How a Mobile Merchant Unexpectedly Turned a Profit

The wireless Web is evolving into more than just a marketing and corporate promotion channel. There's money to be made, too.

WHILE THE CHEERLEADERS for Japan's wireless Web would have you believe that all content and service providers on the official menus (who can make use of the carrier's billing system to effect mobile commerce) are making buckets of cash, it ain't necessarily so. In fact, aside from major brand names (like Toshiba, Post Pet by Sony, and Itochu), existing content owners (like Disney, Bandai, and Sanrio -- of Hello Kitty fame), and those lucky few service providers who -- like their counterparts on the wired Web -- got there first (did someone say Kinokuniya?), very few small or startup official content partners are making serious revenue via their mobile Web efforts, and fewer yet are making a profit.

Speaking in May 2001, NTT DoCoMo's Takeshi Natsuno, one of the animating figures behind the creation and development of i-mode, admitted that only approximately one-third of the official content sites even try to earn revenue -- the rest of the sites are marketing, promotion, or value-adding plays that leverage off-line businesses (see "Takeshi Natsuno: The Incrementalist," June 2001). Of the one-third trying to make a go of it, only 50 percent are profitable, according to Natsuno. Like on the Internet at large, it appears that on wireless, a tiny number of official content menu sites generate the bulk of the traffic (and, presumably, the revenue).

But as Japan's wireless Web evolves, it appears that opportunities for the rest of the sites to earn a little cash are growing, and one path towards profitability seems to be building a marketing-and-promotion-only mobile site that is so useful, it actually -- surprise! -- turns a profit.

This is precisely what happened to Tsutaya Online (www.tsutaya.co.jp), a subsidiary of Culture Convenience Club (CCC), headquartered in Tokyo. CCC owns and operates Japan's largest chain of video, CD, DVD, and book rental and sales shops under the popular Tsutaya yellow-on-blue brand name. There were over 1,000 retail outlets as of mid-year, and it would be an understatement to say that CCC has turned marketing into a fine science. The company claims to have divided the entire nation into 500-meter square blocks and mapped every region having 2,000 or more people. The result is that any potential store location can be rapidly assessed against a database of consumer behavior, consumption patterns, and preferences. Tsutaya shops are also carefully located with major retail partners, including consumer electronics, railway company-operated department stores, gas stations, and retail chains.

This cross- and co-branding finesse was also applied to CCC's online plans, which started with the July 1999 launch of Tsutaya Online (TOL)'s content-creation and marketing efforts (not long after NTT DoCoMo launched i-mode in February 1999). Initially, TOL had a Web-focused business plan, and expected the bulk of customer response to come via the (wired) Web. But the firm quickly realized that youth especially seemed to prefer the keitai over the PC, and that this would create a large potential market as the wireless webs grew. "By autumn, we shifted our business plan from a Web-centered one to a mobile-centered one," TOL president and CEO Takehiko Ogi says. Since then, only 35 percent of Tsutaya online customers access the service via PC; the remainder prefer mobile.

Using their cellphones, TOL customers can download ring tones and screen wallpaper images; access title sales rankings and download sample CD/DVD clips (and search by title/artist/genre); reserve new titles; purchase gifts for in-store pickup or home delivery (e.g., movie-themed cellphone wrist straps); play games, chat, take part in surveys/promotions, and read fortunes; purchase books, CDs, DVDs, and videos for in-store pickup or home delivery; register for email coupons and notices; and obtain information on Tsutaya shop locations and operating hours.

Tsutaya Online revenues (both wired and wireless) for the April-June quarter (latest figures available) were JPY725 million, generating a profit of JPY22 million. This was the first quarter in which the company made a profit, which came as a surprise to industry watchers. Gilles Renaud, an analyst at Credit Suisse First Boston, explained that TOL was not intended to be a profit/loss business, but rather was aimed at promoting the bricks-and-mortar chain. "They never said it was an online business," he says, adding, "Because of their brand, it's been very easy to get customers, [who] have surprised [the company] with their Web purchasing activity."

One key to TOL's success seems to be the company's active email marketing system, which provides coupons, news, promotions, and contest invitations directly to the pocket rocket cellphones of the 1.82 million active TOL members (as of August 2001). "If a customer doesn't come to the store in three months, we send a mail to him. We don't know if he hasn't come because his lifestyle has changed, or maybe he's going to one of our rivals or something. So we send him a coupon and try to entice him to come to the store," says Ogi.

Another factor is placement on the official carrier menus. In late October, TOL was the No. 1 menu entry in the shopping and entertainment categories on NTT DoCoMo's i-mode portal, for example. Also, all of TOL's mobile services are free, except for ring tone, sample CD/DVD track downloads, and receipt of celebrity artist information. Both of these factors are likely key to encouraging frequent use.

Surprisingly, it isn't just kids and teens using the service. The company reports that 34.9 percent of its users are age 30 and over, indicating that if a mobile marketing and promotion service can be packaged in a useful format, wireless surfers of all ages will happily log on. Ultimately, TOL's success may hinge on the fact that the company is using the mobile Internet to leverage an extensive chain of bricks-and-mortar stores, and that the products being sold are particularly amenable to e-commerce. When purchasing a CD or DVD, a buyer knows in advance precisely what he or she is getting, and doesn't need to handle the physical goods before paying (unlike, say, with shoes or clothing).

"The model works because they have a famous, youthful brand that blends well with the wireless medium," says analyst Renaud. Also, TOL seems to have realized that searching for and sampling entertainment is in itself entertainment, and a perfect pastime for bored, commuting keitai owners. @