at the lowest possible price. Flytxt—still a nimble start-up—sensed the threat and created a competing service, Flytxt Direct. Its customers now include 75 percent of all commercial radio stations in the U.K., and 50 percent of the country's magazine publishers.

Today, Flytxt has 50 employees, with offices in London, New York, and Seattle. Its clients include Coca-Cola, Panasonic, the British Broadcasting Corporation, Qantas, and cellular carriers including T-Mobile. Gelenbe sees future growth as inevitable: "The penetration of multimedia handsets is reaching 40 percent. Browsing, picture messaging, and mobile commerce are now a reality, and that acts as a new driver for mobile direct marketing."

Reprinted with permission from "Good Call," Strategy & Innovation, Vol. 2, No. 7, January-February 2005.

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Steve Wunker is a principal at Innosight. Previously he led start-ups and corporate ventures in the European and African wireless industry, and before that worked for strategy consultants Bain & Company. He can be reached at innovation@hbsp.harvard.edu.