This research note by Marek Pawlowski examines the development of Blyk and considers whether the classification of ‘advertising-funded MVNO’ is still appropriate for a business focusing on developing a ‘youth media’ with user experience at the heart of its model.

It is interesting to see many commentators in the mobile industry continuing to refer to Blyk as an advertising-funded MVNO. I’ve been keeping an eye on this company since the pre-launch stages and am increasingly of the view it must be considered as a rather different type of entity.

Blyk sees itself as a true hybrid: part communications network and part media property. Having spent some time with the company’s management recently, my personal evaluation is the media influence is growing ever stronger – and that’s a very good thing.

For those unfamiliar with Blyk’s business, the customer proposition is as follows: users aged between 16 and 24 sign up for a SIM card which provides them with 217 free text messages and 43 cross-network voice minutes each month. In return for the free mobile service, they fill out a profile describing themselves and expressly agree to receive up to 6 advertising messages per day from Blyk’s clients.

Blyk’s research predicts this will, in effect, provide a completely free mobile service for about two thirds of their target audience. Those who want to use more minutes or texts can top-up their SIM card just as they would with any other pre-pay provider.

The company operates as an MVNO on Orange’s network in the UK and is planning to launch over the next 12 months in The Netherlands, Belgium, Spain and Germany.

So why should we question the definition of Blyk as a simple advertising-funded MVNO?

Much of the answer lies in the company’s unique approach to the mobile user experience. Blyk targets a very specific audience with a very specific offer, of which free communication is just one part. The major difference is Blyk also explicitly markets its service as an opportunity for its customers to interact with brands which are relevant to them – the advertising is promoted as a positive customer benefit.

Since launching in the UK it has signed up more than 200,000 subscribers in the 16 – 24 age group. While this makes it a tiny player in the overall UK mobile network landscape, it makes it the fastest growing and arguably the largest single youth audience for advertisers.

The ‘media property’ label may seem like a question of semantics, but it is absolutely crucial to understanding why Blyk is delivering great results to its advertisers while at the same time keeping its customers happy.

According to management, churn levels are consistent with those of other UK operators, a somewhat surprising statistic given the adverse reaction many analysts predicted Blyk would experience once it started sending adverts to its customers. At the same time, it is maintaining an average response rate of approximately 25 percent for its advertisers. When you consider those two factors together, they represent an extraordinary achievement.

By making the ‘opt-in’ process seem like a benefit to its customers and providing them with an attractive reward for their attention, Blyk has managed to develop an environment where users feel they are engaging in a conversation with advertisers about brands, products and issues which matter to them.

This is the key difference so often missed by those evaluating the potential for mobile advertising. Advertising in the mobile environment requires a much more personal approach and it must be done in a way which puts the user in complete control of how, when and where they respond.

Blyk has invested in understanding the user experience of mobile advertising from the outset. While other companies have focused on generating mobile internet page impressions and selling space on these as inventory, Blyk has stuck to a seemingly simple, yet extremely effective method of communication – messaging.

Text and multimedia messaging might seem like somewhat dated mediums for communicating with users but it is a method with which customers are familiarand, crucially, where they feel in control of the conversation. The asynchronous nature of this delivery mechanism means users chose when they want to engage in a dialogue with advertisements and easily dismiss those which are not of interest to them.

Giving customers thise sense of control over their mobile advertising experience is one of the main reasons Blyk’s users view the advertisements as a valuable source of information rather than an interruption to their mobile environment. Among Blyk’s target age group, information is seen as social currency.

According to Timo Ahopelto, who leads strategy and business development for Blyk, its net advocacy rate runs at about 40 percent, comparable with brands like YouTube and Facebook, while larger operators like Three, Vodafone and Orange languish at less than half that.

This focus on providing a great experience for customers has a dual benefit. Firstly, it translates into some attractive operational economics. Blyk has invested almost no money at all in marketing: a huge proportion of its customer base comes through word-of-mouth recommendations. Combined with the fact it does not sell handsets or offer handset subsidy, Blyk’s subscriber acquisition cost (SAC) is a small fraction of the amount spent by other operators to attract new customers.

It is also translating into a positive community of Blyk members who are able to help each other out with technical questions on the company’s active user forum. As a result, 98 percent of Blyk’s customer support issues never require interaction with one of its customer service representatives.

Instead of expensive call centre contacts, most of Blyk’s support issues are dealt with by its own members. Anyone familiar with how call centres work will know just how expensive it is for companies each time one of their customers needs to spend time on the phone with a telephone representative.

An operator with unusually low customer support costs, unusually low subscriber acquisition costs and no capital expenditure on network infrastructure? It almost sounds too good to be true…

The second benefit of Blyk’s investment in mobile user experience is for its other group of customers: the advertisers. By ensuring the end users feel positive about the Blyk brand and making them feel they are playing an active part in the creating their own experience, Blyk’s customers seem to be genuinely motivated to participate in conversations with the advertisers.

Blyk’s management has always been very much aware that, just like media companies in the world of TV and magazines, they are balancing the needs of advertisers and audience. The company has been structured from day one to ensure it can talk the same language as its clients in the advertising world. This is even reflected in the structure of the management team. Of the two co-founders, one (Pekka Ala-Pietila) is from the telecoms world, where he was formerly President of Nokia, while the other (Antti Ohrling) is Chairman of advertising group Contra.

Every time I sit down with people from Blyk, I just get the feeling they really understand how to engage advertisers with the concept of mobile marketing. The company has dedicated itself to making it as easy as possible for companies with mobile advertsing budgets to reach its audience.

Shaun Gregory, managing director of Blyk’s UK operations, explained why this is such an important issue. He tells an anecdote about how Blyk created a real budget of £25,000 to test the state of the UK mobile advertising market by trying to buy advertising with a competing operator. According to Gregory, it took several days of calls, emails and more than 27 separate touchpoints before they finally realised they actually couldn’t physically spend the money with this operator because they hadn’t yet got the right process in place.

In contrast, Blyk is taking an active role in working collaboritively with the advertising industry to promote understanding of the mobile opportunity. In particular, it is seeking to address the cost and complexity of experimenting, with the long-term goal that once companies have seen the benefits they will continue to spend.

I received some interesting figures from the management to back this up.

The 25 percent average respond rate is just part of the story (this compares with 3 – 6 percent for other mobile advertising mediums). Of greater interest to potential advertisers is Blyk’s ‘cost per response’, which averages out to about GBP 0.50, compared with £2.20, nearly five times as much, for other mobile advertising channels.

The fragmented nature of the mobile advertising eco-system means it is one of the few mediums where the cost of producing the creative actually considerably exceeds the cost of the advertising space itself. Most agencies make the bulk of their revenues from taking commission based on the value of the advertising they place, making traditional mobile a hugely unattractive proposition for them – small wonder they have been slow to promote it as a mainstream communication method.

According to Blyk, the ratio of media value to cost of creative for most other mobile advertising channels is approximately 2.5:10. In traditional media, the ratio is almost reversed, at 10:1.5 (i.e. for every 10 pounds spent on buying advertising space, 1.5 is spent on producing the creative).

Blyk’s ratio is 10:1, making them more attractive to agencies than traditional media.

This is a key factor, easily forgotten by the mobile industry: to make a success of mobile advertising, the industry needs to show the economics are genuinely more attractive to all parts of the advertising value chain. Offering great response rates is one thing, but if you can’t convince the companies which control the purse strings it is in their interests to direct spend into mobile, growth will always be slow.

Blyk thinks it has found the right way to make its media attractive to both clients and agencies. To this end, it has just concluded a major framework agreement with a big global advertising agency to add the Blyk network as a key channel.

Results vary from campaign to campaign (Blyk has now run more than 1000), but in one particular cross-media promotion for Lucozade, they were able to generate 35 percent of the client’s total responses for just 1 percent of the total media spend. The campaign involved sending out vouchers via a range of traditional and digital means, enabling customers to claim a free bottle of drink. The company spent just 1 percent of their total budget with Blyk, but found Blyk’s customers constituted 35 percent of their overall responses.

Despite the growth of its advertising client base, Blyk’s management is conscious they still represent a tiny fraction of overall spend for most advertisers. Chief Operating Officer Leif Fågelstedt said that he believed a lot of their current business was coming from ‘funny money’, funds ear-marked for so-called ‘special projects’ rather than the main advertising budgets.

However, as they continue to focus on demonstrating the extraordinary return on investment they can deliver for clients, Fågelstedt believes they will see an acceleration in their business as advertisers start to make proper budget allocation for mobile media. The headline figue he cites is that Blyk is generating about GBP 10 in business for every GBP 1 spent by its clients.

Blyk’s conversational approach to advertising delivery also brings some unique benefits. Many of its campaigns are quite transactional in nature: they send a user a message asking whether they want to receive more detailed information or a free sample and wait for a ‘Yes/No’ style confirmation. However, the nature of text messaging means they can also capture much more ‘qualitative’ responses: in one particular campaign, 4,000 of the 22,000 responses received were actual text conversations with the users.

This is indicative of the kind of audience Blyk provides access to. These so-called ‘Young recommenders’ are a new type of customer who expect to engage in conversations with the brands that are important to them and do not want to simply be ‘advertised at’. Their attention is often captured by a number of media simultaneously, with people aged 16 – 24 able to engage with an average of 5.4 media channels at the same time, while older people can only support 1.7 channels.

Blyk also cited research from The Future Laboratory, indicating that 60 percent of teenagers prefer to communicate through text or IM than face-to-face. To get their attention, mobile advertisers must be able to speak their language and use a medium relevant to their lives. Given the fragmentation of media usage in this age group, where users can often be viewing the TV, surfing the web and using their mobile all at the time, the mobile handset is one of the few potentially unifying media that is with the user at all times.

Like many successful companies, Blyk is winning because it is maintaining focus on its customers: users and advertisers alike. It focused first on really understanding the experience its end users would enjoy and arrived at a simple but attractive proposition: a no hassle, no commitment mobile service that will mean completely free communication for most members.

With the user base expanding much more rapidly than predicted, it is now focusing on making it easy and cost effective for advertisers to develop a unique way of interacting with a very targeted audience.

So how should we classify Blyk?

I like to think of it as a media property which has found a way to capture a targeted and engaged audience without having to produce any content of its own. It has an advertising proposition it can resell to clients as if it were a magazine or a television channel, but doesn’t have to spend money on writers, designers or producers.

If we accept this definition, the main question marks hanging over Blyk’s long-term success and unique status are:

– When building a media channel, is it really cheaper to give people free minutes and texts rather than investing in content production? My gut feel is yes, it is. Content is an expensive, messy business and fraught with quality risk. Network resources like minutes and texts are an attractive commodity and one where the wholesale price is falling all the time.

– Can Blyk execute correctly and finance the initial, capital intensive stages of expansion? The strength of the management team and company culture is a strong positive in this area. However, questions remain over whether the company can finance its current expansion plans in continental Europe given the dire conditions in the wider capital markets. There may need to be a slowdown in these moves unless Blyk has already got sufficient finance in place. However, in the long-term, the proven experience of Blyk’s management team would suggest that if anyone gets financed, it will be them.

– Will the audience continue to show such extraordinary levels of engagement with advertisers? This is where I am least certain about Blyk’s prospects. I believe they have laid the right foundations for a sustainable mobile user experience, but they are pioneers in the early days of a nascent market. User behaviour may change over time as the mobile environment becomes more saturated with advertising, leading to lower response rates and more competition for advertisers.

What do you think? Let’s get some debate going on the blog… Please add your comments below.