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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

  • Great post, agree with you on each and every point, and I think that the "Intel Inside" will be "Qualcomm Inside" since they're the only people who can offer smartphone platforms, with integrated modems, that span both the $100 – $150 level with their MSM7227, and the > $400 – $500 level with their Snapdragon based products.

    The future of Android is looking bright, but after recently purchasing an Android device (Nexus One), and using it for about a month now, I can say for sure that it needs some time to mature. What will the Android of this time next year look like is a very interesting question.

    The next 3 years, as you said, are going to be very interesting, but then again we've been saying this every year!

  • I'm not so sure about this Android storm. Handset maker will have to try to retain their customers : Apple Appstore is only there to "oblige" users to invest in the iPhone/Mac platform to lead them to by Apple again. Nokia will do that with their own platform … Samsung is doing Bada for that. Android is becoming a treat for OEM themselves, a commoditization treat.

    So game is not over yet, and I don't see (hope) the OEM doing the same mistakes as IBM (HP/Compaq/etc).

    As for the operators, I tend to agree with you, even if we never know if they'll finally manage to raise their billing and customer control strengths.

    Rendez-vous taken 🙂

  • Great post Andreas!

    I agree with you, but the MNOs biggest problem is not Android, but the paralysis of wealth – sitting on a gold mine does not make one stare death in the eye, get your act together, or be innovative and increase risk.

    Android is commoditizing the OEMs and opening opportunities, at the same time as the vertical niche OEMs (RIM and Apple) are short time wins but brand-killers, and the Internet players will become a co-opetition. Right now MNOs could take the step and create their own vertical propositions like INQ and Vodafone 360, and with a fraction of a cost of what 360 cost Vodafone.

    There are so many services that the MNOs could be innovative around – what about a "tariff app store" where you pay for reduced rates to certain people or certain times: "I'll be in the UK for the day, I would pay €60 for a full day data pass", "Can I call my kids for free for €5 a week?" – even auctions about tariffs which would make people call/watch streaming video less during peak hours to unload the net.

    If I was an MNO I would hire you directly to help me with the strategy for the new undisturbed company within that in 2-5 years will become my game changer.

  • Stefan,

    Qualcomm is most definitely the market leader in Android designs and STE and Broadcom are still playing catch-up. But I 'm not convinced that the Wintel of mobile will need to *fix* the 'tel' part to a single chipset vendor, as chipset vendors are not defining bus architectures (ARM is) and there is no unique features to chipsets that are being exposed to apps (although Qualcomm is the first one that is pledging to make a difference). So perhaps it's going to be a Win* strategy for mobile..

    – Andreas

  • Thomas,

    Android, WinMo, Symbian etc have always been a double-edged sword for OEMs; on one hand a way to reduce platform R&D and instead invest in differentiation; on the other hand a way to abstract value into platform services which co-opete with OEMs. But in this 10's decade, OEMs have no option but to adopt third-party platforms as there's no more budget for software R&D, and there is still plenty of room for technical UI differentiation in Android (and commercial, depending on how tightly Google continues to run its CTS). Plus, as long as Android is being pushed by operators, OEMs will follow.

    – Andreas

  • Hampus,

    Great way of putting it – 'paralysis of wealth'. And agreed – there's so much simple services operators could be using to add unique brand value – from tariffs like you mention (can I call my kids for $5 a week?) to safety/insurance (24h device replacement if lost and automatic contact backup when you move to a new handset) to a concierge service for VIP users. But as always, innovation never manages to 'bubble itself up' within operator organisations..

    – Andreas

  • Excellent and correct article. In the future, I expect operators will be reduced to simple ISP (Internet service providers).

    The handset are starting to appear independently (Nexus 1), and the voice call will dissappear as Voip becomes the norm. That will be great for us consumers.

    Just like we don't buy our PC from our ISPs, we will not depend on the operators anymore.


  • JulesLt

    An interesting question is how long Google will keep subsidising products that don't generate revenue (i.e. VOIP, sat-nav, even Android itself). It's a good way to drive market-share, but at some point it will be unnecessary, and equally shareholders or new management may begin to question how much revenue is created.

    Also, on the Mac vs PC at half-the-cost point – an equivalent PC has an RRP of around 85% of the price of a bottom end Mac. Cheap PCs are still noticeably inferior to premium PCs at many tasks (3D gaming, video and audio editing, compiling code, and even running the latest version of MS Office. The quality of video encoding in video calling is also noticeably different).

    On the other hand, for the task most PCs are used for (web browsing and older versions of MS Office) commodity PCs are fine.

    I think that gives some hint as to where product differentiation is likely to remain – it's notable that both Android and Palm introduced NDKs for games developers to get lower level access to phone hardware.

    From a development point of view, it feels like people are having to 'think performance' on even the highest end phone models, in a way that hasn't been true on the PC for a decade.

    My gut feel is that we are about 3 generations away from the point where the commodity platform is 'good enough' (i.e. the point on the PC where it ran Office on XP with no frustrating slowness, and prices started to fall) – although it will likely be good enough for most simple uses (Facebook, etc) in the next generation.

  • Jeff Kelly

    I don't think MNO branding efforts will be successful.

    Previous attempts have been met with contempt by the users.

    Also customers don't want operator/provider lock-in. I can take my iPhone or Nexus one to any provider in the world, buy a SIM and am ready to go without investing in a new device. I can move my internet access to a number of different ISPs and still use my router and computer.

    A branded device by an MNO would be worthless if I switch to a different operatar and I would need to buy a new phone.

    I'd also have a whole new experience to deal with. The vodafone branded services work differently than the t-mobile branded services and so on.

    With an Android device or an iPhone I am still using the same thing but get phone service/data access from a different provider and I retain the experience I am used to.

    People don't buy services and use specially branded devices, they buy devices and then use services, and they want the ability to use the same device and the same services regardless of the ISP or MNO.

    I don't want a freakish vodafone clone of Facebook, I want Facebook, I don't want a freakish t-mobile clone of internet access I want Internet access (that's why WAP was such a failure).

    Any branding you can do as a MNO is superficial or you alter the experience people are used to which they not only won't accept but will despise.

    People buy an iPhone, an Android Phone, a Nokia phone and they expect to do everything that they could before regardless of MNO or ISP.

    The alternative would be that the phone business turns into the travesty that is Cable where each company only offers a very small number of cheap branded cable boxes (although there is a large number of offerings available), that usually fail at even the most basic tasks but can't be replaced because the Cable companies don't allow it.

    Something that the operators would have needed to implement 20 years ago when the business was new but today would not be accepted by your customers.

    I simply don't see any opportunity for branding

  • Jules,

    This is very insightful.

    Re: subsidising Android: My guess is that Google will continue subsidising Android until there is a far more effective platform of deploying analytics, Checkout and Voice out on the mass-market of devices. However, there's none such Google platform on the horizon.

    Re: mobile performance. Yes, chipset vendors are optimising with hardware acceleration (e.g. graphics, browsing), platform vendors are optimising (with developer NKDs), OEMs are optimising (e.g. Java performance on SEMC). But there will always (IMHO) be a gap between the very low cost devices for emerging markets and the general-purpose smartphones / computing devices. Smartphones and feature phones will merge over time, and I would dare (!) say in 1-2 generations rather than three, as software can simplify access to common services (FB, etc) without needing the performance – Opera Mini and Snaptu are good examples of this.


    Well said and argued. But mobile is a controlled market, i.e. it's most often not consumers but the companies working within the industry that decide. In North America, Japan, Korea and to a lesser extent Europe, it's operators that decide what goes in and on a handset.

    Having worked for an operator, there's no remedy for the ivory-castle, self-important, ego-boosting notion that the operator knows best how to customise devices and brand their own logo, apps and locked-down services onto consumers.

    Mobile handsets is not a 'free market', so that consumers can freely decide on what's best for them – it's a tightly controlled, highly verticalised market where only a limited number of operator propositions (services and handset customisation bundles) exist per country.

    Google and Apple want to break that and turn it into a different kind of verticalised system, controlled by them.

    The DELLification of mobile and the emergence of a 'free market' might eventually emerge, but that lies beyond the predictable future of the mobile industry.



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