Google comes to Mobile - Nothing will be the same again

Welcome
by Dr. Mehmet Unsoy

Welcome to the new edition of Cartagena Capital Newsletter.

First, you may wonder who Cartagena Capital is.  We are

In addition, we have established a world-class team of Executive Advisors, which provides us with extensive depth and breadth of the industry directions. So, it is the new objective of this newsletter that we share this insightful understanding of some of the major market trends with you.

In this issue, we examine Google’s entry into the Mobile World, its implications, especially the challenges & opportunities it creates, and why things will not be the same again!

• We have a guest author, Andreas Constantinou who analyses the significance of Google’s Android, [Read article]
• Jane Zweig puts this into a broader perspective of what it means for the rest of the wireless eco-system, [Read article]
• Tom Nolle examines the implications of “wireless openness” for beyond wireless, [Read article]
• Dr. Hong Jiang evaluates the China Mobile perspective, [Read article]
• Steve Wallage reports on European operator implications, [Read article] and
• I share some of my views on the mobile advertising business model era that Google’s entry to mobile world ushers in. [Read article]

I hope you find the newsletter insightful and useful. Please give us your feedback.

With warmest regards,

Dr. Mehmet Unsoy
Partner, Cartagena Capital
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www.cartagena-capital.com

The Significance of Google's Android
by Andreas Constantinou

Google is not an internet search firm. It is a broker of advertising inventory. Google makes money by building inventory (i.e. white space on web, print and radio) and auctioning off inventory to advertisers. Search is merely the means to create a boundless amount of inventory and attract billions of eyeballs to it.

The Android operating system for mobile phones is no different. It is a platform for building and channeling inventory, much like a web browser. In fact we could say that Android is similar to a browser on steroids, in that it allows developers to easily build any connected handset application anywhere within the mobile user journey, and within those create more inventory.

So why is Google spending more than 200 man years building a complete operating system, instead of building just a browser for mobile phones or even a downloadable application, like an  on-device portal ? Because browsers on mobile handsets are used for a tiny percentage of the time, probably less than 5% of the time the user spends on his phone. Ninety five percent or more of the user journey is taken up by the contacts application, idle screen, main menu, calendar, inbox and settings. In parallel, with Android, Google is addressing the need of handset manufacturer for an operating system they can control (it is licensed under APL2), that¹s low-cost (it is mostly  free), that reduces time to market for variants. Plus, Android is backed by Google, a heavyweight vendor who can support OEMs during launch of multi-million units.

What is so special about Android? Android is different from other OSes, including Windows Mobile, Symbian/S60/UIQ, the Linux variants and proprietary OSes (Nucleus, EMP, BREW, etc) in several ways:

- The declarative XML UI framework enables developers and handset manufacturers to rapidly develop the user interface for new applications.

- The Android SDK is an environment for building connected applications. Every application (including dialler, idle screen, SMS, contacts, etc) can consume and produce content. Every application on Android is a Web 2.0 citizen.

- The Android source code will be licensed under the Apache 2.0 license, a non-copyleft license which, contrary to the GPL, allows handset manufacturers to modify the source code without being required to share back their modifications.

- Android allows developers to program against the familiar Java SE library of APIs (the desktop version of the Java libraries), which is much broader and more powerful than Java ME, the mobile version. Moreover, Android uses a proprietary Java virtual machine code-named Dalvik, which in essence means that OEMs shipping Android-based phones do not have to pay any royalties to Sun. However, Sun is unlikely to let this insult go by unnoticed and may easily claim IPR infringement by the Dalvik implementation.

- Symbian may arrogantly dismiss Android as yet another Linux initiative, but the breadth and depth of Java APIs is something Symbian never managed to get right. And unlike Sun’s FX Mobile platform (née SavaJe), Android has several OEMs who are planning to build handsets on it.

- Android is not only a departure from Java ME development model, but also away from Linux development. Developers would be writing for the Java SE platform, not Linux.

- Google is paying developers $10 million to write applications for Android, which is a smart move to motivate developers especially when no phones are out yet. It is worth noting that $10 million exceeds the yearly marketing budget of most mobile operating system vendors.

Interestingly Google has not formally clarified whether the entirety of Android’s source code will be freely available (incl. any IPR-encumbered code) and whether there will be zero royalties to handset OEMs.

What is in it for Google?  Android is a service access platform, not a delivery platform. It is about growing the pie of mobile advertising inventory and not necessarily growing Google¹s share. Moreover, Google might want to bundle the gPay payment system or connect the physical world to Google advertisers via its ZebraCrossing QR reader technology for mobile phones.

What is even more interesting is that Android may provide a channel for feeding customer analytics back to Google, such as presence, contacts, call logs, SMS messages and a wealth of user profile information that can be used to build extremely detailed digital footprints.

Another important impact of Android is that it will catalyse the development of white-label phones, i.e. phones ready-to-customise by consumer brands like MTV, Nike, Gucci and Tag Heuer. Rapid software customisation is what hampers the scalability of customised design manufacturers such as ModeLabs today.

All-in-all, Android seems to be the only non-proprietary operating system with a strong chance of wider commercial adoption.

Andreas Constantinou, Ph.D.
Guest Author
Research Director, VisionMobile Ltd.
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www.visionmobile.com

Google moves into Mobile
by Jane Zweig

Another piece on the chessboard is moving. Google has now “formally” entered the mobile world.  Though all were expecting Google to announce the G-phone, it did not, for hardware is not Google's business.  Software is.

Its acquisitions for location based services, mobile advertising, chat, search, social networks and others set Google up on a collision with major handset vendors, software developers, mobile operators and others on the value chain.  But it is a collision with partnerships. 

Android is Google's open software initiative.  It is free, Linux-based and an operating system.  Google believes it will speed the deployment of Internet applications for mobile handsets.

It has partnered with 33 companies and formed the Open Handset Alliance.  Together the alliance is betting that they can reform the mobile phone industry.  The alliance includes handset manufacturers such as Motorola, HTC, Samsung and LG, mobile operators such as Sprint, T-Mobile, KDDI, NTT DoCoMo, Telecom Italia, Telefonica, and China Mobile, semiconductor companies such as Broadcom, Intel, Qualcomm, and Texas Instruments among others and some software companies such as eBay, and PacketVideo.

But major vendors who have not participated in the OHA alliance will not die.  Nokia and SonyEricsson for example are marching down their own paths.  Nokia with its Ovi initiative and Symbian are well placed to continue their strong presence in the mobile world.  SonyEricsson with its UIQ user interface, PlayNow initiative, Sony's brands, Ericsson's network expertise and back-end hosting will be powerful in that it will leverage both companies' strengths and be a formidable competitor which crosses eco-system lines.

Handset vendors who have joined with Google as part of the Open Handset Alliance are in need of “something” to help differentiate themselves and increase their market share.  They view Google as a partner who can help them do that for now.

But none of the pieces will stand still and the Google mobile play will evolve as time moves on. In fact, Google has announced it will “bid” on the US 700 MHz spectrum (this does not mean that they will win or even want to win for Google is not an operator just as it is not a hardware vendor) but it ensures they will put pressure on the industry to adopt an open access platform.  Case in point, Verizon in late November said it would support open access on its networks in late 2008.  Others will follow. This is a stay-tuned story.

Jane Zweig, CEO, The Shosteck Group
Executive Advisor, Cartagena Capital
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www.shosteck.com

Implications of “Open Wireless” beyond Wireless
by Tom Nolle

Google’s announcement of the “Android project” and “Open Handset Alliance” will obviously have an impact on the handset market, but its importance could stretch far beyond handsets to impact the underpinnings of the entire mobile industry.

The Open Handset Alliance creates industry validation for a position that regulators worldwide are already interested in—demanding relaxed control of handsets and services by the mobile network operators.  In the US, the FCC Chairman Kevin Martin quickly offered support of the notion, which fits well into the FCC's plan to reserve a portion of the upcoming spectrum auction for providers who promise open application and device connection.  The OHA becomes an industry lobby group to support open wireless, and potentially a highly articulate and powerful one.  That increases the chances that some movement toward open wireless will happen worldwide.

There was quick validation of this point in Verizon's decision to open its own wireless network to user-provided phones and applications.  While there are some restrictions to insure network stability, Verizon is taking a step to not only address the OHA but also to insure that it can bid on the FCC's open-access spectrum set-aside, to prevent Google from obtaining the spectrum with a low bid because the major wireless operators would be unable to bid at all.  While Google could still obtain this spectrum and use it for OHA-based wireless, it will now cost Google much more to do so.

The second major impact of OHA and Android is in the revenue model of the operators.  Virtually all the major wireless operators recognize that wireless Internet is the most “magnetic” non-voice application, and thus are forced for competitive reasons to offer it at reasonable prices.  It is very clear that Google intends to take OHA and Android toward exploiting over-the-top or Internet-based applications of content, GPS/location, etc.  Such a move would subsume these applications into the mobile Internet pricing model, limiting the operators' ability to earn incremental revenue for them.  That makes it much harder to raise revenues and margins on non-voice mobile services, at a time when mobile voice is under tremendous competitive price pressure.  Canada, for example, is setting aside a portion of its next spectrum auction for non-incumbent bidders only, and the EU is considering pan-European regulation of telecommunications, a move that will certainly increase wireless competition there.

The third major impact is on IMS.  Over-the-top applications of the type OHA is clearly intending to support bypass the IMS session/application control model because they are indistinguishable from “the Internet”, which is why they push content and data firmly into the mobile Internet pricing model.  Since a major mission for IMS was to control these applications when offered in “non-Internet” mode by the operators, OHA would reduce the incentive to deploy IMS.

OHA may even impact FMC plans.  If the price of mobile Internet falls far enough under competitive pressure, even over-the-top voice services may be viable, and the handsets could be used to bypass the operator’s own voice offerings.  If Wi-Fi or femtocell-based FMC were to be deployed, the operators' 3G networks could end up losing voice and data traffic to hotspot providers and even over-the-top Internet portal players.

All of these things add up to a sharp polarization in the market, not unlike the one that was created by “net neutrality” in wireline broadband.  The Internet information companies like Google, and many handset vendors, are likely to line up on the side of the OHA, and network operators and telecom equipment vendors on the other side.  The key question will be how regulators respond to this polarized pressure, since OHA impact on the industry depends on open wireless receiving considerable regulatory support worldwide.

Tom Nolle,
CEO, CIMI Corp.
Executive Advisor, Cartagena Capital
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www.cimicorp.com

China and OHA
by Dr. Hong Jiang

OHA intends to open up the entire mobile software platform from OS to middleware in the hope that the dominating mobile operators will loosen up their grip on the mobile services/applications and adopt a more Internet-like model over time.  OHA is designed to help the underdog mobile operators and new entrants by attracting application developers and thus more mobile applications to compete with the more dominating operators.  That is why it is not surprising to see Sprint/Nextel as a member and that Verizon or AT&T are conspicuously missing.

It is somewhat surprising to see that China Mobile is a founding member of OHA since China Mobile’s recent behavior has indicated that they want to confine the value-added services/applications within the walled garden as much as possible.  China Mobile occupies 70% of Chinese mobile subscribers, it thus enjoys a near-monopoly power in China.  It intends to offer key mobile value-add services themselves such as mobile IM, Mobile TV and mobile music.  China Mobile has made it difficult for WAP users to browse content outside of China Mobile network (Monternet). 

So why is China Mobile endorsing OHA?  The reason might lie in the current lack of control of mobile handset manufactures by China Mobile.  Unlike in the US, Chinese mobile operators historically did not have much control over handset design, manufacturing and distribution.  A mobile subscriber can buy a phone on the street, swap out the SIM card and make phone calls.  In recent years, China Mobile has spent more resources on writing handset specifications and working with handset makers to develop customized phones.  They started to subsidize handsets by locking subscribers into yearly contracts.  With OHA, China Mobile will have more leverage against the handset makers in asking for what they what and getting what they want. 

However, open platform is a double-edged sword for China Mobile.  On one hand, it gives China Mobile leverage against mobile handset makers in getting the features they want at a lower price.  On the other hand, it opens up the mobile applications/services development environment.  There are tens of thousands of application developers in China eagerly waiting for a more open platform to develop applications that connect directly to the Internet, not to China Mobile’s walled garden Monternet.  So does this mean that China Mobile will block mobile Internet access through its border gateway like what they did with WAP service?  Will only China Mobile endorsed applications or developers be allowed to access the Internet?

So it seems that having an open mobile platform is only solving half of the puzzle.  If the mobile operators filter or block Internet access from handsets, there isn’t much OHA can do, or is there?

Dr. Hong Jiang
CEO, Montina Inc.
Executive Advisor, Cartagena Capital
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European Operators and Android
by Steve Wallage

Google could claim strong European operator support, with the original 34 in the Open Handset Alliance including Telecom Italia, T-Mobile and Telefonica. All three companies are keen to explore the alliance, despite reservations on execution, and other operators in Europe are likely to join. The obvious loser is Nokia, with around 50% of the European handset market, and the company for which many of the operators are looking to reduce their dependence. Nokia had seemed to fight back, announcing the day after Android, that Telefonica and Vodafone would be using Ovi based handsets. However, such is the level of customization that Nokia has had to offer, and the limits of these deals, that the power of Android can already be seen.

Steve Wallage
Executive Advisor, Cartagena Capital
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Mobile Advertising Business Model
by Dr. Mehmet Unsoy

Mobile advertising is going to be a game changing event, potentially shifting the paradigm of the ARPU based business models. Google’s formal entry into the mobile world confirms this shift.

Market forecast for the mobile advertising are very impressive, according to various analysts: $19B mobile ad revenues by 2011, where about $9B will be from mobile video / TV content delivery according to a recent report by ABI Research. But, even more impressive are the early market findings that, with an ad-supported model, mobile user audience grows by a factor of 10. Also, these studies have found that well-targeted mobile ads could be very effective, with 26% of mobile users responding with at least an SMS message, and 18% clicked to call!

Mobile ad revenues significantly increase the revenues as well as the valuation of companies in the value chain, not just companies like Google, but also younger companies in various parts of the same mobile content delivery eco-system.

Companies like Google and Facebook are leveraging their customer profiles for more targeted advertising opportunities, fully utilizing their so called “social graph”. However, mobile operators are so far, either too slow, lack the key technologies, or tied down by regulations to leverage their intrinsic knowledge of the customer profiles, including the location information, etc.

But, generally the mobile operators are understandably worried that mobile users may react negatively to mobile ads.  That’s why it is critical that any mobile advertising be properly targeted, made compelling and informative through various contextual awareness, including location, time, and personal preferences. Users must be given a wide range of options, including opting in and out. Operators have to establish clear, well-understood policies for mobile advertising.

That is the reason why the new innovative mobile advertising infrastructures will be critical to navigate the mobile industry in this business model paradigm shift.

Dr. Mehmet Unsoy
Partner, Cartagena Capital
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