Distilling market noise into market sense
The VisionMobile blog is a space where VisionMobile analysts and industry insiders exchange views on the fast-changing mobile market and the trends that define the future direction of telecoms.
Value Quadrants: understanding value creation in mobile
[how are the revenue models changing in the mobile industry? Research Director, Andreas Constantinou introduces Value Quadrants, a tool that deciphers the multitude of revenue models and maps how value creation is changing in mobile].
Revenue models in the mobile industry are in a state of constant flux; the business models that used to work two years ago do not apply in today’s market.
Take for example content; the sale value of content is constantly decreasing as sideloading and PC-loading are becoming the norm route to get the latest ringtones and wallpapers. In 4Q07 m:metrics reported that the percentage of subs buying a ringtone fell consistently over 12 months in UK, France, Germany, Italy and Spain. The value is in content remixing and communication (see our Mobile Megatrends 2008 presentation).
After the years of investments in content megadeals and next-gen services, it’s pure bits that count. Some mobile operators are making more money from data traffic than from content and premium services – for example in 4Q07 Telecom Italia’s mobile service revenues were made up from mobile browsing (6.1%), content and premium services (5.3%) and messaging (12%) according to data from Informa’s Mobile Communications Europe.
Mobile software is also changing fast as a business; Per-unit royalties are rapidly disappearing in favour of per-activation, per-user and ad-funded revenue models.
At VisionMobile we are often involved in strategy advisory projects; ‘where should I go next’ is a typical question asked by clients and as a result we ‘ve developed a model that demostrates how value creation is changing in the mobile industry.
Introducing Value Quadrants
Value Quadrants maps value creation and revenue model changes by asking WHEN and WHERE is value being created. The WHEN of value creation is function of the handset lifecycle, from design, development and production (pre-sales phase) to point-of-sale and in-life use (post-sales phase). There WHERE of value creation is either on the device (hardware, software, patents and industrial design) or on the services ‘cloud’ (for designing and delivering content and services).
Each quadrant that is formed corresponds to a distinct type of value creation, as shown below. Starting from bottom left and moving clockwise:
- On the bottom left quadrant, value is created from intellectual property (hardware, software, patents and industrial design) during handset creation, development and production – examples include Nokia, Android, Flash, IDEO, Qualcomm and Cibenix.
- On the top left quadrant value is created through tools licencing, i.e. tools for building and managing software, content, UIs and services – examples include Adobe, Teleca and Trolltech.
- On the top right quadrant value is created from infrastructure (hardware and software) used to deliver services – i.e. to view, edit, share, buy and deliver software, content, UIs and services in general – examples of companies in this space are Vodafone, Nokia (Ovi), Google, Admob, Bango and Logica CMG.
- On the bottom right quadrant value is created from monitoring and activation of on-device assets- in other words from monitoring usage of devices, software, content, UIs and the network. Examples are Carrier IQ, m:metrics and Bluestreak.
Mapping revenue models with Value Quadrants
Value Quadrants become more interesting when you observe how revenue models change across quadrants. Starting from bottom left and moving clockwise:
- Pre-sales, on-device revenue models are typicaly per-unit royalties, per year maintenance fees and per-project fees (NREs, platform porting fees, etc)
- Pre-sales, service-related revenue models are tools licensing, i.e. per-developer-seat or per-CPU, as well as per-year support contracts.
- Post-sales, service-related revenues come from usage fees (per-user, per-active user, per-use, per-level), subscriptions or advertising fees (CPC or CPM).
- Post-sales, on-device revenues come from activation of on-device software and from monitoring and analytics for device/network performance and usage monitoring.
Understanding revenue model changes in the mobile industry
Last but not least, Value Quadrants can be used to map revenue model changes in the mobile industry. The sale value of on-device intellectual property is constantly decreasing – this applies equally to handset average selling prices, hardware platforms, and software. It’s no secret that with operating margins of the order of 8-12% handset OEMs are finding it tough to survive and invest in R&D. Moreover, in the case of embedded software, the sale value is dropping, driven by 5 market forces;
- Linux, which is commoditising the OS kernel
- WebKit, which is commoditising browsers
- Android which is commoditising Java and the whole OS space,
- Mediatek, which is commoditising the business of hardware & software reference designs and
- Flash, which is commoditising rich content platforms (see Adobe’s April 08 announcement for zero royalties for Flash Lite).
Furthermore, industrial design firms have also been under pressure in the last 3 years, as OEMs and even ODMs (e.g. Flextronics, Lawton & Yeo) have been developing in-house ID divisions.
The only type of value that is sustainable is essential patents; which is where both Nokia and Qualcomm have a stronghold. The LTE cross-licensing pact between Alcatel-Lucent, Ericsson, NEC, NextWave Wireless, Nokia, Nokia Siemens Networks and Sony Ericsson is another testament to the importance of essential patents, which can easily command 5% or more of the handset wholesale price. I would argue that essential patents are the most sustainable source of revenue for the handset industry in the foreseeable future.
So where is value creation migrating to ? The answer is simple: to the remaining 3 quadrants. For example:
- Adobe has been aggressively subsidising Flash Lite (2% of Adobe’s revenues) in order to drive sales of its industry-leading tools. Microsoft has been following a similar strategy for its mobile division, investing cash to its hemorrhaging Windows Mobile platform for years in order to drive Visual Studio and Office sales; same for BREW and Qualcomm’s QCT (chipset) and QTL (licensing) businesses.
- Google has invested in acquiring Android and developing the OS in order to multiply the advertising inventory that will boost its post-sales ad business. Nokia’s Ovi will also rely on Trolltech’s Qt as a service substrate, in which Nokia invested over 100 million euros. Nokia’s whole mobile organisation is in fact banking on Ovi as the vehicle to transition Nokia from a manufacturing and software development business into an internet services business.
- Mobile software vendors are flocking away from per-unit royalties into per-activation fees, as network operators are more willing to invest in revenue share opportunities rather than up-front licensing fees; Bluestreak is a such an example of software vendor in what we see as the rule rather than the exception in mobile software revenue models. Moreover, a new revenue stream is emerging in the form of monitoring device, network and service usage (and the subject of a VisionMobile report on Mobile Service Analytics that is due to launch soon).
Value Quadrants are discussed extensively in a forthcoming VisionMobile report titled ‘Mobile Business 2.0: Opportunities for business model innovation in the mobile market’. For additional insights into the migration from data ARPU into Channel ARPU see also the article Making money on the last mile: introducing Channel ARPU.
Comments welcome as always.