Monetising mobile

February’s Mobile World Congress in Barcelona saw the annual gathering of representatives from every aspect of mobile communications – device and component manufacturers, network equipment vendors, mobile network operators (MNOs), software and content developers and service providers 

Unlike many events that see swathes of consumers (such as January’s Consumer Electronics Show in Las Vegas), the cost of entrance to the Mobile World Congress (MWC) means that it is heavily focused on business, and the business of the 60,000+ attendees was how to monetise mobile communications.

Over the years, the scale and scope of the event has grown massively and it is now the largest mobile technology show in the world. There were more than 1,300 companies exhibiting this year and many others taking meeting rooms and hospitality suites to meet current and potential partners, customers and suppliers.

The attendees span the universe of mobile communications. Handset and tablet manufacturers such as Research In Motion, Apple, HTC, Huawei, HP and Nokia had high profiles and demonstrated their latest products. Slightly off the main strip, multiple second-tier manufacturers were offering products with comparable functionality at a lower price point.

As part of this, there are a number of software companies providing the necessary infrastructure software to enable MNOs or device manufacturers to offer functionality similar to an iPhone or BlackBerry (including push email, instant messaging and social networking) but on much lower-functionality devices and hence at a much lower price to the consumer. These include Synchronica (SYNC) and Globo (GBO).

Synchronica, through organic growth and acquisition, has secured 82 MNOs as customers, representing an addressable market of more than 1.2 billion subscribers. It has also signed up a number of Tier 1 and Tier 2 device manufacturers as customers. With 50 services live at the end of 2010 and a further 20 or so likely to go live this half, MNOs should start to eat through initial licence sales, resulting in high-margin follow-up orders with shorter sales cycles.

All present and correct
There was good representation from the component and technology suppliers to the handset manufacturers – e.g. ARM (ARM) and Imagination Technologies (IMG) – plus the operating system and software providers. There was a further large hall of app developers and content providers that are looking to exploit the capabilities of these new devices.

The event was partly overshadowed by two bits of news from Nokia the week before. The company has been the dominant provider of handsets, peaking at the end of 2007 with 40 per cent worldwide market share of new device shipments coupled with industry-leading operating margins (22.8 per cent).

However, with the arrival of the iPhone at the top end and a slew of cheaper phones at the bottom end and Android-based phones across the range, Nokia’s market share and margins have been squeezed and Nokia’s response to date has been slow.

Catch-22 situation
On the Tuesday before the event, an internal email from Nokia CEO Stephen Elop was leaked that set out in stark detail the scale of the problem faced by his company. He likened Nokia’s situation to a man standing on a burning North Sea oil platform – either he burns alive or he jumps into the icy waters beneath.

Elop conceded that Apple now owns the high-end smartphone range and that Google has created a platform in Android that attracts application developers, service providers and hardware manufacturers. Having started at the high end, Android has successfully expanded to the mid-range and is expanding into the sub e100 market.

Android was heavily represented at the show, with more than 80 booths with Android devices, more than 160 Android products and a dedicated ‘Android-Land’. At the low end, a raft of manufacturers in the Shenzhen region of China are producing handsets quickly and cheaply based on MediaTek reference designs for complete chipsets.

On the Friday, Elop announced a long-term partnership with Microsoft that will see Nokia use Microsoft’s Windows Phone as its principal smartphone operating system. There had been rumours that Nokia would embrace Android but Microsoft is perceived to be more stable, a key consideration for Nokia’s corporate users, but also that Nokia wanted to avoid becoming a commodity handset manufacturer.

Everyone’s a winner
Much of the show was spent deliberating on the ramifications. Microsoft, perceived to have a technically proficient product in Version 7 but which has failed to gain traction, is an obvious beneficiary of the partnership – and Microsoft’s stand and demos enjoyed good attendance.

Nokia gets to reduce costs but retain some sort of edge over the commodity manufacturers. The combination also represents a stronger alternative, along with Android, to Apple, which has enjoyed such a phenomenal rise.

Apple’s charging structure (30 per cent commission on many apps and content) is angering many major media customers (software and content providers), while its semi-proprietary supply chain can potentially make cost savings harder versus products based on off-the-shelf components – comparable to Macs versus PCs. As such, there is scope for alternatives.

Another major theme of the show was the massive rise in data volumes associated with smartphones and other data-intensive devices – and the limited benefit that mobile network operators (MNOs) have seen. While the volume of global traffic has increased 25 times since 2008, global MNO revenues have only doubled. As such, something has to give.

Unsustainable usage
On the one hand, the ‘all you can eat’ data plans that consumers have enjoyed so far seem unsustainable and some sort of price tiering for different traffic types looks inevitable. From an investment perspective, Sandvine (SAND) is the leading global provider of Deep Packet Inspection and network policy controls for wireless and DSL networks. This enables operators to understand the network traffic better, manage network congestion, ensure quality of experience and enable targeted service plans.

On the other hand, we have entered a period of substantial network investment as MNOs look to deploy 4G/LTE (long-term evolution) networks, optimise existing infrastructure through HSDPA and HSDPA++ (as a precursor to LTE) and/or deploy femtocells and microcells to boost coverage and capacity.

LTE offers lower cost per bit and higher capacity peak and user data rates than 3G. There are a number of differences between 3G and 4G deployment. Whereas 3G was built to satisfy a perceived demand – ‘build it and they will come’ – 4G is being deployed to deal with an actual demand. Mobile subscribers are seeing their quality of service deteriorate – the success of the iPhone has been something of a double-edged sword for MNOs.

Second, the deployment of 4G is more global and represents the convergence point for a number of rival global 3G standards. There is also the potential for further convergence of the rival LTE standards (TD-LTE and FDD-LTE) into a single standard.

As at the time of the show, 24 MNOs claimed to have launched commercial LTE networks, 128 MNOs have made a firm commitment and 52 trials or pilots are under way. In the US, Verizon Wireless is taking the lead and demonstrated 11 LTE products at the show. In Europe, TeleSonera has live networks in Norway, Sweden, Denmark and Finland while NTT DoCoMo is live in Japan. In the UK, long-running litigation over current and future airwave allocations is delaying 4G deployment.

This does not mean that UK investors cannot participate in the rise of LTE, however. Anite (AIE) and Spirent (SPT) are both well placed to benefit from the period of investment by providing the necessary test equipment and services to ensure that new devices are compliant with the LTE standards and interoperate with existing 2G and 3G networks and ensure network performance.

Anite is one of the three largest global providers of test equipment (development, conformance and interoperability). It has a clear lead in the development phase against its main competitors (Rohde & Schwarz and Anritsu), with the largest number of test scripts validated and substantial barriers to entry.

Finally, there was an area dedicated to machine-to-machine (M2M) communications, the so-called ‘Internet of things’. There are initiatives across a number of industries (including automated meter reading, transportation, security and consumer/professional) that are driving the deployment of M2M modules to enable machines, devices and vehicles to communicate via wireless networks.

MNOs are also aggressively promoting M2M as it represents an opportunity for strong incremental revenue streams, good growth prospects and low churn but with limited network capex requirement.

Telit like it is
Telit Communications (TCM) is the number three global developer and manufacturer of cellular and short-range communication M2M modules. It has continued to take share in the global M2M market and maintained growth through the recent downturn, and this rate has accelerated as the overall market returned to growth.

With its share of design wins ahead of its current market share (management believes it has been winning up to 25 per cent of all new designs over the past few years), Telit’s revenue should continue to grow faster than a market forecast 16.7 per cent over the next five years as unit volume growth more than offsets average sales price declines.

Telit successfully relocated the bulk of its manufacturing to China at the end of 2009, which has helped to offset the reduction in average selling prices and boosted capacity to capitalise on the larger market opportunity. It also recently acquired the M2M division of Motorola, broadening its product range and customer base.

David Johnson is Head of Research at Northland Capital Partners, which acts as nomad and broker to Synchronica