A Wild September for Wireless: Putting it in Context
A wild and wacky wireless September it was. In one of the most frenzied months in the history of nearly any tech sector, we saw the following developments dominate the headlines:
- Verizon bought out Vodafone’s stake in Verizon Wireless for $130 billion. In a week, this financing went from “can they do it” to being oversubscribed.
- Microsoft acquired Nokia’s handset division for $7.5 billion.
- Samsung launched its foray into the wearables space with the launch of the Galaxy Gear smartwatch.
- Apple announced two new iPhones, the 5s and 5c, sold 9 million of them the first weekend, and upgraded a quarter of a billion users to iOS 7 in a matter of days.
- The BlackBerry death spiral accelerated, as the company abandoned the consumer market, pulled back the launch of BlackBerry Messenger on Android and iOS, and announced a proposed acquisition by Canadian private equity firm Fairfax Financial for $4.7 billion (a quarter of its valuation just three years ago). Expect more suitors in the coming weeks.
- Facebook’s stock is up 50 percent from its IPO price, driven in large part by its performance in mobile advertising.
- Twitter, 60 percent of whose use comes from mobile devices, announced its plans for an IPO.
- Ericsson announced a landmark product called the Dot—a small cell site the size of a carbon monoxide detector.
As an industry analyst/consultant who has been working in the wireless industry for the better part of 20 years, I see some common threads from these developments that might help Xconomy readers think about the wireless roadmap.
1. Say what you will about operators being “the pipe”, but there is tremendous value in wireless networks.
Verizon’s $130 billion financing to buy out Vodafone financing was completed with relative ease and rapidity. Combine the Verizon deal with the Softbank acquisition of Sprint and the Deutsche Telekom investment in T-Mobile’s turnaround and rapid LTE deployment, and you are seeing tremendous investment in 4G wireless networks. Now Europe and other developed markets have to catch up with the U.S., South Korea, and Japan.
Operators are girding for continued tremendous growth in data usage, the next phase of which will be driven by video. There is tremendous opportunity for those who can optimize wireless networks for rich media, and improve the economics of data delivery below today’s prevailing $10/GB retail price point.
2. Operators are looking for the next big thing…and they might accomplish it.
Wireless operators realize that the heady days of double-digit smartphone growth and mid-40s margins from service plans will not last forever. They are putting serious thought into the next phase of their growth. Given their size, they have to think big in order to move the revenue needle. AT&T has already made important bets around home security and the connected car. Verizon is investing big in cloud. Areas to keep your eyes on: big data, indoor location, video, and machine-to-machine (M2M) communication.
Now, I am sure that many entrepreneurs among the Xconomy readership who have worked with wireless operators are rolling their eyes, saying “yeah, right.” But I’ve been an exec at and regularly spend time consulting to the operators, and I am seeing a cultural shift. They are opening foundries and innovation centers, hiring experts from a diverse range of industries, and becoming more external-facing. Now, they might never be characterized as “nimble” or “agile,” but I’d argue that the leaders among the operator community will look and behave quite different five years from now than they do today. This means goodness for the Xconomy community.
3. The United States is the locus point for wireless leadership in wireless.
The Verizon, Sprint, and T-Mobile deals were all votes for the dynamism and growth of the U.S. wireless sector. The U.S. leads the world in 4G investment, smartphone adoption, and data usage. Only South Korea and Japan are in the same league. It is also notable that Nokia, once the poster child for European leadership in mobile, is now owned by Microsoft, and that Motorola, now under Google ownership, opened a huge manufacturing plant in Texas. If I think about the 10-15 most important and influential companies in wireless (outside the 7 “supercarriers” with 100+ million subs that drive capex and device purchasing power)—Apple, Google, Microsoft, Qualcomm, Cisco, Ericsson, Amazon, Facebook, Twitter, Samsung, Huawei, Netflix, Comcast, Foxconn—all but a handful are located in the U.S. Plus, I’d estimate, conservatively, that 80 percent of the dollars invested in wireless startups are coming from U.S.-based VCs.
4. Ecosystems are more important than devices, in what I call the “post-smartphone” era.
There might not be anything “game changing” about the physical design of the Apple iPhone 5s, for example. But if you combine the faster processor, M7 coprocessor, fingerprint recognition that really works, and iOS 7, you have a pretty significant upgrade of the overall experience, and a platform for app developers to do some exciting new things. Think, for example, about how much the Google Maps experience on a smartphone has changed over the past two years. This tells us that the evolution of the smartphone experience going forward will require the stars to align in both hardware and software, and a dialed in developer community to harness these improvements. As another example, the latest Lumia device from Nokia (now Microsoft) is pretty fabulous. But hardware, software, and apps don’t fall into place for Windows-Nokia in the same way as they do in the Apple and Google ecosystems.
5. Video is going to be a huge driver of the next phase of growth in mobile.
We see this in traffic growth, confirmed by regular studies released by bellwethers Cisco, Ericsson, and Akamai. There are going to be two types of rich media (pictures and videos) content: short-form, snackable media that people capture, consume on, or share from their mobile devices; and longer-form content a la TV everywhere that consumers want to view on their tablets and smartphones. Operators are trying to find the balance between leveraging video and not being killed by it. This is why Wi-Fi and small cells will play a big role. Also expect alternative business models for media delivery, driven by Google, Amazon, Netflix, DISH, and major content producers and distributors.
6. The public sector needs to be more engaged.
The FCC isn’t as paralyzed as the rest of the federal government, but progress on opening significant new swaths of spectrum remains painfully slow. Which is why there’s so much operator M&A and spectrum horse-trading, as the private sector seeks solutions to the public sector’s shortcomings. There’s a lot of available spectrum out there, and there are creative approaches and technologies (such as TV White Spaces) to effectively harness it. But the spectrum issue is becoming increasingly caught up in the politicized vortex that is Washington, as demonstrated by the nearly year-long confirmation process of the proposed new FCC commissioner Tom Wheeler. Washington’s near paralysis is starting to visibly hamper the progress of one of this country’s most promising industries.
Another piece of this is our educational system. There are well in excess of 100,000 job openings, broadly, in the wireless sector. We aren’t producing graduates with technical skills (at all levels) fast enough. Plus, the country that is producing all these fabulous devices, software, and apps, has yet to figure out how to harness this technology in K-12 education. On a daily basis, our kids wake up in a 21st century home and commute to a mid-20th century classroom, then back to 2013 again (at 2:00 p.m., no less).
7. Networks will be a locus point of innovation.
Over the past few weeks, I have spent significant time with the leading companies in wireless (cellular and Wi-Fi) networks. My conclusion: I think we are entering a period of accelerating innovation in mobile networks, driven by:
- Continued rollout of 4G LTE. A year from now, there will be four 4G LTE networks in the U.S. with a near-nationwide footprint. This will spark some price competition and innovative business models.
- The first LTE-Advanced networks. The two most important words for you to know: carrier aggregation. This means the ability to combine channels across an operator’s spectrum holdings, leading to significant improvements in speed and capacity.
- Aggressive deployment of small cells. Small cell products designed to improve coverage and capacity have made significant products over the past couple of years from the standpoint of form factor, performance, and price. A great example is Ericsson’s announcement last week of the Dot base station. Major operators have announced substantial commitment to small cell technology, and over the next three years, we should see broadening deployment inside buildings. Combined with iBeacon, sensors, low power Bluetooth Low Energy (BLE), and Wi-Fi, there will be exciting new opportunities for in-building applications leveraging location.
- Network optimization. There is a broadening toolset available to help wireless operators optimize their networks for data and video traffic. This is an exciting area of innovation, and is a frontier for venture investing in the wireless sector.
9. Wi-Fi will be critical.
Even with these developments in the macro network, Wi-Fi is playing an important role in the deployment of mobile broadband and in managing data demand. In the past year, Ruckus Wireless went public; Cisco acquired Meraki; and Ericsson acquired Bel-Air. The leading cable companies deployed some 150,000 public Wi-Fi hotspots, with more on the way. Public Wi-Fi is being deployed in cities worldwide, using innovative business models. Wi-Fi will be an integral element of the “wireless” experience… and might even drive it.
10. Ericsson and Cisco are the two most important companies in wireless networking.
While everyone fawns over Apple, Google, Facebook, and Qualcomm, did you know that 40 percent of global wireless traffic uses Ericsson equipment, and that they employ 25,000 R&D engineers? Cisco, too, made a big bet on wireless with the acquisition of Starent in 2009, and has been steadily increasing its portfolio of assets in the mobile sector. Both firms have sizeable share, talent, and assets in IP, wireless radio, data gateway, and other elements of cellular and WiFi networks.
These are some of the broader themes I think we can take away from one of the busiest months ever in the mobile ecosystem.