The Wintel future for mobile: a wake up call for network operators

[The PC-esque commodisation of the mobile industry has been prophesied many times before, but never before has it become so lucidly clear. Research Director Andreas Constantinou uncovers the dynamics of the mobile industry that will lead to a Wintel future, and the impending disruption to the network business model]

We ‘ve all heard this before. The story of the bit-pipe future for mobile networks/carriers and the threat of Google and Facebook to the mobile industry status quo. But this time the facts are clear; the dice has been cast and is pointing to a Wintel future for the mobile industry. Bear with me – this is a long argument.

The virgin years of mobile
The mobile industry has rapidly evolved through two decades:
– 1990s growth: The 1990s was the decade of unrestrained growth, building up huge empires on thin air (a.k.a. radio spectrum). Operators invested on building networks with worldwide reach, on increasing spectral efficiency (more bits per pipe, setting 2G to 3.5G standards) and snapping up new subscribers
– 2000s competition: The 2000s was the decade of competition, reality check and disillusionment. Operators invested in competing with more complex tarriffs, deeper device subsidies, unique devices (custom or exclusives) and bundling fancy services on the device (from mobile TV to myFaves and social networking).

Next up: survival
The 2010s decade is about survival. It’s no secret that ARPU (average revenue per user) has been dropping for the last few years, and the much-promised data services have failed to deliver. Plus networks are threatened by the establishment of over-the-top services like OEM-own services (Apple App Store, Nokia Ovi, Sony Ericsson PlayNow, RIM Blackberry services), the entry of alternative payment providers (Apple iTunes, Paypal Mobile, Google Checkout), alternative voice providers (Skype, Google Voice) and of course the myriad of social networking services (epitomised by Facebook and Tencent).

So, how are operators differentiating today beyond tariff games?

Investing on device subsidies: Network operators are spending big money to snap high-spending customers away from their competitors; for example investing 300-400 EUR on the top models from RIM, HTC/Google and Apple (case in point: Orange France). The subsidies are recouped back from such customers in around 9 months, but without factoring in the disproportionately high cost to the network, where the cost increases linearly per-MB consumed. All this, for a short-lived advantage, no stickiness to the network. Worse than all – operators are pouring marketing and subsidy investments into the same companies – including Apple, Google and RIM – that aim to commoditise their network.

Selling broadband Internet dongles and mobile WiFi (MiFi) hotspot devices at flat-rate bundles that aim to drive revenues, but at the same time lead to surging network OPEX costs. To appreciate this irony, consider that operator marketing budgets are never linked to the network infrastructure OPEX budgets; and so marketing groups may spend away into fancy deals, while resulting in alarmingly high network costs, especially for network maintenance and upgrades. Operators are investing into the bit-pipe business without knowing how to monetise it.

Customising devices (a favourite pastime of operators) like Vodafone 360 and Orange Signature that aim to deliver own services on the mobile, while limiting the experience to high-end devices. Although 360 has some strategic attributes (locking customer contacts into the network), its execution has been inefficient to say the least with a team of 250 people at Vodafone needed to launch the service (which could have been accomplished with perhaps 50 people in a software startup environment). Operators are pushing Internet brands to the forefront of the customer experience (see Skype promos from Three and Verizon) for a short-lived advantage of customer attraction.

To sum this all up; operators are investing in their demise, pouring money into the same Internet companies that aim to commoditise them into bit-pipes. Worst of all is they ‘re drawn into a inward spiral, a black hole that is near impossible to escape from; as an operator, if you don’t have the latest devices and cheapest tariffs, your competitors will.

The loss of control points
The situation is much more dire, as the current balance of power in the mobile industry is about to be shaken up. Operators control around 70% of the mobile industry pie of $1 trillion, thanks to three very important control points:

device subsidies: operators (with few regional exceptions) pour large marketing budgets into promotions and device subsidies, thereby in effect dictating terms to their handset suppliers. Only Apple has been able to challenge this status quo to date, but on a tiny 2% of the mobile market. Yet, a new disruption is appearing in the form of Android that might extend to well beyond a tiny market share, to significantly drop retail price points and render subsidies meaningless (more on this Wintel phenomenon later).

mobile termination: by design, mobile operators are the exclusive gateway to reaching any specific subscriber. That’s how operators have been able to charge ridiculously high voice and roaming charges (incl. receiver pays model). However, mobile termination is slowly coming under threat as more and more services are being delivered over the network like social networking and VoIP, while flat-rate tariffs for mobile Internet is becoming the norm. Consider that Google might at some point offer free voice calls amongst Android device users. It’s a question of when, not if. But abstracting the service from the underlying network carrier, the service providers assume the mobile termination gateway role, by acting as the service transport across networks and devices.

payment broker: The premium SMS boom is the best example of how operators have leveraged their billing relationship outside their network, charging often 50-60% commission for reverse billing, i.e. the ability to charge users for a ringtone, game or televoting from their mobile phone bill. Yet, Internet players are now carving up their niche into the operator-own game in the form of Apple App Store (no doubt to be transformed into a payment gateway for third parties) followed by Paypal Mobile and Google Checkout.

Wintel and the Google game
A very important change in industry dynamics is underway. Google’s Android has morphed from a feared entrant to a loved ally, with all handset manufacturers (except for Nokia) investing in Android-powered handsets thanks to Android’s low cost of creating a differentiated handset. In parallel, chipset vendors led by Qualcomm and Mediatek are rolling out out-of-the-box solutions that pre-integrate hardware + a software platform + applications (e.g. Android Market), that can be easily differentiated in both plastics and UI.

These out-of-the-box solutions will rapidly decrease in price led by the impending price competition amongst chipset vendors (led by Mediatek exports) and the advancement in silicon manufacturing (with sub-40nm chips squeezing smartphone capabilities in feature-phone price points). Combined with Android (low cost of UI differentiation + bundled apps market so incremental revenue) this should lead to a diversity of Android-powered phone at $100 retail price points in the 3-year horizon. This is a game where Asian mobile and consumer electronics manufacturers will gladly play, by creating low-cost, on-demand phone + service solutions for media brands and operators.

This is the Wintel game of the PC industry, making its appearance in the mobile industry; only the title of ‘Intel-inside’ is still up for grabs. What’s more, with smartphone prices at $100 dollars, the operator subsidies are going to become meaningless, in effect creating a handicap for network operators and a sudden loss of negotiating power. The tables are slowly turning.

What about Symbian and Windows Mobile, you might ask? We believe Symbian will become a Nokia-only operating system (more this on a future post), while Windows Mobile is driven by short-lived motivations today (a fresh UI and an operator interest in it), which can easily be delivered by Android, once UI design and technology firms release customisable layers on top of Android (something that Ocean Observations is hinting to be working on with Brandroid = Brand + Android).

What about Apple, Nokia and RIM; the few tier-0 handset OEMs that have developed vertical propositions (from hardware to services) will still be able to command premium prices; making this so very similar to the PC industry where you can buy an Apple computer at premium price or get the same functionality for half the price in a PC clone.

The shock to the operators will be like the shock that the music industry got when they woke up one day and realised that the Internet has disintermediated their brick & mortar business model.

All is not lost
Operators can still get their act together. It’s rare that operators have invested in long-term strategy – see Orange’s investment in mega-SIMs in 2007 (albeit betting at the wrong standard). And there might be the odd operator that has the conviction and foresight at the management level to achieve such long-term planning. We ‘ve long advocated that operators should platformise (read: Network-as-a-Service) while creating new control points and meaningful brand deliverables – for a brief analysis see our Mobile Megatrends 2010 deck, especially the chapter on ‘new smart pipe strategies at the intersection of brands and consumers’. Or drop us a line.

Comments welcome as always,

– Andreas

Low cost Android: crossing the $100 barrier

[Where’s Google’s Android going? Guest blogger Ben Hookway uncovers the race for low cost Android taking place behind the scenes of the mobile industry, and how this may change the face of Android as we know it]

Low cost Android devices have been forming a large part of R&D activity for some time now. Behind the scenes of the mobile industry all major players – including semiconductor vendors, software vendors, software services companies, ODMs, OEMs, and network operators – are putting considerable resources into rolling out low cost Android phones. It’s a silent revolution in the making that, once set in motion, should see Android shipments lift off from the single-digit millions.

So how low is ‘low cost’? Reports of $75-$110 reference designs are emerging from Asia; these are fully featured touchscreen devices, albeit with an EDGE (2.75G), rather than a 3G baseband chipset.

Why the interest in low cost Android? Low cost means volume which in turn means market share, and a consistent platform for the provision of services. There are multiple parties with a compelling interest in having a low cost Android device.

Semiconductor companies are under pressure to better address the market for  Android platforms. Qualcomm is the overwhelming leader in 3G chipsets for Android phones in Western markets. Their competition such as ST Ericsson, Broadcom and Infineon are responding and a low cost Android niche may be a way for them to break into the current Qualcomm dominance.

The majority of handset manufacturers are investing heavily in Android. With so much effort going into a single platform, there is an inevitable pressure to be able to scale that platform on as wide a range of phones as possible. While the lion’s share of press coverage is on ‘smartphones’, the mass volume still is in lower end devices.

Network operators are already developing and deploying ‘operator packs’ comprising of specific operator applications and service enablers, designed to run on Android devices. Longer term, Android may end up affording operators the standardised  platform for devices they have been craving for years; a standard platform they can consistently deploy their own ‘pack’ on. That’s assuming operators can gain access to low cost, mid-range Android devices on which they can deploy standard operator packs on and therefore extend the operator experience to the mainstream consumers.  Moreover, with subsidies widely practiced in the mobile industry, it is in the best interest of the operators to reduce the cost of Android phones.

Continue reading Low cost Android: crossing the $100 barrier