GMP 3GSM Wrapup
Our friend Ray at GMP has done a good job wrapping up what one of our CEOs called “the New COMDEX”. Reading between the lines, you get a sense of nervousness about RIM’s prospects; which might explain why GMP has a hold on that stock right now, and a one-year share price target that is well below the current quote:
“More data, subscribers, and speed – highlights from 3GSM 2007
The industry generally looks quite exciting for 2007. Technical variables are converging along with carrier sophistication to achieve two important objectives. The first is making telephony a reality to those in the world that are not connected but reside in coverage of a mobile network. The second is evolving mobile technology so that the handheld device is a personal connection to the global network. Soon it will be possible to send a text message to half the world’s population. The mobile services market also continues to outpace all comparable services market in both size and growth. In the past we articulated a thesis that the mobile services market is absorbing the fixed telephony as well as the Internet itself from a value perspective. Growth potential for the market remains strong as we expect to see a mobile population of 3 billion users by end of 2007 (up from 2.6
billion today) and 5 billion by 2015.
A series of new handset introductions at 3GSM are bullish for increased mobile data usage, however, significant new innovation was not apparent. The mobile phone industry, the world’s largest consumer electronics market, should grow 10-12% in unit terms to 1.1 to 1.2 billion units in 2007, slowing from last year’s better-than-expected unit growth of roughly 16%. Growth rates for the handset market will continue to slow and will increasingly depend on mobile users replacing handsets. A study by Informa Media & Telecoms on the 2006 handset market found that 46% of units sold included a camera, 16% music playback, and only 0.3% with broadcast television. Dozens of new handset models have been introduced by vendors although none jumped out to us as innovative or surprising. Ironically, the GSM Association best handset award was given to the Sony
Ericsson K800 which was released a year ago in February 2006. The K800 is a 3.2 megapixel camera phone with mp3 player and has shipped an estimated 6.5 million units this year.
In previous years it was possible to define a broad theme such as mobile TV, camera, or PDA. The majority of handsets released this year are evolutionary improvements from previous models. If forced to pinpoint a single technology which appears destined for broad adoption we would pick GPS which we liken to when camera integration began in mobile devices in 2003. Major handset OEMs such as Nokia, Motorola, and Samsung released new generation smartphone products. On the surface they appear similar to previous versions, however, the more significant difference is improvements in software. Devices like the Nokia e61 (sold an estimated 2 million units to date) and the Motorola Q9 (the original Q targeted 5 million units last year but fell substantially short of this goal) are refined progeny of QWERTY high-speed products that will be more impactful in 2007. RIM’s 8800 series is a solid product release from a form factor perspective and we expect to see a strong upgrade cycle from the existing user base. Built-in GPS functionality as well as the track ball are smart differentiators for the product although the competition is closing the gap from a application point of view. Nokia products ship with Intellisync push email (which supports over 100 devices including many non-Nokia vendors) and Motorola’s purchase of Good Technology will end in a similar result albeit with a time difference of roughly 6-12 months. Nokia and Motorola both have subsidiary enterprise email solutions and combined represent over 600 million of the handsets that will ship this year.
The smartphone market remains a lucrative, high growth segment of the market and is associated with the best mobile customers from an ARPU and profitability perspective. LG won the industry bake off for the ultra-low cost 3G handset. Similar to an initiative to provide low cost 2G handsets won by Motorola, LG will supply the KU250 product to an operator group representing 620 million subscribers. Prices are not yet disclosed although the device is expected to be roughly 30% cheaper than the average price of 3G devices when released. We don’t as yet see the fit between a high speed device with the ultra low cost niche in emerging markets (besides the obvious general trend towards lower cost devices).
Apple had no formal presence at 3GSM although this is surprising given the level of iPhone questions to vendors who feature multimedia capability. The general perception of handset competitors is that the hype surrounding Apple is a marketing blessing but may prove to be an operational curse as the company will be challenged to live up to expectations. Many also question the durability of the touch screen. We spoke to industry executives who are testing the device and found that there are numerous technical glitches that need to be addressed prior to launch this summer. In addition, it will be interesting to see how Apple manages wireless intellectual property issues. Most vendors in the sector swap IPR which lowers the cost of license fees. In the cast of Apple it is not clear what they would swap and in the extreme scenario where they pay full fees this could result in a 5 to 10% cost disadvantage.
Microsoft launched its latest version of Windows Mobile last week. The new operating system has many new features (many of which subtle improvements like a Vista look/feel, presence, access to global contact list, last communication to each contact, account wizard for email support) while others like full HTML email support, VoIP software, integration with the 240 million users of Windows Live, or the ability to search exchange server for archived emails are more meaningful. Microsoft also replaced Activesync with an application called Mobile Device Center which resides on the desktop and allows carriers to customize a section of the software to do things like provide links to buy applications or upgrade device software. Microsoft also updated its market progress during an analyst briefing. Microsoft reported that sales during calendar Q4 2006 were 3 million units (consider that RIM shipped 1.8 million units last quarter). This compares to 6 million units shipped during all of F06 (June/06) and 3 million in F05. Microsoft now has 125 operator customers on over 140 devices. Microsoft also disclosed that they now boast over 120 enterprise deployments of over 1000 units and 30% of these were competitive wins from existing RIM customers. Microsoft indicated that it is beating RIM on new, large deployments as well displacing them from existing accounts. Microsoft also indicated that at Cingular the new Samsung BlackJack with Microsoft is outselling all BlackBerry devices combined.
Separately, Symbian announced that 51.7 million phones shipped in 2006 with the Symbian operating system (14.6 million in Q4/06 alone versus 11.3 million in Q4/05. There have been 108 Symbian smartphones commercially released and a further 56 are in development. Average operating system license royalty of $5.10 is flat versus last year. We did not see a significant representation from Linux this year, however, Motorola announced that they expect 60% of their products will use this operating system. Motorola says that it is not using Linux due to cost as lower license costs are offset by the higher costs of development. The key reason that Motorola says it uses Linux is for third party tools applications. Both Vodafone and Orange have strongly endorsed Linux with Vodafone indicating plans to phase out all operating systems on its network other than Microsoft, Symbian, and Linux. One complication we can foresee is the complexity of providing support to mobile users who encounter software problems on their device. Strategy Analytics found in a study that average support call time for a smartphone user is 45 minutes, costing $63 versus 5 minutes and $7 for basic voice-only phones. Remote diagnostics software is going to play a key role in keeping the smartphone market operational
in the coming years as software and content evolves.
Mobile TV Handsets, WiFi, and WiMAX Handset Technologies
LG and Samsung continue to lead the industry in development of mobile TV handsets. Nokia has a conservative view on the sales of mobile TV handsets and predicts that this market will be somewhere between 5 and 10 million units in 2008 and 20 million units in 2009. Motorola recently released the HSDPA Motorizr Z8 device shown below which delivers 30 frame/second video performance. Qualcomm announced last week that their UBM (Universal broadcast modem) has begun sampling with support for both the FLO and DVB-H standard and aims for a price point of $10 to $12 (for context current industry estimates are that a mobile TV handset costs $150 more for the carrier versus the average handset selling price). AT&T also announced 2H/07 launch plans for the mobile video MediaFLO network that Qualcomm is building across the United States. AT&T’s support is a significant boost to Qualcomm’s mobile video ambitions. Sprint Nextel is not planning on supporting MediaFLO over the near term as the third largest carrier in the United States executes on its WiMAX strategy. Last year was the year when mobile TV started to make sense technically and this year is when we should see selective commercial deployment. Therefore we predict 2008 will the first real year of mobile TV where we will gather critical mass from a financial perspective. We also believe that a derivative impact of mobile TV will be video file sharing as an application. WiFi handset designs are increasing and a Informa Telecoms and Media study which finds that 70% of mobile calls occur in-building supports WiFi’s role in mobile voice services. The WiFi alliance has
certified 100 devices since 2004. LG and Samsung were demonstrating WiMAX model handsets that expect to be formally released in the next several months. The devices are large and bulky compared to modern cellular handsets but are actually impressive when considering they are first generation units that support cellular, WiMAX, and mobile TV.
Finding Hortizonatal Apps Beyond Messaging
One of the challenges for the mobile industry is finding some form of application (including content) that has broad based appeal beyond messaging. This is proving to be much more difficult then expected while in the meantime the SMS market defies reasonable growth off a large base of business with an estimated 1.5 trillion text messages sent in 2006, versus 1 trillion in 2005. We believe that the ever sought application beyond messaging needs to be better understood on a demographic basis. In our opinion we believe that carriers and technology developers need to consider that the behaviour of a 65 year-old mobile user is different than the college student. One is a voice-centric user whereas the other could decide to never have a landline phone, cable modem, or personal computer.
Mobile Web Surfing Remains Elusive
Basic web information retrieval has horizontal market potential because there are many times when a user has spontaneous need to know something. The challenge is that performing a Google search on a device often doesn’t cut it as the mobile user does not want to click through pages of links using a small browser screen. Media Matrix research suggests that mobile portals must bring content to users within six clicks as there is a 10% drop rate per click. We believe that the sweet spot to compel the mobile user is the ability get the info within three clicks of launching their application or browser, however, this capability remains elusive. Determined information seekers will suffer a longer process but it’s the spontaneous web search for a data point that is being discussed during a meeting or over a casual conversation that needs to be considered to give web access the opportunity to be a universal mobile application. Last year we discussed the introduction of the .mobi organization and within its first year of operations hundreds of .mobi websites have been launched (one .mobi domain name recently sold for $200,000). WAP, full HTML browsers, software to optimize display on a mobile device, and .mobi are all attempting to improve the mobile web surfing experience.
Mobile Web 2.0 Lacking and Mobile Advertising
We are surprised about the lack of web 2.0 mobile developments. Big brands like Ebay.com, myspace.com or youtube.com are making progress in the mobile area (Vodafone announced content deals with several online leaders last week – a marked departure from the walled garden approach of Vodafone Live! Service) but no online community has made a material impact to the mobile market. We expect to see this emerge as a key theme next year with leadership potentially emerging from a community constructed from inception for mobile users. Google’s mobile effort is gaining the attention of mobile operators and handset vendors and is introducing the $16 billion online advertising community to several interesting opportunities. Mobile operators are tentatively considering advertising as they attempt to balance a great fit of understanding the user profile (age, name, sex, geography, call patterns) with concerns about intruding on their customers by targeting ads. Google’s ambitions in mobile extend beyond search (a separate Kelsey Group study on mobile search advertising suggests a $3.7 billion market by 2010) and include physically building out WiFi networks in major cities, location based services, and local search/commerce but these topics are beyond the scope of this report. A study by Mobile Marketing
Association showed 41% of users would accept watching ads on mobile devices in return for lower subscription fee. Other studies from mobile TV trials have found that mobile users are pushing back on mobile TV service fees so combining the profile with advertising may improve the ability of operators to broaden adoption and charge lower subscription prices. Not surprising, Vodafone Netherlands did a survey on what mobile users want to watch on their device and found news, weather, and sports to be the first choice but first statistics show adult content currently represents 38% of usage.
Navigation then Mobile Commerce are Compelling Apps
Navigation as an application is showing all signs of mass market potential as handset OEMs, semiconductor suppliers, operators, and software vendors conspire to make this a much bigger category in the near term. We believe that the market in 2007 and 2008 will drive navigation into 5 to 10% of handset sales with potential to hit 20% by 2010. The challenge for this area is extending value beyond navigation to include enterprise applications as well as location based services such as local search. We believe that the time has now arrived where mobile commerce begins to fulfill the promise of turning the mobile device into an electronic wallet. The GSM Association announced plans on working with MasterCard on a pilot program to support international money transfers over mobile phones. We believe that this could be a simple way to gain attention from the mobile community, especially as users need to gain comfort on using their device and operator for commerce. The GSMA and MasterCard are targeting the 200 million migrant workers with mobile devices, many of which who don’t have banking facilities in their employment country. The expected impact of the project is significant as the number of international transfers is anticipated to double to 1.5 billion worth over $1 trillion by 2012 with
significantly lower cost to the end users.
2007 3GSM disappointments
There were several disappointments from our perspective. The first is the failure of the Intel/Nokia relationship to work on high speed cellular integration as a personal computer standard. The Mobile Virtual Network Operator evolution has not occurred as we anticipated. A prime example is mobile ESPN which we had predicted would marry premium content with the mobile experience. Instead, content-oriented MVNO’s have not taken off and subscribers have bifurcated into high and low end offerings. Informa projects 133 million MVNO subscribers by 2011. The majority of these are discount oriented with 27 million expected to be niche customers with premium ARPU levels. There was a lack of hardware innovation as discussed earlier in this report. GPS integration is poised to become a mass market technology in handsets although this is nothing new. Much of the innovation
over the past year (besides the new user interface of the iPhone) occurs in subtle improvements in software.”