Editor’s Note: Welcome to our weekly Reality Check column. We’ve gathered a group of visionaries and veterans in the mobile content industry to give their insights into the marketplace. In the coming weeks look for columns from Laura Marriott of the Mobile Marketing Association and more.
While it is relatively simple for me to make a straightforward case that a slowdown in the U.S. economy will adversely impact U.S. mobile data revenues, it is less easy to document any slowdown so far using figures from Cheetan Sharma Consulting’s recently released Q1 2008 US Wireless Data Market Update. Still, given the relatively smooth economic sailing mobile data has encountered since starting to make a substantial contribution to overall carrier revenues beginning in 2004, it is hard to imagine that growth will continue at its recent pace as the economy softens.
Sharma shows U.S. wireless data revenues in the first quarter of this year growing 38% over the same quarter in 2007, down only slightly from the 45% growth rate CTIA reported for the six months ending Dec. 30, 2007. CTIA reported annualized data revenue for ’07 of a little over $23 billion, and Sharma, based on first quarter results, proclaims the industry is on track to reach $34 billion in data revenues in ’08. The 48% growth rate that presumes, based on CTIA figures, would be down only slightly from the 53% CTIA reported for all of ’07.
So, where are the effects of a recession?
As I said, the argument that an economic downturn in the United States will adversely affect mobile data revenues is relatively straightforward: Unlike wireless voice communications, which consumers have started to treat as though it were a utility that they must have, wireless data products and services for most consumers is a much more discretionary spend. At a time when incomes are stagnant, changes in discretionary spending becomes a zero-sum game. And with food and energy prices growing rapidly, and no new income to offset the rising costs, consumers can be expected to cut back somewhere. Mobile content will be a not unlikely victim. The question is whether other mobile data revenue sources will grow to take the place of any cutback in mobile content spending?
Deconstructing the mobile data market brightens the picture some and indicates why, like voice, some of it could be immune to the effects of adverse economic conditions. But avoiding the threats posed by the economy requires the emergence of a new base of mobile data consumers – specifically, enterprise customers. And while there are indications in the statistics that enterprise adoption is growing, the question is whether it can grow fast enough to offset the loss from other data revenue sources likely to be adversely affected by an economic downturn.
Like voice, messaging has become a staple of consumers’ communications tools, and can be expected to be largely shielded from the effects of a recession. At around 41% of total mobile data revenues at year end ’07, according to CTIA’s survey, messaging revenues provide a solid base for mobile data growth. But if the rate of growth for messaging revenues slows in ’08 only as much as it did in ’07 (when it declined to 47% from a growth rate of 88% in 2006), meaning around 25%, it would still amount to $12 billion in total messaging revenues this year, comprising 34% of Sharma’s projected total.
Where the real pain, growth-wise, is likely to be felt most for mobile data revenue is in the area of mobile content. Total downloadable content revenues slowed dramatically in ’07 from its growth rate in ’06, according to CTIA’s survey, and as a category of mobile data revenues, it is most likely to be affected by zero-sum changes in consumer discretionary spending: Messaging may be a core component of a consumer’s communications needs, but spending on ringtones and ringbacks, games, and video clips is going to have to vie with other entertainment media for discretionary dollars diminished by rising food and fuel costs. If content grows at the same anemic rate in ’08 as it did in ’07, rather than falling, it is unlikely to add to more than an additional half-billion dollars to the carriers’ bottom line, amounting to less than $3 billion in total.
The rest of the growth to reach $34 billion will have to come from additional revenue for access and services fees. On the positive side, consumers have shown a willingness to pay extra for some services, such as turn-by-turn directions. But economic conditions are sure to cause consumers to scrutinize those buys closely, perhaps exchanging subscriptions for a la carte purchases. And so the question remains: Are their other services beyond directions that consumers will pay extra for?
Access fees
That brings us to access fees – both for handsets and data cards – and to the enterprise customer. When carriers first started rolling out wireless data products and services in the ’90s, it was widely presumed that the enterprise customer would drive market adoption. But wireless, at the time, didn’t have the networks or the devices to allow applications providers to replicate the desktop experience and most enterprises sat on the sidelines waiting for the technology to catch up. In the meantime, ringtones and consumer adoption of mobile content ignited the growth in mobile data revenues.
Today, as the capabilities of the networks and the devices replicate the desktop experience, access fees make up a substantial portion of total mobile data revenues, and the growth rate is increasing compared with declining growth rates for other mobile data revenue categories. There is interesting evidence of increasing enterprise, or at least pro-sumer demand: This year, Dell will produce 23 different laptop models with embedded wide-area wireless modems, according to Alex Gruzen, senior VP of the company’s Products Group, who was on my WiMAX panel at last year’s Rutberg Wireless Influencers conference. Also, while sales of consumer handsets dropped by 22% in the first quarter of this year compared with the same period last year, smartphone sales increase 10%, according to a recent analysis by the NPD Group. Presumably, enterprise users are driving these numbers. The question is whether or not enterprise adoption will grow quickly enough to offset the loss of consumer discretionary spending caused by the softening economy?
Mobile data revenues have had a good recent run. However, unlike voice and messaging, mobile data revenues are not yet a “utility” in the minds of consumers, or possibly even to the enterprise customer. As a result, as the economy weakens, the growth rate for mobile data revenues is likely to face a stiff test. It will be interesting to see whether mobile data products and services can meet the economic challenges they will face in ’08, and allow revenues to grow to the level predicted by Sharma Consulting.
You may contact Mark directly at MDesautels@ctia.org. You may contact RCR Wireless News at rcrwebhelp@crain.com.
