Deal Radar 2010: Zong

Zong is a mobile payment service used by online gaming and social networking sites. It leverages direct connections with mobile network operators around the world to provide consumers, merchants, and publishers with a a secure payment solution. It claims that its payment experience converts shoppers into buyers at rates up to ten times greater than traditional payment methods.

The timing for Zong’s launch could not have been better. Online games were struggling with ways to find a new business model since advertising didn’t work and subscription fees provided too big of an adoption hurdle. The move to “free to play” games with in-game microtransactions for virtual goods started to take off in 2008. Additionally, game developers had challenges associated with monetizing audiences in markets that had low credit card adoption rates. Finally, the mobile revolution had already taken off. By 2008, there were almost 3 billion handsets in the world with only about 1 billion credit cards. (Today there are over 4 billion mobile handsets). This meant that Zong could enable billions of users to make payments online without a bank account or credit card. These market conditions combined to form a perfect storm for Zong.

David Marcus is the founder and CEO of Zong and drives the overall direction for the company. Marcus has created a number of successful venture-backed businesses, including the first alternative telecom carrier in Switzerland, GTN telecom, which he launched in 1996. In 2003, Marcus co-founded VOX telecom, a leading VoIP and wholesale carrier which services over 60% of the largest incumbent carriers globally. He also spearheaded the creation of echo6 in 2006, a joint venture between Echovox and the French leading media group M6 (Metropole Television). In March 2008, David co-founded Twitterfone, the popular and free service that converts a voice message into Twitter updates from any mobile phone.

Zong lets anyone with a mobile phone make an online payment by typing in one’s mobile number and confirming a text message. No registration, bank account, or credit card is required. So, for the consumer, ease-of-use is the primary value proposition and, Zong believes, is why its payment conversion rates for merchants are up to ten times greater than traditional checkout payment methods, such as credit cards. For example, a user makes a successful payment with Zong 7 out of 10 times after clicking “Pay by Mobile” or “Pay with Zong”. Payment conversion rates with credit cards are 5%–10%, meaning that merchants can benefit from Zong with more paying customers.

Zong believes that two main aspects of its service set it apart from the competition: direct carrier connections, and the product. Being a mobile payments player with direct binds to carrier billing systems gives Zong a major advantage because it can scale to large transaction volumes with high-availability technology and systems. This is extremely important to the company’s largest merchants, such as Facebook, which uses Zong as its mobile payment option for purchasing Facebook Credits, a major new initiative for the company. Other players access carrier-billing systems through third-party mobile aggregators that have designed their systems to deliver ringtones and wallpapers. Not only does this extra layer of connectivity introduce fail points, but it also adds another layer of fees, adding to the already high carrier costs of the transactions.

On the product side, in November 2009 the company launched Zong+, a mobile payments platform that combines the high conversion rates of carrier-based payments with the flexibility and low costs of card-based payments. This means that Zong users now have a choice to link their payment card to their mobile number to facilitate card payments in a safer and easier-to-use checkout. Users are free to continue to use Zong to have charges show up on their mobile phone bill, but Zong+ provides added incentives, such as increased security (via SMS authentication) free bonuses, and higher transaction limits.

In the near term Zong considers the market for digital goods and services sold online to be its addressable market, which it segments by industry and by addressability. Industry segments are social gaming, MMOGs (massively multiplayer online games), virtual worlds, software downloads, video, music, news and mobile apps. In terms of addressability, the company looks at its ability to actually capture market share. For example, at present the company deeply discounts the digital music industry because so much volume is sold through iTunes, which prohibits third-party payment providers. Additionally, it considers sales in markets that don’t have carrier connections (e.g., Japan) to be unaddressable. The company estimates Zong’s TAM to be about $12 billion in 2010, growing to $45 billion in 2012. For the near term, Zong is focused on the fast-growing online gaming and social networking segments.

Longer term, Zong sees the entire ecommerce marketplace, estimated to be close to $1 trillion, to be addressable. The company plans to address this market by building on innovations such as Zong+, which dramatically lowers its transaction costs, making physical goods a more addressable market.

Zong is the mobile payment provider for Facebook Credits. The hundreds of other sites it works with include Gaia Online, IMVU, and Aeria Games. Reaching over 1.5 billion mobile users, Zong provides local payment capabilities in over 30 countries in 16 languages. Additionally, since the beginning of 2010, Zong has grown by over 20 major publishers, including IAC’s Mindspark, Playdom, Slide, Kongregate, and TrialPay. Through its wide merchant distribution, Zong’s reach has surpassed over 500 million online users. Zong’s products see an average customer conversion rate of 70% and for some customers, 90%. Moreover, the launch of Zong+ made Zong the only online mobile payment platform to combine carrier billing with payment cards. The product earned Zong the 2009 Frost & Sullivan Best Practices Award for Product Innovation.

There are a number of competing mobile payment companies, including Obopay, Bango, and Boku, which last year acquired Paymo and Mobilcash. Marcus said that he does not consider PayPal to be a competitor but rather another payment method offered alongside Zong. But for Boku, it’s a different story: Marcus has said that he thinks the two companies are “on for a good boxing match in the ring.”

In a February 2010 case study, Aeria Games showed tremendous revenue gains from implementing Zong+ for their users: there was 100% revenue growth due higher average purchase prices and lower transaction costs with a 67% drop in transaction costs with Zong+ over traditional mobile payments. Over 32% of Aeria’s mobile payment revenue from Zong came from Zong+ users, with a 48% increase in repeat payments.

Zong earns well over $1 million in revenue, and this number will quadruple in 2010 over 2009. Zong is a spin-off of Echovox, one of the leading mobile media companies in Europe. Zong was therefore fully funded through Echovox until recently. The company is not raising capital at the moment.

Zong believes that it will reach the size that will make it intriguing to go public at some point in the next 18 to 24 months. There are also many potential acquirers that have started circling around, but it’s far too early for Zong to start thinking seriously of any of these options, especially an IPO.

This segment is a part in the series : Deal Radar 2010