Analyst Angle: When Telecom Galaxies Collide

Editor’s Note: Welcome to our Monday feature, Analyst Angle. We’ve collected a group of the industry’s leading analysts to give their outlook on the hot topics in the wireless industry. In the coming weeks look for columns from M:Metrics’ Seamus McAteer, Ovum’s Roger Entner and Current Analysis’ Peter Jarich.
The collision course between the cellular and computer/Internet galaxies is an unstoppable force I have been watching for over a decade. There is certainly no shortage of trends coming from both industries to confirm that this collision has been well underway for some time.
For example, about the same time Nokia started referring to millions of its high-end devices as “multimedia computers,” I also began to see strong evidence to suggest growth in embedded 3G notebooks was really set to take off this year. “Hmm,” I thought to myself, “major notebook OEMs are finally thinking outside of the box in terms of cellular, and Nokia is finally thinking ‘outside of the phone’ with a computer mindset.”
While real colliding galaxies amazingly tend to pass right through one another, violent and cataclysmic interactions do occasionally happen. Stubbornly staying with my cosmic analogy here, my two observations on Nokia and 3G notebooks can be considered passing stars, exerting an influence on one another (and certainly useful for an analyst to squirrel away in his knowledgebase), but stirring up no real friction. Nothing earth-shattering, shall we say. Sometimes, however, news cycles have a way of flaring up in ways that are more like violent collisions. When these intergalactic highway pile-ups happen within colliding industries, you know it. It jolts you into reality, but can also lead to overreaction. Year-to-date 2007 has been one of those cycles.
Let’s face it, Apple’s iPhone announcement in January effectively trumped the entire 2007 Consumer Electronics Show on a number of levels. This is perhaps not surprising considering it laid to rest an unprecedented run up of frothy iPod-fueled excitement and guesswork (the likes of which will not be matched for some time in the phone market). Damage is not necessarily done in the way of players battling it out directly, but in the way that some news events can wind up the hype and idle speculation machinery waaaay too tight. Ron Garriques’ exodus from Motorola created a huge spike of the speculation meter-is this part of Michael Dell’s master plan to usher in a new era of smartphone supremacy? Well it was certainly enough to make jumpy Wall Street types wonder out loud if computer icons are ready to put their cash cows to pasture in an effort to beat the smartphone pioneers at their own game.
Are computer titans really set to invade the cellular industry? Before we draw any chalk outlines on the pavement, take a deep breath and repeat after me: NOTEBOOKS ARE ABSOLUTELY CORE TO DELL AND APPLE’S PRODUCT ROADMAPS, AND NEITHER IS GOING MAINSTREAM IN THE PHONE MARKET ANYTIME SOON.
Just how aggressively will Dell’s Global Consumer group pursue handheld devices with Garriques at the helm? It will be interesting to watch the extent to which Dell tries to replicate the Motorola marketing sizzle (of old?) or stay with more buttoned-down smartphone designs that will also appeal to their existing IT channels. Make no mistake though, notebook computers are vital and highly profitable product lines for both Dell and Apple, with billions tied up in R&D. Forget about iPod fever and Razr-mania for just a moment to consider the stunning rapidity with which notebooks have topped desktops as the personal computing platform of choice. From a cellular perspective, a sizeable chunk of this R&D is likely related to wireless in one form or another. For Dell, I expect 3G notebook connectivity will remain the main here-and-now mobility play for the foreseeable future. For his part, Steve Jobs’ feet won’t really be held to the fire on reported iPhone sales volumes until 2008. Apple notebook devotees that found themselves without type II PCMCIA slots on recent machines finally have ExpressCard options capable of handing high speed data on both the forward and reverse link (EV-DO Rev. A and soon HSUPA).
What is the more immediately relevant story for notebook OEMs? The truth is that the market beyond handsets for cellular PC cards and integrated 3G modems (not to mention wireless wide area network routers and machine-to-machine modules) is stronger than ever and poised for impressive growth over the next 5 years. Option Wireless’ 2006 revenues were up almost 41 percent over 2005, and Novatel’s were up over 28 percent, with embeddable modules ramping up quickly. Not only do integrated modules offer improved antenna gain, longer battery life and component costs that are (in theory) lower than PC cards, the build-to-order model (practically invented by Dell) is perfectly suited for 3G modems, which even in their cheapest form still have a relatively high impact on the bill-of-materials. Furthermore, our research suggest that big-ticket purchases of items like notebooks represent a unique opportunity to introduce users to new features and lock them into recurring revenue streams. Lastly, faster speeds on the reverse link enabled by EV-DO Rev. A and HSUPA clearly make the embedded 3G decision easier for OEMs and users alike.
The newfound receptivity of notebook OEMs towards integrating 3G is a godsend for mobile operators looking to monetize their 3G investments (though in truth, operators’ generous “activation bounties” were fairly persuasive in swaying notebook OEMs this way).
The reality for network operators is that while VoIP potential and the uploading of user-generated consumer content from handsets are huge albeit risky long term positives for EV-DO Rev. A and HSDPA/HSUPA, it is the immediately solid business case for browsing and sending large e-mail attachments rivaling fixed broadband that clinched operator decisions purse these technologies.
On yet another front in the cellular vs. Internet fracas, in this very column last week you may have read a well-reasoned view from one of my industry analyst colleagues on the ever-contentious net neutrality debate. Well I couldn’t resist the opportunity to weigh in on this, particularly when I can stretch my colliding galaxy metaphor to include it so easily!
Should wireless reflect the relative anarchy we see in the Internet, or a locked-down colony ruled with an iron fist? Something in between is probably the best (and most likely) outcome. In a competitive environment, mobile operators have every right to dictate device costs, subsidies and contract obligations as well as charge what they see fit, to whom they see fit (including the Google’s of the world), for bit carriage. The free market and looming threat of potentially disruptive technologies does an astonishingly good job of keeping things in check. Fair competition and the threat of technological discontinuities are a big part of the answer. Note Vodafone CEO Aurin Sarin’s strong cautionary message in Barcelona regarding the emergence of a more Internet-centric and Internet-friendly WiMAX ecosystem originating outside of the mobile operator’s world.
That said, I do hope that competitive dynamics will effect a number of changes on the device side, and soon. For the U.S. ecosystem and market revenues to reach their full potential, carriers individually approving each and every device running on their network is a major stumbling block, and one that really works more to the detriment of CDMA operators. And while users can get around long contracts by paying more (much more) for an unsubsidized device, they are more often than not still subject to the same mandated operator UI and disabled functions as a fully subsidized subscriber.
The fixed Internet had an incredible set of catalysts from the get go that was a far cry from the cellular world-one protocol (IP) and essentially two device types (IBM compatible PC’s and Macs) with highly software-driven functionality, so let’s not expect any overnight miracles.
Questions or comments about this column? Please e-mail Cliff at CRaskind@strategyanalytics.com or RCR Wireless News at rcrwebhelp@crain.com.