Mobile Opportunity - News And Views from Google MO

In school they teach you that one of the drivers of economic progress over the centuries has been society’s increasingly accurate management of time. The seasons had to be tracked so that farming cultures would know when to plant. Once people started sailing across the oceans, they needed reasonably accurate chronometers to measure longitude. When railroads were built, the idea of uniform time zones became important so that the trains could keep predictable timetables. The term “railroad time” is still sometimes used to mean keeping an accurate schedule.

By the time I was growing up, it was universally accepted that rigorous scheduling was one of the hallmarks of an advanced economy. We scheduled everything well in advance — classes in school, meetings at work, even social events like parties and dates. How many movies and television shows have you seen where a character says, “pick you up at eight”? And don’t be late.

A lack of rigorous time discipline, we were told, was one of the factors holding back economic growth in the developing world. That belief was so well accepted in the US that I don’t think anyone even debated it.

So it’s very interesting to see what electronic communication — on PCs, but especially on mobiles — is doing to time management in the world’s most advanced economies. Where my generation pre-arranged its social calendar, I watch my kids make it up on the fly. They’ll decide on IM that they all want to get together in an hour, or they’ll agree via SMS that they’re all going to hang out downtown that evening, where they then call or text each other to link up on the fly.

I have seen this developing for years, but I didn’t have a gut feel for its power until earlier this year, when I took my family to Disneyland. Touring the Magic Kingdom with two kids was once an exercise in controlled paranoia. The place is so complicated and crowded that you lived in constant fear of losing one or more members of the family. If you did, it might take hours, and a long trip to the lost child center, to find them again.

Anytime we separated — mom going with one child to one ride, and dad with another child to a different one — we had to carefully agree on when and where we would meet up. Inevitably someone would be 15 or 20 minutes late, and you’d spend the whole time worrying that the vacation might fall apart.

It wasn’t the walking that wore you out at Disneyland, it was the fear.

But the last time we went was the first time when everyone in the family was old enough to have a mobile phone. Suddenly, as we walked through the park on one of the busiest days of the year, we realized that we didn’t have to worry any more. If a child got lost, they could call us. If two people wanted to go off in a different direction, that was no problem at all; we could just use the phone to find each other later.

In other words, we could stay together without staying in sight of each other.

That may not sound like a big difference, but it completely transformed the Disneyland experience. The food was still overpriced, and the lines way too long, but the whole thing was much less stressful. It was almost, dare I say it, relaxing.

It made me realize that a similar transition is happening throughout our society. Ubiquitous personal communication makes it much less important to rigorously schedule many elements of your day; you can just make it up as you go along.

As smartphones arose, we thought they were going to absorb the calendaring function of the PDA. They have somewhat, but I think mobile phones are also making the personal calendar less important.

The first time I went with Palm to China, our employees in Beijing cautioned me that I shouldn’t talk about the great calendaring built into Palm handhelds, because people in China just didn’t care about it. They didn’t schedule meetings, I was told. If they wanted to talk to you, they would just give you a call. At the time I assumed that was just a transitional thing, that over time as their economy grew they would learn to do more and more scheduling. But now I’m starting to think that maybe they were ahead of the rest of us all along.

There’s so much hype in the mobile industry that I’m always reluctant to use a word like “shocking,” but nothing else fits Nokia’s announcement today that it will support Microsoft Silverlight.

If you missed the press release (link), Nokia said that it’s going to make Microsoft Silverlight available for all of its mobile platforms — Series 40 (the low-end phone OS), S60 (the high-end OS), and its Maemo Internet tablet. (It’s not clear if Silverlight will be bundled or just offered as a download.) Silverlight is a web app graphics and interface layer, intended to displace Adobe Flash.

The announcement was shocking for several reasons:

–Up until now, Nokia and Adobe had worked together closely. Nokia is one of the few companies paying to bundle Flash on its phones, and Nokia had featured Adobe prominently at some of its developer events in Silicon Valley. So the announcement I was expecting was that Nokia would bundle Air, the next evolution of Flash, rather than its competitor.

–Nokia has generally treated Microsoft as the spawn of the devil. The whole Symbian OS consortium was designed primarily as a way to prevent Microsoft from getting a controlling role in mobile software. Now Nokia gives Microsoft’s software layer a huge boost?

–Although Microsoft had hinted vaguely about taking Silverlight mobile, it had given no definite plans at all. So this is a huge step forward for Silverlight.

–Just a few weeks ago, Nokia bought TrollTech and announced that its software was going to unify development across Series 40 and S60. Now Nokia endorses Silverlight, which will also run across Series 40 and S60. Which one are developers supposed to focus on?

What in the world is going on?

I don’t know. Nobody from Nokia has explained it to me, so I have to read between the lines. Nokia says in the press release: “Nokia aims to support market leading and content rich internet application environments and to embrace and encourage open innovation. By working with Microsoft, we are creating terrific opportunities and additional choices for the development community.” Okay, so I guess what they’re saying is that they want to support every platform and development option out there. Presumably the benefit to them is that they can claim their phones support more software than anyone else.

I doubt that’s the only motivation, though. By supporting numerous platforms, Nokia reduces the possibility that any one of them can dominate the market and push around Nokia. It also lets Nokia play the sides off against one another. I’m sure the threat of embracing Air made Microsoft give Nokia a very good deal on Silverlight, and no doubt Nokia will now use its Microsoft relationship to get business concessions from Adobe (assuming that Nokia still plans to work with Adobe at all; that’s not entirely clear).

Anyway, I can sort of see how this all works for Nokia strategically, although it feels like Nokia is trying too hard to be clever. I’m not as clear on the benefits of all this for mobile developers and users. As was covered in last week’s post on mobile apps (link), many developers view the proliferation of platforms as a problem, not a benefit. Microsoft itself said in the Nokia press release:

“We want to make sure developers and designers don’t have to constantly recreate the wheel and build different versions of applications and services for multiple operating systems, browsers and platforms.”

That’s a pretty danged funny quote coming from a company that now offers at least four mobile platforms (two versions of Windows Mobile, Silverlight, Tablet PC, and does .Net CF count as a fifth?), in a press release from a company that apparently wants to support every platform available. If you really think platform confusion is a problem, guys, look in a mirror.

For users, the benefit of all this deal-making is unclear. We’re stumbling into a world where you’ll need to know details of which platforms are loaded on a particular phone in order to know which apps it can run. I can’t think of a better way to discourage use of mobile applications.

The other day when I was writing about the fate of mobile apps (link), I mentioned one of the laws of technology strategy. It made me realize that although we in the industry talk about those laws all the time, I’ve never seen them all written down in one place. There are probably more than three laws, but these are my favorites. Please post a comment if you want to add some more.

Here we go, twenty years of industry experience boiled down to three lines:

1. An elegant business model paired with mediocre technology beats an elegant technology paired with a mediocre business model.

To put it another way, if you create a marvelous tech product that has no way of making money, you get a long and passionate entry on Wikipedia. If you create a lousy tech product that prints money, you get to be Bill Gates.

Windows is the best case study here, but this one has been proven over and over again in the history of the tech industry. But companies keep tripping over it because they’re often run by engineers who have been trained to value technical elegance as an end in itself.

Don’t get me wrong, elegance is great. The most wonderful tech companies are those that combine elegant products and great business models. But you must pay the bills or you don’t get to keep playing. And wads of money can buy a lot of patches and kludges.

2. Design for a need, not a desire.

A serial entrepreneur once expressed this to me nicely: “I focus on aspirin issues.” In other words, if someone has a serious enough problem that they feel pain, they’ll be much more likely to pay money for an answer. (I wish I could remember who told me that — I’d like to credit him by name.)

Very often tech companies will fall in love with a concept that is compelling to people in the company, but not to non-technologists. They’ll convince themselves that people will want it because, well, they ought to want it.

A related problem: A company will come up with a product that’s nice, but doesn’t really address an aspirin problem. You know you have this problem when someone in the company says that need a marketing campaign to explain to people why they should want the product. The really good products need marketing for visibility, not persuasion.

I think this is the underlying problem behind most failed web applications. They do something interesting, as opposed to something compelling.

What makes this whole problem especially tough is that you can’t just ask customers what they need. They aren’t engineers, they don’t understand what you could build. All they’ll ask you for is improvements on the products they already have today. What you have to do is get inside the customers’ heads, understand how they live, and figure out what you could do to improve their lives. That’s what the best product managers do.

3. Software designed for one platform usually fails on another.

We teach this one to ourselves every time the industry goes through a platform transition, and then we promptly forget it again:

A computing platform isn’t just a technology, it’s a mindset, with a huge set of unstated assumptions about customers and business practices attached to it. When you port software from one platform to another, you take those assumptions along with you, and usually they don’t fit.

This is why the software leaders in one generation of computing usually fail in the next generation. Check it out — which software products led in the DOS world? Lotus, WordPerfect, Ashton-Tate. Did any of them thrive in the Windows/Mac world? Nope.

Then did the software leaders in Windows/Mac — Adobe, Microsoft, Symantec, Intuit — dominate in the Internet? Nope, the new startups without the mental baggage dominated.

Which leads to an interesting question: Do you think the leaders of mobile Internet will be the same companies that led the PC Internet? Or is the next Adobe/Lotus/Google a little startup out there, rethinking what it means to be connected in a mobile setting?

Think about it.

I was very surprised by the volume of responses to last week’s post on the decline of the mobile applications business. Many of the comments were passionate and well reasoned, and if you haven’t seen them I recommend that you check them out here.

My biggest insight from the comments was that I had generalized too broadly about the mobile software world. Several mobile developers wrote in to say that they’re doing just fine, thank you. Most of them seem to be either in enterprise mobile software, or doing contract development for major companies that have decided they want a mobile presence. In both cases, they have ways to get around the distribution logjam that I see as the biggest barrier to success in mobile software. I wasn’t thinking about either of those developer categories when I wrote the post.

Anyway, I really appreciate all the comments. I learn a lot from the folks who post feedback, and I hope the comments are useful for you as well.

I’ve been invited to moderate a panel on mobile operating systems at the CTIA conference this April. No doubt this will be the highlight of the entire conference , so make your travel reservations early.

Participants tentatively will include Symbian, Microsoft, Access, RIM, and several others.

Here’s the session description:

Operating Systems, User Interfaces and Browsers: Where is the Technology Going?

Mobile phones are plagued with interoperability issues, making it difficult for applications to run properly on all handsets, hurting both consumers—who find their handset incapable of running the desired application—and applications developers—who have to develop multiple versions of the same application. What are the pros and cons of open versus closed handheld operating systems? This panel will address the likely outcome of the openness rage should it move to the handset, including the long-term effects of this possible technology shift.

Should be a fun conversation.

The panel will consist of brief presentations followed by Q&A, so I wanted to give you an opportunity to participate. If you’ll be at CTIA, please come by the panel on April 2 at 2:30. If you won’t be there, let me know what questions you’d like to see asked. Just post a comment below, and I’ll see what I can do. I’ll also post a report after the session.

(By the way, if you’ll be at CTIA and want to chat, drop me a note at the address here.)

More than half of the traffic to this weblog comes from outside the US, so there are times when I feel obligated (and a little embarrassed) to explain how the mobile market works here. This is one of those moments.

Verizon, the largest US mobile carrier, made headlines in the US today by announcing that by the end of 2008 it’s going to make its network available to any device and any application that the user chooses to install (link).

This will seem remarkable to people living in GSM countries where it’s normal to choose any device you want. But in the US, it’s an unusual idea. Here mobile usage is split between GSM and CDMA. GSM phones have SIM cards, which technically allow you to switch your account to any phone you want. But in practice, almost no users are willing to give up the several hundred dollar subsidy for buying a phone and service plan together, so they only choose phones that come through the operator.

Things are even more restrictive in the CDMA space, where there are no SIM cards. If you buy a Verizon phone, it can only be used with a Verizon account. Same thing for Sprint.

So Verizon’s announcement is a nice change, on the face of it. It’s also something of a pleasant shock, since Verizon has the reputation of being the most conservative and controlling US operator. But the announcement’s actual impact on the market is going to depend on several questions that Verizon hasn’t answered yet:

–How will open access be implemented? Verizon says it’s going to define a process by which phones can be certified to work on its network. That could be routine or it could turn into a huge barrier to entry. We also don’t know how a user’s account will be switched between phones. Is Verizon planning to start installing SIM cards in its phones (something that has been done with CDMA in China)? If not, will you have to take the phone to a Verizon store to get it activated? How much will that cost?

Verizon apparently said something about doing activation through a toll-free number, which could be cool.

–How will the service be priced? Verizon’s service plans include recovery of the several hundred dollar subsidy for hardware. You pay for the subsidy as part of your monthly bill. Since Verizon doesn’t have to recover a subsidy cost on its open access phones, there’s about $10 or more a month that it could pass along to consumers in the form of lower bills.

If Verizon doesn’t price the open service lower, what happens to the extra money? Does Verizon pocket it? Or will they offer some sort of rebate on purchase of open access phones?

The answer to this one is critical. The US GSM carriers are technically open, but the subsidy prevents significant sales of alternate phones. If Verizon pockets the subsidy money, very few people will take advantage of the open service. The whole thing could turn out to be a PR gesture rather than a genuine change.

But in the hope that Verizon wants it to be more, here’s what they ought to do:

–Make the monthly cost of the open plan lower than a traditional service plan, reflecting the absence of a subsidy.
–Make the handset certification process simple and low cost.
–Make it easy for users to switch their account to a new phone (preferably via a SIM card or website or that 800 number, so they don’t have to come to a store).

That’s an announcement I’d stand up and cheer for.

Impact on the industry

Until we hear the answers to the questions above, it’s impossible to guess how impactful this announcement will be. The most important factor may be how the other US operators react. The best result would be if they start competing with each other to see who can make their network more open. If that dynamic takes hold, competitive forces might drive them to really open up even if they don’t intend to.

The bottom line: Google is now an OS company.

The fact that Google’s recently-announced OS products are aimed at mobile devices and social networking sites is interesting, and I’ll talk about the impact of that below. But it’s secondary. I think the big, really important change is that Google has now jumped with both feet into the middle of the operating system world. That potentially has huge implications for the industry.

The impact will depend a lot on how Google follows up. If it pours substantial energy and resources into its OS offerings, it will be extremely bad news for Microsoft and other companies trying to charge money for their own platforms. On the other hand, if Google doesn’t make a serious long-term commitment, it will embarrass itself deeply. This isn’t like launching a new web application — an OS has to be complete, and it has to work properly in version 1, or there won’t be a version 2.

What they announced

It’s kind of ironic. For years after Google became a prominent web company, people speculated about whether or when it would create its own OS. The logic was that Microsoft has its own OS, and Google was challenging Microsoft, so Google would create its own OS too. But then as the years went by and it didn’t happen, people moved on to other subjects. The speculation died out. But one of my rules about the tech industry is that “obvious” things happen only after everyone in the industry has written them off. So I guess Google was due.

The company has been creeping toward the OS space for a while. Google Gadgets is an API to create small applications that run in web pages, and Google Gears is code that lets web apps run offline, making it easier for them to challenge desktop applications. But they were both relatively low-profile (or as low profile as anything Google ever does). But in the last couple of weeks, Google made two much more assertive announcements:

–OpenSocial is an effort to create a shared platform for applications that can be embedded within social websites (link).

–The Open Handset Alliance is an effort to create a shared platform powering mobile devices (link).

Although they’re aimed at very different parts of the industry, they’re both efforts to create a standard platform where there was fragmentation; and they’re both alliances of numerous companies, with Google providing most of the code and the marketing glue. I think there’s a recurring theme here.

Details on the Open Handset Alliance

Open Social was covered very heavily when it was announced a couple of weeks ago, so I won’t recap it all here. If you want more details, Marc Andreessen did an enthusiastic commentary about it on his weblog (link).

The OHA announcement was today, and I want to call out some highlights:

–It’s built around a Linux implementation called Android. Android will be free of charge and open source, licensed under terms that allow companies to use it in products without contributing back any of their own code to the public. This will probably annoy a lot of open source fans, but it’s important for adoption of the OS, as many companies thinking about working with Linux worry that they will accidentally obligate themselves to give away their own source code.

–Google is creating a suite of applications that will be bundled with Android, but they can be replaced freely by companies that want to bundle other apps, according to Michael Gartenberg (link). There is a lot of speculation, though, that if you bundle the Google apps you’ll get a subsidy from Google. The folks over at Skydeck estimate the subsidy could be about $50 per device (link). That might not sound like huge money to you and me, but keep in mind that mobile phone companies routinely turn backflips to squeeze 25 cents out of the cost of a phone. When you sell millions of phones a year, it adds up.

–A huge list of companies participated in the announcement. That’s not as impressive as it sounds; when you have a well-known brand, a lot of companies will do a joint press release with you just for the publicity value. But a few stood out:

Hardware vendors. Samsung, Motorola, LG, and HTC all endorsed the OS. HTC and LG gave particularly enthusiastic quotes. The first three companies have all been playing with Linux for some time, so I wasn’t surprised. But HTC is another matter — it is the most innovative Windows Mobile licensee, and Microsoft must be very disturbed to see it blowing kisses at Google.

(A side comment on Motorola: For a company that said it wanted to consolidate down on a small number of platforms, Motorola is behaving strangely — it jumped all over Symbian a couple of weeks ago, and now is supporting Android as well. I think it has now endorsed more mobile operating systems than any other handset vendor.)

Operators. Participants in the announcement included NTT DoCoMo (a long-time Linux lover), KDDI, China Mobile, T-Mobile, Telecom Italia, Telefonica, and Sprint. That’s a very nice geographic spread, and ensures enough operator interest to make the handset vendors invest.

–Google claims all Android applications will have the same level of access to data on the phone. That’s pretty interesting — most smartphone platforms have been moving toward a multiple-level approach in which you need more rigorous security certification in order to access some features of the phone. I’ll be interested to see how the security model on Android works.

–We’ll get technical information on the OS November 12, and the first phones based on Android should ship in the second half of 2008.

–Although Android’s first focus is mobile phones, the New York Times reports that it can be used in other consumer devices as well (link).

What it means to the mobile industry

It all depends on the quality of Google’s work and the depth of its commitment. If Android has technical or performance problems, it could sink like a stone. If it doesn’t have enough drivers or has poor technical support, the handset vendors will avoid it. If the developers can’t create good applications, users won’t want it. This is a very different business for Google — handset vendors and operators will not tolerate the sloppy, indifferent technical support that Google provides for its consumer web apps.

If, on the other hand, Google’s platform really works and the company invests in it, I think it could have some very important impacts.

Impact on Windows Mobile: Ugliness. The handset companies endorsing Android are also Microsoft’s most prominent mobile licensees. I doubt any of them are planning to completely abandon Microsoft (they don’t want to be captive to any single OS vendor), but any effort they put into Android is effort that doesn’t go into Windows Mobile. So this is ominous.

The whole mobile thing just hasn’t worked out the way Microsoft planned. First it couldn’t get the big handset brands to license its software, so it focused on signing phone clone vendors in Asia, thinking it could use them to pull down the big guys. But Nokia and the other big brands used their volume and manufacturing skill to beat the daylights out of the small cloners.

Now Google is coming after the market with an OS that’s completely free, and may even be subsidized. This will put huge financial pressure on not just Windows Mobile, but all of Windows CE. Even if Microsoft can hold share, its prospects of ever making good money in the sub-PC space look increasingly remote.

Impact on Access: Ugly ugliness. How do you sell your own version of Linux when the world’s biggest Internet company is giving one away? I don’t know.

Impact on Symbian: Hard to judge. Symbian is the preferred OS of Nokia. As long as Nokia continues to use Symbian, it stays in business. The question is how much it’ll grow. After years of painful effort, Symbian just managed to get increased endorsements from Motorola and Samsung. Now Google is messing with both of them. Japan has been a very important growth market for Symbian, now Android is endorsed by both DoCoMo and KDDI. All of that must feel very uncomfortable. If nothing else, it’s likely to produce pressure on Symbian to lower its prices. And Symbian should be asking what happens if Android turns out to be everything Google promises — a free OS that lets handset vendors create great phones easily. It’s not fun competing against a free product that’s been subsidized by one of the richest companies in the world (just ask Netscape).

Maybe if Symbian agrees to enable Google services on its platform it can get the same subsidies as Android does. It’s worth asking. If not, maybe Symbian should be looking for other places where it can add value in the mobile ecosystem.

Impact on mobile developers: Potentially great. Mobile developers have suffered terribly from two things: They have to work through operators to get their applications to market, and they have to rewrite their applications dozens of times for different phones. If Android produces a single consistent Java environment for mobile applications, that would be a big win. And if it can open up the distribution channels for mobile apps, that would be great as well. We don’t have enough details to judge either outcome yet, and the app distribution one depends on business arrangements that may be outside Google’s control.

Impact on Apple, RIM, and Palm: Probably none at all. A lot of the coverage of Android is positioning it as some sort of challenger to iPhone and RIM.

I don’t buy it.

Apple, RIM, and Palm all make integrated systems in which the software and hardware are coordinated together to solve a user problem. Android, by contrast, is only an operating system. It’s plumbing, not the whole house. Unless Google’s handset licensees magically develop the ability to design for users — a feat equivalent to a giraffe sprouting wings — their products won’t be any better as systems solutions than they are today. The OS hasn’t been the thing holding them back, and changing OS won’t alter the situation.

Android puts interesting financial pressure on Microsoft, but it doesn’t directly solve any compelling user problems. If it eventually drives a great base of mobile applications, that might eventually be attractive to some users. But in that case the systems vendors could just add a copy of Google’s application runtime (it’s open source, they can grab it anytime they want). Or they could host their devices on Google’s plumbing. Palm and RIM might both benefit if they could transfer engineers away from core OS and toward adding value that’s visible to users.

Impact on the tech industry: This isn’t just about mobile phones

I have no access to Google’s internal thinking, but even if it sincerely believes it’s only doing a mobile phone OS, I don’t think it can or will stop there. Technology products often develop a momentum of their own, no matter what was intended at the start. The lines between the computing and mobile worlds are breaking down already, and if Google creates an attractive software platform that’s free of charge, that platform will inevitably get sucked into other types of devices. I’m not saying that Android is going to end up in PCs, but if it’s functional and well supported I think it could end up running on just about everything else that has a screen.

Besides, if you look across all of the recent Google announcements, I think it’s clear that Google has a larger agenda: It wants to break down walled gardens, because they interfere with Google’s ability to deliver its services. It has even developed a standard methodology for attacking them: Create a consortium so you don’t look like a bully, and fund an “open” alternative to whatever is in the way. They are doing it to Facebook, and they’re doing it to Windows Mobile. Google doesn’t even have to make money from the consortium, as long as it clears the ground for its services to grow.

Take a lesson from evolutionary history. The most successful animals are not those that adapt to the environment; they are the ones that reshape the environment to match their needs. I think that’s what Google is doing. It’s going to use open source and alliances to suck the profitability out of anybody who creates a proprietary island that it can’t target.

It’ll be interesting to see if and how Google applies this principle to the upcoming frequency auction in the US.

Or to anyone else who gets in its way.

I want to write some more about all the recent mobile product announcements when I get more time, but tonight I have a chance for only a brief comment on Apple. I can’t speak for Apple’s motivations, and I know they pride themselves on thinking different, but no one I know in the tech industry — and I mean no one — cuts the price of a consumer tech product two months after launch unless they’re seriously worried about demand. It’s just not done, because it pisses off your early buyers, trains customers to wait a few months before they buy, upsets the channel, produces a lot of returned products, and distracts people from your other announcements.

If current iPhone sales are okay, the only other reason I can think of to cut prices this soon would be if you’re worried about a competitive situation. Let’s see, what competitive announcement could have possibly spooked Apple? Could it be Nokia’s announcement last week of a music phone priced at 225 euros ($306)? (Link)

Despite all the hype and excitement about the mobile data market, it is very difficult to get reliable data on how it’s actually developing. The mobile operators don’t like to release full details of their sales, and surveys of users cost a lot of money to conduct and therefore are usually available only to people who pay.

We’re left to chew on anecdotes, partial information released by companies that are trying to push a point of view, and unscientific “polls” of online enthusiasts.

So I’m always on the lookout for more rigorous information. Recently I came across several fairly good sources of data, and they give some interesting perspectives on what’s happening with mobile data. It is by no means a complete view, and most of it is US only. But I think it’s worth sharing.

Steady, unspectacular growth

The overall picture of mobile data is one of steady but unspectacular growth. It’s a bit like watching a tree grow — you can’t see anything changing day to day, but if you walk away and come back in six months you’ll notice the difference. SMS continues to be the dominant service, especially in Europe, and there’s no sign of some other service surpassing it.

Is the growth rate good or bad? It all depends on how much growth you were expecting, and how fast you wanted it to happen. The one thing I think is very clear is that each country market is different, and you can’t classify any of them as leaders and laggards. They’re just unique.

Here are the details:

Capabilities of mobile phones in the US

The Pew Internet organization has been surveying Americans on their Internet usage for years. A couple of the questions in their survey ask about the data capabilities of their mobile phones. In the most recent results, from early 2006, 75% of mobile phone users in the US said their phones are capable of texting. 63% said they can play games, and 39% said they have cameraphones. Here’s the full chart:

Nothing there stands out as shocking, although I expected the penetration of cameraphones to be higher. My guess is it has gone up in the last year.

(Note that some people could have capabilities in their phones and not realize it. So the question tells us as much about awareness of features as it does about the phones themselves.)

What people do with their phones: Nothing else rivals SMS

The chart below examines the percent of mobile phone users in the US and several European countries who have ever performed various tasks with their mobile phones. The source is M:Metrics, Q4 2006, and the numbers were quoted in a presentation by Orange / France Telecom.

The figures show that there’s no other mobile data service with near the penetration of short messaging service (texting). That’s not really news, but it’s striking to see the hard numbers. About 80-85% of people in most of the big European countries have ever sent a text message, with France lagging slightly (at about 75%). In the US, almost 40% of mobile phone users report that they have sent a text message.

The next closest service is picture messaging, with 20-30% of mobile users in the big European countries saying they have received photo messages at least once. In the US, the figure is 15%. It’s ironic that photo messaging is in second place, since it’s generally considered a major disappointment. What does that say about the other services? Well, none of them generally crack 10% usage.

Is the US really a laggard? The other thing in the chart that really stood out to me was that the adoption “lag” of US mobile users varies depending on service. The US is far behind in SMS, MMS, and playing music on the phone (the last one is, I’m sure, due to the strength of the iPod in the US). But in the other categories, the US is in the middle of the pack, or even ahead (somebody explain the ringtone result to me, please).

It’s always fun to stereotype the US market as primitive in all areas of wireless, but the adoption numbers don’t support that. It just looks different.

What does it all mean? Orange’s spin was that it means we’re just getting started in mobile data, and everyone should wait patiently for the good services to take off. They showed the following growth projection from Ericsson as evidence:

No offense to Orange, but that is basically a statement of faith rather than analysis. If you’re a cynic, you’ll point out that the chart assumes compound growth will continue uninterrupted for a decade, something that is often true for technology specs but is rarely true for technology markets.

What we really need is time-series data, so we can see what’s growing and what isn’t. Unfortunately, Orange didn’t present any numbers like that, but the research firm Telephia did, in a separate presentation. Unfortunately, their numbers were US only, and they didn’t cut the usage categories in the same way as France Telecom. But they still show some interesting trends…

Mobile data growth in the US

Telephia measures mobile data usage by analyzing the monthly bills of mobile phone users. This should give very accurate information on revenue and number of users, but it doesn’t track physical usage. Because some services are billed per-use and some have monthly subscription fees, it’s hard to tell how heavily people are using the services listed below.

Telephia reports that billings are growing steadily for a wide range of mobile data services. The chart below shows total US operator revenue for mobile data from Q3 2006 to Q1 2007. (These figures include anything that passes through the user’s phone bill. Applications and services paid for separately by the user are not included.)

The chart is in billions of dollars, so it shows that in Q1 2007, total on-deck US data revenue was about $4.6 billion. Is that a big number or a small one? Well, total service revenue for the US mobile operators is about $32.5 billion per quarter, according to the CTIA. So mobile data is about 14% of mobile billings.

Where is e-mail? I can’t find e-mail anywhere on the chart. I’m very surprised they didn’t break it out separately.

Strangely consistent growth rates. The weirdest thing about the chart is that everything’s growing at the same rate. In the real world, that sort of thing doesn’t often happen. I wonder if a lot of the growth might be driven by people buying service bundles, where they pay a flat extra rate per month to activate a bunch of different services, and then the revenue gets allocated across the services by the operator. That would cause everything to grow in lockstep.

If that’s what’s going on, then these numbers really might not say much about usage — what they’d be tracking is the ability of the operators to sell services bundles.

Anyway, the numbers show that the US operators are making pretty good revenue from mobile data. I didn’t make a chart of this, but in general, the growth in mobile data billings is large enough to make up for the ongoing decline in mobile voice revenue. So the operators aren’t getting rich, but data is helping to keep them from getting poor.

More details. Telephia lumps a lot of different things in the “Downloads” category. For Q1 2007, they gave more details on that category. So I can’t give you a time series, but here’s a more fine-cut look at how mobile data revenue looked in the US at the start of 2007:

Premium SMS is mostly ringtones paid for via SMS, plus voting for things like American Idol. Audio is downloading and streaming of songs. The other categories are self-explanatory. I feel bad about the tiny size of the applications category, but keep in mind that most smartphone apps are sold through the web and then synced onto the device, and so don’t show up in operator billings.

Number of users per service. Telephia also reported the total number of users for each service. As we saw in the Orange chart, SMS has the most users in the US (although the gap between it and the other services isn’t as large as in Europe).

Revenue per user. Combining the user and revenue data, we can estimate monthly billings per user for each service:

You can see why the operators like premium SMS. And look at WAP! It never lived up to the original hype that it would become the mobile version of the Web, but as a tool for getting things like sports scores and weather reports, it’s not doing too bad. (Whether it’s paying for all the money that was invested in it is another story.) Video’s generating the most revenue per user, but with a very tiny user base. Audio revenue (which is revenue from listening to songs, not ringtones) is fairly close to what Apple gets from iTunes users (the average iTunes user downloads about 3.3 songs per month, or about $3.30) (link).

Usage doesn’t follow capability. And now for the “big” mashup. We can combine Pew Internet’s figures on phone capabilities with Telephia’s numbers on service usage to figure out roughly what percent of US mobile customers who know they have a given feature on the phone ever actually use it. The results are interesting:

For communication-related services, the percentage of users is quite high (although remember that we don’t know how heavily the features are being used). But most mobile users are not adopting the entertainment features in their phones. That’s exactly what you’d expect if only a limited percentage of the population were interested in using their phones for entertainment, which is what a lot of user studies have shown (link).

The lesson: If you’re an operator or handset vendor, be careful about pushing phones that are a kitchen-sink collection of expensive features. The odds are very good that you’ll spend a lot of subsidy money on people who won’t ever adopt the underlying services that were supposed to justify the subsidy. It’s much better to offer a variety of phones specialized for different types of user, and let them pick the ones they want.

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As I said at the start, it’s an interesting collection of tidbits, but far too US-centric. If you live outside the US and have information to add on your market, please post a comment.

Sources:
Total revenue of the operators: link
Orange’s presentation at the Global Mobility Roundtable: link
Telephia’s presentation at the GMR: link
Pew Internet: link

The announcement of Amazon FPS made my whole week, on a lot of different levels. I’m excited about the service itself, I’m excited about what it means for the development of web applications, and I’m excited about what it’ll eventually do for the mobile data world.

Okay, I’m just excited.

About FPS. Before I talk about what it means, I should give a quick overview of what it is. FPS is a web service, meaning it’s a set of online APIs that the creator of a website or web application can use to perform tasks. What FPS does for you is billing — you can use it to accept payments for something you sell online. Basically, you transmit the customer’s info to Amazon, and they take care of the credit check, credit card processing, billing, and so on. They send you the money, less a percentage cut that they take.

That’s not at all revolutionary. PayPal and Google Checkout offer the same thing already. Amazon’s cut is about the same as PayPal — about 2% to 3% of your revenue, depending on the amount of business you do, plus 30 cents per transaction. Google is a tad cheaper, plus you get AdSense credits for using it.

(For more information on FPS, there are good articles here and here).

What impressed me about FPS is its flexibility. Amazon says you can set different payment terms for every customer, set up subscriptions and multiple payment schedules, manage a store in which you pass payments from a customer to your suppliers, set up either pre- or post-payment systems, and most importantly you can manage micropayments down to a couple of pennies per transactions (link).

The competing systems either don’t offer this at all, or do it badly. I think FPS is a really important change to the competitive situation in payment services. And, because the payment services are all available to any website, that means it’s an important change to the whole web platform.

New forms of online business. So far, e-commerce online has been limited mostly to selling things that we could already get through regular stores — books, clothing, software, etc. One of the main culprits for this was payments. The current credit card system, with its strong discouragement of small transactions, makes it very hard to sell anything priced below a few dollars online. I think the most interesting use of online commerce will be the creation of markets for things that we can’t buy through stores today. Most of those things are intellectual property of various sorts, and the natural market for them is a buck or less a copy. So the payment system is a big barrier.

I won’t recap my whole argument for minipayments; I wrote about it recently, and you can read it here. Minipayments have already changed the world in music, where Apple’s proprietary minipayment system in iTunes has revived the market for music singles, something that was virtually dead in stores. Another example: iStockPhoto has created a market for low-cost stock photography. By creating an easy system of practical minipayments, Amazon FPS will help to enable the creation of lots of iTunes and iStockPhoto equivalents for other products and forms of intellectual property. Think short stories, art, games, and probably a lot of other things we haven’t even thought of yet.

I know FPS isn’t perfect — for example, small payments have to be aggregated and then billed in a single larger transaction. But it advances the state of the art dramatically, and more importantly it challenges Google and PayPal to improve their own minipayment handling. That competitive dynamic should eventually result in a truly great minipayment mechanism online, no matter who makes it.

Amazon vs. Google: A contrast in strategies. I think Amazon’s approach to web services makes Google look bad. Both companies are taking on PayPal, but Google’s approach so far has been pure blunt force — duplicate PayPal’s features, underprice them a bit, and tie it to another Google product (you get AdSense credits for using Google Checkout). Let’s see…you compete by duplicating someone else’s features, underpricing, and tying back to your dominant product. Does that remind you of a certain company in Redmond?

In contrast, Amazon has been trying to find holes in the infrastructure that nobody has filled yet. Its storage and compute services provided very important infrastructure that helped accelerate the growth of Web 2.0 companies. Although its payment system is not as unique, the emphasis on minipayments is, and I think it too will play an important part in the online ecosystem.

Bottom line: Google is often copying, Amazon innovating. I’d say that I’m disappointed in Google, but actually given their size they would crush everyone else if they were also innovative. So maybe we should be grateful.

What will Amazon do next? Their pattern is clear — they’re picking out things that they know how to do well (because of their retail operation) and turning them into services for other developers. A logical next step would be if they offered developers the infrastructure needed to set up an online store — order tracking, support request tracking, inventory, displaying merchandise, etc. That would work with their other services, and would put them in a position to start draining business from eBay.

I’d also love to see them offer some sort of unified product and content discovery system. One of the things missing from the online ecosystem is an easy way to find goods and services that are for sale online, and comparison shop between them. You can use search for it, but it’s not very well organized, and comparisons are difficult. eBay kind of does that, but you have to be registered as one of their sellers, and eBay does the billing. I’d love to see a looser directory than eBay that doesn’t take the payments directly, but just points you to things you can buy.

That’s what I thought Google Base would evolve into, but Google hasn’t made the move yet, so there’s still time for Amazon to seize that territory.

What it means for mobile. You can probably guess what I’m going to say here. The operators consistently charge up to about 50% of revenue for any songs, games, or other content sold through their networks. The mobile software stores like Motricity and Handango charge about the same. Amazon, Google, and PayPal each take about 2-3% of revenue, and that cost is likely to decline due to competition. As the wireless Internet takes hold, how many users will be willing to pay 50% extra just for the pleasure of having a game appear on their Sprint or Verizon bill rather than their Amazon bill?

If an operator bit the bullet now and priced competitively, they might be able to hold onto about 10% of revenue in exchange for the greater convenience of running content purchases through the mobile bill. But a 50% cut is like waving a red flag in front of a bull. There’s no way Amazon and friends will be able to resist the temptation to target the mobile web. The question is not if, it’s when.

The name of the game is infrastructure. In an open, decentralized computing environment like the Web, the best way for a software company to succeed is to create a control point — to offer a piece of critical infrastructure that others need, and build a franchise around it.

Google understood that concept with search + advertising, and did well with maps, but has been remarkably inept at creating other strong points. I think that’s because, to be blunt, engineering PhDs don’t necessarily make the best business strategists. Google, if you want to go to the next level, ya got to hire business people who are as smart as your technical people. And you have to give them some authority.

Microsoft seems to get it, but is still trying to retrofit its applications into services rather than really thinking through what’s needed in an online ecosystem. Apple seems to understand, but so far hasn’t been interested in opening up its services to others (it could easily have turned iTunes into a content discovery and billing service, long before either Google or Amazon hit the market). Some other big Internet companies, like Yahoo, don’t seem to really understand yet that this is the competitive battleground of their future.

Amazon is the one major web company that seems to both understand the situation, and be able to consistently come up with good new services. They already have two strong points (computing services and storage), and payments looks to be the third. If some of the other players don’t wake up soon, Amazon’s going to end up in an extremely powerful position online.