SMARTPHONES ON COURSE TO DRIVE A NEW "TRIPLE PLAY" OF WALLET - KEY -PHONE IN ONE?
May 2010
Joao Sousa, Partner
js@deltapartnersgroup.com
Andreas von Maltzahn, Principal
avm@deltapartnersgroup.com
Most people don’t leave the house without keys, wallet and phone.
In the not-too-distant future they might only look for one thing: their smartphone. A far-fetched scenario? Possibly, but innovation in the mobile industry is evolving fast as players attempt to overcome commoditizing voice revenues and try to realize the full promise of mobile data.
Phones go already beyond communication by replacing cash in Japan where users can pay for groceries in the store by swiping their phone on a reader or phones are substituting keys, with InterContinental trialing the use of web-enabled phones as room keys.
Smartphones like the iPhone, Blackberry and Android-based phones are currently transforming the mobile industry in their quest to go beyond voice, providing high-speed internet on the move, offering 100,000s of apps and able to store 1,000s of songs. Nearly 1 billion new smartphones will be sold by 2013, accounting for nearly 50% of new phones sold in North America and Europe in 3 years time according to Gartner research.
Eric Schmidt, Google CEO, said recently that smartphone sales will soon surpass PC sales and that his firm’s new mantra is “Mobile First” with his best developers working on mobile.
Customers in several developed markets already state that 80-85% of their purchase decision is on the type of device and the content/apps on offer – as opposed to the operator brand. Smartphones are shaking up the structure of the industry and operators need to rapidly decide where to play in the value chain in order not to be left out.
An always-on world is transforming communications from "Talk to Text"
Essentially, in the next few years most people in developed markets will have the internet in their pocket wherever they go, rapidly changing how people interact with each other
The internet has started it, but smartphones are accelerating a fundamental transformation of inter-human communication: from talk to text.
Users increasingly communicate for free via instant messaging like Blackberry’s BBM and status updates with their friends, with communication moving from one-to-one towards one-to-many. Particularly Blackberry is driving this trend as a Qwerty text-optimised device that started as a business tool and is now capturing the world’s youth. Even Hollywood has picked up on this trend portraying teenagers chatting away on their Blackberries. Added to this, Facebook just launched its Zero service with mobile operators allowing free data access to messaging and status updates to grow its 100m mobile users.
Calls are increasingly made for either time critical instances like changing an appointment or staying in touch with close ones. This is not just the case in developed but also emerging markets like Kenya, where students like to use Facebook updates instead of SMS or calls to organize social activities in the evening.
UAE: Facebook explosive growth, Blackberry, iPhone and Skype on the rise
EXHIBIT 1: Relative number of Google searches by topic in the UAE – 2007-2010
Picture
Source: Google Trends, UAE
In fact, 80% of iPhone owners use email and 50% social networking sites like Facebook, this is 4x more than your average Nokia user. Add to this free Skype-to-Skype calls, and operators can be forgiven if they are worried about core voice and SMS revenue growth.
Commenting on recent industry trends, The US operator Sprint’s CEO was quoted as saying "In the next few years, users will be charged by the data used and not voice minutes."
The phone as a wallet and a key
One of the key themes of the Mobile World Congress in Barcelona this year was near field communications (NFC), where the phone’s in-built sensors can communicate with their surroundings enabling uses as payment solution in shops just by swiping the phone. Beyond NFC, the phone is already being used as a payment tool in places like Japan or in emerging markets as a secure way to transfer money between family members or make payments like taxi bills, supplier bills or receiving salaries.
Further, NFC allows for phones to carry the users "DNA" – personal information in a protected SIM environment to run secure applications – allowing for phones to be used as National IDs.
It is especially for these transactional functions that mobile operators have an advantage over the global innovation power of Apple, Google and Facebook in the entertainment and information space, through their established distribution networks and local presence.
The wall is down and consumers have left the operators’ walled gardens
On the entertainment side, Smartphone users are beginning to cut out the mobile operator from the value chain and replacing them with the internet and the device players. Users now consume content/value added services via device vendors' App stores or Google's Android market store. 3 billion apps have already been downloaded on Apple's app store and counting. With the entire internet at their disposal and hundreds of thousands of lifestyle, productivity, games etc apps on offer, the operator is more often than not relegated to simply providing connectivity
Some of the major operators like Vodafone, Orange and Telefonica are not willing to accept this and are working on alternatives consisting of their own app stores in alliances with other major operators and customizing their own-branded handsets to allow for optimized access. The jury is still out if they will be successful. Smaller operators have already given up trying to dominate this space and instead focus on simply providing a competitive device offer
Information is King
The next battles will be fought on location-based and context-driven information due to the anticipated advertising opportunities. Google in particular is driving this by enhancing their maps, streetview and local search capabilities. It acquired Plink this year, for instance, a mobile visual search tech firm where its app allows you to take a picture of a famous painting with your phone and get all the information show up on your phone. This is just the beginning, where with 25% of all new phones now GPS-enabled, and by taking photos of their surroundings users can interact not just with people but with their environment.
Further, machine-to-machine (M2M) is on a steep upward trend. The vision here is that in the mid-term 100% of electronic devices will be connected to the internet via either Wi-Fi or 3G+, with the connectivity coming through the operators. This would allow consumers to use their smartphone as their information dashboard for home appliances (regulate air conditioning etc), or remote control for their car and entertainment devices. This is especially being developed by operators like Telefonica as a way to enhance their connectivity offering.
How worried should mobile operators be?
Operators need to carefully evaluate at what stage of development their markets are and how much their business will be affected by the exploding popularity of smartphones. Operators in developed markets are already living through the smartphone trade-off of exploding data traffic, higher subsidies and losing control of the content value chain – in exchange for higher data access revenue.
Google, Apple and other device vendors like Nokia with their ovi store are taking the customer ownership away from operators in their push to provide the emotional experience.
2010 is a key year where operators need to make strategic decisions on where to play in the value chain. Key questions abound around what device strategy to follow, what alliances/partnerships to forge, how exactly to evolve their wap portals into app stores and building emotional experiences and how to go beyond their traditional value chain into services like M2M, payments and ID.
So far, operators in the Middle East are somehow protected from the new players in the value chain as language barriers provide an edge to local offerings and competitive data pricing and little subsidies make the economics favourable. But as smartphones continue to grow strongly, this might soon change.
One thing is clear though, if innovation continues on its current trajectory, phones might just be on the way to becoming the ultimate all-in-one device that consumers will never leave the house without.