Tag: vodafone

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

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]

The Mobile App Store Landscape 5 years Ai (After the iPhone)*

[Where is the app store frenzy heading after all?  Guest blogger Francisco Kattan discusses why it’s a winner-take-all game]

2009 was the year of the app store wannabes.  Following the remarkable success of the Apple App Store, OEMs, mobile platform vendors, mobile operators, and traditional aggregators either created new app stores or repositioned their existing offerings as app stores.  There are now between 24 to 32 app stores depending on who is counting (see Distimo’s app store report and the WIP App Store Wiki for reference), and more stores are surely to follow.  However, key questions remain about how the app store landscape will emerge after the current period of hysteria subsides and the dust settles.

– Are we going to see many app stores on each handset?
– Will app malls emerge to host multiple app stores within?
– Will operator stores gain critical mass?

Andreas Constantinou wrote an excellent article that defines the app store building blocks and predicts a “dime-a-dozen” app store future.  I will build on this post, but will offer an alternative view of how the landscape will evolve.

It’s a Winner-Take-All Contest
If we were to extrapolate the current trend, we could expect a future where each handset will host many app stores.   An LG Android device on the Orange network would have the LG App Store, the Android Market, and the Orange App Shop.  The Verizon version would have the V CAST store in place of the Orange App Shop.  On top of this, you could add the Getjar multiplatform store and several specialty stores for say, games, health, and productivity apps to name just a few.  Can you imagine the mess this would create for the user experience?  Which app store do I launch? Which apps do I find on which store? Are apps duplicated on multiple stores?  Are the prices the same across stores or do I need to shop around?  Are the versions of the apps consistent across stores?

Fortunately when the dust settles consolidation will occur and one app store will command nearly all the market share on each device.  Sure there may be a couple “also rans” with a small share, but as history has shown us, these two-sided platform battles tend to result in winner-take-all contests (see definition of two-sided markets here).   We’ve seen similar battles already play out on the web with Amazon winning e-commerce, eBay winning auctions, and Google winning search.

Why winner-take-all markets happen has already been well documented.  Economists Frank and Cook documented this phenomenon with their Winner Take All Society book and Rich Skrenta wrote a nice post on the battle for search supremacy that led to Google’s reign. In two-sided markets there are two sets of users (consumers and developers in the case of app stores) and once both sets of users pick a winner, it is very hard for competitors to gain much share. To cut to the chase, the app store battle in mobile will also result in a winner-take-all contest for the following reasons:

  • Low switching costs.  Given how easy it is for a consumer to switch from one app store to another, any advantage of one store, even if small, will cause more consumers to visit the better store. Why buy at the world’s second best store when the best store is only a click away?  This initial advantage could be in terms of time-to-market, quality or quantity of applications, user experience, or pricing.
  • The word spreads.  Word of mouth, accelerated by social networks, will cause a snowball effect attracting more and more users to the store with the initial advantage.
  • Developers vote.  As more consumers visit the winning store, more and more developers will prioritize that store for their applications offering that store an even greater advantage.
  • Economies of scale.  As one store gets significantly larger, it will enjoy greater economies of scale and therefore a cost advantage over competing stores.

A positive feedback loop cements the ultimate winner.  The more consumers that visit one store, the more developers will create apps for that store, and the greater the economies of scale the winner will enjoy. This battle will play out on a device by device basis with the Apple App Store already the winner on Apple devices (to be accurate, there was no real battle in this case as Apple’s policy does not allow competing stores).  A battle will play out for say RIM devices on the Verizon network (V CAST versus App World), another one for Android devices on the Orange network, etc.  So while we are initially headed for a “dime-a-dozen” app store landscape as Andreas predicted, over time we will see significant consolidation.  And as the number handset platforms themselves consolidate (surely to happen, but this is outside the scope of this post), we’ll have even fewer stores.

The Two Exceptions that Prove the Rule

  • Adult Content.  Niche stores will exist to satisfy needs that, by policy, are not met by the winning store.  Adult content stores such as MiKandi are a clear example.  Another example is Cydia, an app store for jail broken iPhones.
  • Enterprise App Stores.  App stores designed for IT organizations to manage application distribution and provisioning within an enterprise have unique requirements that the consumer stores will not meet.  In addition, the low switching costs described above do not apply to enterprise stores.  Examples of Enterprise stores include Mobile Iron and Ondeego.

Think Department Store, not App Mall
Rather than app malls that host multiple stores, the winning app stores will be like department stores with applications organized by category.  Games, health, productivity, entertainment, etc. will be departments within a big store, not specialty stores within a mall.

For clarification I’m defining a “mall” from the point of view of the customer experience, as in the real world.  Customers walk into a mall and discover multiple branded stores, each with its own checkout process.  An example of an app mall is the now defunct Nokia Download. You may recall that Nokia Download (formerly called Nokia Content Discoverer) touted its “advanced shopping mall experience” when it was announced, hosting multiple stores such as Handango and Jamster (called aggregators at the time).

The mall concept does not work because it hurts the user experience for no extra value:  users end up clicking on unknown store brands adding an extra layer of user interface that gets in the way of the app discovery process.  Moreover, if each store in the mall requires users to enter a form of payment the user experience suffers even more.  Although there are more reasons why Nokia Download failed, the user experience of its mall concept was an important factor and as a result Nokia is now busy copying the more successful department store model with the Ovi Store.

This does not mean that there won’t be aggregators behind the scenes.  In fact, the ingestion process could include a publisher like Symbian Horizon or a syndication service like Getjar’s.  However from a user experience point of view, it’s a department store, not a mall.  Amazon is a good model for the winning app stores.  There may be many sellers behind the scenes, but it looks much more like a department store than a mall.  There is one prominent store brand with many departments, a single shopping cart, and a single checkout process.

Will operator stores gain critical mass?
Once upon a time operators had a virtual monopoly for the distribution of mobile applications (depending on the region). Apple changed all that, of course, and the tables are now turned resulting in a developer exodus away from operators (for more on this see My Number One Wish for Operators).   To regain developer mindshare many operators are launching their own “app store style” stores, implementing many of the lessons learned from Apple, including the 70% rev share, developer set pricing, and click-through agreements.  Verizon announced V CAST, Orange has App Shop, O2 is testing Litmus, AT&T has App Center, Vodafone has 360, etc.  But will these operator stores succeed?  I think it depends on the type of device (feature phone vs. smartphone) and on the size of the operator.

Operators lose the app store battle on smartphones, but win on feature phones
Operators have a natural disadvantage to attract developers compared to the smartphone platforms because they are more fragmented.  There are dozens of operators compared to only a handful of smartphone platforms.  Developers are better off working with the small number of smartphone platforms to get worldwide distribution across all operators instead of targeting each operator separately (each with their own SDK, certification requirements, business terms, and fragmented device line-up).  To compensate for this disadvantage operators would have to add much more value with their own stores.  Carrier billing and access to network APIs are areas where operators can add value, but these capabilities are likely to also become available on the native handset stores.  Operators can also differentiate by tapping into their huge advertising budgets to market their apps, enticing developers whose apps are difficult to discover given the unlimited shelf space in the stores.

Another option for operators is to increase store switching costs for their customers by not preloading competing stores on devices they sell.  This would require customers who want to shop elsewhere to find, download, and install other stores on their own.   Verizon Wireless is a good example of an operator trying this strategy.  Verizon does not preload RIM’s App World in favor of its own (upcoming) V CAST store.  However, as operator influence over smartphone providers continues to erode (a trend surely to be accelerated as devices such as Google’s Nexus One are sold directly to consumers), this option will go away forcing operators to truly differentiate their stores, or else. We’ll see how this plays out, but operators will likely lose the app store battle on smartphones unless they find a way to significantly differentiate and do it fast before the native stores consolidate their advantage.

The battle for app stores on feature phones is quite different for two reasons:

  • This category of devices is much more fragmented and operators can gain an advantage by providing a common platform across them to attract developers. This approach neutralizes the fragmentation advantage that OEMs enjoy in the smartphone category, as discussed above, and is precisely the strategy that AT&T just announced at CES: AT&T will launch Qualcomm’s BREW Mobile Platform across its mid-tier devices to attract developers for its AppCenter store
  • Operators enjoy much more influence over feature phone specs and content than on smartphones.  This will enable many operators to exclusively preload their own stores on these devices essentially blocking alternative stores.

Although the smartphone category is where the growth is, there is still a very large and mostly underserved market at the high end of the feature phone category.  These devices have large displays and often full QWERTY keyboards (touch or physical), representing a large untapped market for mobile applications that operators can serve.

However only tier 1 operators are large enough to attract developers to their own stores.  Even tier 1 operators are better off getting together to form a much larger market to attract developers as we have seen with the JIL alliance or the collaboration between AT&T, Orange and America Móvil (just announced at CES).  Smaller operators will have to rely on third party stores that can aggregate applications and syndicate them across multiple operators.  A good example of an operator pursuing this strategy in North America is Sprint.  Sprint has announced that it will remove its own application offerings from its smartphone line-up and will partner with an external aggregator to launch a white label store for its feature phone line-up.  Other operators will have to follow the same approach.

What are your thoughts?  Do you buy into the winner-take-all argument?  Are we going to see app malls or department stores?  What role do you believe operator stores will play?

– Francisco

[Francisco Kattan has worked in the mobile industry for 10 years and has deep expertise across the entire ecosystem, including devices, operators, developers, and content providers.  Francisco has held leadership roles at Edify, Openwave, Adobe, and currently Alcatel Lucent where he is Senior Director, Developer Ecosystem.  You can follow Francisco via his blog, on Twitter and he can be reached at franciscok [/at/] stanfordalumni.org. This post reflects the author’s personal opinion and not necessarily that of his employer.]

* As an aside, the launch of the iPhone changed the ecosystem so dramatically that we need a new way to measure time in mobile.  Any discussion about how the mobile ecosystem works must specify Ai or Bi (After or Before the iPhone) in the same way historians use BC and AD to date events.