Analyst Angle: The untapped mobile data opportunity

Editor’s Note: Welcome to our weekly 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.
Many operators have been glumly reflecting on a year of declining margins in what is a climate of market saturation, price erosion and ultimately deteriorating margins.
The pressure on prices is said to be exacerbated with operators finding little other opportunity to differentiate: either by their network capability or with device innovation. This despite consumers placing tremendous importance on the mobile device and high user engagement.
A majority of the operators have overlooked a huge opportunity for improving revenue and margins: getting data services to the untapped mass market.
There has been over $300 billion spent on data devices over the past two years on over 2 billion devices. This has largely come from the expensive high-tier smartphone market, representing just 9% of the global market penetration.
There has been a polarization as a result of operators diverting the bulk of their customer acquisition investment at this top end of the market, largely subsidizing expensive smartphones.
It has left the vast majority of the consumer markets in the world with very basic voice-and-text devices (‘feature handsets’) on mostly 2G networks.
That small slice of the smartphone market has not only taken up the lion share of the operators’ subsidies, but has also drained network capacity. The average smartphone user spends less than 20% of his or her time on voice. The rest is on applications, messaging and Internet services.
For operators, there has been an issue of managing data growth. O2 recently revealed that one consumer watching a YouTube clip was the equivalent of managing 500,000 text messages.
This comes as many operators’ financials have experienced narrowing margins. Costs are made up of customer acquisition costs (commissions, marketing, etc); network; support (call centres, churn); subsidy (handset cost).
We calculate that the margins on both the smartphones and the feature phones are both approximately 32%, despite the significantly higher spends of smartphone users. This is due to the relatively high cost of smartphone subsidy. It leads one back to the opportunity of increasing data usage in the mass market.
The encouraging trend of 2009 that many operators gravitated towards was that in the midst of the recession, many consumers were trading up to smartphones – the segment was up 12.7%. They represent 1.8 times the ARPU of the feature phone (according to AT&T), so it’s no surprise there has been such a focus.
It should be noted that that although there is higher average spend, these consumer were always the bigger spenders and made the most voice calls prior to using smartphones. Many smartphones users still use their (free) smartphones for just voice and text.
Smartphone usage is also localised to high spending groups in North America, Western Europe, Korea and Japan.
These high-cost devices on expensive data plans are a severe obstacle for the majority. But there continues to be unquenched demand in this ignored majority for mobile e-mail and Internet services.
For operators this is a market ripe for targeting. It requires the availability of compelling, efficient devices, optimised for e-mail and Internet services on 3G networks.
It is crucial for operators to address this need for data in the mass market, as voice revenues continue to be under severe pressure.
Between 5% and 10% of the feature phone market are connected to data plans, compared with 70% to 80% of smartphone users.
In 2008, 3.3 billion feature phone users were doing nothing more than voice and text on their mobiles. That compares with 74 million in the smartphone category.
There are two ways to address this opportunity. The first, taking as many feature phone users as possible into the smartphone category. The other, bigger opportunity is in getting those feature phone users to use data without subsidising expensive smartphones.
It brings us to a middle ground that has been ignored for the last 18 months. It means enmeshing functionality of a smartphone, a relevant data plan, efficient devices capable of messaging and Internet services at lower costs and running them over 3G networks.
The industry has essentially applied 2G voice thinking for the new world of 3G data services.
Devices are not designed or created with a suitable 3G backbone in mind that is relevant to what younger consumers of media want from a mobile device today – browsing, messaging, Internet communication and several applications running concurrently.
Building data propositions relevant to the mass market will also present an opportunity to bring value back to the huge investment made in 3G networks.
Operators will have to focus on introducing devices and services that are affordable and that don’t rely on big subsidies or two-year contracts to recoup the investments. The combination of optimised 3G networks and mass market consumption of media has left an untapped opportunity of targeting the broad cross-section of the user population with relevant applications, messaging and internet services.
Chetan Sharma is President of Chetan Sharma Consulting and is one of the leading strategists in the mobile industry. He has served as an advisor to several Fortune100 companies in the wireless space and is probably the only industry strategist who has advised each of the top 6 global mobile data operators. His client list includes NTT DoCoMo, China Mobile, AT&T, Sprint Nextel, KDDI, Reliance, KTF, Sony, Juniper, Alcatel-Lucent, Qualcomm, Comcast, HP, and Disney. Chetan is also a leading authority and IP expert in the wireless industry, testifying in cases such as ITC – Qualcomm vs. Broadcom as well as the author of 5 best-selling books on wireless. He is interviewed frequently by global media and his research is widely quoted in respected publications such as NY Times, WIRED, Business Week, Fortune, WSJ, Reuters, AdAge, and MIT Technology Review. Chetan serves on the advisory committees of several startups. http://www.chetansharma.com.