Making mobile’s math work

Editor’s Note: Welcome to our weekly Reality Check column. We’ve gathered a group of visionaries and veterans in the mobile industry to give their insights into the marketplace.
Up until very recently, proprietary handset platforms, walled gardens and expensive data tariffs have served well as the foundation for operator and vendor business models. However, this “old” mobile math has become very challenging within the current global economic situation. Stakeholders have very quickly realized that tough but healthy changes are required not only to ensure smooth sailing within troubled waters but also to make the most of new business opportunities that arise from a change in the socio-economic environment.
Impacts of the economic downturn
The economic downturn is both exacerbating existing challenges and creating new ones for the various stakeholders within the mobile value system. Operators are experiencing an increase in their capital and operational expenditures, while the average revenue per user (ARPU) is under pressure as a result of over-stretched consumer budgets.
As the operators are feeling the pinch, they have started cutting handset subsidy budgets and are delaying handset upgrades in an effort to reduce costs. This is, in turn, having a big impact on the rest of the value system – handset manufacturers, component suppliers and consumers. After many years of strong growth, analysts are now predicting that handset demand will dip in the fourth quarter of 2008 and through the first half of 2009 – CCS Insight, for instance, is predicting -3% year-on-year (YOY) growth for the fourth quarter of 2008 and -6% YOY for the first half of 2009. The fact that manufacturers are carefully controlling inventory levels to avoid oversupply in the face of further stagnation of demand means that component suppliers will suffer proportionately. In other words, the economic downturn is causing a domino effect throughout the whole mobile ecosystem.
The silver lining to the dark clouds
However, the situation is not completely gloomy: The smartphone segment, spurred by devices such as Apple’s iPhone, is still experiencing significant growth. According to Informa Telecoms & Media’s November 2008 “Future Mobile Handsets” report, revenues from smartphone sales will represent over 55% of the total market value in North America, Western Europe and Japan. Device volume sales in emerging markets are also expanding; Informa predicts these markets will make up about 60% of global handset market value by 2013.
In order to offset creaking ARPU, operators have started turning their focus to non-voice services, with mobile broadband becoming a big hit for them. The challenge and the prize is to reinvent business models by reducing costs and creating and monetizing new service-based revenue streams across all segments. A tough but healthy change within the industry is underway.
Handset vendors, too, can no longer rely only on mobile phone sales to sustain growth. They will have to look at content creation and service offerings. Nokia, for instance, is forecasting service revenues of $2.7 billion in 2011. Product differentiation will increasingly shift from hardware to software, with innovation being led by consumers and delivered by third-party developers with the support of mobile network operators (MNOs) and original equipment manufacturers (OEMs).
As for operators, they will have to drive the adoption of industry platforms in order to gain scale efficiencies in service deployment and bring forward ever-more innovative tariffs and service offerings to retain consumers and sustain ARPU.
The “new” mobile math
The “new” mobile math-enabled by new open device platform initiatives (such as Google Android, LiMo Foundation and Symbian Foundation), open technologies (such as Linux), open networks (such as Verizon) and open business models – is shining a bright light toward a healthy new future.
There is no doubt that the liberalization of the mobile value system will be its savior in hard times, as open and collaborative development will enable the mutualization of costs and act as a springboard for efficient, relevant and practical innovation. Cost-effective handset platforms will help blur the lines between smartphone and mid-tier devices, as well as between mid-tier and low-end devices, so that the devices themselves will not constitute a barrier to the deployment of innovative services.
Some functionalities such as Wi-Fi and global positioning system (GPS) have been around for a while, but now is the opportunity for developers to use these to create applications offering tangible customer benefits that are delivered in a relevant, personal and timely fashion – for example, services enabling the consumer to find better deals (search for “cheap gas;” get “Save 5 cents per gallon at station only 2 miles down the road.”)
Intrinsically, mobile use fits in seamlessly with the day’s activity while PC activity dictates a static mode of operation, which means you are more likely to check your friends and update your status on a well-executed mobile platform than on a PC. In fact, mobile devices of the future will be flexibly “aware” of their owners’ situation (professional mode, parent mode, social mode, play mode, available mode, etc.) and adapt accordingly. The fact that the MySpace Blackberry app was downloaded 400,000 times in seven days gives an indication of the commercial potential of such a service!
Conclusion
Stakeholders across the mobile ecosystem are gearing up for the current challenges in the global economic climate. It is likely that some “old” math businesses will be reinvented successfully; others may not make it, while many new ones will appear. This is the power of openness at work, and it is very exciting!
Morgan Gillis is executive director of LiMo Foundation (http://www.limofoundation.org), the non-profit industry consortium dedicated to creating the first truly open, hardware-independent, Linux-based operating system for mobile devices. Write to Morgan at [email protected]. Write to RCR Wireless News at [email protected].