How Forces That Drive the Mobile Industry's Growth Also Threaten Its Future
The mobile industry is enjoying a remarkable moment in business history, one that ought to make executives from other industries look on it with envy. Thanks to the burgeoning popularity of smartphones, demand for mobile bandwidth is guaranteed to outstrip supply for many years to come. Mobile is where some of the world's most innovative and entrepreneurially rewarding companies are being created; the business sector hasn't seen such a hotbed for innovation since the early days of the Internet. Considering the steady growth of mobile in even the poorest parts of the world, it's fair to say that everyone, everywhere will soon be a mobile customer.
But for Terry Kramer, former regional president of Vodafone Americas, that is just the sanguine half of the precarious, best-of times, worst-of-times situation in which mobile carriers currently find themselves. Speaking June 1 at Wharton's San Francisco campus, Kramer told his audience how the same forces that are driving mobile's success are simultaneously threatening the industry's very foundation.
Kramer described life in a mobile boardroom as one in which executives perpetually worry about two macro trends: first, relentless demand and the accompanying need for expensive infrastructure build-outs, even while revenue growth slows; and second, becoming "commoditized" by the same devices and apps that are causing so much of the sector's current success. "They worry a lot about becoming dumb pipes," said Kramer, referring to a scenario in which mobile network operators merely provide the mechanics to connect a customer's phone to the Internet, rather than also offering games, applications or other services. "As soon as that happens, margins collapse completely."
Kramer's 20-year career in the mobile industry was capped by his heading up Vodafone Americas, where he was responsible for overseeing the U.K.-based Vodafone's 45% investment stake in America's Verizon Wireless. Vodafone is the world's second-largest mobile carrier, with market capitalization of more than $130 billion. (China Mobile, with more than 600 million subscribers, is the largest.)
Kramer retired from the company two years ago, and is currently entrepreneur-in-residence at the Harvard Business School, as well as the head of a number of non-profit groups. He was recently called upon by President Obama to represent the United States at the December conference of the UN-sponsored International Telecommunications Union, scheduled to be held in Dubai.
End of Vertical Integration
The basic challenge affecting mobile, Kramer noted, involves the end of the vertical integration that once characterized the industry. Carriers previously occupied all parts of the food chain, from making the devices to supplying all of the (mostly voice-related) services that customers used. Today, companies like Apple and Google are far more closely associated with device design than the carriers or even the traditional phone manufacturers. And Apple and Google, in turn, face competition for their hold on customer loyalty from popular app makers such as Facebook, which is perpetually being rumored to have its own mobile phone under design.
These new participants in the mobile market usually have entirely different cultural characteristics from mobile operators, whom they often view as slow-moving and overly interested in maintaining the status quo. "When I would talk with entrepreneurs and VCs, many would say straight out that they'd rather not have to work with operators," Kramer said. He added that there is even a new industry buzzword for companies that work entirely independently of mobile companies. Firms like Netflix are said to be "over the top" for the way they assume the existence of a mobile network but don't ever interact with it.
The high cost of staying in the mobile business, Kramer noted, is leading to a bifurcation throughout the industry, with just two or three carriers and handset makers prospering while the remainder continue to fall behind, their long-term outlooks uncertain. One of the most sobering statistics of Kramer's presentation involved global revenue growth rates for the mobile industry. While profit rates are high almost everywhere, revenue growth rates in the U.S. and Europe are surprisingly low. In Europe, for example, revenues basically aren't growing at all, while in the U.S., top line growth is at 8%, but trending steeply downward. In fact, Kramer said he expects the U.S. mobile industry to join Europe's as a no-growth market, at least for revenues, within five or seven years.
That reality is forcing any number of changes onto the industry. For one, it means an ever-important role for analytical data tools that will allow operators to squeeze the most revenue possible out of their limited customer base. Currently, the average revenue per user a month in the U.S. is $50, compared to $30 in Europe and about $5 in India -- where, Kramer said, mobile operators are profitable despite not only those low average rates, but with calling costs as low as half a cent per minute. One reason for their profitability involves the fact that several different Indian companies will pool resources to build out their networks, especially in rural areas, a trend that Kramer said is being imported into Europe. That is one of several business practices that he said mobile operators are bringing home from their overseas operations. Another he mentioned involves increasing the use of outsourcing for non-core corporate functions.
Mobile operators, according to Kramer, are responding to their situation with a number of strategic efforts to differentiate their brands, as evidenced by the ongoing advertising battle in the U.S. between AT&T and Verizon over who has the faster network. High-data volume users of mobile phones will be distressed to hear that Kramer was pessimistic about whether network quality in the U.S. will ever be as good as they would like. Not for at least a decade, he predicted, on account of ever-increasing demands for higher quality video. Kramer added that nearly every web experience in the future will involve some form of video; the item listing for something on Amazon, for example, will evolve from today's static image to a piece of moving video.
Smartphones for $50?
These "rich" mobile experiences won't be limited to the U.S. and Europe, where relatively expensive smart phones command much of the market. On account of the continuing improvements in computer technology signified by Moore's Law (the trend identified in the 1960s by Intel co-founder Gordon Moore, who noted that computing power tends to double each year), Kramer said he expects that within a few years, a phone with the capabilities of a current high-end iPhone or Android will be available in the developing world for less than $50. The advanced video features of those phones will place even more demands on developing networks.
That demand for video has caused mobile carriers to embrace and encourage "offloading," in which their users download data not from the carrier's system, but from the nearest Wi-Fi network. The practice might be considered unusual corporate behavior, in that companies are encouraging their customers to take at least a part of their business someplace else. But Kramer said that as soon as smartphones began gaining in popularity, carriers realized they had no choice but to encourage off-loading, lest their core voice networks freeze from excessive demand.
Kramer described another way that mobile carriers are trying to avoid the near-death experience of commoditization: By securing a toe-hold in new mobile phone markets, especially involving payments. Mobile phone operators, he said, are betting heavily on Near Field Communications, or NFC, technology, a small chip that can be embedded into mobile phones and allow them to operate much like credit cards by simply being waved near a checkout device. NFC gives mobile operators a crack at a percentage of the billions of dollars of sales that now flow through the credit card system. But precisely because the stakes are so high, such endeavors require contributions from all the usual suspects, including current payment providers and new social media companies, in whose social networks many future purchases are expected to be made.
When asked about his upcoming work representing the United States in Dubai, Kramer said that there was some concern in the West that countries like China and Russia might use the conference -- a technical session held every 25 years, and ostensibly dedicated to technical pricing issues -- as a vehicle to try to clamp down on an open Internet. But as Kramer had received his ambassadorial appointment only the day before, he declined to elaborate, saying he needed to first study up on the issues.