The data on mobile devices and data is clear and simple: smart-phone users consume more data because their devices are optimized for games, video, music and e-mail. Even the most popular handsets-for instance, the seemingly ubiquitous Motorola Inc. Razr-don’t come close to driving similar use.
All this according to M:Metrics’ May Benchmark Survey of smart-phone use and data consumption in the U.S., the United Kingdom, Germany and France.
So is driving data adoption, which challenges the industry, as simple as building affordable smart phones and they will come?
One view is that driving data adoption, at least in the United States, is in fact as simple as making smart phones available at affordable prices. That follows the traditional model in use today in which network operators subsidize handsets to make their money on two-year service contracts, with either smorgasbord or a la carte pricing for viewing video, downloading music, sending text messages, downloading ringtones, etc.
But another view is that the industry should develop stronger value propositions for both devices and data offerings and focus on maintaining prices and thus margins for long-term profitability, avoiding the fate of the wireline companies that competed on price until their services were commoditized, cannibalizing their industry.
“The data is clear,” said Seamus McAteer, senior analyst at M:Metrics, which measures mobile subscriber behavior through surveys. “Smart-phone users are significantly more likely to consume content than users of devices that don’t have an operating system. Devices optimized for data use lead to greater consumption.
“Yes, today, smart phones are a relatively small chunk of data consumption. If you look at the numbers in the United Kingdom, however, as a harbinger of the future for the European market for instance, we’re looking at a set of devices that will account for a substantial chunk of `http traffic’ going forward. That’s obviously important for marketers and advertisers, who are concerned with page views.”
Why does the U.K. stand out?
“The operator, 3, promoted Nokia [Corp.]’s Series 60 phones as primary devices at price points below [$183],” McAteer said. “Once they did that, others followed suit and there was a sort of `race to the bottom’ on pricing for smart phones. As a result, you had a substantial market of smart-phone users consuming a steady diet of data.”
Are observers watching Verizon Wireless’ offer of the Motorola Q-priced disruptively at $200, vs. $300 to $400 for Palm Inc.’s Treo and Research In Motion Ltd.’s BlackBerry’s-to see if the same phenomenon takes place in the U.S.?
“The Q’s just been launched (last month) and hasn’t had a huge impact yet on the U.S. market,” McAteer said. “We’re in wait-and-see mode on that. Obviously it’s launching at a low price point and that could go lower. That could well go below the $100 price point in 2007 and once that happens you reach a tipping point” for smart-phone adoption.
McAteer sees this as at least one predictable path to data uptake, to slake network operators’ thirst for a source of profit growth beyond the waning voice sector. And data uptake, at least on smart phones that can cruise the Web, seeds the ground for other nascent industry segments such as advertising.
“As advertisers start to look at this medium, smart phones provide them with a platform-the mobile Web-that they understand, due to the traffic that smart phones will generate,” McAteer added. “As we reach 20 percent or so penetration of smart phones, you’re close to 50 percent of `http traffic.’ This is a platform advertisers will be drawn to.”
Pricing politics
That’s all good and well, but Roger Entner, analyst with Ovum, insists that the industry could do better. Entner takes a somewhat contrarian, even curmudgeonly view on the traditional U.S. model of subsidized handsets and logic of lowering prices to make devices available, even if data uptake is improved. Hold the line on prices and maintain margins, he intoned. Stop cutting prices to prop up a lack of compelling devices and services, or simply to boost lackluster quarterly earnings. Go with the Palm Treo and RIM BlackBerry strategy of offering a truly useful device with productivity offerings and entertainment possibilities and come up with content worth paying for. He does not mince words.
“Lowering price is the idiot’s way of marketing,” Entner said. “Of course demand will go up. Why not make devices and applications so useful that you can charge premium prices? People are willing to pay for value, even in the U.S.”
There’s some support for Entner’s view in the M:Metrics data on the U.S. market. The Palm Treo 650, in both CDMA and GSM flavors, leads the U.S. smart-phone market, followed by the RIM BlackBerry. Generally, the cost of a Palm Treo or RIM BlackBerry is higher in the U.S. than the five smart phones from Nokia that dominate in France, Germany and the U.K. However, it is also true that smart-phone penetration in the U.S. is only 2 percent of the base of 190 million mobile subscribers, while the U.K. and Germany have three times that penetration rate with smaller installed bases.
“Do device prices have to come down to a reasonable level?” Entner asked. “Yes. Are certain data services priced out of the mainstream? Yes. But what we’re still missing are excellent applications that take advantage of handsets’ size and mobility. The user interface must improve. We’re still not there yet.”
The Palm Treo, for instance, has a touch screen that vastly improves navigability; the Motorola Q doesn’t. That, Entner said, is an example of the difference between device quality that makes for a useful experience and an aggressively priced device that doesn’t quite measure up.
As for the advanced content that may drive mobile data consumption, Entner doesn’t buy into the concept that mobile terminals will allow users to enjoy or work on content that appears elsewhere, such as the home television or theater or PC. Presenting mobile content as an extension of other environments is a mistake.
“Accept reality,” Entner said with detectable ennui. “Size matters.”
