We are entering the golden age of mobile. Mobile has become the most critical tool to enhance productivity and drive human ingenuity and technological growth. And the global mobile market will reach $1.65 trillion in revenue this year. Over the next decade, that revenue number will more than double. If we segment the sources of this revenue, there will be a drastic shift over the course of the next 10 years. During the last decade, voice accounted for over 55 percent of the total revenue, data access 17 percent, and the over-the-top and digital services a mere three percent. Over the next decade, we expect mobile digital services to be the leading revenue-generating category for the industry, with approximately 30 percent of the total revenue. Voice will represent less than 21 percent.
There is already a significant shift in revenue structures for many players. The traditional revenue curves of voice and messaging are declining in most markets. Mobile data access, while still in its infancy in many markets, is starting to face significant margin pressure. As such, the industry has to invest in building a healthy ecosystem on the back of the fourth wave — the OTT and digital services. The revenue generated on the fourth wave is going to be massive, but much more distributed than the previous curves. It will end up being a multi-trillion-dollar market in a matter of a decade — growing much faster and scaling to much greater heights than previous revenue curves.
Vodafone, one of the biggest mobile operators in the world, recently reported that in each of its 21 markets, voice and messaging declined (YOY). In some markets, like Italy, even the data access segment suffered negative growth. However, what was more disturbing was that the increase in access revenue didn’t negate the decline in voice and messaging revenue in any market. The net revenue declined in every single market, no matter which geography it belonged to. The net effect was that the overall revenue declined by nine percent, despite data access revenue growing by eight percent, because the overall voice and messaging revenue streams suffered double-digit losses. Once the access revenue started to decline (and it is already happening to some of the operators), these companies will have to take some drastic measures to attain growth. The investment and a clear strategy on the fourth wave will become even more urgent. They will have to find a way to become Digital Lifestyle Solution Providers.
So, what is the mobile fourth wave, and who are the dominant players today? The fourth wave is not a single entity or a functional block like voice, messaging or data access, but is made up of dozens of new application areas, some of which have not even been dreamt up yet. As such, this portfolio of services requires a different skill set for both development and monetization. Another key difference in the competitive landscape is that the biggest competitors for these services (depending on the region) might not be another operator but the Internet players who are well funded, nimble and very ambitious. The services range from horizontal offerings such as mobile cloud; commerce and payments; security; analytics; and risk management to mobile being tightly integrated with the vertical industries such as retail, health, education, auto, home, energy and media. Mobile will change every vertical from the ground up, and that’s what will define the mobile fourth wave.
In the past, the Top 10 players by revenue were always mobile operators. If we take a look at the Top 10 players by revenue on the fourth wave, there are only five operators on the list. The Internet players like Apple, Google, Amazon, Starbucks and eBay are generating more revenue on this curve than some of the incumbent players. However, some of the operators like AT&T, KDDI, NTT DoCoMo, Telefonica and Verizon have been investing steadily on the fourth curve for some time. The two Japanese operators on the list have even started to report the digital revenue in their financials.
Just as data represents 50 percent or more of their overall revenue, we expect that, for some of these operators, digital will represent more than 50 percent of their data revenue within five years. Relatively smaller operators like Sprint, Turkcell, SingTel and Telstra are also investing in new service areas that will change how operators see their opportunities, competition and revenue streams.
This shift to digital has larger implications, as well. Countries with archaic labor laws that don’t afford companies the flexibility needed to be digital players are going to be at a disadvantage. It is one thing to have figured out the strategy and the areas to invest in, and it is completely another to execute with the focus and tenacity of an upstart. If companies are not able to assemble the right talents to pursue the virgin markets, someone else will. Such players will see decline in their revenues and become targets for M&A. Some of this is already evident in the European markets, which are also plagued by economic woes. Regulators will have a tough task ahead of them in evaluating some unconventional M&As in the coming years.
The shift to digital will also have an impact on the rest of the ecosystem. The infrastructure providers will have to develop expertise in services that can be sold in partnership with the operators. Device OEMs without a credible digital-services portfolio will find it hard to compete just on product or on price. The Internet players will have to form alliances to find distribution and scale. The emergence of the fourth wave is good news for startups. Instead of just looking toward Google or Apple, the exit route now includes the operator landscape, as well. In fact, some of the operators have been making strategic acquisitions in specific segments over the last few years — Telefonica acquired AxisMed, Brazil’s largest chronic-care management company; Verizon acquired Hughes Telematics; and SingTel acquired Amobee.
For any telecom operator looking to enter the digital realm, the strategic options and road map are fairly clear. First, it has to solidify and protect its core business and assets. A great broadband network is the table stakes to be considered a player in the digital ecosystem. Depending on the financial condition of the operator, the non-core assets should be slowly spun off or sold to potential buyers so that the company can squarely focus on preserving the core and on launching the digital business with full force. The digital business requires a portfolio management approach that requires a completely different mindset and skillset to navigate the competitive landscape.
The first three revenue growth curves have served the industry well, but now it is time for the industry to refocus its energies on the fourth curve that will completely redefine the mobile industry, its players and the revenue opportunities. Several new players will start to emerge that will create new revenue from applications and services that transform every industry vertical that contributes significantly to the global GDP. As players like Apple and Google continue to lead, mobile operators will have to regroup, collaborate and refocus to become digital players.
There will be hardly any vertical that is not transformed by the confluence of mobile broadband, cloud services and applications. In fact, the very notion of computing has changed drastically. The use of tablets and smartphones instead of PCs has altered the computing ecosystem. Players and enterprises who aren’t gearing up for this enormous opportunity will get assimilated.
The future of mobile is not just about the platform, but about what’s built on the platform. It is very clear that the winners will be defined by how they react to the fourth wave that will shape mobile industry’s next trillion dollars.