Japan’s Softbank is taking 70% of Sprint, a move that combines with recent reports on looming declines in revenue and profit for European mobile operators to pose questions about mobile overall. One interesting thing this deal shows is that at mobile markets mature in a given geography, profits and margins slow their growth and eventually turn around. This leads to operators investing outside their home areas. Think for a moment what the prospects in Japan must be if there’s a better shot at making money by buying Sprint.
Pressure on mobile revenues and profits are created by many of the same forces that created wireline problems starting a decade ago. The Internet generates traffic for operators but revenue generation even for mobile doesn’t keep pace with traffic growth. That means that the operators are forced into providing incremental capacity more and more efficiently, putting downward pressure on equipment prices and driving cost-conserving changes in how equipment is deployed. This effect has been the primary cause of pressure on the network equipment vendors.
What makes mobile interesting is two differences versus wireline. First, the history of usage pricing in mobile has made it possible to sustain better margins there for a longer period, which means that there’s been more time to consider possible solutions to the problem of revenue growth. Second, mobile broadband is much more of a behavior-changer than wireline broadband because it opens a gate to broadband consumption where no consumption was previously possible—when the user is not at home. Obviously these two forces tend to act in tension with each other, and I think the significance of recent mobile trends is that they show the negative forces are winning.
There’s another difference, or potential difference in mobile, though, and that difference is in how tightly mobile ties OTT to both customers and operators. Mobile services have generated a direct customer revenue model with the app, versus the indirect model represented by advertising that’s dominated wireline broadband OTT services. Mobile services also create “OTT disintermediation” by partner device vendors and not indiscriminate hosting providers. The operators themselves either accepted the risks of smartphones and tablets, underestimated them, or both. BUT, the good news is that a direct revenue model is easier for operators to play in since that’s their current model for revenue flow.
When operators saw their world changing, they launched their “transformation” projects aimed at changing their business model away from pure bit-pushing, but these projects gained little traction early on because vendors simply didn’t provide operators any support or solutions. A couple of years ago, the generalized “transformation” stuff was displaced by “monetization” as operators focused their attention on three targets—content, mobile/behavioral, and the cloud—in order of their likely bottom-line impact. Projects were launched in all these areas.
The problem is that these projects continued to flounder on lack of technology support. We’ve barely reached the half-way point in getting content projects launched, and mobile projects are WAY behind that. Only the cloud has beat expectations, and there it’s because operators could proceed without much equipment vendor support. Mobile has shown the least progress of all, and it’s hard not to believe that mobile is lagging in large part because cloud execution of mobile/behavioral services isn’t moving forward fast enough. The percentage of content projects involving cloud implementation is way more than double that of mobile projects. That’s why I think the Alcatel-Lucent announcement last week was worthy of discussion, but it’s also why I think a LOT more work needs to be done here.
The big problem with mobile/behavioral services in cloud terms is that all the credible services are based on web-oriented execution—an app partnership with a website that provides information/processing. That kind of relationship is the “Internet” that “Internet offload” typically addresses. Thus, mobile infrastructure focus has arguably been on dumping the traffic that represents the operators’ revenue future like a hot potato!
We’ve taken the first baby step to the cloud future by making IMS more cloud-friendly; host IMS itself as a cloud app and expose IMS services and features as APIs that web developers can use when they build their behavioral-driven apps. But we also need to figure out how to alter the basic structure of mobile backhaul, and likely metro overall, to reflect the new reality. One reason is that mobile services will be the revenue plumb so you have to support them, obviously. Another is that Windows 8 is proving that mobile concepts are going to be pulled back into wireline; you don’t stop behaving in a mobile-driven way just because you walk in the door.
Mobile/behavioral symbiosis is the most important issue in the cloud too, because it’s where most of the cloud revenue will come from. You heard me! We are NEVER going to convert everyone’s data center spending into cloud hosting; a quarter of that in rough terms is all we’ll get. All the rest of the huge pie of cloud-based revenue (I’ll be forecasting that in detail in Netwtacher’s November issue) will come from mobile/behavioral symbiosis. But in addition, services drive infrastructure change, and how mobile/behavioral apps work in the cloud will drive both cloud deployment and access to the cloud, meaning the metro network. THE biggest issue in the industry, and we’re not there yet. Vendors, see an opportunity?