A decade ago, when the iPhone was just a twinkle in Steve Jobs’s eyes, few could imagine that the dull, uninspiring telecommunications industry of yesteryear would revolutionise the world in the 21st century. No one could have imagined how an online social networking service available on the phone could stimulate the Arab Spring and lead to regime change. And surfing the internet on a mobile – well, that was simply impossible.
But somewhere along the way, the impossible rapidly became the everyday, and telecoms became cool again – not just for twittering tweens, but for investors who recognised a lucrative revenue opportunity in a sector that’s now set to join automobiles, food and defence as one of the world’s few trillion dollar industries. The mobile revolution promises to be the most significant technological trend of our lifetimes: by 2020, the number of mobile devices (smartphones, tablets or car electronics) is expected to surpass 10 billion units; in comparison, the PC boom of the 1990s only sold hundreds of millions of units.
Of course, such a market commands fierce rivalry, with each mobile provider battling it out for a slice of the pie. And the competition is only getting hotter; earlier this year, Stephen Elop, chief executive of the now embattled Nokia brand, told staff that they were “standing on a burning platform,” with no choice but to jump into the “icy waters” below.
So what are the trends that will continue to drive growth and determine the battlefield landscape? What will firms need to do to stay competitive? And which firms will emerge victorious, and which will fall by the wayside?
A market of seven billion people
A key trend that will determine the success of mobile providers in coming years will be how they play the emerging markets opportunity.
Over the next five years mobile device subscriptions are expected to hit 7.1 billion, enough for every man, woman and child in the world. With developed markets heavily saturated, the emerging markets of Asia, Latin America and Africa will account for the majority of this growth, something that mobile phone providers have been buzzing about for a while now.
In 2000, developing countries accounted for approximately one quarter of the world’s mobile phones; in 2009, their share had grown to three-quarters. In Brazil, the number of mobile subscribers is expected to grow an astounding 39 percent between 2010 and 2015. Meanwhile, 60 percent of Spanish giant Telefonica’s sales now come from Latin America, while mobile connections in Brazil are expected to grow four-fold in the next decade and reach one billion by 2022.
Perhaps most astonishing is that within a few years, more than 40 countries will have more people with access to mobile networks than with access to electricity.
The emerging markets opportunity is obvious; but how to play it is less well known. Winners will be the mobile providers that recognise the differing needs between their customers in traditional markets and those in emerging markets.
Viva La Revolución
How a customer sees their mobile phone and what they want from it differs tremendously between the developed and developing world, something that Western firms have been slow to realise.
Phones are more valuable to those in poor countries as they provide access to telecommunications for the first time; access to a phone is a revolution rather than an incremental change. According to a recent report by The Economist, adding an extra 10 mobile phones per 100 people in a developing country boosts growth in GDP per person by up to 80 percent.
In rural areas where there is a lack of public transportation, mobile phones substitute for travel by allowing businesses to track deliveries virtually. Phones with SAP software, for example, can break down a buyer’s order without requiring an internet connection; orders can be done via bulk SMS, which can function with even the most basic mobile networks. In essence, applying mobile technology to traditionally labour-intensive activities boosts worker productivity. A customer therefore sees their phone as an investment, valuable for its utility and reliability.
In comparison, rich countries are more likely to prefer a smartphone that offers sophisticated features to build on what’s already available. Consider that while music downloads and mobile gaming are the preferred data services in developed markets, users in developing countries prefer to use their mobiles for agricultural advice, healthcare, and money transfers.
In the past five years, the battle-lines of the mobile technology war have been redefined, with home-grown mobile operators springing up in China, India, Africa and the Middle East, and challenging the previously dominant Western companies. Despite initially being seen as low-cost and low-quality producers, Chinese firms Huawei and ZTE have stolen market share from their Western counterparts, with subscriber numbers growing rapidly as networks in China and India are upgraded from 2G to 3G technology.
Local operators’ structures are different from their incumbent Western counterparts. In particular, nimble Asian firms such as Micromax and ZTE have mastered a business model which enables them to be highly profitable in servicing poorer customers, operating at higher margins than their larger competitors can afford to. Nokia, for example, has virtually been squeezed out of its own emerging markets space by local low-cost phone providers. The company recently made its second quarterly operating loss in a row, and as a last ditch attempt to resurrect itself, unveiled the Lumia 710 in October – the world’s cheapest Windows smartphone. Only time will tell if it will be able to pull itself out of the “icy waters” and back onto land. If Nokia’s plan works, it may just be able to shake up the smartphone duopoly of Apple and Android.
Of course, the success of telecommunications firms in emerging markets will also rely on their ability to recognise that people are aspirational. It would be dangerous to oversimplify the emerging markets opportunity by limiting products to fit today’s customer profile only.
As the middle class in developing economies grows, so too will the consumer’s penchant for more sophisticated products. Research in Motion (RIM) has cottoned-on to the value of the aspirational customer, maintaining the positioning of its BlackBerry line as the fashionable and slightly more expensive phone of choice. The company has had some success using this strategy, with Nigeria becoming one of its fastest growing segments globally. The firm has successfully weaved the brand appeal into the country’s social fabric; the local movie industry Nollywood has even made a movie, BlackBerry Babes, to capture the local youth’s fascination with the brand.
The need for speed
Beyond harnessing the potential of emerging markets, the winners of the new-age technology arms race will be those firms that are the most innovative in a post-PC world.
The convergence of numerous applications – from emails to maps to photos – onto a single mobile device has changed the landscape for technology firms by eroding the importance of the personal computer. It is predicted that by the close of 2012, annual shipments of smartphones will exceed that of PCs. The number of people using their mobile as the sole way to access the internet is expected to increase from 14 million in 2010 to 788 million by the close of 2015; an astonishing 56-fold increase.
This reflects a broader shift in the technology industry as a whole, with Western technology giants desperately trying to adapt to the changing shape of their industry. Mark Dean, IBM’s Chief Technology Officer in the Middle East and Africa, recently stated that the PC was destined to go the same way as typewriters and vinyl records, something he had “never expected” in his lifetime.
For Western power-brokers such as Microsoft, the downfall of the PC has created an inventor’s dilemma. Since the company came into existence, its value proposition has largely been in its Windows operating system; the company is practically wedded to it and up until now has been able to get away with simply rolling out a new version as the answer to every problem. For such a firm, it will be no mean feat to adapt to a world where the PC is less relevant, and it will have to uncover new revenue streams to stay afloat; since the start of the year, Microsoft is down nine percent.
However, Microsoft’s recent deal to provide the software for Nokia’s new Lumia line is a sign that the Western giant is, begrudgingly at least, trying to adapt to the new world order. How its operating system compares to Apple’s new iOS 5 system will make for interesting watching in the coming months.
The definition of innovation in the mobile space is quickly changing, and now goes beyond simply ensuring quick time to market.
It also means consolidating and buying up the intellectual property used to create a phone: everything from the design elements (Apple now owns the ‘slide to unlock’ patent on smartphones) to the operating systems (think Google’s very own Android system).
Apple leads the pack in this space, owning its entire phone ecosystem, from the design to the operating system to the software and the hardware. Of course, there is a big question mark hanging over whether Apple’s product innovation – largely rooted in its simplicity – can be maintained without Steve Jobs at the helm. While iPhone 4S sales topped four million within three days of its launch in October, it remains to be seen whether the company’s products will maintain their innovative simplicity and avoid the ‘feature-creep’ (the tendency for new and often unnecessary features which serve only to complicate design to be added to a product throughout development) which Jobs fought so hard against.
The importance of owning the entire bionetwork of product design has been recognised by other large players. Recent takeovers, such as Microsoft’s $8.5bn purchase of Skype and Google’s $12.5bn acquisition of Motorola Mobility were motivated by the need to build up patent stockpiles.
Patent wars are becoming increasingly fierce and the success of mobile firms will depend on how well they can navigate the prickly issues of litigation. The number of handset patent infringement filings to the US courts grew from 22 cases in 2006 to 84 cases in 2010. The speed of innovation has been blamed for the increase in filings, all of which involve an increasing amount of intellectual property as phones continue to add more features: from cameras and internet browsers today, to potentially credit cards in the future.
The latest round of patent wars has seen a number of the larger Western firms line up their legal ranks, including LG, Sony, Ericsson, Kodak and Nokia.
This is not to exclude Apple, however, which has so far been the most successful at protecting its rights through design-related lawsuits. It has filed lawsuits to successfully stop Samsung Electronics from selling its Galaxy Tab 10.1 tablet in the Australian and German markets. The Asian firm has since counter-filed in an attempt to ban iPhone sales in Japan and Australia, but has so far been unsuccessful.
Recently, Microsoft sued Motorola Mobility for use of video coding; the company is counter-suing over Microsoft’s implementation of email and messaging devices. Motorola Mobility is now being taken over by Google, which in turn is being sued by Oracle over Java programming in its operating system.
The heat over ideas and who owns what is perhaps best demonstrated by Steve Jobs, who stated he was “willing to go thermonuclear” over Google’s Android software, elements of which he claimed had been copied from the iPhone.
Victory is spelled survival
The complex web of patent infringements is likely to get more and more tangled as new products continue to be launched.
Mobile companies around the world seem to be heeding Chinese philosopher Sun Tzu’s advice from The Art Of War: “If you are far from the enemy, make him believe you are near.” With firms’ rankings changing almost as quickly as new products are launched, who is near and who is far in the technology race is still up for debate.
In the coming years, the most victorious firms will be those who know how to play the emerging markets opportunity right; those that innovate and iterate their way through a harsh terrain; and those that steer their course successfully through the complex web of patent wars.
Perhaps the late Jobs put it best when he spoke of Apple in 2001, before it had resurfaced: “Victory in our industry is spelled survival… the only way we’re going to survive is to innovate our way out of this.”