Investors answer call for mobile content

Sondra Peterson wanted a Hummer. But she didn’t want to pay a lot. So she whipped out her cell phone, text-messaged her best offer and ended up getting a brand-new H3 for $36.65—more than $29,000 off the sticker price

Her secret? A new startup called Limbo 41414 that runs reverse auctions for cell phone users. Limbo puts up a prize, such as an H3, and tells its users to text bids to 41414. The user with the lowest “unique” bid—the lowest bid that no one else has made—wins the prize. James Hempworth texted 41414 and got a $400 portable DVD player for less than $6.

Venture capitalists are paying a lot more than that for a piece of companies like Limbo, which produce content—from auctions to games to e-coupons—for mobile devices. In September alone, $153 million went to companies that create, enable or deliver mobile content and applications.

The cell phone is now society’s most valued piece of technology. “People will leave the house without their keys and wallets before they leave without their phone,” says Bill Nighan, managing director at Incubic Venture Fund. “The phone is so much a part of who we are.”

VCs look at the mobile space and see not only the integral role that cell phones play now, they see trends that indicate its role will grow—and with it, the opportunity to make money on services that go way beyond voice.

People will leave the house without their keys and wallets before they leave without their phone.”

Bill Nighan, Managing Director, Incubic Venture Fund

He points out that last year the number of text messages sent worldwide passed the 1 trillion mark. Another plus for SMS-based content applications: no platform issues to deal with and a big user population right here, right now. “Keep it simple,” Lester says. “Don’t try to tell consumers how to do something new on their phones. Conform to what they’re already doing and thereby have broader, quicker adoption and lower barriers to acceptance.”

Another mobile-content startup that leverages what consumers already know is e-coupon company Cellfire. It sends coupons from businesses like Hollywood Video and T.G.I. Friday’s straight to mobile devices. Business customers appreciate Cellfire because they don’t waste money paying to print coupons that never get used. Consumers like it because it’s free and because they don’t fill up their wallets and purses with paper.

Menlo led a $10 million Series B round in Cellfire in July. Menlo Managing Director Doug Carlisle says he likes the startup because, “It’s very simple to understand and to use. And almost everybody uses coupons and carries a cell phone with them all the time.”

Price pressure

But Menlo Ventures is also looking beyond simple apps for the cell phone and is funding startups that serve feature-rich services to mobile devices. One driver for these investments is the increasing power—and decreasing cost—of those devices.

Try to put too many things on a phone bill and eventually there will be a breaking point.”

Bill Nighan, Managing Director, Incubic Venture Fund

Another influence, says Shawn Carolan, a managing director at Menlo, is carriers want new ways to make money beyond voice, but aren’t good at developing those services themselves. Startups that step in and provide the content can take advantage of carriers’ massive distribution channels and customer support.

And where others view the mobile consumer market and see pushback on pricing, Carolan makes a good point: Customers are used to paying in the mobile world, unlike the I-want-everything-for-free land of the Internet. “I don’t know what the psychology behind it is, but consumers will pay in a mobile environment, which makes it a very good area to do business,” Carolan says.

Take ringtones, for example. Consumers pay $2.99 for a low-quality ringtone, while online the entire song in pristine condition goes for 99 cents. “Maybe it’s because all these charges just show up on your phone bill and you don’t have to think about it or enter a credit card, which still carries psychological barriers. The internet introduces a lot of friction that does not exist in the mobile environment.”

Some of the more sophisticated mobile applications that Menlo Ventures has funded are PlayPhone, MobiTV and MyWaves. MobiTV puts network programming on your small screen. PlayPhone sells mobile games, ringtones and wallpapers. MyWaves, which Menlo Ventures seeded in 2005, lets users share videos with others—a bit like YouTube for cell phone video.

Value ad

Video is in its infancy, but I think it’s an exciting application [for cell phones].”

Mike Tyrrell, General Partner, Venrock Associates

Many venture capitalists look at price barriers in the mobile space and see the same solution that the Internet came up with: advertising. Will consumers put up with ads on their cell phones? VCs funding ad-supported applications say, yes, consumers have been trained by the Internet to accept the fact that free content comes with advertising attached.

Incubic’s Nighan predicts there will be carryover from the Web to the cell phone and that users will put up with ads. “Try to put too many things on a phone bill and eventually there will be a breaking point,” he says. “Consumers are not willing to pay for an infinite number of things on their phones.”

That’s the premise behind Incubic’s investment in Greystripe, which delivers free games, with ads, to mobile handsets. Ads can be cumbersome on the small screen, Nighan acknowledges, but he says Greystripe has a smoother technology that serves ads at the beginning of a game or at the end. It also can target ads by location and by the type of game being played.

What won’t work?

Until phones, networks, software and user interfaces get significantly better, the best bet is to keep the applications simple. Most of the mobile-content companies attracting the attention of consumers now understand that. Meanwhile, many in the entertainment industry are struggling to comprehend that they cannot simply cut an episode of “24” down to two minutes and stream it to a cell phone screen.

“Video is in its infancy, but I think it’s an exciting application,” says Mike Tyrrell, a general partner at Venrock Associates, which led a $10 million Series B round in EveryPoint, a startup that enables almost-realtime text-and-graphics coverage of sporting events like last summer’s World Cup. “But as content is created specifically for small screens and shorter attentions spans, it has to be formatted appropriately and produced for the form factor.”

The producers of “Lost” have created a series of unique 20-minute “mobisodes” of the show that will be viewable only on a cell phone.

Clearly, the picture is not yet in focus. With so many VCs investing in so many different mobile startups, the winners and losers have yet to be shown. One thing is clear: They are willing to try almost anything to attract users—even if it means selling a Hummer for less than 40 bucks.