Mallinson: A golden age for mobile broadband and smartphones

Keith MallinsonMobile phones are the fastest-growing consumer product category ever. Stellar growth for 25 years since inception produced 1.2 billion device sales with around $150 billion revenues in 2008. Following the ensuing global recession, recovery is expected in 2010 and the handset market outlook is positive until the middle of the decade when peaking unit growth rates and ongoing price declines will tend to flatten core product revenues in handsets, dongles and modules. The strategic imperative for incumbent device vendors is to find ways to establish significant new layers of value that can generate their revenue and earnings growth thereafter.

Device value growth has been driven by increasing performance in successive generations of modem technology and the complementary features that are embodied in handsets. Market revenues also reflect increasing sales volumes and decreasing average prices. The time line chart shows that while new generations of network technology have been introduced every nine years, it takes sixteen years from market launch to peak sales volumes for the major mobile standards. Whereas market volumes have increased substantially from one technology generation to the next, average handset selling prices have reduced from several thousand dollars in the 1980s to around $100 today.

Source: WiseHarbor

Mobile phone market development with 1G analogue since the early 1980s was mainly characterized by falling costs and prices with improving battery performance and shrinking form factors along the way. The introduction of 2G digital network technologies in the 1990s provided the foundation for phones' Swiss Army Knife-like functionality. Thus included colour screens, rudimentary browsers and polyphonic ring tones. These new features helped arrest the Moore's Law-driven rate of wholesale price declines and boosted market value growth as new devices were deployed on new networks.  The early years of 3G also boosted revenue growth for handset vendors with the more costly WCDMA modems. But most consumers derived modest benefit, if any at all, from 3G network innovations until around 2005 with disappointing data performance, poor battery life, inadequate data services and mobile applications ecosystems. In many cases, handset subsidies had to be increased substantially to persuade consumers to buy WCDMA phones at all.

Value growth for devices has been supported more recently by the widespread adoption of mobile broadband including HSDPA and CDMA2000 EV-DO in PC dongles and smartphones. These have driven exponential data traffic growth on the 3G networks, with rich and pervasive use of web and applications on mobile devices. Device subsidies have been maintained in many cases, justified by operator revenue growth from the data services.  iPhone users, for example, spend significantly more each month than average 3G subscribers. It is possible to obtain this $600 wholesale cost device for nothing under an 18 month contract at £50 ($73) from O2 in the UK and with similar deals elsewhere.

The trend in market value growth is resuming as increasing proportions of subscribers trade-up from narrowband with GSM, WCDMA and CDMA2000 1x to mobile broadband and as subscribers start to adopt LTE. Whereas around half the world's 6.7 billion population has a mobile phone--with approaching five billion connections worldwide--the vast majority only use these for voice and text today. Most people will switch this decade to mobile broadband and smartphones with significantly more costly modems, applications processing and software than for regular narrowband phones. Increasing proportions of these modems in phones and other devices will buoy declining average device prices for a while. Multiple modem device ownership is already significant: it will rise substantially with cellular dongles and modems more frequently embedded in PCs, netbooks, smartbooks, cars, cameras and other CE devices.

WiseHarbor has just published a detailed forecast revealing significant market value growth, as well as unit sales growth, over the coming decade for mobile broadband with HSPA, EV-DO, LTE and WiMAX devices. The long-term wholesale price trends for phones, dongles and modules will most likely remain downward at historic rates in 3G technologies. Despite increasing adoption, frequent replacements and multiple device ownership with mobile broadband in 70 percent of all mobile devices sold in 2016, there will be a flattening of revenues in these device categories that exclude the whole value of items such as PCs, tablets, cameras and cars.

Mobile device vendors must seek new revenue growth opportunities as do device vendors in other market sectors. TV manufacturers have repeatedly enhanced their products for value growth over the decades.  Innovations include colour, alternative form factors such as in furniture cabinets, larger screens, and new screen technologies such as LCD, LED, HD and 3D. TV manufacturers also diversified into adjacent new product categories including, VCRs, DVDs, camcorders, theatre systems and set top boxes for cable, satellite and digital TV reception.  Meanwhile revenue growth in services has outstripped that for the terminal equipment with subscriptions and pay-per-view supplementing advertising and license fee-based programming.  There are more TVs than people in America. However, one month's cable fees can now cost as much as a cheap TV.

Similarly, handsets, dongles and modem modules alone will not be able to generate significant revenue growth indefinitely for mobile technology vendors.  Diversifications into applications, services and new product categories are essential.  Offerings such as BlackBerry, iPhone and iPad illustrate this trend already, as does Nokia's attempts with Ovi and its Life Tools in emerging nations.  The core modem and phone business will plateau as most of the world's population becomes connected for phone, internet and handheld computing with mobile broadband.  Mobile technology connectivity will increasingly be for devices other than phones and many of these will drive significant new service revenues.

Market segment-switching is a risky business that can prove lucrative for some. Handset vendors and mobile operators alike mostly have poor track records in developing value-added services beyond voice and text.  In contrast, Apple came from an adjacent segment and deserves most credit for making the smartphone category the success it is. Apple was already proven deft at leading a new product category, service delivery and payment ecosystem with the iPod music player and iTunes music store. The success of these helped it with the iPhone because there were many synergies. The iPad is another new product category that will create additional service revenues. RIM was always focused on two-way enhanced messaging services, as well as devices. Samsung and LG are already significant players in various neighboring CE product categories such as camcorders.  This could help them as more and more CE devices become connected with cellular modems.

With ongoing price compression, eventual market saturation in devices and relatively slow replacement rates in high-growth markets such as India, the migration to new technologies such as HSPA+, MIMO and LTE is insufficient alone to create sustained revenue growth to 2020. Value growth in adjacent markets that will embody the modems and new services that exploit them are also essential. In all probability, some significant new product and service categories do not yet exist.  Incumbents need to diversify if they are to deliver growth in the latter half of the decade following the current bonanza in smartphones and mobile broadband devices.

Keith Mallinson is a leading industry expert, analyst and consultant. Solving business problems in wireless and mobile communications, he founded consulting firm WiseHarbor in 2007. WiseHarbor has recently published its Extended Mobile Broadband Device Forecast to 2020. Further details are available at: