The (partial) state of the mobile data market

Despite all the hype and excitement about the mobile data market, it is very difficult to get reliable data on how it's actually developing. The mobile operators don't like to release full details of their sales, and surveys of users cost a lot of money to conduct and therefore are usually available only to people who pay.

We're left to chew on anecdotes, partial information released by companies that are trying to push a point of view, and unscientific "polls" of online enthusiasts.

So I'm always on the lookout for more rigorous information. Recently I came across several fairly good sources of data, and they give some interesting perspectives on what's happening with mobile data. It is by no means a complete view, and most of it is US only. But I think it's worth sharing.


Steady, unspectacular growth

The overall picture of mobile data is one of steady but unspectacular growth. It's a bit like watching a tree grow -- you can't see anything changing day to day, but if you walk away and come back in six months you'll notice the difference. SMS continues to be the dominant service, especially in Europe, and there's no sign of some other service surpassing it.

Is the growth rate good or bad? It all depends on how much growth you were expecting, and how fast you wanted it to happen. The one thing I think is very clear is that each country market is different, and you can't classify any of them as leaders and laggards. They're just unique.

Here are the details:


Capabilities of mobile phones in the US

The Pew Internet organization has been surveying Americans on their Internet usage for years. A couple of the questions in their survey ask about the data capabilities of their mobile phones. In the most recent results, from early 2006, 75% of mobile phone users in the US said their phones are capable of texting. 63% said they can play games, and 39% said they have cameraphones. Here's the full chart:



Nothing there stands out as shocking, although I expected the penetration of cameraphones to be higher. My guess is it has gone up in the last year.

(Note that some people could have capabilities in their phones and not realize it. So the question tells us as much about awareness of features as it does about the phones themselves.)


What people do with their phones: Nothing else rivals SMS

The chart below examines the percent of mobile phone users in the US and several European countries who have ever performed various tasks with their mobile phones. The source is M:Metrics, Q4 2006, and the numbers were quoted in a presentation by Orange / France Telecom.

The figures show that there's no other mobile data service with near the penetration of short messaging service (texting). That's not really news, but it's striking to see the hard numbers. About 80-85% of people in most of the big European countries have ever sent a text message, with France lagging slightly (at about 75%). In the US, almost 40% of mobile phone users report that they have sent a text message.

The next closest service is picture messaging, with 20-30% of mobile users in the big European countries saying they have received photo messages at least once. In the US, the figure is 15%. It's ironic that photo messaging is in second place, since it's generally considered a major disappointment. What does that say about the other services? Well, none of them generally crack 10% usage.



Is the US really a laggard? The other thing in the chart that really stood out to me was that the adoption "lag" of US mobile users varies depending on service. The US is far behind in SMS, MMS, and playing music on the phone (the last one is, I'm sure, due to the strength of the iPod in the US). But in the other categories, the US is in the middle of the pack, or even ahead (somebody explain the ringtone result to me, please).

It's always fun to stereotype the US market as primitive in all areas of wireless, but the adoption numbers don't support that. It just looks different.

What does it all mean? Orange's spin was that it means we're just getting started in mobile data, and everyone should wait patiently for the good services to take off. They showed the following growth projection from Ericsson as evidence:



No offense to Orange, but that is basically a statement of faith rather than analysis. If you're a cynic, you'll point out that the chart assumes compound growth will continue uninterrupted for a decade, something that is often true for technology specs but is rarely true for technology markets.

What we really need is time-series data, so we can see what's growing and what isn't. Unfortunately, Orange didn't present any numbers like that, but the research firm Telephia did, in a separate presentation. Unfortunately, their numbers were US only, and they didn't cut the usage categories in the same way as France Telecom. But they still show some interesting trends...


Mobile data growth in the US

Telephia measures mobile data usage by analyzing the monthly bills of mobile phone users. This should give very accurate information on revenue and number of users, but it doesn't track physical usage. Because some services are billed per-use and some have monthly subscription fees, it's hard to tell how heavily people are using the services listed below.

Telephia reports that billings are growing steadily for a wide range of mobile data services. The chart below shows total US operator revenue for mobile data from Q3 2006 to Q1 2007. (These figures include anything that passes through the user's phone bill. Applications and services paid for separately by the user are not included.)



The chart is in billions of dollars, so it shows that in Q1 2007, total on-deck US data revenue was about $4.6 billion. Is that a big number or a small one? Well, total service revenue for the US mobile operators is about $32.5 billion per quarter, according to the CTIA. So mobile data is about 14% of mobile billings.

Where is e-mail? I can't find e-mail anywhere on the chart. I'm very surprised they didn't break it out separately.

Strangely consistent growth rates. The weirdest thing about the chart is that everything's growing at the same rate. In the real world, that sort of thing doesn't often happen. I wonder if a lot of the growth might be driven by people buying service bundles, where they pay a flat extra rate per month to activate a bunch of different services, and then the revenue gets allocated across the services by the operator. That would cause everything to grow in lockstep.

If that's what's going on, then these numbers really might not say much about usage -- what they'd be tracking is the ability of the operators to sell services bundles.

Anyway, the numbers show that the US operators are making pretty good revenue from mobile data. I didn't make a chart of this, but in general, the growth in mobile data billings is large enough to make up for the ongoing decline in mobile voice revenue. So the operators aren't getting rich, but data is helping to keep them from getting poor.

More details. Telephia lumps a lot of different things in the "Downloads" category. For Q1 2007, they gave more details on that category. So I can't give you a time series, but here's a more fine-cut look at how mobile data revenue looked in the US at the start of 2007:



Premium SMS is mostly ringtones paid for via SMS, plus voting for things like American Idol. Audio is downloading and streaming of songs. The other categories are self-explanatory. I feel bad about the tiny size of the applications category, but keep in mind that most smartphone apps are sold through the web and then synced onto the device, and so don't show up in operator billings.

Number of users per service. Telephia also reported the total number of users for each service. As we saw in the Orange chart, SMS has the most users in the US (although the gap between it and the other services isn't as large as in Europe).



Revenue per user. Combining the user and revenue data, we can estimate monthly billings per user for each service:



You can see why the operators like premium SMS. And look at WAP! It never lived up to the original hype that it would become the mobile version of the Web, but as a tool for getting things like sports scores and weather reports, it's not doing too bad. (Whether it's paying for all the money that was invested in it is another story.) Video's generating the most revenue per user, but with a very tiny user base. Audio revenue (which is revenue from listening to songs, not ringtones) is fairly close to what Apple gets from iTunes users (the average iTunes user downloads about 3.3 songs per month, or about $3.30) (link).

Usage doesn't follow capability. And now for the "big" mashup. We can combine Pew Internet's figures on phone capabilities with Telephia's numbers on service usage to figure out roughly what percent of US mobile customers who know they have a given feature on the phone ever actually use it. The results are interesting:



For communication-related services, the percentage of users is quite high (although remember that we don't know how heavily the features are being used). But most mobile users are not adopting the entertainment features in their phones. That's exactly what you'd expect if only a limited percentage of the population were interested in using their phones for entertainment, which is what a lot of user studies have shown (link).

The lesson: If you're an operator or handset vendor, be careful about pushing phones that are a kitchen-sink collection of expensive features. The odds are very good that you'll spend a lot of subsidy money on people who won't ever adopt the underlying services that were supposed to justify the subsidy. It's much better to offer a variety of phones specialized for different types of user, and let them pick the ones they want.

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As I said at the start, it's an interesting collection of tidbits, but far too US-centric. If you live outside the US and have information to add on your market, please post a comment.

Sources:
Total revenue of the operators: link
Orange's presentation at the Global Mobility Roundtable: link
Telephia's presentation at the GMR: link
Pew Internet: link

Mobile video: Is there a there there?

[Reposted due to a correction. Sorry if you get this twice on your feed.]

I recently I spent a couple of days at the Global Mobility Roundtable, an annual conference that brings together mobile-related academics and a selection of people from the mobile industry. This year's conference was in Los Angeles, so it also drew a number of attendees and speakers from the major entertainment firms. It turned into a kind of a mobile meets entertainment event, and the results were interesting. Mostly, they underlined how far we still need to go in bridging the gaps between the tech industry, mobile, and entertainment.

There's a lot of information to cover, so I'm breaking this post into two parts: mobile video in this part, and in part two the status of mobile data in general and the relationship between Hollywood and the operators.


Is there a pony in the stable? If so, it's a very small pony.*

There was a lot of disagreement about whether mobile video will take off, which may be just as well because the economics of it are seriously dodgy. It's not certain that users really want it, no one knows whether the revenue will come from sponsors or from user fees, and even if video does take off, it's not at all clear that the mobile operators can deliver it without bankrupting themselves.

Other than that, the prospects look great.

One panelist compared the situation in mobile video to a company running a health club: they want to sell a lot of memberships, but they don't want anyone to actually use the facility.

The information below is drawn from a series of different sessions I attended. I've mashed them together so I could organize the information by topic. All quotes are as accurate as I could make them. They are definitely correct as to message, but I probably missed a few words here and there.


Who wants mobile video? A segment of the market.

There are plenty of people in the industry who are enthusiastic about mobile video. One presenter quoted Rob Hyatt, executive director of mobile content at Cingular, as saying, "Watching video on cell phones could eventually easily surpass [demand for games, ringtones, and wallpapers], to reach 100% of the population." That's pretty remarkable, since even SMS doesn't reach 100% of the mobile population yet. (You can find the original quote from BusinessWeek here).

Telephia, a mobile industry research firm, reported that revenue from mobile video is growing rapidly, from $35m in Q3 2006 to $146m in Q1 2007. In that same period, the number of mobile subscribers in the US using video services grew from 5.7 million to 8.4 million (for comparison, there are 77 million MMS users and 148 million SMS users). The Telephia numbers imply that revenue per video user has grown from $2 per month to $5.80. Unfortunately, they didn't give any details on which particular services are growing.

The base is still very small, so it's dangerous to extrapolate from those numbers. But they're definitely hopeful. A number of other speakers were much less optimistic, though.

At the conference, USC presented the results of the sixth annual Worldwide Mobile Data Services study. It showed that about 30% of 18-24 year olds and 20% of 25-34 year olds in the US felt that video downloads to mobiles were an important feature, about the same percentage as wanted games on their mobiles. That's nice, but not the universal usage that Cingular talked about.

Sanjay Pothen, CEO of Pliq (a mobile video production company), claimed that 44% of mobile users are interested in mobile video -- but only 4% are willing to pay for it. That's the typical pattern for mobile data features -- most people don't want them if they have to pay anything for them.

Frank Chindamo, CEO of Fun Little Movies, which produces short video for Sprint, asked the audience how many people in the audience had Sprint phones. About five people raised their hands. "If you all subscribe, that will double our revenue for next month," he joked. [For the record, Frank asked me to make clear that he was only joking; he says he's actually quite happy with the Sprint relationship.]

Is the glass half full or half empty? As I've said before, I think there's abundant evidence that the market for all mobile data products is highly segmented, and we need to learn to make money from products that appeal to ten or fifteen percent of the users. I heard nothing at the conference to change that view.

But overall demand for mobile video is just the beginning of the story...


What sort of video will people watch on mobiles?

This one is still very much undecided. The usual assumption is that because short video is popular on the Web, it'll also be popular on mobiles. For example, Funny Little Movies is creating original short animated films for mobiles. (The place is run by a USC film professor who has his students create a lot of the content.)

Pothen of Pliq said the ideal sort of video for mobile is neither short individual clips (like YouTube) or long-form video (like a TV show), but chunked content -- an engaging story told in two-minute segments. He said excerpts from reality shows can work well -- highlights from America Idol, for instance. But original content seems to be his main target: soap operas, telenovelas, and cooking for young women, comedies and dramas for young men. The goal is to get people hooked by an ongoing story so they'll keep coming back to watch every segment.

Derek Brose, SVP of business development for Paramount Digital, was also excited about short video. He said the company is cutting all its movies into clips of different lengths, for various mobile usages. Two second clips -- something like Harrison Ford saying, "trust me" -- are for embedding in an MMS message. Twenty second clips are for use in ringtones. Two minute clips are for streaming your favorite scene from a movie. Paramount's goal is to teach consumers a variety of different things that they can do with mobile video.

But some people were skeptical about the prospects for short video on mobiles. Bill Sanders, VP of mobile programming at Sony Pictures, said that in Japan people are watching broadcast TV shows on their mobiles rather than short video streamed over 3G. He said 3G in Japan is great for certain kinds of applications, such as e-wallet. But he said data is priced so high that streaming video barely exists on 3G at all.

"The only thing you find in 3G is porn, because it's the only form of video where people will pay $10 for three minutes of content." --Bill Sanders, Sony

USC's mobile survey also strongly implied that the biggest demand is for broadcast TV. More than 40% of users said they thought that was the most interesting type of video for a mobile, compared to about 20% for short video.

David Tilson of Case Western University supported that view. He said that in a UK test of DVB-H (a broadcast video standard for mobiles), users watched three hours a week of television on their mobiles, with viewing concentrated in the lunch break and commute hours. That's very intriguing, because it implies that mobile video might add new television viewers at times when people don't usually watch TV. Unfortunately, the users were not charged anything in the test, so it's very hard to tell how much usage mobile TV would get if operators started charging for it.

I have no clue what the answer is on this question. People may say they prefer broadcast television just because that's what they're used to. Their actual purchase behavior might be very different. I think price will make a huge difference in adoption, which brings us to the next subject...


Who will pay for mobile video?

You've got two choices -- users pay, or advertisers pay. There are good arguments on both sides.

Sanjay Pothen of Pliq made an interesting case for having the advertisers pay. Since his company is involved in that business, his argument was not a surprise, but it was still interesting.

Pothen claims that neither paid nor ad-supported video are taking off today in the mobile world. As I noted above, he said few users are willing to pay for video, which stops the user-funded scenario right there. But ad-supported video is also problematic on both PCs and mobiles because users are not very tolerant of watching even a short commercial in order to see a two minute video. So what Pliq does is build the sponsor into the video itself, through placement and other promotion within the video.

Pothen said advertisers are willing to pay significant sponsorship fees for these videos. He wouldn't go into details on his financials, but someone I talked to privately said the revenue can be dollars per viewer for a three-minute video. That's impressive, and far more than you could charge a viewer for a few minutes of video.

Unfortunately, Pothen said, the operators want to take 50% of the revenue from these videos. He said that's not acceptable, that the revenue split should be more like 20% of revenue to the operator. "If we work in collaboration and the walled garden is down, we're willing to create original content (for mobiles)....We can drive mass adoption." But he said that won't happen in the current revenue situation.

My take: I don't think it has to be one or the other. Apple's selling a lot of video downloads to iPods, and that won't just dry up. But I think it's going to be very hard to make paid downloads the leading mobile video product, because they'll be competing with free video from places like YouTube, and because ad-supported TV teaches people to expect their television for free. Besides, if advertisers really are willing to pay dollars per viewer, there's no need to make people pay.

The revenue split is an ongoing problem in every mobile data category. There's no immediate solution, at least in the US. I think we're stuck in a chicken and egg situation in which the revenue split discourages the kind of programming investment that might drive a lot of usage, thereby justifying a more generous split.

That may be just as well, though, because video might break the mobile networks if it did take off.


Can mobile video be delivered?

This was the most disturbing topic of all. Even if we can find the right users, the right product, and the right pricing scheme, most of today's 3G networks are not well suited to delivering video.

Tilson of Case Western quoted some very sobering statistics on the economics of mobile video. He said one megabyte of data delivered as SMS messages yields £268 of revenue to an operator in the UK. That same megabyte delivered as video yields 20 pence of revenue, roughly 1/1000 the revenue. Of course, a single user of video is much more likely to consume a meg of data than is an SMS user, so the billing per user might still be fairly good. But video quickly exceeds the capacity of a typical 3G data network. He said no more than six viewers per cell can watch video at one time, and if 40% of users on a typical 3G system watched six minutes of video a day, they would saturate the entire network.

Hardly the basis for achieving Cingular's dream of 100% viewership.

Some of the operators at the conference confirmed this perspective. Francois Thenoz, Director of Strategic Marketing at Orange, said it takes seven minutes to download a 60-90 second video clip on a standard 3G network. 3G "evolved" takes 90 seconds (so you can just about stream in real time). The CDMA 1X network I use to connect my notebook PC is a lot faster, but GSM is the standard for most of the world, so his point was that in most places the wireless network simply isn't ready for video.

Higher-capacity networks are in development, of course. But Tilson said that in the UK, spectrum for a DVB-H wireless video system won't be available until 2102 at the earliest. That implies that for the next five years, mobile video in the UK is more of a science experiment than a serious commercial project.

In the US, the functional equivalent of DVB-H is MediaFlo, which is already deployed in Verizon's VCast system. MediaFlo transmits video one way, using a separate wireless signal, so it gets around the network saturation problems you get in 3G. Similar systems are already being used in Japan and Korea, and reportedly account for most of the mobile video usage there.

A drawback of the broadcast technologies is that they're not streamed on demand. You watch whatever's been programmed at that time. It's like a cable television system, but with far fewer channels. Tilson said one driver of mobile video usage is the availability of a lot of different programming, so limits on the number of channels might eventually restrict usage.

The other challenge for broadcast systems like MediaFlo is that they compete with people using SlingBox or similar products to retransmit their home cable television signals to their mobile devices. "Why get HBO Mobile when you can already get HBO home slinged to your phone?" asked Sanders of Sony. He pointed out that the Three network in the UK is bundling Sling services with its flat-rate 3G service offering.

"Three is like an airline that just bought a bunch of 777s and now they're flying with a bunch of empty seats," replied Brose of Paramount. He claimed that Three has to be betting that video usage will grow slowly enough that faster data networks will be available before the usage of video saturates the network.


The "encoding nightmare"

Then there's the question of standards. Unlike the PC, there aren't one or two video standards for mobiles. Because of the huge array of different screen sizes and software environments, a company that wants to stream video to mobiles supposedly needs to encode it in up to 150 different formats (seriously, that's the figure I was given by a couple of people). An executive I talked to called this the "encoding nightmare." Some companies are starting to offer server appliances that encode the video in real-time from one or a few base formats. But this adds expense to the business model, and real-time encoding is not as high-quality as pre-encoded video, especially if you're trying to compress the video heavily -- which is exactly what operators need to do in order to conserve bandwidth.


What does it all mean?

I think there's a role for mobile video, but considering the limits on user interest, and the huge technical and business challenges, it's not going to be the great horizontal application that drives the mobile data market. At best, it'll be a nice add-on for entertainment-focused users who want video in addition to their MP3s and games.

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*This is a reference to an old joke about a boy who desperately wanted a pony. One day he saw a stable stall full of manure, and began furiously shoveling it out. "What are you doing?" his parents asked. "Well," the boy replied, "with all this manure, I figure there has to be a pony in here somewhere."