Chetan Sharma - incisive and exhaustive analysisThe analyst Chetan Sharma has released its analysis of the mobile industry for H1 2011. It’s the usual, thorough, exhaustive piece of work.
Chetan Sharma says it expects total revenues for the industry to touch approximately $1.3 trillion (£813bn) in 2011, with mobile data representing 24 per cent of the mix. Global mobile data revenues are expected to eclipse $300bn for the first time. 2011 is also the first year in which non-messaging data revenues will make up the majority of the overall global data revenues, at 53 per cent.
The analysts expects the total number of subscriptions to exceed 6bn by the end of 2011. The first 1bn took over 20 years; this last one is going to take only 15 months. The primary growth drivers are India and China which are cumulatively adding 75m new subs every quarter. Indian and China are also entangled in the race to the billion. At the end of Q2 2011, China was ahead by 50m, but India is adding subscriptions at a faster rate, and is likely to eclipse China before Q2 2012. By then, both nations are expected to exceed 1bn in total subscriptions, making up 31 per cent of global subscriptions.
In Q1 2011, US became the first major market to exceed the 50 per cent mark in smartphone sales. The global figure stands at approximately 26 per cent. Some operators expect 90 per cent of their devices sales to be smartphones by the end of the year. In terms of the actual smartphone penetration, Chetan Sharma expects the US market to eclipse the 50 per cent mark in 2012.
China leads in the number of subs, but the US dominates in both total and data revenue. A number of emerging nations are now in the top 10, including Brazil, India, Russia, Indonesia, Pakistan and Mexico. At the same time, once dominant nations, including Korea, the UK, Italy and Germany, have dropped off or slipped in rankings.
The number of mobile operators with more than $1bn in data revenues will increase to 47 in 2011, compared to just 13 in 2005. Japan continues to be the leader in mobile data, with NTT DoCoMo, KDDI, and Softbank Japan ahead of the pack in terms of mobile data revenue and data as a percentage of total ARPU. In 2011, it became the first major market to derives more than 50 per cent of its mobile revenue from data services. Australia and the US have also made good inroads in the last two years. In fact, looking at the overall data revenue, US is much further ahead than any nation, due to the size of the market.
While India has the highest subscriber growth rate in the world currently, Chetan Sharma says the revenue-generating opportunity remains “downright anaemic” compared to other major markets, with average overall ARPU as low as $3.50. Even with a significant subscriber base, there is going to be a general lack of opportunity in the market for the next couple of years relative to other markets, the analyst believes.
Here are Chetan Sharma’s key mobile trends for 2011:
Total global subscriptions to hit 6bn, with India and China racing to 1bn each.
Total global mobile revenues to hit $1.3 trillion, almost 2 per cent of global GDP. The top 10 operators control 43 per cent of the global mobile revenues.
Total global mobile Data revenues to eclipse $300bn. Non-messaging data now represents 53 per cent of global mobile data revenues.
Mobile Devices are now exceeding traditional computers in unit sales and revenue. The majority of device sales in the US are now smartphones. Device replacement is shrinking.
Mobile broadband (4G) is being deployed at a faster rate than previous generations. There will be over 1bn broadband connections by the end of 2011.
Global mobile apps revenue has shifted to off-deck. The decline is directly proportional to the increase in smartphone penetration by region.
All major markets are consolidating, with the top 3 players at 85 per cent of the market. Regulators will have to be more prudent and proactive about managing competitiveness and growth.
Mobile Data Traffic will represent 95 per cent of global mobile traffic by 2015. Many countries are facing spectrum exhaust in the next five years.
Connected device segment is growing at the fastest pace. Operators will have to quickly adapt their strategies to stay relevant in this segment.
Several multi-billion dollar opportunity segments are emerging. These include Mobile Advertising, Mobile Commerce, Mobile Wellness, Mobile Games, and Mobile Cloud Computing to name but a few.
The mobile ecosystem has become very dynamic and unpredictable. Apple, Google, Amazon, and Facebook have become the most important revenue-generating mobile platforms.
There will be more changes in the next 10 years than in the previous 100. The value chains will be continually disrupted every 12-24 months by the new players and business models.
Intellectual Property has become a key component of long-term product strategy. The top 20 control on third of the overall mobile patent pool.
Devices
Chetan Sharma notes that Apple has had the tablet space to itself. Thus far, the analyst says, the response from the competitors has been tepid, especially on the pricing dimension. Apple has had such a mastery over the supply-chain and is so far ahead of the competition in time terms that by the time they figure out the details, Apple has already locked up the pricing advantage for the cycle. OEMs try to catch-up on the features but can’t do so on the margins.
OEMs can grow the pie by bringing products at a better price points that helps attract different demographics to the mix. Microsoft can make good inroads into the space with its Win8 tablet release in 2012, but it will be again in a catch-up mode, as the iOS ecosystem will be even more robust by then. The cheaper Android tablets will do well in the market. As expected, tablets will pretty much eliminate the need for netbooks and are starting to eat into the desktop/laptop revenue.
Nokia and RIM are under severe market scrutiny, as investors and developers leave in droves. Lack of product planning and execution has left their market share in disarray. Nokia’s valuation has been cut in half, while the newcomer HTC edged past the industry giant in one of the most remarkable stories of the year.
Nokia’s release of the N9 shows the company’s engineering and creative design depth, but a lot is riding on the first generation of Nokia Windows Phones. While the market hasn’t shown much appetite for Windows Phone 7 thus far, a good family of devices might be able to slow the loss trajectory and position the combined team for the up-for-grabs third spot in the ecosystem.
HP’s acquisition of Palm is finally bringing some new products to the market, but the lack of an effective ecosystem means a lack of traction in 2011. Given that the computing is shifting to mobile devices, Chetan Sharma expects some of the weaker desktop/laptop players to exit the industry.
Tablets are primarily being used in wi-fi mode, because the primary use case is indoors and wi-fi gives a better (and cheaper) user experience. Once operators start to roll out user-friendly family data plans across multiple devices, the analyst expects cellular activation to increase, but wi-fi will still dominate overall.
Managing data growth
As a result of the data tsunami, there are two types of opportunities that are being created - one is those that take advantage of the data being generated in a way that enhances the user experience and provides value; the other is technologies that help manage the traffic data that will continue to grow exponentially.
To be able to stay ahead of the demand, significant planning needs to go in to deal with the bits and bytes that are already exploding, Chetan Sharma believes. New technical and business solutions will be needed to manage the growth and profit from the services. Relying on only one solution won’t be an effective strategy to manage rising data demand. A holistic approach to managing data traffic is needed, and Chetan Sharma’s analysis shows that the cost structure can be reduced by more than half if a suite of solutions are deployed, rather than taking a one-dimensional approach. This, the analyst says, will bring the hockey stick curves of data cost more in line with the revenues, and thus preserve the margins.
The decision-making process within operator organizations will need to be streamlined as well, the analyst says. Operators should also consider creating a senior post which focuses on both the cost side and the solution side so that they can devise and institute a sustainable long-term policy and keep margins healthy.
The competitive landscape
Chetan Sharma says that the ‘Rule of Three’ is evident in all major markets. While the percentage market share might vary, on average, the top three operators control 93 per cent of the market in any given nation. It doesn’t matter if the market is defined by “controlled regulation” as in China, Korea, and Japan or if it is “open market” driven in markets such as the US, UK, and India. Eventually, only the top three operators control the majority of the market. There are niches that others occupy, but they are largely irrelevant to the overall structure and functioning of the mobile market.
Markets such as the US and India experienced a similar competitive environment in their hyper-growth phase. For the US, this phase was in the 90s-mid-2000s, while India has been experiencing a similar environment in the last three to four years. In both cases, at the start there are five or six players with no more than 25 per cent market share, but higher than 10 per cent of the mix. Gradually, however, market forces enable consolidation. Over a period of 18 years, the US has settled into a “top 3” operator market. India’s brutal price wars are going to trigger consolidation in the next 12 - 24 months and it will eventually settle into a structure similar to other markets, Chetan Sharma believes.
The competitive equilibrium point in the mobile industry seems to when the market shares of the top three are 46 per cent, 29 per cent and 18 per cent respectively, with the remaining 7 per cent being allocated to the niche operators. To achieve some semblance of equilibrium in the market, the top operator should not have more than 50 per cent of the market share and the number three player should not have less than 20 per cent. This helps create enough balance in the market to derive maximum value for the consumer.
Mobile operators will face some hard choices in developing and protecting the role they want to play in a given region and the ecosystem at-large, the analyst believes. The strategy they choose will have a direct impact on the expected EBITDA margins, investment required over the long-haul, how investors view them, and on the competitive landscape of the country. Given, the fast pace of globalization, new rules and trends might emerge over the course of this decade that further define “communications” and “computing” as we know them.
Apps and services
As expected, mobile commerce and payment discussions are dominating the ecosystem, and attracting a lot of investment and marketing dollars. Chetan Sharma notes, however, that the traditional payments networks are largely intact. The new opportunities are being built on top of the existing payment platforms with convenience (Square) and offers and advertising (Google Wallet, ISIS, Groupon).
Beyond payments, mobile is becoming ingrained into every vertical and every facet of our lives, from healthcare to education, from energy to entertainment, from communication to socialization. And we are in the early innings of figuring out the business models, ecosystem leaders, user behaviour, regulatory needs, and the overall impact on society.
Ecosystem dynamics
Chetan Sharma says it is very clear that the ecosystem dynamics can change very quickly; one just can't take the competitive and friendly forces for granted. In the past, the silos and segments were clearly defined, with little overlap. However, over the course of last couple of years, players have been migrating and surfing in segments across the board - from Apple to Visa, from P&G to AT&T, from Facebook to Time Warner, from Google to Best Buy, every company wants to capture the mindshare and a piece of the consumer’s pocketbook.
The fine line between partners and competitors can be obliterated in a quarter. Apple is competing with Cisco, Comcast is going after AT&T’s business, Visa and Verizon want to be the payment channel of choice, Amazon is gunning for Microsoft’s enterprise business. One product launch, one acquisition, can change the game in an instant. And this is only the beginning, the analyst notes.
Mobile is fundamentally reshaping how we as consumers spend, from housing and healthcare to entertainment and travel, from food and drinks to communication and transportation. Mobile not only influences purchase behaviour, but also post purchase opinions. When the ‘Share’ button is literally a second away, consumers are willingly sharing more information than ever before. Mobile is thus helping close the nirvana gap for brands and advertisers who seek to connect advertising to actual transactions.
Chetan Sharma concludes by saying that the long-term battle, however, is to own the context of the users. Having the best knowledge about the user to help drive the transaction is the simply the most valuable currency of commerce.
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