Facing reality in the mobile industry

Three mobile-related news items caught my eye today.


Welcome to the real world

The first item was the least important. Skype CEO Niklas Zennstrom talked about getting his software on mobile phones:

"When we began developing the mobile-phone version, we didn't realize the number of technical obstacles. It is challenging and is taking much longer than expected."

Well, duh. There are a couple of ways you could use Skype on a mobile phone. One is to establish an data connection via 3G and then use the data channel to make a call. The operators tend to be a tad wary of that because it basically cuts off most of their revenue.

Then there are WiFi phones. The difficulties there include dreadfully short standby battery life (because 802.11 uses much more power to maintain presence than a cellular network does) and endless difficulties handing off a call seamlessly between a WiFi network and a cellular network. (Someone in the industry once told me confidently that the solution is to pre-emptively establish a connection to the cellular network anytime the user gets close to the edge of the WiFi network. Problem: you're almost always at the edge of the WiFi network unless you're sitting on the transmitter. So basically your phone will almost always be making two calls at once.) Pairing to the diversity of WiFi base stations out there is also a lot tougher than many people realize. Plus many of the operators don't want mixed WiFi/mobile devices to succeed because they weaken the operators' control.



Oh, and the first WiFi phones are butt-ugly.

The tech industry is excited about WiFi mobile phones because it wants somebody to make the operators disappear. I'm fine with that, and I like Skype (I'm a user). But you've got to differentiate between the technologies you want to be real and the ones that actually are.

My guess is that, especially in the US, we'll see WiFi phones sell in volume first as cordless phones in the home, where you don't expect to roam and a lot of people already have WiFi base stations. I could maybe picture them on college campuses, which often have very broad WiFi networks and a lot of students anxious to make cheap calls. In Europe, there is more possibility for dual cellular/WiFi phones because they can be sold aftermarket, bypassing the operators. But you still have to deal with the handoff and pairing issues.

If you want to replace a mobile phone for the mass market, you have to come pretty close to the usability and mobility of today's mobile phones. That will be very, very, very hard to achieve with WiFi.


Tragic but not surprising

I'm seeing almost no coverage of this in the US tech press, but Benq announced that it's closing down the mobile phone business that it acquired from Siemens, just one year and 29 days after the deal closed. At the time of the deal, the combined companies were the fourth largest mobile phone company in the world.

Siemens once had huge ambitions in mobile phones, but it never seemed to find a clear market identity. It was one of the few mobile phone companies to license Series 60 from Nokia (a disaster), and it launched a very aggressive campaign to create a line of fashion designer phones (another disaster).

Outside of Germany (where the Siemens brand is very well respected) the company was mostly known as a supplier of low-cost mobile phones. When Nokia decided to take back market share by leveraging its high production volumes to cut prices, Siemens went into a death spiral from which it never recovered. The mobile phone unit was already in deep financial trouble when Siemens sold it, and in fact they basically paid Benq 250 million euros to take the business off their hands. (Benq had to assume some of the contract liabilities to Siemens' German work force, and supposedly agreed not to do layoffs in the Siemens mobile phone business for one year.)

Apparently the Siemens mobile business continued to decline in the year after the deal, and the press release from Benq was amazingly blunt:

"Both revenue and margin development will fall far short of expectations in the important Christmas quarter.
[Mike's translation: The operators refuse to sell our stuff; that's how we know in September that we're going to have a bad Christmas]. Due to the discontinuation of further financial support from the parent company, BenQ [Translation: We have thrown too much money into this thing already], and the resulting lack of liquidity and implicated disruption to business [our mobile division is flat out of cash], BenQ Mobile in Germany will file for insolvency at the local court in Munich within the next few days [We're laying off everyone, selling the buildings they work in, and stiffing as many creditors as we can. But we'll keep using the Siemens-Benq brand for another four years, because we get to do that under the terms of our deal.]"

The situation is sad for the former Siemens employees, and sad for Benq's ambitions. A year ago the phone ODMs (manufacturers who don't sell under their own names) were supposedly about to turn themselves into the masters of the mobile phone industry, with Benq leading the way. Now Nokia, SonyEricsson, and Motorola are all on the rebound.

I'll close with comments by Richard Windsor, a very brainy investment analyst with Nomura in London:

"BenQ has effectively signalled the end of its mobile phone business.... Handset delays, testing and acceptance problems have prevented devices getting to market on time which has proved catastrophic for revenues, profits and cash flow.... There can be little doubt that this is the end of the road for BenQ's ambitions to become a branded handset manufacturer.... We expect that Nokia will get the lion's share of BenQ's business as BenQ has remained mostly in the low end where Nokia is by far the strongest.... Negative for Symbian as yet another licensee appears to have gone up in smoke, dealing its credibility as an impendent software vendor a blow. Negative for the Linux consortium as BenQ's long-term feature phone roadmap looked like it was heading towards Linux and the consortium is now deprived of a credible member."


Not sure if it's tragic, but it's ominous

The other sad but not surprising end was the abrupt discontinuation of Mobile ESPN, the MVNO focused on sports fans. (An MVNO is a mobile phone operator that buys air time from one of the big operators, pairs it with specialized phones and services, and sells the bundle to the public.) I thought Mobile ESPN's phone interface had huge flaws, but most observers are attributing the failure to bad marketing or just a general failure of the MVNO concept.

A lot of nasty rumors had been circulating about Mobile ESPN, which is why the shutdown was not surprising. At CTIA earlier this month I spoke with one well-connected industry insider who was furious about the situation. He said it's unreasonable to expect a new MVNO to find its market immediately.

He had a point. I strongly believe in the idea of MVNOs, because they enable an operator to focus on vertical solutions for vertical markets, which is the way most mobile data usage will develop. I think Mobile ESPN was poorly implemented. But other MVNOs are more promising (Helio remains my favorite example). I hope they'll be given enough time to prove themselves.

A year ago MVNOs were supposed to be the next big thing in the operator world. Now many people are trashing them. This is typical of the faddish, short-term behavior of the mobile industry. When you have no vision of your own, you jump on whatever idea is trendy at the moment. MMS. WAP. And now MVNOs. The industry often behaves like a flock of birds – it doesn't really matter where you go, as long as you don't get separated from the others.

5 comments:

Avi Charkham said...

As a mobile solutions developer I keep telling myself that a realty where any mobile device can be connect to broadband web in a seamless way is inevitable.

As a developer/user I tell my self that household billing where I pay for data access once (be it pc mobile or TV) and use all connected appliances under the same contract is inevitable. To convince myself I say that today’s data consumption reality is a equivalent to the electricity company charging me twice…Once for refrigerator and than again for the washing machine.

And on top of that I tell my self this will be a reality in no more than 3 years.

The question is am I hallucinating?

Michael Mace said...

Hi, Avi.

Thanks, and I don't think you're hallucinating.

The thing that's hard to predict is the date. I remember the high hopes that many of us had about five years ago that Bluetooth would let all devices talk to one-another. Maybe if Palm or somebody else had pushed it aggressively it might have lived up to the hopes. But in the absence of that sort of strong champion, it has never gotten to critical mass on the most interesting potential uses. Instead it's just a glorified cable replacement.

Very sad.

I worry that your vision of one data subscription for all could go the same way. At least some companies (the cable TV people in the US) have a strong incentive to make it real. So there may be hope.

Avi Charkham said...

Michel, I’ve given up on “all devices talk to one-another”.
Interoperability is a hopeless issue at this point of time.

I think that the real question now is what will be the market force that will drive the operators out the value chain and will enable mobile devices to access the web simply and cheaply creating a “world without operators” (at least as we know them today).

Operators being operators will do all in their power to prevent such a reality and so I think that D2C is the force that will drive this process…


Step one (already happening):
A move from the “All in one” approach to a “None in one” approach.
The classic example is what’s happening in the media players market. People have voted big time against the “All in one” approach and instead of using their phones as media player they are investing hundreds of Dollars in players like Ipod.

Step two (starting to happen):
“None in one” devices using local wireless connection to access content.
This will be the real start of the D2C revolution. Once content providers will realize they have a channel to push their content directly to their customer without sharing their revenues with the operators that it will be too late for the operators to react.
Again we should look at the media players market to see Microsoft’s Zune and it’s ability to connect to the web wirelessly. Why should I download a song from the operator and pay $2 if I can sit in Starbacks, or go around the stands of Tower Records and download the song for 89 cents.

Step 3:
“Anywhere any Time” is great but “Most of the time” is also cool.
The dream that 3G was supposed to sell us (and failed) is having a broadband web at the palm of our hands 24/7.
In 2-3 years local wireless networks will account for 90% of our daily routine. We will have a wireless network at work, at home, at the mall, at the movies, the subway etc… sure I may be standing in the corner of the street and have no coverage but who cares… “Most of the time” is good enough for the market if it means cutting the operators fro the value chain.

Step4:
A massive change in the operators world.

Michael Mace said...

Hi, Avi.

Very good stuff!

So in your scenarios, the WiFi + cellular smartphones are going to be very important. Even if the operator keeps the cellular side as a walled garden, if the WiFi side is open, we'll eventually get an open data economy there.

I can kind of see it happening. TMobile has announced that it's going to make a push in WiFi + cellular phones. The details will be really important -- will they enable the phones to talk to any WiFi hotspot, or will you be restricted to TMobile ones? And will you be able to run any apps that you download over WiFi?

Unfortunately, Om Malik says it's likely to be restricted to only certain WiFi networks, which stinks. But I'll make a little prediction here -- if TMobile restricts the WiFi networks you can log into, or doesn't allow full access to the Internet, customer complaints will pretty quickly force them to open up the access.

Avi Charkham said...

Looking backwards is the best way to find out what’s going to come next.
Many things that are happening nowadays in the mobile web scene give me flashbacks of the early days of the web.

- Companies enabling restricted access to web using a walled garden approach

- Per use billing (the more you browse the more you pay)

-Limited interoperability (only users of the same service can connect with each other)

Now if I was an operator I would go to Wikipedia and carefully read the history of Compuserve. Having millions of customers is not a guarantee for anything. And the speed in which you can lose your position as a market leader is overwhelming.

So as I said History doesn’t lie and I’m quite sure that the walls of the operator's garden will fall faster than we imagine.