The Wireless Industry is Changing Before Our Eyes
There are moments in time where one can sense important shifts going on in an industry. I think now is one of those times in wireless. First, some historical context – what have been the other ‘big shift’ moments?
• Introduction of the portable phone (early 1990s) – made this the ‘mobile’ industry, not the ‘car phone’ industry
• Move from analog to digital (mid 1990s)
• Introduction of AT&T Digital One Rate – all but eliminated domestic LD and roaming
• First popular smartphones (mid-2000s) – starting with Blackberry and Palm Treo, culminating in the introduction of the iPhone in 2007
• Apple launching the App Store (2008)
• Launch of LTE (2011) – the first real ‘mobile broadband’ network
This particular shift is different, in that it is not rooted in the introduction of a signature new product or service or a major technical advance. On the surface, wireless looks like business as usual: the carriers are still raking in the dollars; the latest iPhones haven’t wowed but are still selling well; and the industry has started on a path toward the ‘Next G’.
So you have to read between the lines to see a developing trend. Just look at what has happened in 2016:
• Major operator moves. The mobile operators have realized growth in core wireless has slowed. Yes, IoT represents an important next area of opportunity but it’s going to take a while to get to those ‘billions of connected devices’. IoT is more a series of base hits than doubles or homers. As an example, total US wireless operator revenues from IoT (outside of tablets) are likely to be about 3% of total wireless revenues. Even if that grows 50% year-on-year for the next several years, investors want more. Which is why we’ve seen AT&T and Verizon aggressively expanding into new and adjacent areas of business in the hunt for top line growth and not betting all their marbles on IoT.
• A wave of acquisitions. In addition to Verizon-Yahoo (and three IoT companies) and AT&T-Time Warner, we are seeing a spike of acquisitions across the mobile ecosystem, including Qualcomm-NXP, Broadcom-Brocade, CenturyLink-Level 3, and a large number of smaller deals. A combination of consolidation and horizontal integration.
• Diminishment of hardware. The iPhone 7 is selling fine but, let’s face it – there has not been a new ‘must have’ phone since the iPhone 6 two years ago. Look at how hard it is for a smartphone OEM to gain share, regardless of how good the device is. The theme can be extended to the tepid reaction, in my opinion, to Apple’s new Macs, slowing tablet sales and the industry still figuring out how to blend the PC and the tablet where, ironically, much of the innovation is coming from Microsoft. It is really now about software and ecosystems.
• Layoffs and disappointing spectrum auction. Major industry bellwethers are going through a fairly painful round of layoffs: Verizon, Sprint, Qualcomm, Ericsson, Cisco, and others. Earnings last quarter weren’t so great and the lower than expected bids in the 600 MHz auction show that spectrum values might have peaked. At the same time, momentum toward spectrum sharing opportunities has intensified.
• The results at Facebook and Alphabet. A contrast to 3Q earnings in the core mobile business and perhaps the most jolting statistic: Facebook and Alphabet command nearly 70% of all mobile advertising.
These trends show we are now moving toward a new set of industry drivers and the emergence of some new players. Rather than one ‘mega-development’, such as the iPhone or launch of LTE, I believe the next phase of developments in mobile will center around five themes – maybe a bit different than the drumbeat around IoT and AR/VR that you have been hearing from other prognosticators.
1. Shifting Power Centers. This trend has been developing for some time. Leading operators are diversifying their business. Apple and Samsung are less dominant. Google, Facebook, and Amazon are innovating and ascending. Microsoft is coming back. Some of the hot Silicon Valley startups are about messaging and chat! In advertising, Verizon has its work cut out, but there is pent-up demand to break up the Alphabet-Facebook juggernaut.
2. Content. We are in the midst of a multi-year re-imagining of how content is developed, distributed and monetized. Mobile is poised to play an important role, especially in the development of shorter form, democratized content where the latest YouTube sensation can become a media star in a fortnight. A new/old player to keep your eye on here: Comcast (cue the eye roll). They are creating a new UI and ecosystem around the X1 Platform that others – notably Apple – have failed to do. Look at the softly launched Netflix integration on X1 and you’ll see my point. There has been some worry that network neutrality might get in the crosshairs of zero rating for video content, which is one way for wireless operators to gain some competitive advantage. We expect the Trump administration and a Republican-dominated FCC to either overturn net neutrality or tread very lightly.
3. The Rise of Artificial/Intelligent Assistants. This has its parallel with the rise of the mobile revolution, which was driven by the confluence of hardware, networks, processing, and app ecosystem. Here, it’s processing (per usual), cloud, big data, and voice-related technologies. We’re in the early innings of a re-imagined way in which we interact with devices – phones, TVs, and so on – and software/apps that are more proactive and do a much better job of talking to each other. This is one of the main reasons Google has intensified its push into the hardware business (Pixel phone, Google Assistant, Google Wi-Fi, Daydream VR headset and platform, new 4K Chromecast stick), with Google Assistant becoming more pervasive throughout the products.
4. New Network Economics. Leading network operators are in a race toward an evolved network. More agile and ‘internet like” is what you’ll hear AT&T’s John Donavan talk about when discussing ECOMP, which is AT&T’s new ‘network operating system’ it hopes other operators will adopt. Another important part of this is altering network economics, which I still think needs to be a bigger part of the discussion. Mobile networks are going to have to handle much more video traffic in the coming years and at a substantially lower cost per GB delivered than they do today. A related question is how fixed and mobile networks coalesce as we move toward 5G and to consider whether, circa 2020, households will still be paying for separate fixed and mobile subscriptions.
5. Back to the Future With Chat and Messaging. While the internet and telco giants work on their respective AI and SDN moonshots, the biggest thing in 2016 is turning out to be messaging and chat (here is a good piece in the WSJ from a couple of weeks ago by Christopher Mims). With apps getting into the game, these past few years have seen the messaging/notification world trending toward overload. Yes, these tools are becoming more important for workplace collaboration (Slack, Teams) but I think the longer game is about simplification and contextualization. And, over time, more functionality – paying for things, ordering things, predicting things – as an evolution from today’s app-driven framework that is starting to feel a bit cumbersome and stale. Uber’s new app provides a glimpse of where things are headed.
There’s no catchy term or moniker for this new phase because it applies to developments within the mobile ecosystem and to adjacent sectors that have a big effect on mobile. But these themes, added together, spell the biggest changes to the mobile sector since the iPhone/App Store/LTE perfect storm that emerged in the 2008-2011 timeframe and will define the mobile space for the next several years.