The case for sponsored video

 We have all seen the announcement  at CES this January. AT&T is to offer a new plan for its 4G customers, allowing companies to sponsor traffic from specific app or content. The result would be that subscribers would not be charged for data traffic resulting from these interactions, the sponsoring company picking up the bill.

While there is not much detail available on how the offer works and what price would the sponsor be expected to pay for the sponsored content (after all, subscribers all have very different plans, with different charging / accrual models), there has already been much speculation and comments in the press and analyst community about the idea.

I haven't really read anything yet to convince me whether this is a good or bad idea, so I thought I would offer my 2 cents.

Costs are rising, ARPU is declining 

Ralph de la Vega, AT&T's CEO was quoted commenting on the press release that AT&T has seen a 30,000% growth in mobile data in the last 6 years. This growth in traffic resulted in an increase in costs, paving the way for the license bid and roll out of LTE. US ARPU are declining for the first time in history, and with rising costs, network operators must find new revenue streams. Since video now accounts for over 50% of data traffic and growing, it is a good place to start looking.

Mobile advertising is under utilized, but there is appetite

According to KPCB, about 41B$ were mis spent by advertisers in the US alone, on old media (print, radio) if we compare to time spent on new media (internet, mobile). The Internet Advertising Bureau 2013 study (people were interviewed in Australia, China, Italy, South Korea, Brazil, UK, India, Russia, Turkey, the US) shows that a large proportion of users are "ok with advertising if [they] can access content for free". The same study shows that announcers are looking at targeting (45%) and reach (30%) as the most important criteria to select a medium for advertisement. At last, video pre-roll seems to be the preferred format for advertising on tablet and smartphones.

Network operators are not (well) organized to sell advertising

Barring a few exceptions, network operators do not have the means to sell sponsored data efficiently. The technology aspect is sketchy. Isolating specific data traffic from their context can be difficult (think facebook app with a youtube embedded video served by a CDN) and content / app providers do not design their service with network friendliness in mind. On the business front, the challenges are, I believe, bigger. Network operators have failed repetitively in coopetition models. They do not have a wholesale division and mindset (everyone is scared of being only a pipe). On the bright side, Verizon, Vodafone, AT&T are putting forward APIs to start enabling content providers to have more visibility and varying level of control on the user experience.

Regulatory forces are not mature for this model

We have seen the latest net neutrality comments and fear flaring on media. Sponsored data and/or video is going to have to be managed properly if AT&T actually wants to make it a business. I am very skeptical with AT&T's statement "Sponsored Data will be delivered at the same speed and performance as any non-Sponsored Data content." I doubt that best effort will be sufficient, when / if advertisers are ready to put real money on the table. They will need guarantees, service level agreements, analytics to prove that the ad was served until completion in a good enough quality.

In conclusion, sponsored data is going to be difficult to put in place, but there is an appetite for it. Technically, it would be easier and probably more beneficial to limit the experience to video only. Culturally and business-wise, operators need to move in this direction, if they want to compete against companies for whose advertising is the dominant model (Google, Facebook, Linked In...). In order to do so, separating video from general data traffic and managing it as a separate service can go a long way. The biggest challenge will remain. It is one of mindset and organization. I am not sure that sending an email to sponsoreddata@att.com is going to get McDonalds to pay for my 30 minutes of YouTube if I buy a Big Mac combo.