Private networks: Lessons so far and what next

The private networks market is rapidly developing

Businesses across a range of sectors are exploring the benefits of private networks in supporting their connected operations. However, there are considerable variations between national markets, reflecting spectrum and other regulatory actions, as well as industrial structure and other local factors. US, Germany, UK, Japan and the Nordics are among the leading markets.

Enterprises’ adoption of digitalisation and automation programmes is growing across various industries. The demand from enterprises stems from their need for customised networks to meet their vertical-specific connectivity requirements – as well as more basic considerations of coverage and cost of public networks, or alternative wireless technologies.

On the supply side, the development in cellular standards, including the virtualisation of the RAN and core elements, the availability of edge computing, and cloud management solutions, as well as the changing spectrum regulations are making private networks more accessible for enterprises. That said, many recently deployed private cellular networks still use “traditional” integrated small cells, or major vendors’ bundled solutions – especially in conservative sectors such as utilities and public safety.

Many new players are entering the market through different vertical and horizontal approaches and either competing or collaborating with traditional telcos. Traditional telcos, new telcos (mainly building private networks or offering network services), and other stakeholders are all exploring strategies to engage with the market and assessing the opportunities across the value chain as private network adoption increases.

Following up on our 2019 report Private and vertical cellular networks: Threats and opportunities, we explore the recent developments in the private network market, regulatory activities and policy around local and shared spectrum, and the different deployment approaches and business cases. In this report we address several interdependent elements of the private networks landscape

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What is a private network?

A private network leverages dedicated resources such as infrastructure and spectrum to provide precise coverage and capacity to specific devices and user groups. The network can be as small as a single radio cell covering a single campus or a location such as a manufacturing site (or even a single airplane), or it can span across a wider geographical area such as a nationwide railway network or regional utility grids.

Private networks is an umbrella term that can includes different LAN (or WAN) connectivity options such as Wi-Fi and LPWAN. However, more commonly, the term is being associated with private cellular networks based on 3GPP mobile technologies, i.e. LTE or 5G New Radio (NR).

Private networks are also different from in-building densification solutions like small cells and DAS which extend the coverage of public network or strengthen its capacity indoors or in highly dense locations. These solutions are still part of the public network and do not support customised control over the local network access or other characteristics. In future, some may support local private networks as well as public MNOs’ services.

Besides dedicated coverage and capacity, private networks can be customised in other aspects such as security, latency and integration with the enterprise internal systems to meet business specific requirements in ways that best effort public networks cannot.

Unlike public networks, private networks are not available to the public through commercially available devices and SIM cards. The network owner or operator controls the authorisation and the access to the network for permissioned devices and users. These definitions blur somewhat if the network is run by a “community” such as a municipality.

Typically, devices will not work outside the boundaries of their private network. That is a requirement in many use cases, such as manufacturing, where devices are not expected to continue functioning outside the premise. However, in a few areas, such as logistics, solutions can include the use of dual-SIM devices for both public and private networks or the use of other wide area technologies such as TETRA for voice. Moreover, agreements with public networks to enable roaming can be activated to support certain service continuity outside the private network boundaries.

While the technology and market are still developing, several terms are being used interchangeably to describe 3GPP private networks such dedicated networks, standalone networks, campus networks, local networks, vertical mobile network and non-public networks (NPN) as defined by the 3GPP.

The emergence of new telcos

Many telcos are not ready to support private networks demands from enterprises on large scale because they lack sufficient resources and expertise. Also, some enterprises might be reluctant to work with telcos for different reasons including their concerns over the traditional telcos’ abilities in vertical markets and a desire to control costs. This gap is already catalysing the emergence of new types of mobile network service providers, as opposed to traditional MNOs that operate national or regional public mobile networks.

These players essentially carry out the same roles as traditional MNOs in configuring the network, provisioning the service, and maintaining the private network infrastructure. Some of them may also have access to spectrum and buy network equipment and technologies directly from network equipment vendors. In addition to “new telcos” or “new operators”, other terms have been used to describe these players such as specialist operators and alternative operators. Throughout this report, we will use new telcos or specialist operators when describing these players collectively and traditional/public operators when referring to typical wide area national mobile network provider. New players can be divided into the following categories:

Possible private networks service providers

private networks ecosystem

Source: STL Partners

Table of content

  • Executive Summary
    • What next
    • Trends and recommendations for telcos, vendors, enterprises and policymakers
  • Introduction
  • Types of private network operators
    • What is a private network?
    • The emergence of new telcos
  • How various stakeholders are approaching the market
    • Technology development: Choosing between LTE and 5G
    • Private network technology vendors
    • Regional overview
    • Vertical overview
    • Mergers and acquisitions activities
  • The development of spectrum regulations
    • Unlicensed spectrum for LTE and 5G is an attractive option, but it remains limited
    • The rise of local spectrum licensing threatens some telcos
    • …but there is no one-size fits all in local spectrum licensing
    • How local spectrum licensing shapes the market and enterprise adoption
    • Recommendations for different stakeholders
  • Assessing the approaches to network implementation
    • Private network deployment models
    • Business models and roles for telcos
  • Conclusion and recommendations
  • Index
  • Appendix 1:  Examples of private networks deployments in 2020 – 2021

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Fixed wireless access growth: To 20% homes by 2025

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Fixed wireless access growth forecast

Fixed Wireless Access (FWA) networks use a wireless “last mile” link for the final connection of a broadband service to homes and businesses, rather than a copper, fibre or coaxial cable into the building. Provided mostly by WISPs (Wireless Internet Service Providers) or mobile network operators (MNOs), these services come in a wide range of speeds, prices and technology architectures.

Some FWA services are just a short “drop” from a nearby pole or fibre-fed hub, while others can work over distances of several kilometres or more in rural and remote areas, sometimes with base station sites backhauled by additional wireless links. WISPs can either be independent specialists, or traditional fixed/cable operators extending reach into areas they cannot economically cover with wired broadband.

There is a fair amount of definitional vagueness about FWA. The most expansive definitions include cheap mobile hotspots (“Mi-Fi” devices) used in homes, or various types of enterprise IoT gateway, both of which could easily be classified in other market segments. Most service providers don’t give separate breakouts of deployments, while regulators and other industry bodies report patchy and largely inconsistent data.

Our view is that FWA is firstly about providing permanent broadband access to a specific location or premises. Primarily, this is for residential wireless access to the Internet and sometimes typical telco-provided services such as IPTV and voice telephony. In a business context, there may be a mix of wireless Internet access and connectivity to corporate networks such as VPNs, again provided to a specific location or building.

A subset of FWA relates to M2M usage, for instance private networks run by utility companies for controlling grid assets in the field. These are typically not Internet-connected at all, and so don’t fit most observers’ general definition of “broadband access”.

Usually, FWA will be marketed as a specific service and package by some sort of network provider, usually including the terminal equipment (“CPE” – customer premise equipment), rather than allowing the user to “bring their own” device. That said, lower-end (especially 4G) offers may be SIM-only deals intended to be used with generic (and unmanaged) portable hotspots.
There are some examples of private network FWA, such as a large caravan or trailer park with wireless access provided from a central point, and perhaps in future municipal or enterprise cellular networks giving fixed access to particular tenant structures on-site – for instance to hangars at an airport.

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FWA today

Today, fixed-wireless access (FWA) is used for perhaps 8-9% of broadband connections globally, although this varies significantly by definition, country and region. There are various use cases (see below), but generally FWA is deployed in areas without good fixed broadband options, or by mobile-only operators trying to add an additional fixed revenue stream, where they have spare capacity.

Fixed wireless internet access fits specific sectors and uses, rather than the overall market

FWA Use Cases

Source: STL Partners

FWA has traditionally been used in sparsely populated rural areas, where the economics of fixed broadband are untenable, especially in developing markets without existing fibre transport to towns and villages, or even copper in residential areas. Such networks have typically used unlicensed frequency bands, as there is limited interference – and little financial justification for expensive spectrum purchases. In most cases, such deployments use proprietary variants of Wi-Fi, or its ill-fated 2010-era sibling WiMAX.

Increasingly however, FWA is being used in more urban settings, and in more developed market scenarios – for example during the phase-out of older xDSL broadband, or in places with limited or no competition between fixed-network providers. Some cellular networks primarily intended for mobile broadband (MBB) have been used for fixed usage as well, especially if spare capacity has been available. 4G has already catalysed rapid growth of FWA in numerous markets, such as South Africa, Japan, Sri Lanka, Italy and the Philippines – and 5G is likely to make a further big difference in coming years. These mostly rely on licensed spectrum, typically the national bands owned by major MNOs. In some cases, specific bands are used for FWA use, rather than sharing with normal mobile broadband. This allows appropriate “dimensioning” of network elements, and clearer cost-accounting for management.

Historically, most FWA has required an external antenna and professional installation on each individual house, although it also gets deployed for multi-dwelling units (MDUs, i.e. apartment blocks) as well as some non-residential premises like shops and schools. More recently, self-installed indoor CPE with varying levels of price and sophistication has helped broaden the market, enabling customers to get terminals at retail stores or delivered direct to their home for immediate use.

Looking forward, the arrival of 5G mass-market equipment and larger swathes of mmWave and new mid-band spectrum – both licensed and unlicensed – is changing the landscape again, with the potential for fibre-rivalling speeds, sometimes at gigabit-grade.

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Table of contents

  • Executive Summary
  • Introduction
    • FWA today
    • Universal broadband as a goal
    • What’s changed in recent years?
    • What’s changed because of the pandemic?
  • The FWA market and use cases
    • Niche or mainstream? National or local?
    • Targeting key applications / user groups
  • FWA technology evolution
    • A broad array of options
    • Wi-Fi, WiMAX and close relatives
    • Using a mobile-primary network for FWA
    • 4G and 5G for WISPs
    • Other FWA options
    • Customer premise equipment: indoor or outdoor?
    • Spectrum implications and options
  • The new FWA value chain
    • Can MNOs use FWA to enter the fixed broadband market?
    • Reinventing the WISPs
    • Other value chain participants
    • Is satellite a rival waiting in the wings?
  • Commercial models and packages
    • Typical pricing and packages
    • Example FWA operators and plans
  • STL’s FWA market forecasts
    • Quantitative market sizing and forecast
    • High level market forecast
  • Conclusions
    • What will 5G deliver – and when and where?
  • Index

Open RAN: What should telcos do?

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Related webinar: Open RAN: What should telcos do?

In this webinar STL Partners addressed the three most important sub-components of Open RAN (open-RAN, vRAN and C-RAN) and how they interact to enable a new, virtualized, less vendor-dominated RAN ecosystem. The webinar covered:

* Why Open RAN matters – and why it will be about 4G (not 5G) in the short term
* Data-led overview of existing Open RAN initiatives and challenges
* Our recommended deployment strategies for operators
* What the vendors are up to – and how we expect that to change

Date: Tuesday 4th August 2020
Time: 4pm GMT

Access the video recording and presentation slides

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What is the open RAN and why does it matter?

The open RAN’ encompasses a group of technological approaches that are designed to make the radio access network (RAN) more cost effective and flexible. It involves a shift away from traditional, proprietary radio hardware and network architectures, driven by single vendors, towards new, virtualised platforms and a more open vendor ecosystem.

Legacy RAN: single-vendor and inflexible

The traditional, legacy radio access network (RAN) uses dedicated hardware to deliver the baseband function (modulation and management of the frequency range used for cellular network transmission), along with proprietary interfaces (typically based on the Common Public Radio Interface (CPRI) standard) for the fronthaul from the baseband unit (BBU) to the remote radio unit (RRU) at the top of the transmitter mast.

Figure 1: Legacy RAN architecture

Source: STL Partners

This means that, typically, telcos have needed to buy the baseband and the radio from a single vendor, with the market presently dominated largely by the ‘big three’ (Ericsson, Huawei and Nokia), together with a smaller market share for Samsung and ZTE.

The architecture of the legacy RAN – with BBUs typically but not always at every cell site – has many limitations:

  • It is resource-intensive and energy-inefficient – employing a mass of redundant equipment operating at well below capacity most of the time, while consuming a lot of power
  • It is expensive, as telcos are obliged to purchase and operate a large inventory of physical kit from a limited number of suppliers, which keeps the prices high
  • It is inflexible, as telcos are unable to deploy to new and varied sites – e.g. macro-cells, small cells and micro-cells with different radios and frequency ranges – in an agile and cost-effective manner
  • It is more costly to manage and maintain, as there is less automation and more physical kit to support, requiring personnel to be sent out to remote sites
  • It is not very programmable to support the varied frequency, latency and bandwidth demands of different services.

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Moving to the open RAN: C-RAN, vRAN and open-RAN

There are now many distinct technologies and standards emerging in the radio access space that involve a shift away from traditional, proprietary radio hardware and network architectures, driven by single vendors, towards new, virtualised platforms and a more open vendor ecosystem.

We have adopted ‘the open RAN’ as an umbrella term which encompasses all of these technologies. Together, they are expected to make the RAN more cost effective and flexible. The three most important sub-components of the open RAN are C-RAN, vRAN and open-RAN.

Centralised RAN (C-RAN), also known as cloud RAN, involves distributing and centralising the baseband functionality across different telco edge, aggregation and core locations, and in the telco cloud, so that baseband processing for multiple sites can be carried out in different locations, nearer or further to the end user.

This enables more effective control and programming of capacity, latency, spectrum usage and service quality, including in support of 5G core-enabled technologies and services such as network slicing, URLLC, etc. In particular, baseband functionality can be split between more centralised sites (central baseband units – CU) and more distributed sites (distributed unit – DU) in much the same way, and for a similar purpose, as the split between centralised control planes and distributed user planes in the mobile core, as illustrated below:

Figure 2: Centralised RAN (C-RAN) architecture

Cloud RAN architecture

Source: STL Partners

Virtual RAN (vRAN) involves virtualising (and now also containerising) the BBU so that it is run as software on generic hardware (General Purpose Processing – GPP) platforms. This enables the baseband software and hardware, and even different components of them, to be supplied by different vendors.

Figure 3: Virtual RAN (vRAN) architecture

vRAN architecture

Source: STL Partners

Open-RANnote the hyphenation – involves replacing the vendor-proprietary interfaces between the BBU and the RRU with open standards. This enables BBUs (and parts thereof) from one or multiple vendors to interoperate with radios from other vendors, resulting in a fully disaggregated RAN:

Figure 4: Open-RAN architecture

Open-RAN architecture

Source: STL Partners

 

RAN terminology: clearing up confusion

You will have noticed that the technologies above have similar-sounding names and overlapping definitions. To add to potential confusion, they are often deployed together.

Figure 5: The open RAN Venn – How C-RAN, vRAN and open-RAN fit together

Open-RAN venn: open-RAN inside vRAN inside C-RAN

Source: STL Partners

As the above diagram illustrates, all forms of the open RAN involve C-RAN, but only a subset of C-RAN involves virtualisation of the baseband function (vRAN); and only a subset of vRAN involves disaggregation of the BBU and RRU (open-RAN).

To help eliminate ambiguity we are adopting the typographical convention ‘open-RAN’ to convey the narrower meaning: disaggregation of the BBU and RRU facilitated by open interfaces. Similarly, where we are dealing with deployments or architectures that involve vRAN and / or cloud RAN but not open-RAN in the narrower sense, we refer to those examples as ‘vRAN’ or ‘C-RAN’ as appropriate.

In the coming pages, we will investigate why open RAN matters, what telcos are doing about it – and what they should do next.

Table of contents

  • Executive summary
  • What is the open RAN and why does it matter?
    • Legacy RAN: single-vendor and inflexible
    • The open RAN: disaggregated and flexible
    • Terminology, initiatives & standards: clearing up confusion
  • What are the opportunities for open RAN?
    • Deployment in macro networks
    • Deployment in greenfield networks
    • Deployment in geographically-dispersed/under-served areas
    • Deployment to support consolidation of radio generations
    • Deployment to support capacity and coverage build-out
    • Deployment to support private and neutral host networks
  • How have operators deployed open RAN?
    • What are the operators doing?
    • How successful have deployments been?
  • How are vendors approaching open RAN?
    • Challenger RAN vendors: pushing for a revolution
    • Incumbent RAN vendors: resisting the open RAN
    • Are incumbent vendors taking the right approach?
  • How should operators do open RAN?
    • Step 1: Define the roadmap
    • Step 2: Implement
    • Step 3: Measure success
  • Conclusions
    • What next?

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5G: Bridging hype, reality and future promises

The 5G situation seems paradoxical

People in China and South Korea are buying 5G phones by the million, far more than initially expected, yet many western telcos are moving cautiously. Will your company also find demand? What’s the smart strategy while uncertainty remains? What actions are needed to lead in the 5G era? What questions must be answered?

New data requires new thinking. STL Partners 5G strategies: Lessons from the early movers presented the situation in late 2019, and in What will make or break 5G growth? we outlined the key drivers and inhibitors for 5G growth. This follow on report addresses what needs to happen next.

The report is informed by talks with executives of over three dozen companies and email contacts with many more, including 21 of the first 24 telcos who have deployed. This report covers considerations for the next three years (2020–2023) based on what we know today.

“Seize the 5G opportunity” says Ke Ruiwen, Chairman, China Telecom, and Chinese reports claimed 14 million sales by the end of 2019. Korea announced two million subscribers in July 2019 and by December 2019 approached five million. By early 2020, The Korean carriers were confident 30% of the market will be using 5G by the end of 2020. In the US, Verizon is selling 5G phones even in areas without 5G services,  With nine phone makers looking for market share, the price in China is US$285–$500 and falling, so the handset price barrier seems to be coming down fast.

Yet in many other markets, operators progress is significantly more tentative. So what is going on, and what should you do about it?

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5G technology works OK

22 of the first 24 operators to deploy are using mid-band radio frequencies.

Vodafone UK claims “5G will work at average speeds of 150–200 Mbps.” Speeds are typically 100 to 500 Mbps, rarely a gigabit. Latency is about 30 milliseconds, only about a third better than decent 4G. Mid-band reach is excellent. Sprint has demonstrated that simply upgrading existing base stations can provide substantial coverage.

5G has a draft business case now: people want to buy 5G phones. New use cases are mostly years away but the prospect of better mobile broadband is winning customers. The costs of radios, backhaul, and core are falling as five system vendors – Ericsson, Huawei, Nokia, Samsung, and ZTE – fight for market share. They’ve shipped over 600,000 radios. Many newcomers are gaining traction, for example Altiostar won a large contract from Rakuten and Mavenir is in trials with DT.

The high cost of 5G networks is an outdated myth. DT, Orange, Verizon, and AT&T are building 5G while cutting or keeping capex flat. Sprint’s results suggest a smart build can quickly reach half the country without a large increase in capital spending. Instead, the issue for operators is that it requires new spending with uncertain returns.

The technology works, mostly. Mid-band is performing as expected, with typical speeds of 100–500Mbps outdoors, though indoor performance is less clear yet. mmWave indoor is badly degraded. Some SDN, NFV, and other tools for automation have reached the field. However, 5G upstream is in limited use. Many carriers are combining 5G downstream with 4G upstream for now. However, each base station currently requires much more power than 4G bases, which leads to high opex. Dynamic spectrum sharing, which allows 5G to share unneeded 4G spectrum, is still in test. Many features of SDN and NFV are not yet ready.

So what should companies do? The next sections review go-to-market lessons, status on forward-looking applications, and technical considerations.

Early go-to-market lessons

Don’t oversell 5G

The continuing publicity for 5G is proving powerful, but variable. Because some customers are already convinced they want 5G, marketing and advertising do not always need to emphasise the value of 5G. For those customers, make clear why your company’s offering is the best compared to rivals’. However, the draw of 5G is not universal. Many remain sceptical, especially if their past experience with 4G has been lacklustre. They – and also a minority swayed by alarmist anti-5G rhetoric – will need far more nuanced and persuasive marketing.

Operators should be wary of overclaiming. 5G speed, although impressive, currently has few practical applications that don’t already work well over decent 4G. Fixed home broadband is a possible exception here. As the objective advantages of 5G in the near future are likely to be limited, operators should not hype features that are unrealistic today, no matter how glamorous. If you don’t have concrete selling propositions, do image advertising or use happy customer testimonials.

Table of Contents

  • Executive Summary
  • Introduction
    • 5G technology works OK
  • Early go-to-market lessons
    • Don’t oversell 5G
    • Price to match the experience
    • Deliver a valuable product
    • Concerns about new competition
    • Prepare for possible demand increases
    • The interdependencies of edge and 5G
  • Potential new applications
    • Large now and likely to grow in the 5G era
    • Near-term applications with possible major impact for 5G
    • Mid- and long-term 5G demand drivers
  • Technology choices, in summary
    • Backhaul and transport networks
    • When will 5G SA cores be needed (or available)?
    • 5G security? Nothing is perfect
    • Telco cloud: NFV, SDN, cloud native cores, and beyond
    • AI and automation in 5G
    • Power and heat

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NFV Deployment Tracker: North American data and trends

Introduction

NFV in North America – how is virtualisation moving forward in telcos against global benchmarks?

Welcome to the sixth edition of the ‘NFV Deployment Tracker’

This report is the sixth analytical report in the NFV Deployment Tracker series and is intended as an accompaniment to the updated Tracker Excel spreadsheet.

This extended update covers seven months of deployments worldwide, from October 2018 to April 2019. The update also includes an improved spreadsheet format: a more user-friendly, clearer lay-out and a regional toggle in the ‘Aggregate data by region’ worksheet, which provides much quicker access to the data on each region separately.

The present analytical report provides an update on deployments and trends in the North American market (US, Canada and the Caribbean) since the last report focusing on that region (December 2017).

Scope, definitions and importance of the data

We include in the Tracker only verified, live deployments of NFV or SDN technology powering commercial services. The information is taken mainly from public-domain sources, such as press releases by operators or vendors, or reports in reputable trade media. However, a small portion of the data also derives from confidential conversations we have had with telcos. In these instances, the deployments are included in the aggregate, anonymised worksheets in the spreadsheet, but not in the detailed dataset listing deployments by operator and geography, and by vendor where known.

Our definition of a ‘deployment’, including how we break deployments down into their component parts, is provided in the ‘Explanatory notes’ worksheet, in the accompanying Excel document.

NFV in North America in global context

We have gathered data on 120 live, commercial deployments of NFV and SDN in North America between 2011 and April 2019. These were completed by 33 mainly Tier-One telcos and telco group subsidiaries: 24 based in the US, four in Canada, one Caribbean, three European (Colt, T-Mobile and Vodafone), and one Latin American (América Móvil). The data includes information on 217 known Virtual Network Functions (VNFs), functional sub-components and supporting infrastructure elements that have formed part of these deployments.

This makes North America the third-largest NFV/SDN market worldwide, as is illustrated by the comparison with other regions in the chart below.

Total NFV/SDN deployments by region, 2011 to April 2019

total NFV deployments by region North America Africa Asia-Pacific Europe Middle East

Source: STL Partners

Deployments of NFV in North America account for around 24% of the global total of 486 live deployments (or 492 deployments counting deployments spanning multiple regions as one deployment for each region). Europe is very marginally ahead on 163 deployments versus 161 for Asia-Pacific: both equating to around 33% of the total.

The NFV North America Deployment Tracker contains the following data, to May 2019:

  • Global aggregate data
  • Deployments by primary purpose
  • Leading VNFs and functional components
  • Leading operators
  • Leading vendors
  • Leading vendors by primary purpose
  • Above data points broken down by region
  • North America
  • Asia-Pacific
  • Europe
  • Latin America
  • Middle East
  • Africa
  • Detailed dataset on individual deployments

 

Contents of the accompanying analytical report:

  • Executive Summary
  • Introduction
  • Welcome to the sixth edition of the ‘NFV Deployment Tracker’
  • Scope, definitions and importance of the data
  • Analysis of NFV in North America
  • The North American market in global context
  • SD-WAN and core network functions are the leading categories
  • 5G is driving core network virtualisation
  • Vendor trends: Open source and operator self-builds outpace vendors
  • Operator trends: Verizon and AT&T are the clear leaders
  • Conclusion: Slow-down in enterprise platform deployments while 5G provides new impetus

5G: The first three years

The near future of 5G

Who, among telecoms operators, are 5G leaders? Verizon Wireless is certainly among the most enthusiastic proponents.

On October 1, 2018, Verizon turned on the world’s first major 5G network. It is spending US$20 billion to offer 30 million homes millimetre wave 5G, often at speeds around a gigabit. One of the first homes in Houston “clocked speeds of 1.3 gigabits per second at 2,000 feet.”  CEO Vestberg expects to cover the whole country by 2028, some with 3.5 GHz. 5G: The first three years cuts through the hype and confusion to provide the industry a clear picture of the likely future. A companion report, 5G smart strategies, explores how 5G helps carriers make more money and defeat the competition.

This report was written by Dave Burstein with substantial help from Andrew Collinson and Dean Bubley.

What is 5G?

In one sense, 5G is just a name for all the new technologies now being widely deployed. It’s just better mobile broadband. It will not change the world anytime soon.

There are two very different flavours of 5G:

  • Millimetre wave: offers about 3X the capacity of mid-band or the best 4G. Spectrum used is from 20 GHz to over 60 GHz. Verizon’s mmWave system is designed to deliver 1 gigabit downloads to most customers and 5 gigabits shared. 26 GHz in Europe & 28 GHz in the U.S. are by far the most common.
  • Low and mid-band: uses 4G hardware and “New Radio” software. It is 60-80% less capable on average than millimetre wave and very similar in performance to 4G TD-LTE. 3.3 GHz – 4.2 GHz is by far the most important band.

To begin, a few examples.

5G leaders are deploying millimetre wave

Verizon’s is arguably currently the most advanced 5G network in the world. Perhaps most surprisingly, the “smart build” is keeping costs so low capital spending is coming down. Verizon’s trials found millimetre wave performance much better than expected. In some cases, 5G capacity allowed reducing the number of cells.

Verizon will sell fixed wireless outside its incumbent territory. It has ~80 million customers out of district. Goldman Sachs estimates it will add 8 million fixed wireless by 2023 and more than pay for the buildout.

Verizon CEO Hans Vestberg says he believes mmWave capacity will allow very attractive offerings that will win customers away from the competition.

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What are the other 5G leaders doing?

Telefónica Deutschland has similar plans, hoping to blow open the German market with mmWave to a quarter of the country. Deutsche Telekom and Vodafone are sticking with the much slower mid-band 5G and could be clobbered.

Most 5G will be slower low and mid-band formerly called 4G

80% or more of 5G worldwide the next three years will not be high-speed mmWave. Industry group 3GPP decided early in 2018 to call anything running New Radio software “5G.” In practice, almost any currently shipping 4G radio can add on the software and be called “5G.” The software was initially said to raise capacity between 10% and 52%. That’s 60% to 80% slower than mmWave. However, improved 4G technology has probably cut the difference by more than half. That’s 60% to 80% slower than mmWave. It’s been called “faux 5G” and “5G minus,” but few make the distinction. T-Mobile USA promises 5G to the entire country by 2020 without a large investment. Neville Ray is blanketing the country with 4G in 20 MHz of the new 600 MHz band. That doesn’t require many more towers due to the long reach of low frequencies. T-Mobile will add NR software for a marketing push.

In an FCC presentation, Ray said standalone T-Mobile will have a very wide 5G coverage but at relatively low speeds. Over 85% of users will connect at less than 100 megabits. The median “5G” connection will be 40-70 megabits. Some users will only get 10-20 megabits, compared to a T-Mobile average today of over 30 megabits. Aggregating 600 MHz NR with other T-Mobile bands now running LTE would be much faster but has not been demonstrated.

While attesting to the benefits of the T-Mobile-Sprint deal, Neville claimed that using Sprint spectrum at 2500 MHz and 11,000 Sprint towers will make a far more robust offering by 2024. 10% of this would be mmWave.

In the final section of this report, I discuss 5G smart strategy: “5G” is a magic marketing term. It will probably sell well even if 4G speeds are similar. The improved sales can justify a higher budget.

T-Mobile Germany promises nationwide 5G by 2025. That will be 3.5 GHz mid-band, probably using 100 MHz of spectrum. Germany has just set aside 400 MHz of spectrum at 3.5 GHz. DT, using 100 MHz of 3.5 GHz, will deliver 100–400 megabit downloads to most.

100–400 megabits is faster than much of T-Mobile’s DSL. It soon will add fixed mobile in some rural areas. In addition, T-Mobile is selling a combined wireless and DSL router. The router uses the DSL line preferably but can also draw on the wireless when the user requires more speed.

China has virtually defined itself as a 5G leader by way of its government’s clear intent for the operators. China Mobile plans two million base stations running 2.5 GHz, which has much better reach than radio in the 3.5 GHz spectrum. In addition, the Chinese telcos have been told to build a remarkable edge network. Minister Miao Wei wants “90% of China within 25 ms of a server.” That’s extremely ambitious but the Chinese have delivered miracles before. 344 million Chinese have fibre to the home, most built in four years.

Telus, Canada’s second incumbent, in 2016 carefully studied the coming 5G choices. The decision was to focus capital spending on more fibre in the interim. 2016 was too early to make 5G plans, but a strong fibre network would be crucial. Verizon also invested heavily in fibre in 2016 and 2017, which now is speeding 5G to market. Like Verizon, Telus sees the fibre paying off in many ways. It is doing fibre to the home, wireless backhaul, and service to major corporations. CEO Darren Entwistle in November 2018 spoke at length about its future 5G, including the importance of its large fibre build, although he hasn’t announced anything yet.

There is a general principle that if it’s too early to invest in 5G, it’s a good idea to build as much fibre as you can in the interim.

Benefits of 5G technology

  • More broadband capacity and speed. Most of the improvement in capacity comes from accessing more bandwidth through carrier aggregation, and many antenna MIMO. Massive MIMO has shipped as part of 4G since 2016 and carrier aggregation goes back to 2013. All 5G phones work on 4G as well, connecting as 4G where there is no 5G signal.
  • Millimetre wave roughly triples capacity. Low and mid-band 5G runs on the same hardware as 4G. The only difference to 4G is NR software, which adds only modestly to capacity.
  • Drastically lower cost per bit. Verizon CEO Lowell McAdam said, “5G will deliver a megabit of service for about 1/10th of what 4G does.”
  • Reduced latency. 1 ms systems will mostly only be in the labs for several more years, but Verizon’s and other systems deliver speed from the receiver to the cell of about 10 milliseconds. For practical purposes, latency should be considered 15 ms to 50 ms and more, unless and until large “edge Servers” are installed. Only China is likely to do that in the first three years.

The following will have a modest effect, at most, in the next three years: Autonomous cars, remote surgery, AR/VR, drones, IoT, and just about all the great things promised beyond faster and cheaper broadband. Some are bogus, others not likely to develop in our period. 5G leaders will need to capitalise on near-term benefits.

Contents:

  • Executive Summary
  • Some basic timelines
  • What will 5G deliver?
  • What will 5G be used for?
  • Current plans reviewed in the report
  • Introduction
  • What is 5G?
  • The leaders are deploying millimetre wave
  • Key dates
  • What 5G and advanced 4G deliver
  • Six things to know
  • Six myths
  • 5G “Smart Build” brings cost down to little more than 4G
  • 5G, Edge, Cable and IoT
  • Edge networks in 5G
  • “Cable is going to be humongous” – at least in the U.S.
  • IoT and 5G
  • IoT and 5G: Does anyone need millions of connections?
  • Current plans of selected carriers (5G leaders)
  • Who’s who
  • Phone makers
  • The system vendors
  • Chip makers
  • Spectrum bands in the 5G era
  • Millimetre wave
  • A preview of 5G smart strategies
  • How can carriers use 5G to make more money?
  • The cold equations of growth

Figures:

  • Figure 1: 20 years of NTT DOCOMO capex
  • Figure 2: Verizon 5G network plans
  • Figure 3: Qualcomm’s baseband chip and radio frequency module
  • Figure 4: Intel 5G chip – Very limited 5G production capability until late 2019
  • Figure 5: Overview of 5G spectrum bands
  • Figure 6: 5G experience overview
  • Figure 7: Cisco VNI forecast of wireless traffic growth between 2021–2022

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Vendors vs. telcos? New plays in enterprise managed services

Digital transformation is reshaping vendors’ and telcos’ offer to enterprises

What does ‘digital transformation’ mean?

The enterprise market for telecoms vendors and operators is being radically reshaped by digital transformation. This transformation is taking place across all industry verticals, not just the telecoms sector, whose digital transformation – desirable or actual – STL Partners has forensically mapped out for several years now.

The term ‘digital transformation’ is so familiar that it breeds contempt in some quarters. Consequently, it is worth taking a while to refresh our thinking on what ‘digital transformation’ actually means. This will in turn help explain how the digital needs and practices of enterprises are impacting on vendors and telcos alike.

The digitisation of enterprises across all sectors can be described as part of a more general social, economic and technological evolution toward ever more far-reaching use of software-, computing- and IP-based modes of: interacting with customers and suppliers; communicating; networking; collaborating; distributing and accessing media content; producing, marketing and selling goods and services; consuming and purchasing those goods and services; and managing money flows across the economy. Indeed, one definition of the term ‘digital’ in this more general sense could simply be ‘software-, computing- and IP-driven or -enabled’.

For the telecoms industry, the digitisation of society and technology in this sense has meant, among other things, the decline of voice (fixed and mobile) as the primary communications service, although it is still the single largest contributor to turnover for many telcos. Voice mediates an ‘analogue’ economy and way of working in the sense that the voice is a form of ‘physical’ communication between two or more persons. In addition, the activity and means of communication (i.e. the actual telephone conversation to discuss project issues) is a separate process and work task from other work tasks, in different physical locations, that it helps to co-ordinate. By contrast, in an online collaboration session, the communications activity and the work activity are combined in a shared virtual space: the digital service allows for greater integration and synchronisation of tasks previously carried out by physical means, in separate locations, and in a less inherently co-ordinated manner.

Similarly, data in the ATM and Frame Relay era was mainly a means to transport a certain volume of information or files from one work place to another, without joining those work places together as one: the work places remained separate, both physically and in terms of the processes and work activities associated with them. The traditional telecoms network itself reflected the physical economy and processes that it enabled: comprising massive hardware and equipment stacks responsible for shifting huge volumes of voice signals and data packets (so called on the analogy of postal packets) from one physical location to another.

By contrast, with the advent of the digital (software-, computing- and IP-enabled) society and economy, the value carried by communications infrastructure has increasingly shifted from voice and data (as ‘physical’ signals and packets) to that of new modes of always-on, virtual interconnectedness and interactivity that tend towards the goal of eliminating or transcending the physical separation and discontinuity of people, work processes and things.

Examples of this digital transformation of communications, and associated experiences of work and life, could include:

  • As stated above, simple voice communications, in both business and personal life, have been increasingly superseded by ‘real-time’ or near-real-time, one-to-one or one-to-many exchange and sharing of text and audio-visual content across modes of communication such as instant messaging, unified communications (UC), social media (including increasingly in the work place) or collaborative applications enabling simultaneous, multi-party reviewing and editing of documents and files
  • Similarly, location-to-location file transfers in support of discrete, geographically separated business processes are being replaced by centralised storage and processing of, and access to, enterprise data and applications in the cloud
  • These trends mean that, in theory, people can collaborate and ‘meet’ with each other from any location in the world, and the digital service constitutes the virtual activity and medium through which that collaboration takes place
  • Similarly, with the Internet of Things (IoT), physical objects, devices, processes and phenomena generate data that can be transmitted and analysed in ‘real time’, triggering rapid responses and actions directed towards those physical objects and processes based on application logic and machine learning – resulting in more efficient, integrated processes and physical events meeting the needs of businesses and people. In other words, the IoT effectively involves digitising the physical world: disparate physical processes, and the action of diverse physical things and devices, are brought together by software logic and computing around human goals and needs.

‘Virtualisation’ effectively means ‘digital optimisation’

In addition to the cloud and IoT, one of the main effects of enterprise digital transformation on the communications infrastructure has of course been Network Functions Virtualisation (NFV) and SoftwareDefined Networking (SDN). NFV – the replacement of network functionality previously associated with dedicated hardware appliances by software running on standard compute devices – could also simply be described as the digitisation of telecoms infrastructure: the transformation of networks into software-, computing- and IP-driven (digital) systems that are capable of supporting the functionality underpinning the virtual / digital economy.

This functionality includes things like ultrafast, reliable, scalable and secure routing, processing, analysis and storage of massive but also highly variable data flows across network domains and on a global scale – supporting business processes ranging from ‘mere’ communications and collaboration to co-ordination and management of large-scale critical services, multi-national enterprises, government functions, and complex industrial processes. And meanwhile, the physical, Layer-1 elements of the network have also to become lightning-fast to deliver the massive, ‘real-time’ data flows on which the digital systems and services depend.

Virtualisation creates opportunities for vendors to act like Internet players, OTT service providers and telcos

Virtualisation frees vendors from ‘operator lock-in’

Virtualisation has generally been touted as a necessary means for telcos to adapt their networks to support the digital service demands of their customers and, in the enterprise market, to support those customers’ own digital transformations. It has also been advocated as a means for telcos to free themselves from so-called ‘vendor lock-in’: dependency on their network hardware suppliers for maintenance and upgrades to equipment capacity or functionality to support service growth or new product development.

From the other side of the coin, virtualisation could also be seen as a means for vendors to free themselves from ‘operator lock-in’: a dependency on telcos as the primary market for their networking equipment and technology. That is to say, the same dynamic of social and enterprise digitisation, discussed above, has driven vendors to virtualise their own product and service offerings, and to move away from the old business model, which could be described as follows:

▪ telcos and their implementation partners purchase hardware from the vendor
▪ deploy it at the enterprise customer
▪ and then own the business relationship with the enterprise and hold the responsibility for managing the services

By contrast, once the service-enabling technology is based on software and standard compute hardware, this creates opportunities for vendors to market their technology direct to enterprise customers, with which they can in theory take over the supplier-customer relationship.

Of course, many enterprises have continued to own and operate their own private networks and networking equipment, generally supplied to them by vendors. Therefore, vendors marketing their products and services direct to enterprises is not a radical innovation in itself. However, the digitisation / virtualisation of networking technology and of enterprise networks is creating a new competitive dynamic placing vendors in a position to ‘win back’ direct relationships to enterprise customers that they have been serving through the mediation of telcos.

Virtualisation changes the competitive dynamic

Virtualisation changes the competitive dynamic

Contents:

  • Executive Summary: Digital transformation is changing the rules of the game
  • Digital transformation is reshaping vendors’ and telcos’ offer to enterprises
  • What does ‘digital transformation’ mean?
  • ‘Virtualisation’ effectively means ‘digital optimisation’
  • Virtualisation creates opportunities for vendors to act like Internet players, OTT service providers and telcos
  • Vendors and telcos: the business models are changing
  • New vendor plays in enterprise networking: four vendor business models
  • Vendor plays: Nokia, Ericsson, Cisco and IBM
  • Ericsson: changing the bet from telcos to enterprises – and back again?
  • Cisco: Betting on enterprises – while operators need to speed up
  • IBM: Transformation involves not just doing different things but doing things differently
  • Conclusion: Vendors as ‘co-Operators’, ‘co-opetors’ or ‘co-opters’ – but can telcos still set the agenda?
  • How should telcos play it? Four recommendations

Figures:

  • Figure 1: Virtualisation changes the competitive dynamic
  • Figure 2: The telco as primary channel for vendors
  • Figure 3: New direct-to-enterprise opportunities for vendors
  • Figure 4: Vendors as both technology supplier and OTT / operator-type managed services provider
  • Figure 5: Vendors as digital service creators, with telcos as connectivity providers and digital service enablers
  • Figure 6: Vendors as digital service enablers, with telcos as digital service creators / providers
  • Figure 7: Vendor manages communications / networking as part of overall digital transformation focus
  • Figure 8: Nokia as technology supplier and ‘operator-type’ managed services provider
  • Figure 9: Nokia’s cloud-native core network blueprint
  • Figure 10: Nokia WING value chain
  • Figure 11: Ericsson’s model for telcos’ roles in the IoT ecosystem
  • Figure 12: Ericsson generates the value whether operators provide connectivity only or also market the service
  • Figure 13: IBM’s model for telcos as digital service enablers or providers – or both

Smartphones: when will Huawei be No.1?

Summary: We were surprised to hear Huawei’s objective of becoming the world’s No.1 Smartphone maker at last year’s Mobile World Congress, and somewhat dubious whether it would achieve that goal. However, at this year’s show Huawei demonstrated impressive progress, and we consider it is no longer a question of if, but when it will achieve its goal. In this analysis we explore industry scenarios and their consequences.(March 2013, Executive Briefiing Service).

Huawei Ascend P2 Smartphone

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Below is an extract from this 11 page Telco 2.0 Briefing Report that can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service here. Disruptive innovation and strategies will be a key theme at our Executive Brainstorms in Silicon Valley (March 2013), and Europe (London, June 2013). Non-members can subscribe here and for this and other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

Huawei’s position

A brief history of Huawei

Huawei is no minnow. Revenues in 2012 were US$35bn, profits were US$2.5bn, R&D spend was US$4.8bn, and it employs 125k people of whom 75k are in R&D and have relationships with nearly every mobile operator on the planet. 

In network equipment Huawei has grown from market entrant to market leadership in fifteen years. The first overseas order was for fixed line products to Hutchison Whampoa in Hong Kong in 1997. The first major overseas wireless order was to build the Dutch operator Telfort’s 3G network in 2003. The initial primary reason for many operators choosing Huawei network equipment was their low price. Many people have claimed the price was below cost. No-one would argue that the decade that followed resulted in a torrent of red ink on most network equipment vendors profit and loss accounts and market share gains by Huawei.

In consumer equipment, Huawei initially focussed upon the dongle market introducing its first datacard in 2007. Within three years, Huawei achieved market leadership and today has a market share in excess of 50% around the globe. At Mobile World Congress 2013 (MWC13), the Huawei stand had by far the most impressive range of dongles: USB, MiFi and embedded. Again, Huawei was the price leader and competitors claimed below-cost selling to establish market leadership. In 2011, Huawei settled a lawsuit with the previous EU market leader, Option, about anti-dumping practices. 

In 2012, Huawei devices had revenues of US$7.5m and sold over 120m units: including 50m dongles and 52m handsets, of which 32m were smartphones. Today, Huawei is the world’s number three Smartphone maker according to data released by IDC.

 Figure 1 – Smartphone Manufacturer – Units and Growth Q4 2011/12

Manufacturer

Units 4Q12

Units 4Q11

Growth

Samsung

63.7

36.2

76.0%

Apple

47.8

37.0

29.2%

Huawei

10.8

5.7

89.5%

Others

97.1

81.9

18.6%

 

219.4

160.8

36.4%

 

 

 

 

All Phone

 

 

 

Samsung

111.2

99

12.3%

Apple

47.8

37

29.2%

Huawei

15.8

13.9

13.7%

Others

307.7

323.5

-4.9%

 

482.5

473.4

1.9%

Source: IDC

Price – Huawei’s usual weapon of choice

Given Huawei’s history, it is highly likely that in trying to achieve its Smartphone goal the primary weapon will be price. This will have a profound effect in the Smartphone market in the medium term. Our view is that the Smartphone profit pool will be severely reduced for nearly all manufacturers, Apple being the exception, at least until Huawei achieves its goal.

In Q4 2012, Smartphone shipments were 45% of total phones compared to 34% in the same period in 2011. Our view is that this growth in penetration will continue over the coming years peaking at approximately 80% in 2015. This growth will mean a lot of new smartphone users which will be extremely price conscious especially compared to the early smartphone adopters.

Our view is that in this growing market of price conscious users across the globe, Huawei is in the prime position to capture a significant portion of the market. In an optimistic case where the existing Smartphone manufacturers allow Huawei a price advantage, we believe it will take Huawei three years (i.e. Q4 2016) to achieve leadership. In a pessimistic case, we believe it will take Huawei five years (i.e. Q4 2018). 

Promotion – how can money help solve this problem?

The Huawei brand is not well known outside of China and many of the manufacturers see this is a major weakness. Our view is slightly contrarian – if Huawei can achieve #3 position with a brand that has such limited customer awareness, imagine what they could achieve if the brand was well known? 

The key Huawei announcement was in our opinion a commitment to brand building in 2013. While it is impossible to build the brand strength of an Apple in the short term, it is possible to create brand awareness with a huge spend on promotion and advertising. We can envisage that all the world’s top branding agencies are current descending on Shenzchen offering to help Huawei with their branding campaigns across the globe. We believe that in three years time the Huawei brand will be as well know as the other Smartphone makers.

Product – Huawei ascendant

Figure 2 – Huawei Ascend P2 Flagship Smartphone

Huawei Ascend P2 Smartphone 

At MWC13, Huawei launched the Ascend P2 as its new flagship product for 2013. Our view is that the build quality is extremely good with a lovely Corning Gorilla Glass screen. Perhaps the quality is not quite as high as the new Sony Xperia, but at least comparable with all the other new models in the show. The differentiator that Huawei is promoting is that it is the fastest handset in the world supporting 4G speeds of up to 150Mbps. This is a bit unrealistic in our view as no networks are yet built to support those speeds. However, it highlights that Huawei do have excellence in radio engineering and will use its vast R&D army to create differentiation. Huawei have already a commitment from the Orange group to sell the Ascend P2. The Ascend P2 will retail at a highly competitive €400 before operator subisidies.

Flagship products are important to show capabilities, but will not create the huge volumes required to achieve leadership. Huawei had a full range of handsets on display across the whole range of price points.

To read the note in full, including the following additional sections detailing support for the analysis…
  • Place – money talks and distributors will listen
  • The Marketing Mix
  • Five Smartphone Market Scenarios
  • Conclusion

…and the following figures…

  • Figure 1 – Smartphone Manufacturer – Units and Growth Q4 2011/12
  • Figure 2 – Huawei Ascend P2 Flagship Smartphone
  • Figure 3 – Smartphone market scenarios

Members of the Telco 2.0 Executive Briefing Subscription Service can download the full 11 page report in PDF format hereNon-Members, please subscribe here. For this or other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

Dealing with the ‘Disruptors’: Google, Apple, Facebook, Microsoft/Skype and Amazon (Updated Extract)

Executive Summary (Extract)

This report analyses the strategies behind the success of Amazon, Apple, Facebook, Google and Skype, before going on to consider the key risks they face and how telcos and their partners should deal with these highly-disruptive Internet giants.

As the global economy increasingly goes digital, these five companies are using the Internet to create global brands with much broader followings than those of the traditional telecoms elite, such as Vodafone, AT&T and Nokia. However, the five have markedly different business models that offer important insights into how to create world-beating companies in the digital economy:

  • Amazon: Amazon’s business-to-business Marketplace and Cloud offerings are text-book examples of how to repurpose assets and infrastructure developed to serve consumers to open up new upstream markets. As the digital economy goes mobile, Amazon’s highly-efficient two-sided commerce platform is enabling it to compete effectively with rivals that control the leading smartphone and tablet platforms – Apple and Google.
  • Apple: Apple has demonstrated that, with enough vision and staying power, an individual company can single-handedly build an entire ecosystem. By combining intuitive and very desirable products, with a highly-standardised platform for software developers, Apple has managed to create an overall customer experience that is significantly better than that offered by more open ecosystems. But Apple’s strategy depends heavily on it continuing to produce the very best devices on the market, which will be difficult to sustain over the long-term.
  • Facebook: A compelling example of how to build a business on network effects. It took Facebook four years of hard work to reach a tipping point of 100 million users, but the social networking service has been growing easily and rapidly ever since. Facebook has the potential to attract 1.4 billion users worldwide, but only if it continues to sidestep rising privacy concerns, consumer fatigue or a sudden shift to a more fashionable service.
  • Google: The search giant’s virtuous circle keeps on spinning to great effect – Google develops scores of free, and often-compelling, Internet services, software platforms and apps, which attract consumers and advertisers, enabling it to create yet more free services. But Google’s acquisition of Motorola Mobility risks destabilising the Android ecosystem on which a big chunk of its future growth depends.
  • Skype: Like Facebook and Google, Skype sought users first and revenues second. By creating a low-cost, yet feature-rich, product, Skype has attracted more than 660 million users and created sufficient strategic value to persuade Microsoft to hand over $8.5bn. Skype’s share of telephony traffic is rising inexorably, but Google and Apple may go to great lengths to prevent a Microsoft asset gaining a dominant position in peer-to-peer communications.

The strategic challenge

There is a clear and growing risk that consumers’ fixation on the products and services provided by the five leading disruptors could leave telcos providing commoditised connectivity and struggling to make a respectable return on their massive investment in network infrastructure and spectrum.

In developed countries, telcos’ longstanding cash-cows – mobile voice calls and SMS – are already being undermined by Internet-based alternatives offered by Skype, Google, Facebook and others. Competition from these services could see telcos lose as much as one third of their messaging and voice revenues within five years (see Figure 1) based on projections from our global survey, carried out in September 2011.

Figure 1 – The potential combined impact of the disruptors on telcos’ core services

Impact of Google, Apple, Facebook, Microsoft/Skype, Amaxon on telco services

Source: Telco 2.0 online survey, September 2011, 301 respondents

Moreover, most individual telcos lack the scale and the software savvy to compete effectively in other key emerging mobile Internet segments, such as local search, location-based services, digital content, apps distribution/retailing and social-networking.

The challenge for telecoms and media companies is to figure out how to deal with the Internet giants in a strategic manner that both protects their core revenues and enables them to expand into new markets. Realistically, that means a complex, and sometimes nuanced, co-opetition strategy, which we characterise as the “Great Game”.

In Figure 3 below, we’ve mapped the players’ roles and objectives against the markets they operate in, giving an indication of the potential market revenue at stake, and telcos’ generic strategies.

Figure 3- The Great Game – Positions, Roles and Strategies

The Great Game - Telcos, Amazon, Apple, Google, Facebook, Skype/Microsoft

Our in-depth analysis, presented in this report, describes the ‘Great Game’ and the strategies that we recommend telcos and others can adopt in summary and in detail. [END OF FIRST EXTRACT]

Report contents

  • Executive Summary [5 pages – including partial extract above]
  • Key Recommendations for telcos and others [20 pages]
  • Introduction [10 pages – including further extract below]


The report then contains c.50 page sections with detailed analysis of objectives, business model, strategy, and options for co-opetition for:

  • Google
  • Apple
  • Facebook
  • Microsoft/Skype
  • Amazon

Followed by:

  • Conclusions and recommendations [10 pages]
  • Index

The report includes 124 charts and tables.

The rest of this page comprises an extract from the report’s introduction, covering the ‘new world order’, investor views, the impact of disruptors on telcos, and how telcos are currently fighting back (including pricing, RCS and WAC), and further details of the report’s contents. 

 

Introduction

The new world order

The onward march of the Internet into daily life, aided and abetted by the phenomenal demand for smartphones since the launch of the first iPhone in 2007, has created a new world order in the telecoms, media and technology (TMT) industry.

Apple, Google and Facebook are making their way to the top of that order, pushing aside some of the world’s biggest telcos, equipment makers and media companies. This trio, together with Amazon and Skype (soon to be a unit of Microsoft), are fundamentally changing consumers’ behaviour and dismantling longstanding TMT value chains, while opening up new markets and building new ecosystems.

Supported by hundreds of thousands of software developers, Apple, Google and Facebook’s platforms are fuelling innovation in consumer and, increasingly, business services on both the fixed and mobile Internet. Amazon has set the benchmark for online retailing and cloud computing services, while Skype is reinventing telephony, using IP technology to provide compelling new functionality and features, as well as low-cost calls.

On their current trajectory, these five companies are set to suck much of the value out of the telecoms services market, substituting relatively expensive and traditional voice and messaging services with low-cost, feature-rich alternatives and leaving telcos simply providing data connectivity. At the same time, Apple, Amazon, Google and Facebook have become major conduits for software applications, games, music and other digital content, rewriting the rules of engagement for the media industry.

In a Telco2.0 online survey of industry executives conducted in September 2011, respondents said they expect Apple, Google, Facebook and Skype together to have a major impact on telcos’ voice and messaging revenues in the next three to five years . Although these declines will be partially compensated for by rising revenues from mobile data services, the respondents in the survey anticipate that telcos will see a major rise in data carriage costs (see Figure 1 – The potential combined impact of the disruptors on telcos’ core services).

In essence, we consider Amazon, Apple, Facebook, Google and Skype-Microsoft to be the most disruptive players in the TMT ecosystem right now and, to keep this report manageable, we have focused on these five giants. Still, we acknowledge that other companies, such as RIM, Twitter and Baidu, are also shaping consumers’ online behaviour and we will cover these players in more depth in future research.

The Internet is, of course, evolving rapidly and we fully expect new disruptors to emerge, taking advantage of the so-called Social, Local, Mobile (SoLoMo) forces, sweeping through the TMT landscape. At the same time, the big five will surely disrupt each other. Google is increasingly in head-to-head competition with Facebook, as well as Microsoft, in the online advertising market, while squaring up to Apple and Microsoft in the smartphone platform segment. In the digital entertainment space, Amazon and Google are trying to challenge Apple’s supremacy, while also attacking the cloud services market.

Investor trust

Unlike telcos, the disruptors are generally growing quickly and are under little, or no, pressure from shareholders to pay dividends. That means they can accumulate large war chests and reinvest their profits in new staff, R&D, more data centres and acquisitions without any major constraints. Investors’ confidence and trust enables the disruptors to spend money freely, keep innovating and outflank dividend-paying telcos, media companies and telecoms equipment suppliers.

By contrast, investors generally don’t expect telcos to reinvest all their profits in their businesses, as they don’t believe telcos can earn a sufficiently high return on capital. Figure 16 shows the dividend yields of the leading telcos (marked in blue). Of the disruptors, only Microsoft (marked in green) pays a dividend to shareholders.

Figure 16: Investors expect dividends, not growth, from telcos

Figure 1 Chart Google Apple Facebook Microsoft Skype Amazon Sep 2011 Telco 2.0

Source: Google Finance 2/9/2011

The top telcos’ turnover and net income is comparable, or superior, to that of the leading disruptors, but this isn’t reflected in their respective market capitalisations. AT&T’s turnover is approximately four times that of Google and its net income twice as great, yet their market cap is similar. Even accounting for their different capital structures, investors clearly expect Google to grow much faster than AT&T and syphon off more of the value in the TMT sector.

More broadly, the disparity in the market value between the leading disruptors and the leading telcos’ market capitalisations suggest that investors expect Apple, Microsoft and Google’s revenues and profits to keep rising, while they believe telcos’ will be stable or go into decline. Figure 17 shows how the market capitalisation of the disruptors (marked in green) compares with that of the most valuable telcos (marked in blue) at the beginning of September 2011.

Figure 17: Investors value the disruptors highly

Figure 2 Chart Google Apple Facebook Microsoft Skype Amazon Market Capitalisation Sep 2011 Telco 2.0

Source: Google Finance 2/9/2011 (Facebook valued at Facebook $66bn based on IPG sale in August 2011)

Impact of disruptors on telcos

It has taken longer than many commentators expected, but Internet-based messaging and social networking services are finally eroding telcos’ SMS revenues in developed markets. KPN, for example, has admitted that smartphones, equipped with data communications apps (and Whatsapp in particular), are impacting its voice and SMS revenues in its consumer wireless business in its home market of The Netherlands (see Figure 18). Reporting its Q2 2011 results, KPN said that changing consumer behaviour cut its consumer wireless service revenues in Holland by 2% year-on-year.

Figure 18: KPN reveals falling SMS usage

Figure 3 Chart Google Apple Facebook Microsoft Skype Amazon KPN Trends Sep 2011 Telco 2.0

Source: KPN Q2 results

In the second quarter, Vodafone also reported a fall in messaging revenue in Spain and southern Africa, while Orange saw its average revenue per user from data and SMS services fall in Poland.

How telcos are fighting back

Big bundles

Carefully-designed bundles are the most common tactic telcos are using to try and protect their voice and messaging business. Most postpaid monthly contracts now come with hundreds of SMS messages and voice minutes, along with a limited volume of data, bundled into the overall tariff package. This mix encourages consumers to keep using the telcos’ voice and SMS services, which they are paying for anyway, rather than having Skype or another VOIP service soak up their precious data allowance.

To further deter usage of VOIP services, KPN and some other telcos are also creating tiered data tariffs offering different throughput speeds. The lower-priced tariffs tend to have slow uplink speeds, making them unsuitable for VOIP (see Figure 19 below). If consumers want to use VOIP, they will need to purchase a higher-priced data tariff, earning the telco back the lost voice revenue.

Figure 19: How KPN is trying to defend its revenues

Figure 4 Chart Google Apple Facebook Microsoft Skype Amazon KPN Defence Sep 2011 Telco 2.0

Source: KPN’s Q2 results presentation

Of course, such tactics can be undermined by competition – if one mobile operator in a market begins offering generous data-only tariffs, consumers may well gravitate towards that operator, forcing the others to adjust their tariff plans.

Moreover, bundling voice, SMS and data will generally only work for contract customers. Prepaid customers, who only want to pay for what they are use, are naturally charged for each minute of calls they make and each message they send. These customers, therefore, have a stronger financial incentive to find a free WiFi network and use that to send messages via Facebook or make calls via Skype.

The Rich Communications Suite (RCS)

To fend off the threat posed by Skype, Facebook, Google and Apple’s multimedia communications services, telcos are also trying to improve their own voice and messaging offerings. Overseen by mobile operator trade association the GSMA, the Rich Communications Suite is a set of standards and protocols designed to enable mobile phones to exchange presence information, instant messages, live video footage and files across any mobile network.

In an echo of social networks, the GSMA says RCS will enable consumers to create their own personal community and share content in real time using their mobile device.

From a technical perspective, RCS uses the Session Initiation Protocol (SIP) to manage presence information and relay real-time information to the consumer about which service features they can use with a specific contact. The actual RCS services are carried over an IP-Multimedia Subsystem (IMS), which telcos are using to support a shift to all-IP fixed and mobile networks.

Deutsche Telekom, Orange, Telecom Italia, Telefonica and Vodafone have publically committed to deploy RCS services, indicating that the concept has momentum in Europe, in particular. The GSMA says that interoperable RCS services will initially be launched by these operators in Spain, Germany, France and Italy in late 2011 and 2012. [NB We’ll be discussing RCSe with some of the operators at our EMEA event in London in November 2011.]

In theory, at least, RCS will have some advantages over many of the communications services offered by the disruptors. Firstly, it will be interoperable across networks, so you’ll be able to reach people using different service providers. Secondly, the GSMA says RCS service features will be automatically available on mobile devices from late 2011 without the need to download and install software or create an account (by contrast, Apple’s iMessage service, for example, will only be installed on Apple devices).

But questions remain over whether RCS devices will arrive in commercial quantities fast enough, whether RCS services will be priced in an attractive way and will be packaged and marketed effectively. Moreover, it isn’t yet clear whether IMS will be able to handle the huge signalling load that would arise from widespread usage of RCS.

Internet messaging protocols, such as XMPP, require the data channel to remain active continuously. Tearing down and reconnecting generates lots of signalling traffic, but the alternative – maintaining a packet data session – will quickly drain the device’s battery.
By 2012, Facebook and Skype may be even more entrenched than they are today and their fans may see no need to use telcos’ RCS services.

Competing head-on

Some of the largest mobile operators have tried, and mostly failed, to take on the disruptors at their own game. Vodafone 360, for example, was Vodafone’s much-promoted, but ultimately, unsuccessful €500 million attempt to insert itself between its customers and social networking and messaging services from the likes of Facebook, Windows Live, Google and Twitter.

As well as aggregating contacts and feeds from several social networks, Vodafone 360 also served as a gateway to the telco’s app and music store. But most Vodafone customers didn’t appear to see the need to have an aggregator sit between them and their Facebook feed. During 2011, the service was stripped back to be just the app and music store. In essence, Vodafone 360 didn’t add enough value to what the disruptors are already offering. We understand, from discussions with executives at Vodafone, that the service is now being mothballed.

A small number of large telcos, mostly in emerging markets where smartphones are not yet commonplace, have successfully built up a portfolio of value-added consumer services that go far beyond voice and messaging. One of the best examples is China Mobile, which claims more than 82 million users for its Fetion instant messaging service, for example (see Figure 20 – China Mobile’s Internet Services).

Figure 20 – China Mobile’s Internet Services

China Mobile Services, Google, Apple, Facebook Report, Telco 2.0

Source: China Mobile’s Q2 2011 results

However, it remains to be seen whether China Mobile will be able to continue to attract so many customers for its (mostly paid-for) Internet services once smartphones with full web access go mass-market in China, making it easier for consumers to access third-parties’ services, such as the popular QQ social network.

Some telcos have tried to compete with the disruptors by buying innovative start-ups. A good example is Telefonica’s acquisition of VOIP provider Jajah for US$207 million in January 2010. Telefonica has since used Jajah’s systems and expertise to launch low-cost international calling services in competition with Skype and companies offering calling cards. Telefonica expects Jajah’s products to generate $280 million of revenue in 2011, primarily from low-cost international calls offered by its German and UK mobile businesses, according to a report in the FT.

The Wholesale Applications Community (WAC)

Concerned about their growing dependence on the leading smartphone platforms, such as Android and Apple’s iOS, many of the world’s leading telcos have banded together to form the Wholesale Applications Community (WAC).

WAC’s goal is to create a platform developers can use to create apps that will run across different device operating systems, while tapping the capabilities of telcos’ networks and messaging and billing systems.

At the Mobile World Congress in February 2011, WAC said that China Mobile, MTS, Orange, Smart, Telefónica, Telenor, Verizon and Vodafone are “connected to the WAC platform”, while adding that Samsung and LG will ensure “that all devices produced by the two companies that are capable of supporting the WAC runtime will do so.”

It also announced the availability of the WAC 2.0 specification, which supports HTML5 web applications, while WAC 3.0, which is designed to enable developers to tap network assets, such as in-app billing and user authentication, is scheduled to be available in September 2011.

Ericsson, the leading supplier of mobile networks, is a particularly active supporter of WAC, which also counts leading Alcatel-Lucent, Huawei, LG Electronics, Qualcomm, Research in Motion, Samsung and ZTE, among its members.

In theory, at least, apps developers should also throw their weight behind WAC, which promises the so far unrealised dream of “write once, run anywhere.” But, in reality, games developers, in particular, will probably still want to build specific apps for specific platforms, to give their software a performance and functionality edge over rivals.

Still, the ultimate success or failure of WAC will likely depend on how enthusiastically Apple and Google, in particular, embrace HTML5 and actively support it in their respective smartphone platforms. We discuss this question further in the Apple and Google chapters of this report.

Summarising current telcos’ response to disruptors

 

Telcos, and their close allies in the equipment market, are clearly alert to the threat posed by the major disruptors, but they have yet to develop a comprehensive game plan that will enable them to protect their voice and messaging revenue, while expanding into new markets.

Collective activities, such as RCS and WAC, are certainly necessary and worthwhile, but are not enough. Telcos, and companies across the broader TMT ecosystem, need to also adapt their individual strategies to the rise of Amazon, Apple, Facebook, Google and Skype-Microsoft. This report is designed to help them do that.

[END OF EXTRACT]

 

Handset IPR – a new cold war begins

This is an extract from a report by Arete Research, a Telco 2.0TM partner specalising in investment analysis. The views in this article are not intended to constitute investment advice from Telco 2.0TM or STL Partners. We are reprinting Arete’s analysis to give our customers some additional insight into how some investors see the Telecoms market.

This report can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service using the links below.

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We’ll be analysing and discussing the Cold War, and also the ‘Great Game’ being played out between the online superpowers (Google, Apple, Facebook, telcos and others) at our upcoming EMEA ‘New Digital Economics’ Brainstorm (London, 9-10 November). Please use the links or email contact@telco2.net or call +44 (0) 207 247 5003 to find out more.

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A New IPR Cold War Begins

When we [Arete Research] published Software IPR: Into the Trenches (Nov. ’10), we emphasized how legal battles around software patents applied to handsets could radically alter a decade-old stable IPR landscape of a few wireless giants (Nokia, Ericsson, Qualcomm). Since then 1) a consortium of Apple, RIM, Ericsson, Sony, Microsoft and EMC paid a staggering $4.5bn for 6,000 Nortel patents, 2) an ITC judge ruled in Apple’s favour in its case against HTC on patents that we thought were too broad to be defended, and 3) after renewed interest in monetising Motorola’s patents, Google bid $12.5bn for Motorola ($9bn net of cash), further escalating the legal spat between three rival gangs: Apple, Google/Android and MSFT/Nokia.

In this note we lay out implications for the mobile device space and try to clarify some misunderstood issues around Google/Motorola, Nortel, and Nokia. We see this as the start of a long Cold War, where all parties are heavily armed, and risk destroying each other (and themselves) with overly aggressive legal actions.

Can Go-Mo Really Go, or Generate Mo?

Google’s acquisition is firstly a tacit admission, in our view, that the project to rescue Motorola Devices failed: despite extensive restructuring and its Android efforts, Motorola Devices could not make money due to a poor track record in execution and reaching scale. In 2Q11 it sold 4.4m Android devices vs. 11m+ for HTC and 18m+ from Samsung. Google has little experience bringing devices to market (see the NexusOne), and cannot change MMI’s cost structure while it runs on an “arm’s-length basis.” It is not clear what returns MMI is expected to deliver.

Contrary to the deal-related rhetoric, we do not think Google wants Motorola to increase its scope at the expense of other Android partners. Instead, we think Motorola will be used to pioneer new concepts like a Google+ phone (like HTC did with Salsa/Cha Cha Facebook models).

Google’s aim for Android is the widest possible search and advertising penetration; this will not be realised if Google aggressively competes with other Android OEMs: Samsung, HTC and Huawei all told us directly they do not expect Motorola to receive preferential treatment. We see little prospect of improvements in Motorola’s low market share or lack of profit. Google needs to avoid any perception of favouritism to prevent Samsung from further efforts in Bada, or HTC to toy around with MeeGo or focus design innovation on WinPhone. Any new Motorola design cycle with closer Google input would only come in 2013, assuming the deal closes in early ’12. 

Motorola’s IPR portfolio is clearly the bulk of the $9bn implied enterprise value: 15,000 wireless patents, another ~6,200 pending, and 3,000 granted or pending patents in Home. Google had the chance to assess both Nortel and MMI’s portfolios and how widely they were licensed. Now Google will own essential IPR – currently being asserted against Microsoft and Apple in multiple jurisdictions – to support all Android vendors, a point made to us in the last day by HTC, Samsung and Huawei.

How might this work in practice, and why did Google need to own a handset OEM, and not just IPR to support Android? This IPR would allow Google to directly negotiate cross-license deals with vendors like Apple on behalf of Android OEMs. It could offer them pass-through rights (PTRs) to Motorola’s IPR for Android devices (but not for WinPhone, Bada, etc.). Qualcomm similarly offers PTRs to vendors that use its chipsets; and MSFT justifies the licensing cost of WP7 as an insurance against IP infringement claims. This could even be a precursor to an Android patent pool – making a NATO-like alliance – in which all licensees share patents for mutual benefit.

Depending on Google’s policies, Android licensees could also save costs from not paying royalties to Motorola; Google cannot charge royalties for Android itself and also claim it is “free,” but may more strictly oblige vendors to use Google services, which it only does on “Google Experience” devices. Since vendors like Nokia and Ericsson license IPR only at the device level, Google has to be an OEM to negotiate directly with them, Apple and Microsoft. Some will argue against OEMs using Google’s “passed-through” IPR in cross-licensing, but Google can also assert Motorola’s non-wireless patents not covered by FRAND, notably in video. There is a lot of legal hard work ahead for Google, but at least it shored up its own weak patent position, and we believe Google has given assurances, if not outright indemnities, to Android vendors to support them.

There are other benefits for Google to realise: Motorola has large NOLs, largely on-shore cash, and Google will get a large video infrastructure installed base with $4bn of Home sales to bootstrap a weak Google TV business. It should help integration of Android tablets and smartphones in the living room. Motorola must show its separation was not done with a sale in mind for its shareholders to avoid tax liabilities (though in our initiation note, Motorola Mobility: Finally Moving Out [Jan. ’11], we said MMI would need a partner, seeing Huawei as a logical choice). Yet the principal benefit is to bolster Google’s own weak IPR position, not by buying a weak portfolio such as IDCC (see InterDigital: Tulip Mania?, Aug. ’11).

To read the Briefing in full, including in addition to the above analysis of:

  • Apple: Realpolitik
  • Making sense of Nortel
  • Nokia: tied up in alliances
  • Microsoft: no need to buy
  • RIM: not an IP superpower
  • Diplomacy or Total War?
  • New rules of engagement
  • The cost of war is always high

Members of the Telco 2.0TM Executive Briefing Subscription Service can download the full 7 page report in PDF format here. Non-Members, please see here for how to subscribe. Please email contact@telco2.net or call +44 (0) 207 247 5003 for further details.

RIM: R.I.P. or ‘Reports of my death are greatly exaggerated’?

Summary: RIM’s shares have plummeted in value over the last four months, prompting an eruption of finger-pointing in the media and speculation of its demise or acquisition. In this analysis we examine whether the doom-mongers are right and what RIM’s recovery strategy might be. (July 2011, Executive Briefing Service)

Apple iCloud logo in analysis of impact of iCloud/iOS on digital ecosystem

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Below is an extract from this 12 page Telco 2.0 Report that can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service here. Non-members can buy a Single User license for this report online here for £295 (+VAT) or subscribe here. For multiple user licenses or other enquiries please email contact@telco2.net or call +44 (0) 207 247 5003.

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Background – RIM’s share price disaster

RIM’s shares have plummeted in value over the last four months, prompting an eruption of finger-pointing in the media and speculation of its demise or acquisition. In this analysis we examine whether the doom-mongers are right and what RIM’s recovery strategy might be.

‘Reports of my death are greatly exaggerated’ – US writer Mark Twain, 1907, when he failed to return to New York City as scheduled and The New York Times speculated that he might have been “lost at sea.”

Figure 1 – RIM has obviously underperformed Apple, but incredibly it has also underperformed Nokia.

RIM, Apple, Nokia Share Prices July 2011 Telco 2.0

With its iconic Blackberry devices, RIM led the way in the mobile messaging era – first in corporate and then in consumer markets. But the transition to the mobile web has seen it surpassed by Apple and Google in consumer developed markets. In this respect RIM faces the same challenge as Nokia. And yet, despite facing the same challenge, RIM and Nokia have taken completely different strategic options for their future. When Nokia announced its partnership with Microsoft it pointedly talked about the creation of the third platform for the mobile web alongside Apple and Google – Nokia effectively discounted RIM from the game.

Previous Telco 2.0 analysis on RIM includes: RIM: how does the BlackBerry fit with Telco 2.0 strategies?; Mobile Software Platforms: Rapid Consolidation Forecast; and Nokia’s Strange Services Strategy – Lessons from Apple iPhone and RIM.

Current Position – on the surface, OK, but…

At first glance, RIM looks in a healthy position and its recent results show that both handset shipments (13.2m vs 11.2m) and revenues (US$4.9bn vs US$4.2bn) were up on the previous year. RIM is making reasonable profits (US$695m) and has a healthy cash position (US$2.9bn). But under the hood, life is not looking as rosy.

Profits: Under Pressure

RIM’s accounts show that its absolute profits are declining as growth in R&D and S&M costs are exceeding the slowing growth in revenues.

Figure 2 – RIM’s Profits are down against growth in R&D and S&M costs

RIM Profits, R&D Costs, Sales and Marketing Costs, July 2011 Telco 2.0

Of course, rising R&D and S&M costs may ultimately result in new revenues, although at present the effects of this spending are not yet evident in overall performance.

Revenues: Squeezed out of Key Markets

RIM’s revenues are dropping in key markets, particularly the USA, and its growth in revenues is coming from emerging markets.

Figure 3 – RIM’s Changing Market Revenues

Table of RIM Worldwide Sources of Revenue and changes, July 2011, Telco 2.0

Market Share: Declining

RIM’s share of the overall smartphone market is declining.

Figure 4 – RIM’s Declining Worldwide Market Share

Table of RIM, Apple, Nokia, Android Smartphone Market Share May 2011, Telco 2.0 (Gartner)

Core Product Advantages: Eroded

Core product advantages (e.g. Blackberry Messenger) are being eroded and surpassed as the competition (e.g. Apple iMessage) improves.

New Products: Late

New devices such as the updated Bold 9900 have missed planned release dates.

To read the rest of this report, including…

  • Outlook – a time of transition?
  • QNX & TAT – RIM’s saviours?
  • Playbook – A disappointing start
  • Coming: the Android / Emerging Market Crunch
  • Corporate Strength
  • Telco 2.0 Conclusions & Recommendations – Is there a recovery strategy?

Members of the Telco 2.0 Executive Briefing Subscription Service can download the full 14 page report in PDF format here. Non-Members, please see here for how to subscribe, here to buy a single user license for £295, or for multi-user licenses and any other enquiries please email contact@telco2.net or call +44 (0) 207 247 5003.

Companies, technologies and products referenced: 7digital, Adobe Flash, Amazon, Android, Apple, Blackberry, BlackberryOS 8, Bold 9900, Carphone Warehouse, Google, Huawei, iMessage, iPad, iPhone, Microsoft, Nokia, Phones4U, Playbook, QNX Software Systems, RIM, The Astonishing Tribe (TAT).

 

 

Strategy 2.0: What Skype + Microsoft means for telcos

Summary: in theory, Microsoft and Skype have the resources, the brands, the customer base and the know-how to shape the future of telecoms and become a strategic counterweight to Apple and Google. Can they do it – and what should telcos’ strategy be? (June 2011, Executive Briefing Service, Dealing with Disruption Stream).

Microsoft Skype Logo Image Medium


This page contains an excerpt from the report, plus detailed contents, figures and tables, and a summary of the companies, products, technologies and issues covered.

 

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(The 35 page PDF format report is available in full to Members of the Telco 2.0 Executive Briefing Service and the Telco 2.0 Dealing with Disruption Stream here. Non-members can buy a Single User license for this report online here for £995 (+VAT) or subscribe here. For multiple user licenses or other enquiries please email contact@telco2.net or call +44 (0) 207 247 5003.)

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Introduction: Skype, the Original ‘Voice 2.0’

Everyone knows Skype as the original Voice 2.0 company – providing free phone calls, free video, status updates, all delivered using an innovative peer-to-peer architecture, and with the unique selling point of VoIP that just worked. This report describes its business model, technology strategy, its acquisition by Microsoft, and the consequences for the telecoms industry.

A little history

Founded in 2003 by Janus Friis and Niklas Zennström, Skype was acquired by eBay in 2005 for $2.6bn. eBay ownership was a period of stagnation – although eBay also owns PayPal, it only made half-hearted efforts to integrate the two. In November 2009, eBay sold 65% of Skype to an investor group led by Silver Lake for approximately $1.9bn in cash, valuing Skype at $2.75bn.

With Skype preparing for an IPO, Microsoft announced in May 2011 that it had agreed to buy the company for $8.5bn, giving the investor group a massive return and ensuring future potentially-disruptive start-ups will also attract plenty of funding. Many commentators have suggested that Microsoft is paying too much for the VOIP company, although the price-earnings ratio is actually no higher than that of Cisco’s acquisition of WebEx. So, what exactly is Microsoft getting for its billions? Let’s take a closer look.

A Dive into Skype’s Accounts

Microsoft has acquired what is essentially a global telephony company with 663 million registered users and very significant gross profitability. Skype contributed more net new minutes of international voice than the rest of the industry put together in 2010, according to Telegeography. Skype has never struggled to achieve growth, but its profitability has often been criticised, as has its ability to generate growth in ARPU. The following chart (figure 1) summarises Skype’s operational key performance indicators (KPIs) since 2006.

Figure 1: Skype’s KPIs: users, usage, and ARPU

Telco 2.0 Skype KPIs Users and ARPU June 2011 Graph Chart v1

Source: Skype’s S-1, May 2011

Questions have been raised about Skype’s performance in converting registered or even active users into paying users. This is critical, as ARPU is relatively flat. However, a monthly ARPU for paying users of $8 would be considered very reasonable for an emerging-market GSM operator and such an operator would tie up far more capital than Skype does. As all Skype users contribute to the system’s peer-to-peer (P2P) infrastructure, the marginal cost of serving non-paying users is essentially nothing.

Another way of looking at the KPIs is to consider their growth rates, as we have done in the following chart (figure 2). Although the growth of paying users is nowhere near as fast as that of free minutes of use, 40% growth per annum in revenue-generating subscribers is still very impressive.

Figure 2: Growth rates of Skype KPIs.

Telco 2.0 Skype KPIs Growth June 2011 Graph Chart

Source: Skype’s S-1, May 2011

In fact, there is very little wrong with Skype at the operating level. The following chart (figure 3) shows that, if we consider the primary challenge for Skype to be converting free users into paying users, it is actually doing rather well. Revenue and EBITDA are advancing and margins are holding up well.

Figure 3: Revenue and EBITDA growth is strong

Telco 2.0 Skype KPIs 5 Years Revenue and EBITDA June 2011 Graph Chart

Source: Skype S-1, May 2011

With 509 million active users available for conversion, ARPU may not be that relevant – just converting users of the free service into paying users has so far provided strong growth in gross profits and could do for the foreseeable future.

Figure 4: Conversion of free users at steady ARPU drives gross profit.

Telco 2.0 Skype Gross Profits June 2011 Graph Chart

Source: Skype S-1, May 2011

Skype doesn’t make money on free calls (not even from advertising or customer analytics/insights, yet), and has to pay interconnection fees and operate some infrastructure in order to provide SkypeOut (calls to conventional telephone numbers, rather than other Skype clients), and SkypeIn (calls from the PSTN to Skype users).

Skype sceptics have argued that eventually termination charges will catch up with the company and destroy its profitability. It is true that most of Skype’s revenues are generated (over 80%) by SkypeOut call charges and that Skype’s cost of net revenue is dominated (over 60%) by the cost of terminating these calls. However, termination as a percentage of Skype’s cost of net revenue is falling and Skype’s gross margin is rising, as its enormous volume growth enables it to extract better bulk pricing from interconnect operators (see Figure 5).

To see Figure 5, the conclusion of our analysis of Skype’s finances, and…

  • Is Skype Accumulating “Technical Debt”?
  • Future Plans: The Core Business, The Enterprise & Facebook
  • Telcos and Skype
  • Enter Microsoft
  • Windows Phone 7: Relevant again? 
  • Microsoft’s other mobile allies: Nokia, RIM
  • How Microsoft will deploy Skype 
  • Developers, developers, developers
  • Key Risks and Questions: execution, regulatory, partners, advertisers & payments
  • Answers: How Telcos should deal with Skype…and Microsoft

…plus these additional figures & fables…

  • Figure 5: How Skype’s spending is changing
  • Figure 6: Why Skype is making a loss
  • Figure 7: Commoditisation is for everybody!
  • Figure 8: 3UK benefits from its deal with Skype
  • Figure 9: Skype’s Deals with Carriers
  • Figure 10: Skype is a good fit for many Microsoft products
  • Figure 11: A unifying Skype API is critical for integration into the Microsoft empire
  • Figure 12: Telco strategy options matrix

 

Members of the Telco 2.0 Executive Briefing Subscription Service and the Telco 2.0 Dealing with Disruption Stream can download the full 35 page report in PDF format here. Non-Members, please see here for how to subscribe, here to buy a single user license for for £995, or for multi-user licenses and any other enquiries please email contact@telco2.net or call +44 (0) 207 247 5003.

Organisations, products and people referenced in the report: 3UK, AdSense, Android, Apple, AT&T, Au, Avaya, Ben Horowitz, BlackBerry Messenger, Cisco, Dynamics CRM, EasyBits, eBay, Exchange Server, Facebook, Facetime, Google, Google Talk, Google Voice, GSMA, Happy Pipe, Hutchison, iOS, iPhone, Jajah, Janus Friis, KDDI Mobile, Kinect, KPN, Lync, Mango, Marchex, Microsoft, Microsoft-Nokia deal, MXit, MySpace, Niklas Zennström, Nokia, Ofcom, Office Live, Outlook, PayPal, PowerPoint, Qik, RIM, Silver Lake, Skype, SkypeConnect, SkypeIn, SkypeKit, SkypeOut, SkypePhone, Steve Ballmer, Telefonica, Teredo, Tony Jacobs, Tropo, Twitter, Verizon Wireless, Virgin, Visual Studio, WebEx, WhatsApp, Windows Mobile, Windows Phone 7, WP7, Xbox, X-Series.

Technologies referenced: GSM, HD voice, HTTP/S, IM, IMS MMTel, IP networks, IPv4, IPv6, LTE, Mobile, NAT, P2P, PSTN, RCS, SILK V3, SIP, SMS, SS7, super node, URI, video telephony, Voice 2.0, VoIP, XMPP.

The Roadmap to New Telco 2.0 Business Models

$375Bn per annum Growth or Brutal Retrenchment? Which route will Telcos take?

Over the last three years, the Telco 2.0 Initiative has identified new business model growth opportunities for telcos of $375Bn p.a. in mature markets alone (see the ‘$125Bn Telco 2.0 ‘Two-Sided’ Market Opportunity’ and ‘New Mobile, Fixed and Wholesale Broadband Business Models’ Strategy Reports). In that time, most of the major operators have started to integrate elements of Telco 2.0 thinking into their strategic plans and some have begun to communicate these to investors.

But, as they struggle with the harsh realities of the seismic shift from being predominantly voice-centric to data-centric businesses, telcos now find themselves:

  • Facing rapidly changing consumer behaviours and powerful new types of competitors;
  • Investing heavily in infrastructure, without a clear payback;
  • Operating under less benign regulatory environments, which constrain their actions;
  • Being milked for dividends by shareholders, unable to invest in innovation.

As a result, far from yet realising the innovative growth potential we identified, many telcos around the world seem challenged to make the bold moves needed to make their business models sustainable, leaving them facing retrenchment and potentially ultimately utility status, while other players in the digital economy prosper.

In our new 284 page strategy report – ‘The Roadmap to Telco 2.0 Business Models’ – we describe the transformational path the telecoms industry needs to take to carve out a more valuable role in the evolving ‘digital economy’. Based on the output from 5 intensive senior executive ‘brainstorms’ attended by over 1000 industry leaders, detailed analysis of the needs of ‘upstream’ industries and ‘downstream’ end users markets, and with the input from members and partners of the Telco 2.0 Initiative from across the world, the report specifically describes:

  • A new ‘Telco 2.0 Opportunity Framework’ for planning revenue growth;
  • The critical changes needed to telco innovation processes;
  • The strategic priorities and options for different types of telcos in different markets;
  • Best practice case studies of business model innovation.

The ‘Roadmap’ Report Builds on Telco 2.0’s Original ‘Two-Sided’ Telecoms Business Model

Updated Telco 2.0 Industry Framework

Source: The Roadmap to New Telco 2.0 Business Models

 

Who should read this report

The report is for strategy decision makers and influences across the TMT (Telecoms, Media and Technology) sector. In particular, CxOs, Strategists, Technologists, Marketers, Product Managers, and Legal and Regulatory leaders in telecoms operators, vendors, consultants, and analyst companies. It will also be valuable to those managing or considering medium to long-term investment in the telecoms and adjacent industries, and to regulators and legislators.

It provides fresh, creative ideas to:

Grow revenues beyond current projections by:

  • Protecting revenues from existing customers;
  • Extending services to new customers;
  • Generating new service offering and revenues.

Stay relevant with customers through:

  • A broader range of services and offers;
  • More personalised services;
  • Greater interaction with customers.

Evolve business models by:

  • Moving from a one-sided to a two-sided business model;
  • Generating cross-platform network effects – between service providers and customers;
  • Exploiting existing latent assets, skills and relationships.


The Six Telco 2.0 Opportunity Areas

Six Telco 2.0 Opportunity Types

Source: The Roadmap to New Telco 2.0 Business Models

What are the Key Questions the Report Answers?

For Telcos:

  • Where should your company be investing for growth?
  • What is ‘best practice’ in telecoms Telco 2.0 business model innovation and how does your company compare to it?
  • Which additional strategies should you consider, and which should you avoid?
  • What are the key emerging trends to monitor?
  • What actions are required in the areas of value proposition, technology, value / partner network, and finances?

For Vendors and Partners:

  • How to segment telecoms operators?
  • How well does your offering support Telco 2.0 strategies and transformation needs in your key customers?
  • What are the most attractive new areas in which you could support telcos in business model innovation?

For Investors and Regulators:

  • What are and will be the main new categories of telcos/CSPs?
  • What are the principle opportunity areas for operators?
  • What are and will be operator’s main strategic considerations with respect to new business models?
  • What are the major regulatory considerations of new business models?
  • What are the main advantages and disadvantages that telcos have in each opportunity area?

Contents

  • Executive Summary & Introduction
  • Pressures on Operators
  • The new Telco 2.0 Framework
  • Principles of Innovation and Services Delivery
  • – Strategic Positioning
  • – Design
  • – Development and delivery
  • Categorising telcos
  • Category 1: Leading international operators
  • Category 2: Regional leaders
  • Category 3: Wholesale and business-focused telcos
  • Category 4: Challengers & disruptors
  • Category 5: Smaller national leaders
  • Conclusions and Recommendations

 

iPad2: how Apple plans to dominate the ‘post PC era’

Summary: Apple’s new ‘PC-killer’ tablet is intended to significantly expand the Apple ecosystem, with long-term impacts on many players including telcos, giving Apple an even stronger hold on the market. What strategies should telcos adopt?

This is an extract from this 14 page Telco 2.0 Analyst Note, that can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service and the Telco 2.0 Dealing with Disruption Stream using the links below.

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Introduction

While Apple’s new tablet has some interesting developments to its content and software ecosystems, the key business model move is that by extremely aggressive market positioning on price, weight and design, it will establish a new dominant platform position for Apple in the ‘post PC era’.

How far should telcos go in supporting Apple’s latest innovation? In this article we outline:

  • the iPad’s significantly enhanced features and consumer positioning;
  • important upcoming developments in the ‘upstream’ content publishing ecosystems;
  • market forecasts and our view of the impact of the new iPad;
  • and explore strategic alternatives for industry players, especially telcos.

It’s Faster, Lighter, Smaller…

At the heart of the iPad2 is a new dual-core processor internally developed by the Apple chip team. Apple claims the new A5 is twice as fast the A4 processor in the original iPad for normal tasks. Graphic intensive tasks are now up to nine times faster. The nullifies an advantage of other tablets which are due to come onto the market during 2011, the majority of which are based on dual processors from either Qualcomm (Snapdragon) or Nvidia (Tegra 2)

The iPad2 is also 33% thinner and 15% lighter which is a significant improvement that Apple sees as having an important impact on the overall user experience. The Telco 2.0 team agrees: the original iPad was already of a higher build quality and ergonomically feels much better than the competition. We also suspect that the iPad2 battery life of 10 hours will also be a big differentiator.

…with more built-in hardware…

The addition of a front and rear camera not only catches up with competition but offers a brand new set of capabilities for third parties developers to build into their applications (see below).

Other notable hardware features are: the additional of a gyroscope, which is already in the iPhone and IPod touch, which gives extra location features especially to the games developer community; and a multi-mode modem, supporting both EVDO and GSM networks. The incremental cost for the dual core modem is retained at US$130, which seems high and the Telco 2.0 team feels shows Apple’s inclination to promote public WiFi over mobile operators 3G networks.

…better accessories…

Apple showcased two new accessories – a new cover and a new cable.

Apple iPad Smartcover

The Smartcover is an intriguing piece of design which relies on magnets to align itself to the iPad and snap into place. It is a radical improvement on the cover for original iPad. The Smartcover comes in multiple colours and in polyurethane (US$39) or leather (US$79). The potential profit from this accessory is worth considering: we would be surprised if the margin is less than 100% for what is after all a piece of plastic with some magnets in.

The other accessory is a HDMI cable which allows the iPad2 to hook up to HDTV’s and play the media contained, whether music, films or TV shows. Apple claimed in the launch presentation that this was a feature requested by the educational sector to aide classroom teaching. But, it obviously has a far more wide reaching application in the hands of the mass market in the living room. 

For non-wired connections to the TV, Apple has upgraded its Airplay protocol to include synching of photo’s and video via an AppleTV box. It is rumoured that Apple is currently offering licensing of the Airplay technology to TV and Audio manufacturers which obviously presents a threat to the alternative, which is DNLA technology.

…and cheaper!

Apple iPad Price

Despite the extra hardware, Apple has retained the existing pricing structure – US$499 for the basic model. Apple is pursuing a very aggressive pricing strategy and obviously is planning to capture a huge share of tablet market.
In comparison, the Motorola Xoom with a similar hardware specification is priced at US$799. Even subsidized, the Xoom is priced at US$599 with a two-year, minimum 1GB data contract for US$20/month from Verizon.

This aggressive price will be a major problem for tablet competitors. It is also noticeable that contained within the Apple Q4 2010 results, the ASP for the iPhone was US$626 compared to an ASP for the iPad of US$667. Given the larger form factor of the iPad, we suspectthat Apple aretaking a lower margin on the iPad than the iPhone.

FaceTime – another move into communications

Apple iPad FaceTime

We think the iPad2 is a much better form factor for videoconferencing that the iPhone. Apple has bundled their FaceTime application with the operating system. FaceTime on the iPad2 highlights how Apple continually increases the value of their overall platform with incremental features. iPad users can now video conference with iPhone, iPod Touch and Mac users – all for free over WiFi connections. This immediately threatens not only Skype, but other social networking tools that are keen to add voice and messaging features and usage, such as Facebook and Google. More importantly for the mobile operators, FaceTime represents a clear and present danger to their voice and messaging revenues.

No MobileMe – yet

Before the launch event, there was a lot of speculation that Apple would be offering an upgrade to its MobileMe cloud services. The speculation was that Apple would allow synchronizing of content, whether audio, video or pictures to an Apple cloud which could then be accessed on any device – whether computer, phone or tablet. These rumours have been around since Apple acquired the LaLa team which had built a similar product for music digital lockers.

We did not expect an announcement at this point, mainly because Apple and the rest of the industry are awaiting a key legal ruling which could enable digital lockers without the need for the licences from the rights holders. This case is MP3tunes v EMI and is currently under consideration by a judge in New York and a decision is due within six months.

Michael Robertson is behind mp3tunes and has been a perennial thorn in rights holders’ paws since the days of mp3.com. He is adopting the DCMA defence, so successfully used by Google/YouTube in their case against Viacom, which is essentially that the web service is not responsible for content uploaded by a 3rd party to their service as long as they take it down when notified by copyright holders of infringement. If Michael Robertson wins, we expect a raft of digital locker services to be launched by the major internet players in the second half of 2011 which will not only be cheap, but also ruin many start-ups, such as Spotify, which have built a premium paid-for model around streaming of content on multiple devices.

Important Changes in the Publishing Model

Apple iPad Publishers

The other big news related to the publishing industry and eBooks in general. Random House wasn’t originally sure about the whole Apple agency pricing agreement and that left them as the holdout at the original iPad launch among the so-called “big six” publishers (including HarperCollins, Penguin Group, Simon & Schuster, Hachette, and Macmillian), but it seems that Apple has managed to convince them to join.

The ‘agency model’, where the publisher sets the retail price of the eBook, and in Apple’s case reaps 70% of the final selling price, is still to be tested in the courts. This model is different to the typical publishing arrangement where the publisher sets a wholesale price and the retailer prices at whatever they feel with whatever margin it yields them. This has allowed retailers, such as Amazon and the Supermarkets, to aggressively price bestsellers earning money on other items in the shopping basket.

The validity of the agency model will be tested throughout 2011 with the EU and several USA states already looking into price fixing. The outcomes of which will have a fundamental effect on the way digital content is brought to market and retailed.

The Post PC Era

Apple iPad Evolution

At the launch event Steve Jobs proudly proclaimed the birth of a new ‘Post PC era’. An era where people are not obsessed with GB and MHz of a single machine, but instead the overall customer experience across a range of devices. We would argue that Apple products have always attracted people that valued overall user experience as superior to the cheaper Wintel computer experience – even in the dark days when the Apple share of the PC market was shrinking and seemingly restricted to content creators, whether desktop publishers or audiovisual creators.

In the recent past, the iPod introduced Apple products to a whole new generation of users – with upside for its computer business. Similar waves of knock-on benefits can be seen with the introduction of the iPhone and iPad – more and more people are joining the Apple platform and there are significant benefits across the whole range of products.

Whatever consumers want, there is a range of products to suit their tastes, from the entertainment focused iPods through to the complete range of work-horse Mac products. It is also noticeable that iOS features such as the Appstore are also being added to the more industrial MacOS.

So we think the strategic message carried in Jobs’ words is that Apple wants to dominate the Post PC era, and it’s means of doing so is to continue to build out and interlink its ecosystem.

‘Apple DNA’ and the ‘Apple Platform’

Apple iPad DNA

Steve Jobs most memorable quote at the launch event was “It’s in Apple’s DNA that technology alone is not enough, that it is technology married with liberal arts, married with the humanities that yield us the result that makes our hearts sing.”

The demo of the iMovie and GarageBand iPad2 applications highlighted Apple tools for video-editing and music creation at unbelievable price points of US$5 for each. It stretches the imagination to see Samsung, Nokia, RIM, Microsoft or even Google to launch similar products. These are perfect tools for someone to experiment with. The professional content creators might need to upgrade to Mac’s and professional grade software: the Coen Brothers used Final Cut Studio is edit their latest movie, True Grit.

Apple’s strategy in the ‘Post PC era’ is an attempt to corner the market in content creation and consumption across a range of devices – again something that individual OEMS even with the software magic of Google and Microsoft will find difficult to beat.

To read the rest of the article, including…

  • Market Forecasts
  • Conclusions – what should mobile operators do?

Members of the Telco 2.0TM Executive Briefing Subscription Service and the Telco 2.0 Dealing with Disruption Stream can download the full 14 page report in PDF format here. Non-Members, please see here for how to subscribe. Alternatively, please email contact@telco2.net or call +44 (0) 207 247 5003 for further details. There’s also more on ‘Lessons from Apple: Fostering vibrant content ecosystems’ at our AMERICAS, EMEA and APAC Executive Brainstorms and Best Practice Live! virtual events.

 

Full Article: Handsets – Demolition Derby

Summary: ‘Hyper-competition’ in the mobile handset market, particularly in ‘smartphones’, will drive growth in 2010, but also emaciate profits for the majority of manufacturers. Predicted winners, losers and other market consequences.

This is a Guest Note from Arete Research, a Telco 2.0™ partner specialising in investment analysis.Arete Members can download a PDF of this Note here.

The views in this article are not intended to constitute investment advice from Telco 2.0™ or STL Partners. We are reprinting Arete’s Analysis to give our customers some additional insight into how some Investors see the Telecoms Market.

Handsets: Demolition Derby

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Arete’s last annual look at global handset markets (Handsets: Wipe-Out!, Oct. ’08) predicted every vendor would see margins fall by ~500bps. This happened: overall industry profitability dropped, as did industry sales. Now everyone is revving their engines with vastly improved product portfolios for 2010. Even with 15% unit and sales growth in ’10, we see the industry entering a phase of desperate “hyper-competition.” Smartphone vendors (Apple, RIMM, Palm, HTC) should grab $15bn of the $23bn increase in industry sales.

Longer term, the handset space is evolving into a split between partly commoditised hardware and high margin software and services. Managements face a classic moral hazard problem, incentivised to gain share rather than preserve capital. Each vendor sees 2010 as “their year.” Individually rational strategies are collectively insane: the question is who has deep enough pockets to keep their vehicles in one piece.
Revving the Engines. Every vendor is making huge technology leaps in 2010: high end devices will have 64/128GBs of NAND, 8-12Mpx cameras, OLED nHD capacitive touch displays, and more features than consumers can use. Smartphones should rise 50% to 304m units (while feature phones drop 21% in units). As chipmakers support sub-$200 complete device solutions, we see a race to the bottom in smartphone pricing.

Software Smash-Up. The rush of OEMs into Android will bring differentiation issues (as Symbian faced). Beyond Apple, every software platform faces serious issues, while operators will use “open” platforms to develop their own UIs (360, OPhone, myFaves, etc.). Rising software costs will force some OEMs to adopt a PC-ODM business model, while higher-margin models of RIM and Nokia are most at risk.

Finally, the Asian Invasion. Samsung, HTC and LGE now have 30% ’09E share, with ZTE, Huawei, MTEK customers and PC ODMs all joining the fray. All seek 20%+ growth. Motorola and SonyEricsson are being forced to shrink footprint, and shift risk to ODM partners. Nokia already has an Asian cost base, but lacks new high-end devices outside its emerging markets franchise. Apple looks set to claim 40% of industry profits in ’10, as other OEMs fight a brutal war of attrition, egged on by buoyant demand for fresh products at record low prices.

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Forget Defensive Driving

Our thesis for 2010 is as follows: unit volumes will rebound with 15% growth, with highly competitive pricing to keep volumes flowing. This will be driven by highly attractive devices at previously unimaginably low prices. Industry sales will also rise 15%, by $23bn, but half of the extra sales ($11bn) will be taken by Apple. Industry margins will remain under pressure from pricing and rising BoM costs. Every traditional OEM, smartphone pure-play, and new entrant are following individually rational strategies: improve portfolios, promise the moon to operators, and price to gain share. Those that fail to secure range planning slots at leading operators will develop other channels to market. Collectively, the industry is entering a period of desperation and dangerous self-belief. There are few incentives to exercise restraint for the likes of Dell (led by ex-Motorola management), Acer (the consistent PC winner at the low-end), Huawei and ZTE (which view devices as complementary to infrastructure offerings) or Samsung (where rising device units help improve utilisation of its memory and display fabs). Motorola and SonyEricsson must promote themselves actively, just to find sustainable business models on 4% share each.

Table 2 shows industry value; adjusted for the impact of Apple, it shows a continuous 4-5% decline in ASPs (though currencies also play a role). The challenge for mainstream OEMs (Nokia, Samsung, LGE, etc.) is to win back customers now exhibiting high loyalty after switching to iPhone or Blackberry. Excluding gains by Apple and RIM, industry sales are on track to fall 13% in ’09. Apple, RIM, Palm and HTC will collectively account for $15bn of our forecast incremental $23bn in industry sales in ’10E.

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Within this base, we see smartphones rising from 162m units in ’08 (13% of the total) to 304m units, or 23% of total ’10E shipments. At the same time, featurephone/mid-range units will drop by 21% in ’09 and 21% again in ’10.

Key Products for 2010

  • Both SonyEricsson and LGE have innovative Android models coming in 1H10, LG with distinctive designs and gesture input, and a new SonyEricsson UI and messaging method.
  • Nokia’s roadmap features slimmer form factors, but a range of capacitive touch models will not come until 2H10. It will update the popular 6300/6700 series with a S40 touch device in 1H10.
  • Samsung has its usual vast array of product, and plans for 100m touch models in ’10 underlining the extent of their form factor transition.
  • Motorola’s line-up will focus on operator variants, with a lead device shipping in 2Q10, but a number of operators think Motorola lacks distinctive designs and see little need for Blur.
  • RIM will not change its current form factor approach until 2H10, when it moves to a new software platform to enhance its traditional QWERTY base. It faces commercial challenges around activation and services fees with carrier partners.
  • We expect Apple to reach lower price points and also launch CDMA-based iPhones in ’10.
  • HTC must also reduce its costs to address mid-range prices.
  • Every vendor plans to widen its portfolio with several “hero” models in 2010; if anything the window to hype any single launch is narrowing.

Main Trends

Discussions with a wide range of operators, vendors and chipmakers about 2010 device roadmaps point to an explosion of attractive products – a few trends stand out:

  • Operators are now deeply engaging Chinese vendors. Huawei and ZTE have Android devices coming, while TCL and Taiwanese ODMs offer low-end devices. Chipmakers confirm Android devices will drop under $100 BoM levels by YE10. This will pressure both prices and margins. The value chain is shifting rapidly to more compute-intensive devices, with Qualcomm and others enabling Asian ODMs to be active in new PC segments with smartphone-like features (touch, Adobe Flash, 3G connectivity, etc.) in large-screen form factors, to leverage their LCD base.
  • All devices will become “smartphones.” Samsung and Nokia are opening up APIs for mass market phones. The smartphone tag (vs. dumb ones) will be applied to devices of all sorts, the way we formerly spoke of handsets. By the end of 2010, all devices (except basic pre-paid models) will be customisable with popular applications (e.g., search, social networking, IM, etc.) even if they lack hardware for video content (i.e., memory and codecs) or mapping (GPS chipsets). Open OS devices should rise 50% to 304m units, 23% of the total market.
  • Pure play smartphone vendors (RIMM, HTC, Palm) must transition business models to emulate Apple (i.e., linking devices with services and content). Launching lower-cost versions of popular models (RIMM’s 8520, HTC’s Tattoo, Palm’s Pixi) implicitly recognises how crowded the high-end ($400+) is becoming. This will get worse as Motorola and SonyEricsson seek to re-invent themselves with aspirational models, and Android devices hit mid-range prices in ’10.

Fearless Drivers

We had said before that key purchase criteria (design, features, brand) were reaching parity across OEMs, splitting the market into basic “phones” (voice/camera/radio) and Internet devices. The former has room for two to three scale players: Nokia, Samsung, and a third based on a PC-OEM model using standard offerings (e.g., Qualcomm or MTEK chipsets). LG and ZTE are both seeking this position, from which SonyEricsson and Motorola retreated to focus on Internet devices. This does not mean mobile devices are now commodities, like wheat or steel. The complexity of melding software and hardware in tiny, highly functional packages is not the stuff of commodity markets. But we see a split where a narrow range of standard hardware platforms will accommodate an equally narrow set of software choices. Mediatek is blazing a trail here. Some operators (Vodafone, China Mobile, etc.) aim to follow this model for pre-paid and mid-range featurephones. Preserving software and services value-add for consumers in a market where hardware pricing is fairly transparent is a challenge for all OEMs.

This model is not confined to the low-end: In Wipe Out! we said Motorola (among others) would adopt an HTC/Dell model (integrating standard chipsets/software and cutting R&D). This is happening, with Motorola no longer trying to control its software roadmap, having fully adopted Android. SonyEricsson is following suit, with initial Android devices coming in 1Q10.

Recent management changes make it even more likely SonyEricsson gets absorbed into Sony to integrate with content (as its new marketing campaign pre-sages). Internet devices will become even more fragmented by would-be new entrants in ’10. In addition to Nokia, Apple, RIMM, HTC and Palm, LG and Samsung intend to build a presence in smartphones, as do Huawei, ZTE and PC ODMs. We had expected LGE or Samsung to consider M&A (i.e., buying HTC or Palm) to cement their scale or get a native OS platform. We forecast the shift to Internet devices would bring 27m incremental units from RIM, HTC, and Apple in ’09E. This now looks like it will be 21m units (partly due to weaker HTC sales), a growth of 58% vs. an overall market decline of 6%.

Growth: Steaming Again

After a long string of rises in both units and industry value, the global handset market retreated in ’09. We see risk of a weaker 1H10 mitigated in part by trends in China (3G) and India (competition among new operators). The industry had already scaled up for 10-20%+ growth during the ’05-’08 boom; most vendors have highly outsourced business models and/or partly idle capacity, meaning they could produce additional units relatively quickly. Paradoxically, 15% unit and sales growth will further encourage aggressive efforts to gain share.

Our regional forecasts are in Table 3. Emerging markets are two-thirds of volumes in ’09E and ’10E, and will lead growth – at ever lower price points – as they adopt 3G. Market dynamics vary sharply between highly-subsidised, contract-led markets (i.e., the US, Japan/Korea, and W. Europe) and pre-paid-led emerging markets (China, India, E. Europe, MEA and LatAm). In the former, operators are driving smartphone adoption; while price erosion helps limit subsidy budgets, we see growth in handset market value. As Table 4 shows, mobile data handsets hit 10%+ of EU operator sales, but are not yet driving operators’ sales growth.

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In emerging markets, the growth in value is led by further volume increases for LCHs. In ’05, we saw an inflection point around Low-Cost Handsets: Every Penny Counts (July ’05) and A Billion Handsets in ’07? (Aug. ’05). Since ’05, there were 1.2bn handsets shipped in China and India alone. LCH chipsets now sell for <$5, with only Infineon and Mediatek actively supplying meaningful volumes. The ongoing mix shift to emerging markets and weak sales of mid-range devices in developed markets were behind the 13% decline in industry value in ’09E, excluding Apple’s sales. Of the extra 170m units we see shipping in ’10E, 105m come from emerging markets, with ~50m sold in China and India.

Costs: Relentless Slamming

In Wipe Out!, Arete laid out four areas where costs might rise in ’09 and beyond, as the source of structural pressure on industry margins. None of these costs are easing or receding. First, the chipset market is increasingly concentrating. TI is exiting, ST-Ericsson continues to lose money, Infineon recovered but still lacks scale in 3G, and Mediatek dominates outside the top five OEMs. This leaves Qualcomm in a de facto leadership position in 3G. This structure does not support meaningful cost reduction for OEMs. Intel may seek an entry to disrupt the market (see Qualcomm v Intel, Fight of the Century, Sept. ’09) but this is unlikely to happen until ’11. Memory may be in short supply in ’10, while high-end OLED displays still face shortages. Capacity cuts and losses at smaller component suppliers in ’09 limit how much OEMs can save. Outsourced manufacturers like Foxconn, Compal, Jabil, BYD, and Flextronics have low margins and poor cash flow. OEMs want to transfer more risk to suppliers that have little room to cut further.

Second, feature creep also thwarts cost reduction efforts: packing more into every phone is needed to stimulate demand, but adds cost. There are rising requirements in the mid-range, going from 2Mpx to 3.2/5Mpx camera modules, and adding touch, more memory, and multi-radio chipsets (3G, WiFi, BT, FM, etc.). Samsung already offers a 2Mpx touchscreen 2G phone for <$100 on pre-paid tariffs.

Third, software remains the fastest-rising element of handset costs. In Mobile Software Home Truths (Sept. ’09), we discussed how software was adding costs, but how many OEMs were struggling to realise value from software investments? Adopting “licence-free” or open source software does not necessarily reduce these costs: it must still be managed within industrial processes. Yet saving licence costs will be the argument used by OEMs forced to limit the number of platforms they support, as Samsung did by recently indicating it would abandon Symbian. We understand WinMo efforts have been largely mothballed at Motorola and SonyEricsson, even as LG is increasing its spend around Microsoft. Costs are also rising for integration of services, while Software costs are not falling; vendors are just shifting them from handset bill-of-materials (BoM) to other companies’ R&D budgets.

Finally, marketing costs are also rising. Vendors must provide $10m-50m per market of above-the-line marketing support and in-store promotions, to get operators to feature “hero” products. Services adds costs for integration and (often-overlooked) indirect product costs (testing, warranty, logistics, price protection in the channel). SG&A must rise to educate users about new services. OEMs cannot retain or win customers in a mature market without more marketing.

The case for services remains simple and compelling: Nokia’s 33% gross margin on €65 ASPs yields €22 gross profit per device, or €1/month over a two-year lifetime. This is the only way to offset further pressure on device profits. The drive to launch Services is another cost OEMs must bear, with a longer payback than that of 12-18 month design cycles for devices.

Margins: Beyond Fender Benders

When Motorola has lost $4bn since ’07 and SonyEricsson may lose as much as €1bn in ’09, we are no longer talking about minor dents. Gross margins for both are already low (sub-20%). The most notable feature of the past few years was how exposed some vendors were when extensions of hit products (or product families) fell flat. SonyEricsson went from 13% 4Q07 margins to breakeven by 2Q08, and RIM saw group gross margins drop 1000bps. Only Nokia (at 33%), RIM, Apple and HTC have gross margins above 30%. Few OEMs managed to raise gross margins after seeing them decline, though we see SonyEricsson and Motorola seeking to do so by vastly reducing their scope of activities.

Having an Asian low-cost base is a necessary but not sufficient condition of survival. Nokia is already the largest Asian producer, with the industry’s two largest plants (in China and India) giving it the lowest cost structure (i.e., the lowest ASPs, but consistently among the highest margins). Few OEMs other than Nokia make money selling LCHs (i.e., sub-€30). Nokia made ~60% of industry profits in ’08, but will be surpassed in profits in ’09 by Apple, which should make 40% of industry profits in ’10, while Nokia has 25%. It is also worth noting that we forecast margins to fall at nearly every vendor in ’10, though Motorola and SonyEricsson must end large losses, and Nokia will benefit for IPR income within its Devices margin.

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Software: Mutual Destruction?

The mobile industry is rapidly adopting the IT industry’s software as a service (SaaS) model. The handset is becoming a distribution platform for services and content; vendors aim to monetise a “community” of their device users. Yet for all the attention it gets, software is a means to an end, and not part of the product. Beyond RIM and Apple, only Nokia can afford its own smartphone platform R&D (i.e., Symbian), yet we see Nokia itself moving closer to Microsoft. Money alone cannot solve software or services issues; if so, Nokia’s industry-leading €3bn R&D budget would have yielded more success, while Apple would not have grabbed as much profit share with a $1.3bn group-wide R&D budget.

No vendor yet excels at ease-of-use for multiple applications (voice, SMS, music, video, browsing, navigation, etc.). RIM offers best-in-class messaging, but falls short in other use cases. The iPhone’s Web experience allowed it to overcome shortcomings in multi-threading and voice/text. Samsung has few services to accompany its sleek designs or high-spec displays and cameras. Just going to 70-100m touch-screed devices in ’10 will not resolve ease-of-use issues.

A number of vendors risk getting addicted to “free” software platforms where others reap the benefits (e.g., Android). Few OEMs have embraced regular updates of components (media players, browser plug-ins, etc.) to meet changing requirements. This is Apple’s edge (and in theory Microsoft’s, but it has not managed handset software efficiently). The current slowdown will only hasten moves to abstraction of hardware and software, long the case in PCs. What is the point of OEMs having their own “developer programmes” (e.g., MOTODEV, Samsung Mobile Innovation, SonyEricsson Developer World, etc.) if they adopt Android? To escape high software costs, some vendors are adopting a PC-OEM model: sub-20% gross margins, 1-5% R&D/sales, with little control over how services are implemented on devices.

When the Dust Settles…

After turmoil and consolidation in ’06, industry margins were robust in ’07, then plunged in ’08. Yet a hoped-for recovery in ’09 has given heart to a range of weaker players, sealing the industry’s fate.

Even with a resumption of growth, rising costs and hyper competition look set to put pressure on margins. The precipitous impact of this may not be seen until 2011; for now, managements are not inclined to call it quits, or admit they lack a services or software play. The handset market is hardly gone ex-growth, but its rules and value chain are shifting, as seen in Apple and Google staking their claims.

The market looks to be falling less than the $11bn we forecast for ’09 (“only” $9bn), but it is Apple’s incremental sales that are changing the dynamics most. We are no fans of M&A, but would welcome moves to remove industry capacity. There are few obvious options, beyond HTC and Palm. We also think Samsung and LGE would benefit from deals that might open up their insular corporate cultures. Nokia has showed how difficult it is for an OEM to assemble a portfolio of Services offerings: none are yet best-in-class. Our verdicts on the key questions for vendors are listed in the following table: We see room for two to three scale players in LCHs/feature-phones (Nokia, Samsung and one other following a PC-OEM model). Smartphones will grow even more fragmented and hotly contested. We are not certain whether the others – SonyEricsson, LGE, Motorola, ZTE, HTC, and Japanese vendors – will emerge from 2010 in one piece.

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Richard Kramer, Analyst
Arete Research Services LLP
richard.kramer@arete.net / +44 (0)20 7959 1303

Brett Simpson, Analyst
Arete Research Services LLP
brett.simpson@arete.net / +44 (0)20 7959 1320

 

Regulation AC – The research analyst(s) whose name(s) appear(s) above certify that: all of the views expressed in this report accurately reflect their personal views about the subject company or companies and its or their securities, and that no part of their compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

Required Disclosures

For important disclosure information regarding the companies in this report, please call +44 (0)207 959 1300, or send an email to michael.pizzi@arete.net.

Primary Analyst(s) Coverage Group: Alcatel-Lucent, Cisco, Ericsson, HTC, Laird, Motorola, Nokia, Palm, RIM, Starent.

Rating System: Long (L), Positive (+ve), Neutral (N), Negative (-ve), and Short (S) – Analysts recommend stocks as Long or Short for inclusion in Arete Best Ideas, a monthly publication consisting of the firm’s highest conviction recommendations.  Being assigned a Long or Short rating is determined by a stock’s absolute return potential, related investment risks and other factors which may include share liquidity, debt refinancing, estimate risk, economic outlook of principal countries of operation, or other company or industry considerations.  Any stock not assigned a Long or Short rating for inclusion in Arete Best Ideas, may be rated Positive or Negative indicating a directional preference relative to the absolute return potential of the analyst’s coverage group.  Any stock not assigned a Long, Short, Positive or Negative rating is deemed to be Neutral.  A stock’s absolute return potential represents the difference between the current stock price and the target price over a period as defined by the analyst.

Distribution of Ratings – As of 15 October 2009, 10.8% of stocks covered were rated Long, 6.8% Positive, 25.7% Short, 10.8% Negative  and 45.9% deemed Neutral.

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Full Article: Mobile Software Platforms – Rapid Consolidation is Forecast

Summary: New analysis suggests that only only three or four mobile handset software platforms will remain by 2012. 

AreteThis is a Guest Briefing from Arete Research, a Telco 2.0™ partner specialising in investment analysis.

The views in this article are not intended to constitute investment advice from Telco 2.0™ or STL Partners. We are reprinting Arete’s Analysis to give our customers some additional insight into how some Investors see the Telecoms Market.

Mobile Software Home Truths

Wireless Devices

famer%20and%20wife.jpg

Amidst all the swirl of excitement around mobile software, some dull realities are setting in.  As the barn gets crowded with ever more exotic breeds (in alphabetical order: Android, Apple OSX, Blackberry, LiMo, Maemo, Moblin, Symbian, WebOS, WindowsMobile), there is a growing risk of fragmentation and consumer confusion.  We see some unglamorous “home truths” about mobile software getting lost in the weeds.

 

Few, if any, vendors make money from mobile software.  Microsoft makes $160 of gross profit per PC while mobile software is moving royalty-free. The few pure plays (like Opera) rely on sales of services around their software.  Mobile software only gets leverage from related services (often a single one).  These must be tightly linked to devices, e.g., e-mail (Blackberry), e-books (Kindle), music (iTunes) or gaming (XBoxLive), with resulting communities controlled by their choice of software; few services work equally well on all devices (e.g., search, YouTube).

 

AppStores are not (yet) content stores. OEMs must link themselves with cloud services (like Motorola’s new BLUR platform) or offer their own (e.g., ITunes, Ovi, etc.).  Individual developers find it hard to make money through AppStores: if even one were making $10m in sales, it would be widely publicised.  Exclusive or “sponsored” applications like navigation or content-like games should fare much better.

 

We see room for only three to four platforms by 2012.  The pace of innovation, R&D cost, and need for customisation (for hardware, operators and languages) invites consolidation.  Supporting OEMs and reaching out to developers is costly and labour-intensive; only over time might HTML5 browsers supplant device-specific applications.  No platform is so productised as to simply hand over to licensees (be they OEMs or operators).

 

Every smartphone will support one (or more) AppStores.  We do not know how many services or what content AppStores 2.0 might offer, or how they will be made relevant to consumers.  The most popular applications should work on every smartphone, even as some devices (like INQ) are optimised for versions of Facebook, Amazon, Twitter, Skype and other popular digital brands and services. AppStores may help OEMs build relationships with users of those services, though both vendors and operators will try to control billing.

 

All phones are becoming smart.  So-called smartphones get attention as a growth segment in a declining handset market, but “dumbphones” (using proprietary software like Nokia’s S40, Samsung SHP/TouchWiz or LG’s S-Class) are getting more sophisticated.  The costs of the two are converging. Featurephones will soon also support AppStores and Internet services.

 

Table 1: Platform Penetration

 

’09E

’11E

 

Symb. v9.3+/S60

~110m

~240m

S60 goes mid-range

Apple OSX

~30m

~120m

Incl. iPod Touch

B’berry OS 4.5+

~40m

~80m

Doubling OS base

Android

<10m

~80m

From >10 OEMs

WinMo 6+

~10m

~50m

Transition to Win7

Palm WebOS

<5m

~15m

Limits w/o licensing

LiMo

<5m

~20m

Platform for LCHs

Source:  Arete Research estimates. 

 

Hard Graft

The costs for developing and maintaining complex software platforms are increasing.  There are no shortcuts to the sheer volume of work, especially in building on legacy code bases and supporting operator requirements, or developing language packs.  Every platform faces significant roadmap issues. Some handset OEMs are building adaptation layers to port a range of applications to their own branded UIs.  Just supporting multi-core chipsets for handling streaming or managing financial transactions needs additional processing power to deal with security and viruses.  Yet it requires software re-writes and poses power management challenges (i.e., tripling or quadrupling processing will drain batteries faster).

 

We long predicted video would become as ubiquitous as voice, i.e., with devices designed around handling video traffic.  There are a wide range of solutions to cope with streaming video, including in software (i.e., Flash or Silverlight) rather than via hardware optimisations. Apple patented technology around adaptive bit rate codecs to handle streaming in its forthcoming iPhones.  All platforms need to support over the air (OTA) updates, embrace graphics-rich applications, handle HD content, and comply with an array of USB drivers and accessories.

 

It is also not clear whether application downloads are a novelty or a mass market phenomenon. Discovery and recommendation engines need to be improved on most platforms, and marketing must focus on what applications offer. The gap between legacy platforms and an over-the-air customisable user experience is a wide one, and will not be resolved by AppStores, fresh UIs, or moves to go open source. Widget and webkit technologies could bring similar UXs across multiple devices.  Most developers will not need access to lower layers or optimise applications for specific hardware.  Over time, HTML5 browsers could supplant device-specific applications (e.g., GMail runs on an iPhone as a web application, as does WebOutlook on Android), but OEMs are unlikely to embrace this approach.  This also does nothing to extend billing or allow for collection of detailed customer analytics.

 

At the same time, operators’ selection criteria are moving from form factors to user experiences.  Operator UX teams now number in the 100s of staff, even if they fake a fragmented approach: Vodafone-subsidised devices currently support Android Market, Blackberry AppsWorld, OviStore and iPhone AppStore, and runs its own developer programme (Betavine). Few telcos develop native applications, but mostly use ones that run in Java, Webkit, Widgets, etc. Only a few (e.g., Verizon Wireless) offer customised UI.

 

While Apple and Google get the most attention (as pioneers of the AppStore concept, and for providing a shop-front for the open source community), Nokia and Microsoft have pivotal roles to play.  Both offer unprecedented scale (in handsets and computing software), even if both are fast followers.  We do not see Nokia’s commitment to Ovi or Symbian wavering. Though Microsoft’s successive versions of WindowsMobile failed to get traction beyond 10-15m units p.a., we expect a renewed push around Windows7 in 2H10. The MSFT/Yahoo search deal could be a blueprint for closer collaboration with Nokia. With its resources (a $9.5bn R&D budget) and assets (enterprise installed base, XBox, HotMail, and Bing), Microsoft could offer handset OEMs revenue share deals. LGE already committed to ship 50+ Windows models by 2012.

 

Figure 1: Product Differentiation?

arete%20mob%20soft%203%20nov%202009.jpgSource: Arete Research.

Content, Not Applications

An AppStore is not a content store, yet.  The next battle will be to add intelligence and filtering to AppStores, and tightly integrate content with platforms (as with iTunes, Kindle, Zune HD, or Comes With Music).  There are limits to how many applications consumers are likely to use, whereas there is a wide range of content to access via mobile devices.  To handle this, mobile devices also need integration with home CE/PC products. Samsung, for one, aims to provide “three screen” offerings spanning TVs, PCs, cameras, and handsets. There will be efforts by Sony, Apple, Samsung and others to make a single harmonised software platform that spans a wide range of video-capable devices.

 

Figure 2: Putting Software at the Centre of a CE “User Experience”

arete%20mob%20soft%202a.jpg

Source:  Arete Research.

 

With multi-radio (e.g., 3G, WiFi and Bluetooth) integration and voice recognition, mobile devices could become a control point to reach “virtualised” content.  This is a longer-term “cloud computing” angle to mobile software, handling access to and storage of personal content.  OEMs will need to offer tight integration with cloud services, or offer their own “stores of content.”

 

Apple and Google designed platforms with PCs in mind, and drew developers from the vastly larger desktop world.  They benefit from programming in AJAX, whereas Symbian uses a range of older object-oriented languages.  Yet in both handset and PC worlds, OEMs, not developers, create devices.  They are the gatekeepers for software and AppStores, managing the flow of any OTA updates that might alter the UX.  Adobe has provided a good model, with regular updates of its popular Flash and Acrobat software.  Yet user expectations of handset stability will get re-set if devices regularly need updates like PCs do.

Too Much Choice?

The number of companies vying to become the platform of choice is staggering, and itself a problem. Beyond the ones we discuss below, we can add Intel (with its Moblin effort), Palm’s WebOS (which remains device-specific) and the range of Linux variants (like the Nokia-sponsored Maemo, LiMO, and components developed under the OMTP).  The latter shows how limited group initiatives have been: OMTP involves VOD, TMOB, TI, TEF, AT&T, and others, but all of these compete for exclusivity with operator-subsidised devices that will never be OMTP-compliant.  None of the above options are yet mass market (i.e., likely to top 10m+ units in ’10).  Just to confuse matters further, there are other applications environments (e.g., BREW) as well as “component” vendors like Opera, Access, and Adobe.  We look at leading platforms below:

 

Apple’s OSX

Apple excelled at innovating around the UX and using animation to mask some of the iPhone’s early weaknesses (lack of multi-threading, slow image processing).  Apple’s marketing anticipated the market’s direction with its focus on applications, and Apple’s PA Semi unit will help it be first to market with multi-core processing (supporting streaming video).  Apple is still attracting developers with the clarity and simplicity of its SDK, and by testing and proving in each layer of stack via PC products.  We expect OSX to be extended to CE products, and also for Apple to bring AppStores to the PC.

Google’s Android

For a two-year-old platform, Android got ample OEM support, following up its G1 (a.k.a. the Android Developer Phone) with subsequent releases Cupcake/Android v1.1, with the Éclair release being v2.0. Android aims to be binary forward compatible, i.e., existing applications written for G1s will run on new devices without modifications.  Developers create Android Virtual Devices with the SDK to run applications for a range of devices. Development and emulator debug time is far shorter in Android compared with Symbian.

Despite OEM support, Android’s governance remains fuzzy.  Android is open-sourced licensed, but not an open source project: a small (~300 staff) team controls the developer ecosystem and Android Market distribution. It has not productised source code or offered post-sales software management tools, and has limited support for operator-compliant packs, libraries of hardware drivers, and language variants. Some developers say Android is slow to respond to change requests and to accept code modifications.  In exchange for access to Android Market, Google requires OEMs to bundle Google Apps and supply usage analytics from devices.  One key commercialisation partner, WindRiver, was bought by Intel, while another, Teleca, started an Android Feature Club to resolve common integration issues.  Android’s end-game is unclear: is it a hedge against Microsoft or Apple controlling end-devices?  A Trojan Horse for Google services?  Or will it become an independent company with license fees?  If operators don’t need devices “with Google,” then Android may fragment into many custom UIs.

 

Nokia’s Symbian

After a decade under a shifting set of parents, the rump of Symbian was bought by Nokia and made an open source project, including Nokia’s own S60 UI.  Symbian/S60 was initially developed for phone functions, and saw limited traction for downloads under cumbersome tree and branch menu structures. Many developers feel Nokia/Symbian offers too many choices (native Symbian code, J2ME, FlashLite, Web runtime and Python), each with limitations and compatibility issues. The S60 browser is based on webkit, but lacks HTML5 support.  Nokia’s decision to open source Symbian/S60 has stalled its development, as Symbian re-writes and tests third-party software in its 40m line code base.  It will be difficult to make major improvements to Symbian (i.e., to support multi-core processors) during this process.

 

When Nokia ships Direct UI in mid ’10, Symbian will effectively break its backwards compatibility.  Whether it also moves to a completely new release (v.10 from v.9.6) is still open. This may alienate developers that have to re-develop for a new platform and comply with Nokia’s new Direct UI (based on QT).  They also must resolve whether Symbian horizon is sufficient as a publishing tool, or if Nokia can get other OEMs to use OviStore, which still lags rivals on many fronts.  Nokia hopes Symbian will present a credible alternative to Android in mid-2010 when it is fully open source/EPL licensed, with Nokia assuring a large market.

 

Microsoft’s Windows

Windows Mobile 6.5 traced a long evolution from the Pocket PC OS, but still uses an older WinCE 5 kernel.  Microsoft recognised its failings by bringing in new management for Mobile, acquiring Danger (designers of the Sidekick device), and engaging LG as a mass market OEM alongside long-term supporter HTC.  We see 6.5 as simply a stopgap solution until Microsoft brings the innovation seen with its ZuneHD UI and leaner Win7 platforms to mobile.  Microsoft is also offering its software in a reference design called Pink, and may tweak its long-held license fee model with PC-like terms (rebates, discounts and marketing support). This may gain traction among Chinese OEMs, after Taiwanese and US OEMs failed to ramp WinMo to volume.  It is too early to rule out a now-dormant Microsoft, given its scale in computing and revival with Win7.

RIM’s Blackberry OS

In a world moving more “open,” RIM keeps its OS development in-house, stressing the need for security and compression. Yet RIM must evolve the BlackBerry’s UI and bring more developers to its AppsWorld platform, as well as open up its charging model beyond PayPal to embrace operator billing. BlackBerry’s application environment works on a J2ME framework with proprietary extensions, which adds fragmentation and compatibility issues. However, the security and bandwidth compression so valued by enterprises may limit performance for consumers, as applications traverse its NOCs via RIM’s proprietary browser.  RIM’s premium pricing still relies on its messaging franchise, which faces challenges from ActiveSync and efforts to bring push e-mail to mass market price levels. Rivals may not match Blackberry’s UX, but some segments may be less sensitive to RIM’s security and delivery than the price of handsets.  While RIM stresses incremental upgrades for its AppsWorld, we hear they are undertaking an extensive OS re-write to support new multi-core chipsets.

 

Down to Earth

This space gets too much attention for the revenue it directly generates.  Mobile software is a means to an end, and the end is selling devices and Internet services.  The cost of development will narrow the number of platforms by 2013, but not before the sheer number of options bewilder consumers who know about them and frustrate others wishing to get simple access to specific content. Given how rapidly key hardware costs are falling, and how sophisticated mid-range software platforms are becoming, all phones will become smartphones of some sort. Who wants to own a dumbphone?

 

AppStores will evolve to offer a range of content and services, with a major battle brewing over billing and data on consumer usage.  Every device will support some AppStores and work with a range of Internet brands and services.  Some content will be packaged and tightly linked to specific devices.  The Holy Grail in all this mobile software will be its extension to ranges of other CE products.  There is ample reason to scoff at the hype around mobile software — for its marginal economics and inevitable fragmentation — but no doubt as to its future role as a control point for more valuable content and Internet-based services and brands.

 

 

 

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