I have been thinking of this blog since the Mobile World Congress .. its taken a while to put all this together – especially the shift to selling services originating from Web and Mobile. Hope it provides some food for thought.
Motivations for upgrading devices: Commoditization vs. differentiation
The deployment of Skype on mobile devices has always been a contentious issue for Mobile network Operators. Recently, Skype was available as a downloadable application on the iPhone and it was a great success with the customers with One million downloads in the first two days.
iPhone Applications themselves are growing exponentially with the customers paying and downloading them and the iPhone expected to hit a billion downloads soon
Customers see iPhone applications as ‘Solving life’s little problems one app at a time’
Against that background, some Operators take a very limited view and block Skype(one of the most popular iPhone applications) even from their WiFi hotspots
In doing so, they are betting against the customer .. and while you can win battles(such as blocking on Hotspots), you lose the war(the customer itself ultimately).
I argue below that an Operator now desperately needs service level innovation to make money.
For starters, that’s where the money is in the first place – i.e. the market for feature phones is not that bright but the market for smartphones continues to grow even in a recession
By definition, people who buy smart phones are more astute commercially and technologically .. for instance they are reading this blog and seeing who bans their apps and why
There is a fundamental change in the Mobile data industry at the moment. Until recently, devices were very simple and mostly comprised only voice and SMS. In this scenario: supply chain efficiencies, lowest common denominator/mass market devices prevailed. Differentiation was achieved through price plans, device aesthetics etc. With the increasing proliferation of smartphones, devices are becoming more complex and sophisticated. Ironically, at one level – they are being commoditised i.e. the megapixels are no longer a differentiator since most devices are roughly similar. Nor is the network itself a differentiator since I expect good coverage at all places within reason. Also, with the uptake of Open source and other technologies, there are many more device manufacturers who are giving the customer greater choice. So, there are many devices and many more new ones to come.
In addition, you cannot charge for IP differentially since an extra charge would mean a higher level of service which the customer paid for and expects. So, the scenario is: Customer pays more for the high value session. Walks under a freeway. Loses connection. Sues Operator. If we are worried about ‘impact on helpdesk’ – then that’s a MUCH greater worry if you think you can get away with differential IP charging on mobile devices.
In any case, Network layer barriers cannot be a business model for almost all cases since the problem is:
a) Network layer interconnect is hard to achieve (SMS interconnect globally took about ten years).
b) The equivalent ‘best case’ service layer is easier to achieve at an interconnect level
c) Network layer interconnect is hard to sell in itself(see example above re walking under freeway and losing connection for which you paid extra) and the customer will always have a choice(or will not use the service)
d) Network layer functionality is easier to sell provided it is very simple(SMS)
e) Even modestly complex services tightly coupled to the network are not easy to create or to sell(think MMS interconnect, Video calling etc etc)
So, the customer likes to buy a service which is simple, predictable and in the case of the Web – not always perfect.
Which accounts for the popularity of Skype.
In any case, that’s just the way the Web/Internet works. No Operator or a group of Operators can change that because the customer has a choice and the customer drives the usage in any industry.
Thus, the result is:
When it comes to upgrades – today customers no longer want to upgrade for network connectivity or more megapixels etc. They want a step change. They want differentiation that they can understand and are already familiar with. This means services. Value created at the service layer (with deep integration to the network and the device) is valued by the customer.
There are of course other ways to create value within the supply chain – but the winners and losers will be decided at the customer facing end.
By services, we mean a mechanism that the user expects an ongoing application perhaps on a subscription basis. The business model for services is well known – for instance the fremium model where you provide a service for free but charge a premium for extra features. To use a common example – a dating site would charge no money to set up a profile but you would have to pay to see who viewed your profile.
With mobile services, we have a more complex equation.
The traditional way to classifying mobile services is a classic Telco only view i.e. look at the capabilities of a network, stick a service on top of it and pray that the services created from them will be useful to the customers(person to person video calling for example which never took off!)
So, How do we classify mobile services?
Some initial thoughts:
a) Firstly, You cannot ignore the Web when you speak of mobile services. The customers don’t and nor should you!
b) Services from markets are not easily transportable across to other markets. Yes, there are some learnings at an idea/conceptual level but the services themselves are not easily transportable across geography
c) Both networks and devices are evolving rapidly and deep integration of networks and devices with Web services will be a key area for the coming future
d) ‘Mobile’ meaning a mainly voice activated device that you can hold to your ear i.e. not a laptop!
So, with this background we can say:
There are four top level classifications:
1) The Web dominates the mobile (Web took off first)
2) Mobile dominates the Web (Mobile largely took off first)
3) Where there is no large scale Web/PC but mobile is emerging (Emerging markets)
4) Where there is neither Web nor Mobile for the foreseeable future (Antarctica!)
Leaving aside the penguins .. And focusing on humanity ..
Here is a further breakdown
1) Web dominates Mobile – example USA and Europe. In this scenario, we have
- Long tail application (appstores)
- Services that migrate from the Web to Mobile (Skype, Android)
- Services that migrate from the mobile to the Web (Ovi from Nokia)
- Services tied to the network: Identity and authentication
- Point to point QOS – ex video calling if customers buy it,
- Access network services (ex HSDPA) etc
- Network capabilities and enablers: Data as a service and various other capabilities which the network can use
2) Mobile dominates Web: Korea and Japan – Many examples here .. ex: Ringback tones etc etc
3) No widespread web yet across the market but mobile is emerging: Emerging markets: babajobs(India), mcommerce in Africa. A significant amount of innovation will be driven by emerging markets in future to advanced markets
These markets are behaving differently i.e. appstores still don’t show a lot of traction in India yet.
So, let us now focus on the markets where the Web dominates the mobile (ex: European and the North American markets and many Asian markets as well depending on broadband penetration)
Not all services are created equal
If we now focus on the markets that the web dominates, then there are two possibilities: The service can originate from the Web or the service can originate from the mobile ecosystem.
When I was at the Nokia booth for the Mobile world congress, I had a long conversation with a nice Finnish lady who explained me a new Nokia service called Green explorer. After listening to her politely for some time .. I asked her .. what is the connection of the service to Nokia / phones? Her reply was: Travellers were likely to use the service considering the Green issues. The service would span the Web and the Mobile.
This is all nice and good .. and as someone who spends a lot of time in airport lounges and airlines – the Green explorer should be of interest to me in theory.
But is it?
The reality is: Most frequent travelers like me use sites like expedia or ebookers.. The switching cost from such a service(credit cards, frequent flyer details etc) is simply too high to adopt a new service SIMPLY because it is mobile.
Which brings us to the second service announced by Nokia at the Mobile World Congress. The deep integration of N97 and Skype.
I cannot wait to sign up for this!!!
Why? Because it is a no-brainer. I already use it. All my contacts are already in it. If mobile(both Operator and device) makes it easier for me to use this service – I would happily sign up to it.
In fact, it is a key decision when the contract comes up for renewal. I could choose device and operator based on the availability of Skype. Combine this behavior with the analytical data from iPhone downloads and the projections of smart phones – then we see that Skype on mobile devices is either a great opportunity. It could also be a GREAT THREAT to the operators but not in the way they think i.e. the highest value customers could switch if they DON’T have Skype (or if Operators block it)
A caveat: Which service would be valuable coming from the device standpoint?
Before we explore this topic more , let us consider the converse situation i.e.
Which service would be valuable coming from the device standpoint?
To do this, you have to create a truly unique mobile experience. Here, the best example of such a service is again Ovi from Nokia. Not the Green explorer but rather from a more conceptual perspective. Nokia is positioning the Ovi platform as the first truly mobile ‘channel’ which just happens to have an appstore.
For instance, Nokia is working with Tim Kring the producer of Heroes and creating unique, immersive narrative content oriented for mobile which will be distributed via the Ovi store . This will be powered by technologies like point and find
which allows users to point their phone at physical objects, initially movie posters, and access related information and services on the Internet.
Again this is a service layer innovation and I see users adopting this channel.
If there is one thing the iPhone has taught us – it is customers value a great experience and will pay a premium for it. This is happening everywhere including the revival of 3D movies.
So, Ovi itself is on the right track in aiming to create a superior user experience for the customer.
The blind spot of seeing the world from the Telco perspective and ignoring the customer
In a previous long blog called Blind rent collectors The blind rent collectors: The future of journalism should not be confused with the future of newspapers ..
I discussed how newspapers had got too entrenched in their existing way of thinking – looking inside within their own industry and with their backs to the customer and to the wider changes going on around them. Often, Telecoms Operators also have the same view and instead of embracing the opportunity created by the change, they try to resist it. In doing so, they come into conflict with their own customer base. See this article as late as December 2004 which says that: Feature Phones Will Continue To Dominate Smart Phones
Feature phones dominate because they are(among other things) : Support the current carrier business model. revenue-generating services like Multimedia Messaging Service (MMS) and Video on Demand (VoD) can increase the average revenue per user for feature phones.
The last I checked, customers do not care about increasing the ARPU of the Operator.
The thinking illustrates how entrenched the current mindset can be – but also how quickly things change completely. This article was written in December 2004. The iPhone was launched in Jan 2007(sounds longer!) completely changing the ecosystem as we know it
Open mobile and the KT boundary – We have come a long way but we also have a long way to go
Much of the changes we discuss in relation to Skype are connected with the concept of Open Mobile. I have long been talking about open gardens(in mobile telecoms terms).
The OpenGardens blog was started in May 2005 and in this short duration, I have seen a major change from denial(On portal – portal discussions), to change (fixed rate charges) to enthusiasm for the word ‘Open’ to actual revenue from Open(HSDPA is a smart pipe strategy which we now accept) to even an Informa conference!(That’s when we know we have arrived! Ha ha!)
But seriously, we have come a long way as an industry
History will look at this narrow stretch of time between 2002(post dot com) to 2012 as the KT Boundary for the Mobile data industry.
In 2012 we will start to see significant deployment of LTE where Operators start to make money from the access network and thus realize that they can even make more money by enabling the applications ecosystem rather than blocking it
(Note: The K-T boundary is a geological signature, usually a thin band, dated to 65 million years ago. In geological terms, it signifies a narrow timeframe of mass extinction of an existing ecosystem – ex Dinosaurs – and the birth of a new ecosystem)
As this article from Wired magazine says: Open Mobile Internet Now!
Consumers and regulators would not stand for a DSL provider refusing to let a customer use an Apple laptop or stopping them from visiting YouTube or using low-cost calling services like Rebtel or Gizmo Project. But expectations aren’t the same when it comes to mobile phones, in part because the carriers have almost always been in control of the devices, bundling them with service plans. As a result, carriers have the motive and opportunity to add only the apps they like and hobble features they can’t control, such as WiFi chips.
This situation exists in large part because the Federal Communications Commission has never explicitly said whether its internet neutrality rules, known as the Broadband Policy Statement, apply to wireless networks. Those 1995 principles require cable and DSL internet providers to allow their customers to freely traverse the net, run whatever programs they like, attach whatever devices they’d like and have providers, app developers and content providers compete with each other.
Now that the iPhone has shown the U.S. that the future will be both wireless and wired, regulators will only face increasing pressure to step in and end the uncertainty.
But until then, carriers will continue to lock their phones, prohibit users from using devices not sold by them, shut off users for violating unwritten bandwidth caps, stifle innovation by banning apps from their phones, cripple their phones’ built in capabilities and outlaw services that compete with their own streaming media services.
Though Apple’s iPhone application store is controlled by capricious and authoritarian rules, it nonetheless stands as the mobile world’s best example of the value of openness. Apple initially locked out all third-party developers, but after its techie customers forced open the devices, the company finally released a software development tool kit. Now, Apple’s own marketing points to the wide selection of third-party iPhone software as among the device’s most valuable features.
This is a lesson in openness that the wireless companies have so far refused to learn.
Data is Data ..
Banning specific applications is hard to justify for the following simple reasons:
a) Data is data. With IP all you have is data. Specifically, there is no distinction between data tied to different formats like TV, Radio, Web etc. Once it is IP, it there are many ways to access it
b) Carriers already have caps on data in their small print. So banning specific applications for the reason that they affect network performance is not viable.
c) When carriers introduce their own VOIP applications, this will come back to bite them. LTE has no voice. So, LTE needs initiatives like VOLGA. That’s VOIP! So, VOIP is VOIP and data is data … Its all the same once its IP.
d) Finally, customers increasingly don’t see a phone. They see a communications device.
Extrapolating the Lessons from 3
But let me conclude by saying what I said at the start, Skype on mobile devices is an opportunity and not a threat. The one operator who launched Skype about two years ago in a big way .. did not report any drop in earnings. In fact, there seem to be benefits.
However, the data from 3 needs to be extrapolated in at least four ways to understand the true potential benefits to a Carrier : Catering for QWERTY devices, the iPhone effect, Wifi vs. cellular deployment for Skype and the inclusion of Skype Out.
As more devices like RIM Blackberry support Skype, we will see a greater competitive advantage shift towards an Operator who adopts Skype. The quantitative measures can be found by looking at the existing success (3 in the UK) and extrapolating to the current ecosystem
A wider study is also needed about how devices are being perceived and sold to customers and the familiarity of the store front salesman with the complexity. In other words, are Operators wasting their marketing budgets by trying to convince us things which we already take for granted (network coverage) or don’t understand and trust (complex price plans) when they could be spending those dollars in a recession getting people to understand how they can do more by selling services which are deeply integrated into the device and the network??
The deep integration of Skype into specific devices is now inevitable with Nokia, Blackberry and iPhone. The customers clearly want it.
Simple business logic would tell us that it is easier to sell to customers what they want. The quantitative benefits can be known as well considering the historical data.
The future may be radically different
Will device manufacturers choosing Operators become the rule – rather than the exception? – Will Operators compete for the best devices – changing the current model of devices deployed to many Operators?
In other words, the iPhone launch was an anomaly .. because it was launched as one device and one Operator.
Android has also taken a similar(slightly broader) route. That’s not the way devices have been launched prior to the iPhone i.e. you have same device (mostly) launched across many operators
So, we are seeing the start of something new .. Both in the case of the iphone and the android. i.e. will now see Palm PRE adopt the same model(start with one – or limited operators)
If I were to be more radical – can I even say that Nokia should also explore this?
The model itself is not so radical. But it is completely driven by the customer. The question to ask is: Will customers queue up overnight to buy the first true deep integrated Skype smart phone? I think so – based on the iPhone downloads
But this is a broader concept! ALL phones will be sold based on the services that they enable
We are seeing a major shift now ..
No longer is the OS etc etc a key differentiator and with increasingly larger number of (mostly Smartphone) devices – the device creates differentiation ..
In addition, the old supply chain efficiencies worked best for simpler devices in mass production.
Ultimately, customers will drive the change ..
They have a choice and they will be increasingly more choosy and a deep integration of devices and services will provide the differentiation
And we are living in the KT Boundary for our industry. It is a period of rapid change when the new winners will be decided(by the customer!)
For sure, this will be a topic of discussion.
Comments welcome as usual
Image source: http://sonyericssonatmec.files.wordpress.com/2009/02/iphone-o2-170209.jpg.