Despite the gadgets, the mobile economy faces growing pains

6 Mar 2013

CEO and chairman of Telefónica César Alierta

Barcelona became the epicentre of all things mobile last week, as more than 70,000 telecoms and internet industry people gathered to reveal and observe the latest breakthroughs, gadgets and technology.

From a hardware perspective, key launches at the Mobile World Congress centred on devices like the Samsung Note 8.0 tablet computer, Huawei’s Ascend P2 smartphone, which at speeds of 150Mhz the Chinese technology giant claims is the fastest in the world today, and Nokia, which as well as bringing out new Lumia 520 and 720 devices for the high street, unveiled a €15 phone, the Nokia 105, as part of a common industry drive to connect the next 1bn people to the internet.

But despite all the wizardry on display, there were more pressing matters at play, most notably how mobile operators are going to continue investing in the rollout of next-generation 4G LTE (Long Term Evolution) networks and actually make money out of the investment in the face of declining revenues as consumers evolve from voice and text services to mobile data.

According to the GSM Association (GSMA), mobile operator data revenues are predicted to overtake voice revenues globally by 2018. The new networks will have massive socioeconomic benefits across the world in terms of things like mobile health and allowing people who never had a bank account before to suddenly engage in e-commerce.

But despite the apparent opportunities, the mobile operators are not happy.

Overburdened industry?

Operators this year said they feel the industry is overburdened in terms of regulations and taxes and mostly they are annoyed that internet giants like Facebook and Google are carving out lucrative empires on the back of their networks while the operators themselves are seeing their own revenues plummet.

While many of the CEOs of mobile operators hinted at the latter frustration, they felt it wiser to try and be more vocal about regulators and taxes because they also know consumers won’t use their networks if they can’t get their Facebook or Google feeds on their shiny new smartphones. It’s what you might describe as a sort of ‘phoney’ war where everybody is outwardly polite, but inside they are raging.

It is a predicament. Mobile revenues are falling and operators are tasked with building massive next-generation 4G networks after bidding for expensive spectrum licences.

“Operators are under pressure,” said GSMA director-general Anne Bouverot, pointing out that the networks know they will be integral in the connected lives of the future but have to be certain of getting a return on their investment.

In Ireland, ComReg raised €855m for the exchequer in the recent 4G spectrum auctions involving Vodafone, O2, Three and Eircom. But in the UK, Ofcom raised stg£2.34bn from its auction of 4G mobile spectrum – some stg£1bn short of the stg£3.5bn it hoped to raise for the UK treasury.

The GSMA estimates the industry is expected to spend US$1.1trn on capex in the next five years and will add 1.3m jobs around the world. The mobile industry’s contribution to global GDP between 2013 and 2017 as a result of its investment is expected to add up to US$10.5trn.

AT&T chief executive Randall Stephenson anticipates that mobile data volumes in the US will increase by an enormous 30,000pc between 2012 and 2017, driven by access to cloud applications over 4G networks.

The regulation issue

But the thorn in the side, the operators say, is regulation. O2 UK’s CEO Ronan Dunne cited the number of telecoms companies operating in Europe alone – more than 126 in total – as an example of over-regulation. “In the US, there are just four mobile operators,” he said.

Dunne’s boss, the CEO and chairman of Telefónica César Alierta, made his feelings clear as he addressed the world’s mobile industry.

“Operators are facing regulation and taxation based on the principle of mobile being a luxury industry with high margins,” Alierta said. “We are still burdened by outdated regulation and taxation in a challenging ecosystem.

“The central role of operators is challenged by new players from the software and hardware worlds. We are challenged to upgrade our networks to accommodate huge growth in traffic. But our revenues are not growing at the same speed.

“We need to see change in the regulatory and policy environment in order to allow the industry to reorganise to cope with the new environment.”

According to the GSMA, there are 3.9bn people in the world accessing mobile devices and over the next five years the industry has set a target of adding 1bn people to the mobile economy over the next five years.

“We are all living in a new world, full of opportunity but which is still largely unexplored in terms of the impact of new players. We need to find the right equilibrium in order to be sooner able to concentrate on delivering the promised connected world to ensure that nobody will be left behind,” Alierta said.

It was clear at the congress this year that the operators want to use the plan to bring 1bn more people online as an opportunity to wrest back some of the control of the mobile data economy from players like Google. In the fourth quarter of 2012, 70.1pc of the smartphones shipped worldwide were devices running Google’s Android operating system.

Firefox OS by Mozilla

One of the strategies employed by the operators is their support for a new mobile operating system called Firefox OS by Mozilla for affordable smartphones in the developed and developing economies.

On board with the Firefox OS plan are operators that include America Movil, China Unicom, Deutsche Telekom, Hutchison Three, MegaFon, Sprint, Telecom Italia, Telefónica and Telenor, to name but a few.

Hardware manufacturers that are making smartphones that will run the OS include LG, Huawei, ZTE and Alcatel.

The first Firefox OS smartphones that will hit the market will go on sale in Asia, South America and parts of Europe in the months ahead.

According to the CEO of Mozilla Gary Kovacs, the internet and the apps economy has become a walled garden dominated by two players, namely Apple and Google.

“A decade ago, the founders of Mozilla called a group together with the intention of making the internet a common good for society and decided that it should not be dominated by two companies only,” Kovacs said.

The interesting thing about the new Firefox OS is that it is entirely built on web standards and allows developers to build websites and apps at the same time. It also makes it possible for app developers to retain 100pc of the revenue from the sale of apps rather than the industry standard of 70pc set by Apple and Google.

Richard Leyland, a spokesman for Bango, a UK-based payments provider listed on AIM and valued at US$150m confirmed there is simmering tension between the operators and the internet giants. Bango supports payments via mobile devices for 200m people worldwide. It counts both Facebook and mobile operators like Telefónica as customers, allowing consumers to buy goods like apps and charge it directly onto their bills.

“It is definitely real. The mobile operators are essentially watching their lunch being eaten and hosting traffic on their networks that is being monetised by other companies. The only appropriate response is to join in and find ways of monetising. The weapon in their armoury is the billing relationship they have with the phone owner and when a transaction is made on a network like Facebook for an app or a game they can get a slice of the action.

“The problem is that in the past operators had unrealistic margin expectations. Those days have gone and the operators are joining in the price negotiations with an open mind and intend to get deals done.”

John Kennedy

Mobile industry targets the next 1bn people

Nokia CEO Stephen Elop summed up the importance of connecting the next 1bn people to the internet.

He said in the developed world most of us take things like birth certs, driving licences and passports for granted. But in the developed world it is different but this could be altered forever.

“To gain access to the digital economy all you need is a phone number and a digital device. Just like that you become part of the tapestry, a light on the grid for the rest of the world.

“Historians estimate that the industrial revolution affected 10m people. If you think about it today – 150 years later – we are going to affect 100 times more in terms of population effect. As we see more and more lights come on the grid, the more powerful and significant will be the economic change that will take place.”

Manoj Kohli, the CEO of India-headquartered Bharti Airtel, the third largest mobile operator in the world with 261m subscribers in 20 countries, said that for every 10pc increase in broadband penetration in a developing country there is a 1pc increase in GDP. He said there is a need for mobile devices that cost less than US$30 and mobile broadband dongles that cost less than US$10.

“To get to the next 1bn users we need to fully enable everybody with a mobile device. We also need to shift the dial from voice to data.”

Kohli echoed the call for more light touch regulation in order to make mobile broadband universally available and affordable. “Governments need to calm down on taxes.”

He said the top 7 markets in the world for accessing Facebook by mobile are in all in Africa. For example, Facebook penetration in Africa is 88pc of the population. “Society needs this.”

Picking up on Kohli’s point about the relationship between GDP and broadband penetration, Elop said: “The individuals may only make a few dollars per day, perhaps less than that, but suddenly he or she has access to the same level of technology and information once reserved exclusively for the middle classes.”

He continued: “We believe that the next 1bn people are very young and very ambitious. For the very first time they are able to afford their own mobile phone, it is not a device they have to share with their family or the village. It’s their own.”

Stephen Elop

Stephen Elop, CEO of Nokia

A version of these articles appeared in The Sunday Times on 3 March

John Kennedy is a journalist who served as editor of Silicon Republic for 17 years