NQ Logic

Technology | Strategy | Consulting

Broadband Goes Mobile

While the media buzz is still digesting the iPad launch in the US, debating over the new advertising platforms from Apple and Twitter, and commenting on the exceptional 2010 Q1 results from technology companies (IBM, Apple, Microsoft and Google), the last month witnessed many dispersed yet drastic changes in the telecommunications ecosystem that could transform the entire industry and impact billions of people’s lives in a sweeping manner.

  1. Monday, April 12 was the first day of the world's first auction for the 4G spectrum public sale, which happened to be in Germany. The auction, which is likely to last several weeks, is not expected to run as high as the previous one a decade ago (€50 billion or U$67 billion), but the strong competition among four major operators (Vodafone Group, Deutsche Telekom's T-Mobile, KPN's E-Plus and Telefonica's O2) will certainly generate a large profit for the German government (estimated at €3 to €7 billion). This world’s first auction sale of a 4G license will undoubtedly set the trend for the following European countries which are expected to launch their own auctions later this year or early next.

  2. A day earlier at the 2010 WiMAX Forum Congress Asia hosted by Taipei, leading WiMAX vendors Alvarion, Beceem, GCT Semiconductor, Intel, Motorola, Samsung, Sequans, XRONet and Chinese handset manufacturer ZTE as well as the Taiwanese research organization ITRI, announced the launch of the WiMAX 2 Collaboration Initiative (WCI). The initiative has a unique mission to accelerate the implementation and interoperability of new WiMAX 2 systems designed to meet the IMT-Advanced (4G) standards, which requires delivering low latency, capacity for VoIP, 1Gbps access speeds to fixed locations, and 100Mbps to fast moving mobile nodes.

  3. On March 23, at the international CTIA WIRELESS 2010 in Las Vegas, Sprint announced the first 4G phone. The HTC Evo 4G is not only the first commercially available 4G handset offered by a US carrier but also the carrier's first WiMAX cell phone. The handset, which is expected to be available during the fourth quarter of 2010, runs the latest Google Android OS 2.1, claims speeds up to ten times faster than 3G, and comes with GPS, 8.0 megapixel camera, Micro SD card slots, WiFi and a 1GHz processor, setting the American carrier as the top leader in the high-bandwidth Smartphone market.

These three announcements are corroborating the trend that Erickson revealed also on March 23, that mobile data traffic surpassed mobile voice globally in December 2009.

"This is a significant milestone with some 400 million mobile broadband subscriptions now generating more data traffic than the voice traffic from the total 4.6 billion mobile subscriptions around the world." — Hans Vestberg, Ericsson President and CEO [March 23]

To understand why a German auction, a worldwide WiMAX collaboration initiative and a new US phone would shape the future of billions of people, a quick dive into the telecommunications ecosystem is necessary to grasp the promises of the next decade.

The Telecommunications Industry Then and Now

Many years have passed since the invention of the telephone in 1876 and the creation of the first telecommunication company in 1879 (AT&T) by Alexander Graham Bell. Today the entire telecommunications sector is one of the most complex, capital-intensive and regulated; and yet a lucrative, crucial and fundamental sector in the world economy.

Telecommunications companies started initially as fixed line network operators (called PSTN line), building for over a century long large networks of analog switches and vast webs of copper cable to connect people around the globe. It was only recently that technology gave the telecommunications companies a new opportunity to create a new market. On April 3, 1973 Martin Cooper, VP at Motorola, placed the first phone call on a handheld cell phone prototype, triggering a brand new sub-industry called the mobile industry. But technology never stops improving, and during the late 90’s another network called the 'internet' surfaced and this network swept over all other networks and soon enough, Internet Service Providers (ISP) were integrated into the giant telecommunications conglomerates to become part of the service offering, alongside the PSTN fixed line, mobile and sometimes cable TV broadcasting networks.

Among the main communication networks of today -- TV, Fixed PSTN, Mobile, and Internet -- the latest has become the obvious choice for any exchange of information. The last decade saw the TV and the Voice networks slowly migrating over to IP, giving rightly the Internet its name of 'network of networks', but Mobile has been a more difficult challenge for obvious technical and business reasons.

Mobile Industry Technologies

GSM World Coverage
Source: GSM World [2009]

As a technical point of view, mobile networks today are split into three main families with many different flavors, and are usually based on where they originated from and from what industry there were emerging from (Telecommunications versus PCs):
  1. GSM (Global System for Mobile Communications) is the most popular standard for mobile telephony systems in the world. GSM is used by over 3 billion people across 212 countries and territories, representing 80% of the global mobile market uses (The GSM Association, 2009).

  2. IS-95 (Interim Standard 95), which represents 15% of the global market, has been originally from the US and Asia (outside Japan). The standard is more widely known under its latest release as CDMA and CDMA200 and has a long-term plan to merge with the GSM technology at the LTE (Long Term Evolution) stage.

  3. WiMAX (Worldwide Interoperability for Microwave Access) which represents only 5% of the global market is a recent technology that provides fixed and fully mobile internet access based on a roadmap issued by the Institute of Electrical and Electronics Engineers (IEEE) of the PC sector. WiMAX has been described as 'Wi-Fi on steroids', and has gained momentum in emerging countries due to its lower cost, better functionality and powerful performance. WiMAX is becoming a true competitive solution against the LTE and could certainly pose a valid threat in the longer future of the GSM standard.

Mobile Technology Evolution
Source: NQ Logic [2010]

More advanced countries are usually using the latest technologies (called 'generation' or 'G'), which are defined in advance by the International Telecommunications Union (ITU). Today schematically only two generations out of four are in use in the world: 2G in emerging countries and 3G in mature markets.

Mobile Networks - Range vs. Speed
Source: NQ Logic [2010]

Mobile Industry Ecosystem

As a whole the worldwide telecommunications revenues accounted for U$3.85 trillion or 3% of the world GDP in 2008, and represented close to 60% of the worldwide ICT revenue (OECD countries making up more than 80% of the total revenue).

Today, out of all the digital networks the most strategic is undeniably the mobile network. With 30 million new subscriptions per month and already at 4.6 billion subscriptions, the overall global mobile revenues ballooned to U$1.1 trillion in 2009, split over mobile voice (57%), SMS (11%), MMS (3%), mobile data (9%), handset manufacturers (15%) and network infrastructure (4%).

Total Telecommunications Revenue - 2009
Source: Tomi T Ahonen [2010], NQ Logic [2010]

Mobile Data, SMS and MMS (called 'Non-Voice') are a nascent revenue source, representing only 30% of the mobile carriers' revenue mix worldwide as in 2009, but is increasingly central in the attempt to offset the declining 'Voice' use in the last few years. Although the SMS has a 90% profit margin, it has neither the potential nor the scale to compensate the monetization loss from worldwide decline in total Voice (Fixed and Mobile) use.

The Size of the Mobile Market
Source: Steve Clayton [2010]

In the last few years, consumers started to connect to the internet using their mobile device, and this trend is accelerating exponentially. Projections from Cisco are somehow impressive with the global mobile data traffic doubling every year through 2014, increasing 39 times between 2009 and 2014, with a disproportionate trend toward video (by 2014, 2/3 of the world’s mobile data traffic will be video and consumer mobile internet traffic will account for 73% of all mobile data traffic). This explosion in data traffic has been fueled by the iPhone, smartphones and other portable devices that will account for 91% of all mobile data traffic by 2014.

Global Telecommunications Revenue
Source: Informa Telecoms and Media [2008]

But not all traffics are equal under the laws of network technologies. Web browsing and video are more bandwidth-hungry than email for example. And this imbalance in traffic causes a massive challenge for network companies that opened their infrastructure to the internet and what it can offer.

Trends Driving the Evolution to LTE
Source: Alcatel-Lucent [2009]

The Real Problem is Monetization not Capacity

After a vast marketing campaign to stimulate the promising mobile data market with all-you-can-eat price plans, today top executives at AT&T, Verizon Wireless, Vodafone, Deutsche Telekom and Telefónica have all recently called on the industry to move away from flat-rate data plans and move toward a tiered-price plan to manage current capacity issues.

Pointing at the power-hungry top customers (top 3% consume 40% network capacity) and the explosion of data mobile traffic (in 12 months network has seen a +4,932% in mobile data traffic), AT&T has planned to cap all customers while investing another U$1 billion on top of the U$3 billion already invested since 2006 to improve the company's mobile broadband capabilities.

This scenario, quite similar to what the internet industry of the 90s witnessed, is in reality a mere attempt to delay the massive industry shift that is happening at the moment — migration of all the different networks over the final IP network, the internet.

"Everything over IP, IP over Everything" — Dr. Dave Wisely, head of FMC research at BT [2009]

Although telecommunications companies are expected to invest this year close to U$200 billion in capital expenditures (CAPEX) to maintain and expand their networks, this and some price plan correction will be probably sufficient to welcome the 1.7 billion additional mobile data consumers expected to join the mobile internet revolution in the next few years, but certainly not make up for the gradual loss of total Voice revenue that the industry is observing now.

The large consumer surplus generated by the technology switch is actually largely redirected to the over the top internet players, the likes of Google, Microsoft, Amazon and Facebook, which are benefiting of a new set of billion consumers using their internet applications from a new device, the mobile phone.

The persistent yet failing lobby effort against Net Neutrality by global telecommunications companies has compelled them to charge customers the same price, regardless of the type of traffic. This prevents the telecommunications companies from price discriminating towards certain services (video, P2P) and from charging more for mobile usage data than SMS or voice.

Some would argue that telecommunications companies could delay the network upgrades to the latest technology and therefore, avoid moving to an all IP network. But the new technological developments driven from the PC sector (i.e., the WiMAX alternative mentioned before) puts considerable pressure on the telecommunications industry to deliver in a very short time a cheaper, faster and more universal technology, at the risk of losing the entire business to a new entrant with WiMAX.

The PC industry and its WiMAX technology have a more ambitious goal in mind, far beyond the traditional communication sector — linking all devices around the world (M2M, RFID and Internet of Things). Thanks to a coordinated effort and enthusiastic leading companies, the entire industry is moving aggressively on the current telecommunications market of connecting people. WiMAX is proposing not only a solid telecommunication alternative in our current perspective but also a bright PC future.

In other words, telecommunications companies have no other choice than to invest significant capital in U$ billions without likely seeing the ROI on their balance sheet. Their consumers today want to use their mobile devices the same way they use their laptops/PCs. Top internet players like Facebook, Amazon, Google, are already reaping the financial benefits on the application layer and will continue to monetize on telecommunication upgrades.

Facing the Future: Made in Japan

The first commercially automated cellular network (1G) was launched in Japan by NTT in 1979. The initial network covered the full 20-million-resident, metropolitan area of Tokyo. Within five years, the NTT network was expanded to cover the whole population of Japan and became the first nationwide 1G network in the world.

Internet services were first made available on Japanese mobile phones by NTT-DoCoMo in February 1999 (i-mode), and they launched 3G services in October 2001. Today with 95% of the handsets running on 3G, Japan will phase out the previous 2G network, which will cease by 2012, making Japan the first large country in the world to be on 3G only.

Mobile Telecommunications Competitors in Japan
Source: NQ Logic [2010], Morgan Stanley [2009]

Today, the mobile web in Japan is rich, fast, stable, and simple. Users press one dedicated button on their phone to connect to the internet carrier’s landing page, or they can also type in URLs directly to get to mobile web sites, which can then be browsed by using one-key shortcuts.

Handset Market Share in Japan
Source: NQ Logic [2010], Morgan Stanley [2009]

The functionality list of a Japanese phone could easily delight any techno mobile enthusiast in the world. A quick pick at the latest product catalogue from NTT DoCoMo, KDDI and SoftBank show that a standard phone in Japan has at least a 8-megapixel camera, a front-facing secondary camera for video conferencing, a GPS, a digital TV service (OneSeg), and an electronic wallet.

Furthermore, a mobile phone is also a university professor, a gaming platform, a music system, a popular e-book reader and can also be a GPS-alarm system dedicated to children, based on their distance. Latest mobile technology evolutions have promised in the very near future to deliver in Japan only, 3D touch-screen, instant voice translation and augmented reality.

All the behind-the-scenes mobile technology developments were paid at a high cost by telecommunications companies. With the introduction of a cheaper mobile data service and a strong internal competition among the three major competitors (NTT DoCoMo, KDDI and SoftBank), Japan’s mobile industry saw a massive market value decline from U$510 billion in 2000 to U$116 billion in 2009.

At the same time, Japan’s mobile internet industry, including companies like Yahoo! Japan, Rakuten, DeNA, Mixi, Gree, have grown from U$6 billion in 2000 to U$33 billion in 2009, accounting now for 22% of total market value of the mobile internet ecosystem.

Within a decade, Japanese telecommunications companies have managed to create an entire ecosystem around their networks to deliver what consumers want. And these companies managed to reside still at the center of the ICT industry, and in 2009, collected on average U$ 425 per user on mobile internet (access, commerce, services and advertising).

Japanese telecommunications companies turned a simple communication object into a ubiquitous and universal behavior assistance device, by moving away from their walled-garden business mindset, offering billing and other technical services to their partners, and proposing to demanding consumers a vast menu of services. Today Japan is 5 to 10 years ahead of the rest of world in the mobile industry. Dedicated online commerce, a wide variety of tailor-made paid services and location-based advertising have gained significant market share in Japan over the recent years, showing to the world that a dynamic mobile internet ecosystem can be nurtured by telecommunications companies.

"In Japan, kids now grow up using mobile phones, not PCs. The future of PCs isn’t bright." — Masahiro Katayama, research group head at market survey firm IDC [2007]

What Is Next for Telecommunications?

Few developments are almost certain in light of regulations, market dynamics, and trajectory seen in a country like Japan:

  1. More people will have mobile phones.
    The mobile phone will become the most universal piece of technological equipment in the history of mankind, far ahead of PCs, TVs, or any Radio devices. Today the global mobile phone penetration is at 68% and will soon rise to 90%. Mobile phone has become the most widespread technology that the world has ever seen.

    The Market at the Bottom of the Pyramid
    Source: C.K. Prahalad [1995], NQ Logic [2010]

  2. More people will use mobile data services in mature and emerging markets.
    As the iPhone success showed, mature markets are already craving for mobile data service. But this explosion in mobile service will also happen in emerging countries. As phone technology keeps evolving, cost of manufacturing decreases by the law of numbers, and emerging markets overflow with cheaper and second hand phones, mobile phones are becoming more powerful, at a fraction of the cost. Rolling out 3G and internet-compatible networks in emerging countries will drastically impact people’s lives and livelihoods (a country's GDP expands by 0.6% for every 10% increase in mobile penetration). The remaining 5 billion people who never accessed the internet before will probably encounter for the first time, the network of network through a mobile phone.

  3. Global telecommunications revenue will decrease.
    With the intense internal and external competition stimulated by government or regulators in the telecommunications sector, and the seismic technology evolution (WiMAX or LTE) converging towards the IP network, telecommunications companies will see a paradox, where their consumer base increases exponentially but their total revenue decreases drastically as the Voice business line contracts over time. This revenue reduction cannot be compensated in absolute value by current service offerings or existing business lines. Telecommunications will have to seek a massive change, opening new business lines (broadcasting, services, or even banking) to re-capture the consumer surplus generated by the current shift.

  4. Telecommunications industry will consolidate.
    The consolidations that happened and is still happening in Europe and North America over the past few decades will expand to emerging countries. Large telecommunications conglomerates will start to appear around the globe making new incumbents less likely to success. With a continual decrease in ARPU (Average Revenue Per User) and increase in OPEX (Operating Expenditure) and CAPEX (Capital Expenditure), telecommunications companies will become less profitable, triggering a wave of mergers and acquisitions. Consequently telecommunications companies will become bigger in size (above 100 million subscriber club) and in value (above U$50 billion revenue club), but weaker on their balance sheets.

  5. Telecommunications companies will become service companies.
    Led by the technology capabilities and consumer demand, telecommunications companies are now being compared to what the internet has to offer (unlimited information and services at a flat price). Telecommunications companies are moving away from the commodities business to embrace the service industry with all its rules and constraints (shorter cycle, fragmented competition, high demand) while restraining the current parameters of their business (large capital requirement, and convoluted operating expenditures). Those that will not change their mindset and modus operandi will disappear, swallowed by market forces.
With the emergence of 4G technology (on both network infrastructure and devices), the consumer desire to get more information and services from mobile phones, and the influence of governments and regulators, telecommunications companies are at a fulcrum point to transform themselves rapidly from commodity corporations to service companies.

Again, this transformation will see them expanding their customer base while reducing their revenue. Ironically enough telecommunications companies are becoming more central to our lives while generating less profit. But only the ones who understand how to service their customer needs well shall survive.

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