Bringing the 'social' out of the operator walled gardens

[Mobile services have long been a carefully guarded commodity, kept within the ‘walled gardens’ of network operators. But as innovation moves to the software and social era, operators need to adapt. Guest author Avner Mor discusses how networks are inherently social and why they should open their walled gardens to developers]

Bringing the 'social' out of the operator walled gardens

A ‘walled garden’ is the term aptly applied to the last decade of mobile operator services. And Facebook is the generic name aptly applied to the social network revolution of our times.

Wikipedia defines ‘walled gardens’ as referring “to a carrier’s or service provider’s control over applications, content, and media on platforms … and restriction of convenient access to non-approved applications or content”. This has been the common sense approach to operator strategies; build high walls to protect your revenues – which by now we know is becoming irrelevant. Mobile operators are facing market saturation, declining ARPU, higher subscriber acquisition costs (see iPhone), fierce regional competition and viable threats of being replaced by the over-the-top players. In 2009 alone, global operator ARPU fell by 7.3% year-on-year and is forecasted to further decline around 10% y-o-y  according to Strategy Analytics. How come operators – having a ‘social’ network at their very core – have been steadily declining, whereas Facebook has risen to a 600 million user, $35B valuation business in just 7 years? Let’s take a step back.

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2010 will probably be known as the year where mobile service innovation has moved squarely to the software domain. Think about the 100,000s of applications against the 10s of operator services launched in the last 2 years.

To compete in this software world, operators/carriers need to leverage their network capabilities to compete with the over-the-top players. For example, think of a voice application that automatically switches to taking a text or voicemail if it knows the other user is busy. Or a service provider in the travel business that can target their Java app and SMS campaign to users who travel abroad frequently. Or web pages that feature a 1-click-buy based on keying in your mobile phone number. Or a “where are my friends” service, where you opt-in to a friends location request no matter what phone you ‘re using. Or travel recommendations where a virtual concierge suggests places to visit in your holiday based on where your friends have been.

Such innovation has shunned the mobile world because network operators have adopted the walled garden business model of building a supermarket with their own branded goods – rather than a shelf (a platform) for third party goods that leverages on the social aspects of the platform. To compete in a world where innovation is defined in software and social, operators need to become a platform – and compete over the top, not in the network.

A platform business model is about leveraging operators’ underutilised, walled network assets, taking a cut from the delivery of innovative services, in the same way that Apple takes a cut from the delivery of mobile apps or Facebook takes a cut out of ad delivery. It’s not just operators that are playing in this developer game – it’s handset vendors investing in developer programs and app stores, online brands opening their assets to developers (from the BBC to Facebook) and Digital TV operators exploring methods to open STB, EPG and DVR channels to developers. Yet operators are the most ubiquitous and most social players of them all.

Leveraging the social side of the network

Networks hold lucrative assets within their walls including voice, messaging, location, presence, user authentication, billing – plus social graph, user profile and preferences. Take location for example; despite wide penetration of GPS receivers in handsets, network-based location covers any device, works indoors, and is particularly suited to emerging markets.

More importantly, mobile networks hole a treasure trove of information about its users; based a few key information like age bracket, ARPU bracket, address region, roaming characteristics and device model which are provided in an opt-in model, one can deliver better search results, ads or campaign targeting. Think about how restaurant recommendations can automagically cater to your spending habits, taste for international cuisines and social lifestyle – an app that knows you from day one.

There are tons more of examples where network APIs can enable unique applications. Yet, when developers try to connect their app to an operator network they experience barriers and restrictions, such as technology fragmentation, long and expensive technical integration, tedious commercial engagements, long time to payment, plus distribution challenges. What’s worse, developers need to engage and integrate separately with each operator. All of these factors hinder the vast majority of developer innovation and essentially diminish the operator ability to be the center of innovation gravity.

Many infrastructure vendors have jumped into the opportunity to connect operator networks to developers:

– Alcatel Lucent – A dominant SDP provider, extended a hosted ‘OpenAPI’ service for developers, providing Consent Management and  ‘LBS API’

– Ericsson – through their ‘Ericsson Labs’ initiative, the SDP provider offers a broad ‘Maps & Positioning’ API set: web & mobile maps, 3D maps, Cell-id look-up (with its own worldwide cell-id database) , operator based  cell-id and  consent management . Ericsson is currently working with operators in Sweden and Norway.

– Amdocs –  an OSS/BSS leader moving into positioning as an open mobile service providers network to 3rd parties: “service providers have the opportunity to drive new revenues by monetizing their unique assets – networks, customer information, charging, billing and customer care…”

– Huawei – An emerging market player builds its position by partnering America Movil and Telefonica in LATAM. Telefonica has completed in 2009 the deployment of Huawei’s openness platform across 13 Latin American countries

Social cloud APIs

Yet such efforts are limited to single-operator deployments. In addition, they have limited developer outreach potential as many these infrastructure vendors stem from the network, not the software world.

The logical next step is a single, cloud-based network API platform across multiple operators, spanning not just regions and multiple screens, but the entire application lifecycle: develop – deploy – discover – monetize. This network API cloud paradigm is essentially a 4-sided platform connecting users (who discover and consume services), developers (who innovate and create services), the applications themselves and the developer program partners (with the tools and technology, go-to-market, support and community assets). Naturally, a multi-operator paradigm needs to support variable access policies for operator assets, including access to network assets, charging subscribers and accessing user info.

Such a developer-friendly cross-operator pilot program was announced recently in the form of WAC, the Wholesale Applications Community, a joint effort to create a standards based apps platform that operators can leverage to build their storefronts. Network API’s are also part of WAC, based on OneAPI, a Commercial pilot project aiming to establish a unified, developer-friendly API environment across operators. Aepona is the technology provider for the GSM Association’s “OneAPI” initiative.

So is WAC the answer? Operator alliances are essential to achieve this goal. Yet, historically we have seen internal complexity and operator competing agendas hinder effectiveness of these pilots. The missing piece is an infrastructure player that understands software innovation, developer programs and running telco-grade cloud infrastructure. A Facebook-like (software) player that can bring the Facebook out of the operator walled garden.

– Avner

[This article is dedicated with appreciation to the Telecom team at Microsoft Israel R&D center
Avner Mor has over 25 years of experience in senior management positions with leading Israeli hi-tech telecom companies and start-ups. In his last role, Mor served as the General Manager of Telecom Products at the Microsoft Israel R&D center.]

Demolition Derby in Devices: The roller-coaster ride is on

[The economic realities will lead to a roller-coaster ride that will shake up the mobile industry. Guest blogger Richard Kramer talks about the impending price war, the implications for industry growth, and how this will alter the landscape of device vendors in the next decade]

With all the discussion of technology trends on the blogosphere, there are some harsh economic realities creeping up on the handset space. The collective efforts of vendors to deliver great products will lead to an all-out smash-up for market share, bringing steep declines in pricing.

In November 2009 I wrote a note about what Arete saw as the impending dynamics of the mobile device market. I called it Demolition Derby. This followed on from a piece called Clash of the Titans, about how the PC and Handset worlds were colliding, brought together by common software platforms and adopting common chipset architectures. As handsets morphed into connected devices, it opened the door for computing industry players, now flooding in.

New categories of non-phone devices
A USB modem/datacard market of 70m units in 2009 should counted as an extra third of the smartphone market, as it connected a range of computing devices. By the end of 2010, I believe there will be many new categories of non-phone mobile devices to track (datacards, embedded PCs, tablets, etc.), and they may be equal to high-end smartphone market in units in 2011.  Having looked at the roadmaps of nearly every established and wannabe vendor in the mobile device space, I cannot recall a period in the past 15 years of covering the device market with so many credible vendors, most with their best product portfolios ever, tossing their hats in the ring.  I see three things happening because of this:

 

1. First, a brutal price war is coming. This will affect nearly every segment of the mobile device market. Anyone who thinks they are insulated from this price war is simply deluded. I have lost count of the number of vendors planning to offer a touch-screen slim mono-bloc Android device for H2 2010. The only thing that will set all these devices apart will be brand, and in the end, price.  Chipmakers – the canaries in the handset coal mine – are already talking about slim HSPA modems at $10 price points, and $20 combined application processors and RF. Both Huawei and ZTE now targeting Top Three positions in devices, with deep engagements developing operator brands. They are already #1 and #2 in USB modems.  Just look at the pricing trends ZTE and Huawei brought to the infrastructure market; this will come to mobile devices.

2. Second, growth will rebound with a vengeance. I expect 15% volume growth in 2010, well ahead of the cautious consensus of 8%.  I first noted this failure of vision in forecasting in a 2005 note entitled “A Billion Handsets in 2007” when the consensus was looking for 6% growth whereas we got 20%+ growth for three years, thanks to the onset of $25 BoM devices. Consumers will not care about software platform debates or feature creep packing devices with GHz processors in 2010. Ask your friends who don’t read mobile blogs and aren’t hung up about AppStores or tear-downs:  they will simply respond to an impossibly wide choice of impossibly great devices, offered to them at impossibly cheap prices.

3. Third, the detente is over. The long-term stability that alllowed the top five vendors to command 80% market share for most of this decade is breaking down.  This is not simply a question of “Motorola fades, Samsung steps in” or “LG replaces SonyEricsson in the featurephone space”.  Within a year, there could be dangerously steep market share declines among the former market leaders (i.e. Nokia) to accompany their decline in value share. Operators are grasping control of the handset value chain; many intend to follow the lead of Vodafone 360 to develop their own range of mid-tier and low-end devices. Whether or not this delivers better user experiences, operators are determined to target their subsidy spend to their favourite ODM partners. In developed markets, long-established vendors are getting eclipsed: in 2010, RIM or Apple could pass traditional vendors like SonyEricsson or Motorola in units. RIM and Apple already handily out-paced older rivals in sales value, and with $41bn of estimated sales in 2010, are on par with Nokia.

Hyper competition
So where does this lead us? Even with far greater volumes than anyone dares to imagine, there is no way to satisfy everyone’s hopes of share gains, or profits. With Apple driving to $25bn in 2010 sales and Mediatek-based customers seeking share in emerging markets, the mobile device market is entering a phase of hyper-competition. It is all too easy for industry pundits to forget that Motorola and Sony Ericsson collectively lost over $5bn in the past 2.5 years. More such losses are to come.

Never before have we seen so many vendors acting individually rationally, but collectively insane. Albert Einstein once famously said that “the defintiion of insanity was doing the same thing over and over but expecting a different result”.

The men in the white coats will have a field day with the mobile device market in 2010.

– Richard

[After four years as the #1 rated technology analyst in Europe, Richard Kramer left Goldman Sachs in 2000 to form an independent global technology research group. Arete has 10 years experience dissecting the financials and industry trends in  semis, software, devices and telecom operators, out of offices in London, Boston, New York and Hong Kong. Richard can be reached at richard [dot] kramer [at] arete.net]