Jason Devitt

Another week, another laughable announcement from a major carrier: I will be able to watch a handful of videos from YouTube on my Verizon phone. Videos carefully screened by Verizon. If I sign up for their $15 per month VCast service. Wonderful. Meanwhile carriers have made it even harder to do something as simple as forwarding email alerts to your own employees via SMS, even if your company is paying for the phones.

Imagine if there were only four major Internet Service Providers in the US. Now suppose that most of the time you had to buy your PC from your ISP - even if you were General Motors or McDonalds or the US government. What kind of PCs would you expect your ISP to offer? What kind of services? And at what price?

The correct answers are ‘crippled’, ‘Soviet’, and ‘too much.’  It would be infuriating. But this is precisely how the market for mobile phones operates in the US and Japan today, and the rest of the world is not much better off.

What will it take to break the carriers’ hold on the market?

Most of my peers believe in some form of technological Manifest Destiny: that change is inevitable, that carriers will see the light or be swept away, that the brave warriors Linux and Ajax will march around the Walled Gardens seven times blowing their trumpets and lo, the mobile Internet shall be ours.

For my business, I care about when and if this is really going to happen, and so I am trying to think about the market forces that may lead to it. I’ll break this up into several posts. Thoughts and comments very welcome.

(1) More Competitors. Please.

The more carriers the better. Competition has driven the cost of long-distance phone calls in the US to near zero. But that took a hundred years and unlike Skype two guys in a garage cannot launch a nationwide wireless network good enough to compete with a Cingular or Vodafone or KDDI.

‘Mobile Virtual Network Operators’ or MVNOs help a little. These are companies like Amp’d and Virgin that lease carrier networks and sell services under their own brands. They have shamed the larger carriers into improving services and trimming prices. But starting an MVNO is like sub-letting your apartment; tenants may prefer dealing with you but you will never put your landlord out of business this way. ESPN and easyMobile have already given up.

New technologies can enable new entrants. There are two WiMax networks planned in the US, but one of those is Sprint’s, so that means net one new entrant this decade. (Estimated cost of building a nationwide WiMax network: $5 billion.)

WiFi? No one can live on WiFi alone. As Roger Entner from Ovum says in this New York Times article, “Everybody who tries a Wi-Fi phone will get down on their knees and thank the wireless phone people for the good job they’ve done on coverage.” As well as spotty coverage and calls that drop even when you are stationary, WiFi drains batteries faster. Hybrid WiFi/cellular handsets actually help the carriers - they get to offer better coverage indoors without building any new towers and they can shift traffic off their own networks. The best we can hope for hope is that customers in turn will shift to lower-priced plans, squeezing carrier revenues.

(2) Market Saturation

The good news is that even without any new competitors, there can still be increased competition.

For twenty years, mobile operators enjoyed continual growth; prices fell every year, but this drew so many new first-time customers that total revenue kept going up. Investing in the network and keeping suppliers and vendors in their proper place was never a problem. Carriers that were modestly successful got bought by carriers that excelled. Failure was rare. 

Now in most developed countries there are at least seven mobile phones for every ten people, which means that pretty much every adult has a phone. In countries like Taiwan the ratio exceeds 100% - almost everyone has a phone and many have two.

This raises the cost of a marginal subscriber; operators have to steal customers from each other or persuade their current customers to stick around and buy more services.

Anything that cuts into revenues or margins forces carriers to rely more on their partners - handset vendors, software companies, content providers, Google. And that is good for all of us.

More to come … stay tuned.

The Carnival of the Mobilists is a weekly roundup of the best writing online about the mobile data market. Each week it’s hosted at a different site - like a traveling carnival. Thanks to C. Enrique Oritz for including my post "Content is the Cup Holder" in this week’s Carnival. If you follow the mobile market, you should definitely read some of the other pieces, particularly Andreas Constantinou on operator strategy.

Photo by violets and handshakes

Why do carriers care about content for mobile phones?

As eMarketer pointed out in an article last month, mobile content is a $20 billion niche in a trillion-dollar industry. That is more than enough to get entrepreneurs and investors excited, and a lot of people have already gotten rich selling ringtones and games. But from the carriers’ perspective, it is 2%.

True, the market for mobile content grew by one third last year. At that rate it might get to be 10% of carrier revenue five years from now, depending on how quickly voice revenue declines. How much time do you spend thinking about products that might represent 10% of your revenue in 2011?

“I thought that mobile data revenue was already much higher than that,” you protest. Yes, but:

mobile data = content + messaging + internet access

Messaging includes SMS (text), MMS (pictures), IM, email, video calls, and whatever is to come; internet access means means wireless connections for laptop computers. Right now messaging brings in three times more revenue than content and still has plenty of room to grow. 3G modems for laptop internet access are very new but the coverage is so much better than WiFi that some people have ditched WiFi altogether. Messaging and internet access explain how mobile data got to be 14.1% of total revenue at Verizon Wireless. Messaging alone explains how the Philippines just became the first country in the world to see data revenue overtake revenue from voice.

Mobile content (games, ringtones, TV, maps, music, location-based services, and everything else) is much less important. Moreover, content must be sourced; dozens of technologies are involved and hundreds of business relationships must be managed; and everyone wants a cut. That makes content far less profitable than messaging or access, for which marginal costs are negligible. So why do carriers care about content at all?

One reason often given is that some category of content is going to break out and generate a hundred billion dollars in revenue. Before the telecom bubble burst in 2000, this was how European carriers explained the prices that they paid for 3G spectrum. But those investments have long since been written off and forecasts for mobile content are today quite modest. Carriers no longer have to be seen putting a lot of effort into content in order to justify their stock prices.

In my view the real reason that carriers care about content is that content is to mobile phones as cup holders are to new cars.

27% of car buyers in America would consider switching make or model to get the perfect cupholder. And no, it’s not just Americans anymore.

This is rational behavior. Once you’ve decided that you want, say, a two-seater car for the city or an SUV, there’s very little to choose between the dozen models available except for details like cup holders, keyless entry, a telescoping steering column, or a power outlet on the center console.

Consumers choosing a wireless carrier care most about price, handsets, and in the US, coverage. But in most countries there is very little to separate the leading carriers. Enter mobile content. When a customer is standing in Radio Shack or Carphone Warehouse trying to choose a new carrier, one rock star, one new game, one favorite TV show might make a difference. Carriers use content to sell voice.

Why is this important? Because if you are in the business of developing content for mobile phones, this explains a lot of carrier behavior that otherwise seems irrational or unsustainable.

• They don’t pay attention when you say that you can increase their ARPU, because you can’t

• They will market a category - say games - but over time they have no interest in helping you to sell your content, because the success of your business can never make a difference to theirs
• They care about brand-name content, even if the application sucks
• Brands like American Idol and Disney pose no threat to the carriers’ business; brands like Google do
• A three-month exclusive may be worth more than three years of revenue from non-exclusive content
• If they marketed games last quarter, they will not market games this quarter; they need something new
• A third-rate app that allows them to claim parity with a competitor is a higher priority than a first-rate app that customers might actually buy
• If you do start making money, they will cut your revenue share; allowing a content vendor to get powerful isn’t worth the risk
• Categories of content that are actually hard to add or might generate negative publicity are at the bottom of the list - think location-based services
• Mobile search is now necessary to help new customers find the content that made them buy the phone in the first place; having the best possible mobile search is not interesting
• Mobile advertising will be a bone thrown to content providers; it can’t possibly help carriers to sell phones

According to Gizmodo, Samsung has decided to exit the market for low-end phones, those old-fashioned devices that just let you make phone calls. They are unable to compete with the likes of Nokia. Meanwhile Nokia’s earnings are down 4% even as revenues grow 20%. So who is winning?

Five years ago I had a conversation with Shannon Maher about the future development of mobile phones. At the time most phones in the US did nothing but voice calls; most American consumers had never heard of SMS. Repeating the conventional wisdom in tech circles, I claimed that Moore’s Law would inevitably lead to ever more powerful and complex cellphones that would be like miniature PCs. Shannon surprised me with the first plausible argument I’d ever heard against this claim. [1]

He pointed out that for 20 years Moore’s Law had been driving the development of desktop PCs and mobile phones in different ways. PCs had gotten more and more powerful every year while staying roughly the same price. Mobile phones on the other hand had gotten smaller and cheaper every year without adding any new capabilities. Why wouldn’t this trend continue, he asked?

Shannon was right about the trend. But then two things happened. First, phones got so cheap that in the US, where carriers subsidize handsets to encourage people to sign up for long-term contracts, the price to the consumer reached zero. Second, almost everyone in the developed world who was ever likely to buy a mobile phone finally bought one.

If phones are essentially free and everyone already has one, there are only two ways for carriers to grow their businesses. They can keep cutting the price of phone service to take customers from each other, or they can persuade customers to buy more powerful phones and new data services. Handset makers don’t have much room left to cut prices on low-end phones, so they too want to sell us more powerful handsets. Or they can sell phones for a few dollars each to people in the developing world and seek The Fortune at the Bottom of the Pyramid.

As the largest handset maker, Nokia bet on its economies of scale and has come to dominate the low end with hundreds of millions of nearly identical handsets. Much smaller rivals like Samsung could not compete. But every disadvantage is a potential source of advantage; because of their small size, Samsung, LG and others were more willing to do small runs of experimental handsets in hundreds of different configurations, with various combinations of color screens, cameras, keyboards, thumbwheels,
GPS receivers, Java, stored-value chips, music players, FM radios,
music players, 3D graphics engines, and memory. This was exactly the sort of expensive Darwinian process necessary to find out what consumers really wanted, and it is still going on.

Samsung briefly overtook Motorola to become the number two manufacturer in the world, but Motorola fought back with weapons that Asian manufacturers still haven’t mastered (and that a lot of people thought Motorola had forgotten): design and branding. Thanks largely to the RAZR, Motorola now has a ten percentage point lead on Samsung again.

Meanwhile Nokia still seems complacent about this vast middle of the mobile phone market. So do many of the entrepreneurs that I meet who want to develop applications and content for the mobile phone. Like Nokia, when they look to the future they look to smartphones, the $500 plus high-end devices powered by Symbian (or Windows Mobile), and they think that they just have to wait for consumers to catch up with them.

I am not so sure. While there are a lot of business customers for whom a smartphone makes sense as a low-cost alternative to a laptop, and a lot of rich consumers who just want to buy the most expensive phone on the market no matter what it does, the future of phones is being decided in the mid-market by Motorola and Samsung.

Despite their recent troubles - the loss of share to Motorola and the downward pressure on earnings caused by all that expensive experimentation - I think Samsung’s approach to the market makes more sense than Nokia’s. The future belongs to them. Or to LG, or Haier, or Motorola or whichever one of the dozen other players can best combine continuous innovation with design to own the mid-market.

And I see no evidence that what most people want is a miniature PC.

[1] ‘People don’t need that stuff’ doesn’t count. People didn’t need the wheel.

The big news from CTIA this week was that News Corp bought 51% (why not 100%?) of Jamba from Verisign.

I took this photo a little over a year ago in a small town called Fethiye in the south of Turkey. It was market day, and stalls were piled high with t-shirts: Mickey Mouse, Britney Spears, Homer Simpson … and Crazy Frog. Crazy Frog, one of a number of lunatic characters created by Jamba to sell ringtones, is not so well known in the US, but seems to be known in every corner of Europe. Jamba has done what no other ‘mobile media’ company has done - created original content that millions of people recognize and seek out. Even if it’s incredibly irritating.

If you want to be a big, rich, standalone media company, you have to own your own content or your own distribution. (Owning both may be a disadvantage. Fear of piracy caused Sony Music to block Sony Electronics from developing an mp3 player until it was too late to catch up with Apple.) Tom cannot build a major media company based solely around licensing Dick’s content and repackaging it for Harry’s channel.*

In mobile, you can’t own distribution, at least not yet. The carriers control what gets on to consumers’ handsets, and even if you market directly to consumers online you still have to defer to the carriers if you want to be able to bill your customers through their phones.

So if you want to build a mobile media company for the long term - as opposed to selling out early -  you have to own create original content. And so far no one has done this as well as Jamba.

Unfortunately, instead of investing more time and effort into developing new characters like Crazy Frog and new products to take advantage of them, Jamba seems to have spent all its time trying to extract as much money as possible from consumers through questionable marketing practices. I am sure that they did nothing illegal. But when regulators introduce new policies that are specifically intended to block your company’s business practices, and nobody comes to your defense, you have probably gone too far.

Jamba/Verisign never made sense to me. Shortly after the deal Verisign execs talked about shutting down Jamba’s direct-to-consumer business and concentrating on powering carrier-branded services. This would have been a better fit with Verisign’s other businesses, but barking mad.

Jamba/News Corp. does make sense. But I hope they do not treat the creative team at Jamba as a job shop, destined only to execute on whatever ideas come out of Fox in the US or UK (a 24-minute of version of "24" without Kiefer Sutherland that costs $10?). Because Jamba knows far more about creating original content for mobile phones than Fox does.

* Caveats:

(1) It’s a great way for Tom to start a media company - think HBO. But what made HBO big and rich was original content. (2) It’s a fine way for Tom to build a company whose revenues or profits are too small for Dick or Harry to care about - think lunchboxes. (3) It’s a wonderful way to build a big, rich company if Tom has a watertight patent on the process for repackaging the content. Gemstar tried this, but failed.

I got some feedback to my last post (and feel free to post comments, this is a blog after all) and have been doing some further research. Some new companies that strike me as ‘interesting’, because they have a novel product or a novel approach to the market or both include:

Obopay - a mobile payments system that people might actually use
Shozu - upload pictures from your cameraphone to your blog or favorite photo-sharing site, not the web site of your mobile operator
Admob - an advertising network for mobile phones that borrows from Google and Overture instead of Doubleclick
Musicgremlin - a music player that isn’t tethered to a PC or to your mobile operator

Obviously these are all consumer-facing companies. Any other suggestions? Right now I am interested in companies with innovative products and/or strategies, not new ringtone download sites, new games publishers, or - least of all - new names for old companies.

I have been away from the wireless Internet market for a little over twelve months; three spent planning our wedding, nine spent travelling the world. I checked in on sites like Moconews every so often, and I took a look at the services available in many of the countries that we visited, but for the most part I kept my distance.

Catching up now I am struck by how little has changed in the last year. Where are all the new startups?

About a year ago Tim O’Reilly wrote an excellent essay, What is Web 2.0, in the course of which he mentions "9.5 million citations" of the term on Google to illustrate how popular it had become. Today I see 57.5 million citations of the phrase "Web 2.0" on Google, and the list of so-called Web 2.0 startups has gone from the unwieldy to the unbelievable to the ridiculous.

On the other hand the list of exhibitors at CTIA has hardly changed at all in the last year.

Web 2.0 may be a bubble. But better to have bubbled and burst than never to have bubbled at all.