The Second Mobile Revolution

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Ben Lee, Business Analyst

ben.lee@redshiftsc.com


2nd smartphone rev graph

We have experienced an exponential growth in smartphone connections over the last decade, growing from under 100 million global connections in 2007, to over 3 billion connections today. This explosive growth has changed the way we go about our day to day lives, whether that be arranging transport, sharing photos and experiences with friends, communicating with colleagues or consuming content. We are now at a stage in many developed nations where smartphone ownership is fully integrated in personal lives and enterprise workflows. An easy conclusion to draw therefore is that the shift to mobile has reached maturity. The above exhibit, driven by GSMA data, shows that smartphone connections are projected to grow by a further 77% by 2020 which would imply otherwise. Given current levels of mobile penetration in developed nations, it is perhaps unsurprising that of these additional 2.5bn connections, 90% will be in developing countries. We have entered a second mobile revolution, and this will have significant implications for both established companies and start-ups alike.

The first shift to mobile has led to mobile first apps being created such as uber, Instagram, whatsapp and tinder which have become household names. The more significant result of the shift however was for the global leading web apps to build out their mobile offering and shift their users from the web to mobile. Looking at the top 50 apps in the UK, excluding games and the aforementioned examples of leading mobile first apps, the remainder are web first companies that existed in 2007. These companies have successfully transitioned to mobile, examples are Facebook, Youtube, Spotify, gmail, ebay, twitter, bbc weather – the list goes on. In this way, the mobile revolution has perhaps been less disruptive than the original dot com revolution of the late 90s and early 2000s, in that the focus has more been on how people access applications rather than what applications they are accessing.

The next chapter however is set to be considerably more disruptive and life changing, in my eyes unlocking the true potential of the internet through addressing a number of major issues facing those living in developing nations. The above graph shows the surge in smartphone connections in developing nations over recent years which is set to continue alongside a levelling of ownership in the developed economies. The second revolution is already underway and a range of players, including mobile operators, entrepreneurs, corporates, governments, investors and NGOs have spearheaded a surge in mobile enabled products and services that seek to address real issues ranging from disaster response and healthcare to education and employment. Examples include M-Pesa, the mobile money system developed by Safaricom, Kenya’s dominant telecommunications company. The company has empowered business creation with many small and large companies relying on the platform for nearly all transactions. An example of such a company using the platform is M-Kopa, whose 1,200 strong sales team sells 4,000 solar units per week to provide African households with affordable, reliable, solar powered electricity. The potential for these companies and the opportunity for any player targeting these markets will grow in line with the exponential growth in smartphone connections over the next five years and beyond.

I’m excited to watch this second phase unfold. The first phase has allowed us to book a cab at the tab of a finger, communicate through ephemeral picture messages and even plan a date with a simple right swipe. Whilst these developments are by no means insignificant, the next phase has the potential to use the scalable power of technology to truly transform billions of lives. The pertinent question which now remains for existing multinational companies, investors, startups and aspiring entrepreneurs is how they can address this second phase. They must consider how they will transition their existing products/ services and business models or create new ones to cater to this growing market which will soon be four times the size of the smartphone ecosystem in the developed world.

Disruption through subscription

Emily Anderson, Business Analyst

emily.anderson@redshiftsc.com


 

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Streaming services have been established for a number of years and are very much integrated into our daily lives, but does this business model actually make any money? If so, might we see other industries migrate towards this model in the future?

The digitisation of music and video distribution has allowed new business models to emerge. Music and video streaming services, such as Spotify and Netflix, continue to gain share in their respective markets. These models demonstrate a shift away from content ownership, for example physical purchase or digital download, towards unlimited renting of content. Subscriber numbers are increasing rapidly and company valuations soaring, giving the illusion of success, but does this business model actually turn a profit?

Streaming is transforming the way that we watch TV. Without the annoyances of advert breaks and waiting a week for the next episode, it’s no wonder that subscription video-on-demand (SVOD) services are becoming so popular. The market is seeing an army of new players vying for a share of the growing revenue. This is causing current players to invest heavily in new content in an effort to continue growing their subscriber base and reduce churn.

Netflix are by far the most popular video streaming service, with the number of global subscribers growing by 34% on average each year and reaching 75 million in 2015. However, they posted a modest net profit margin of 2% for 2015, and continue to make a loss on international streaming. This profit margin has decreased from 4.9% in 2014, which Netflix imply is due to their investment in new international markets and original content. This profit squeeze could also reflect the increase in content price caused by the increasingly competitive market.

The music industry has gone through various shifts in its distribution model in the last 30 years. Vinyl LPs and cassette tapes were usurped by CDs in the 90s and then came the digital revolution. In 2014 digital music revenue caught up with physical sales revenue globally, and in 2015 streaming revenue surpassed digital download revenue in the U.S.; the same inflection point globally is expected within the next few years. Two monetisation models are being used within music streaming (ad-supported and subscription) however the top three services by number of subscribers: SoundCloud, Pandora and Spotify, are yet to turn a profit.

Taking Spotify as an example, something needs to change; they posted a net loss of £117m in 2014. Premium subscribers accounted for 91% of Spotify’s revenue, yet only made up a quarter of their subscriber base. The advertising targeted at the 45 million ‘freemium’ subscribers, only generated 9% of Spotify’s revenue. The main attraction of ad-supported streaming platforms is that they provide easy access to free music compared to the alternative of illegal torrenting. There is a risk that if Spotify were to transfer to a subscription-only service, a significant proportion of those 45 million would simply turn to the ‘free’ illegal download scene. Apple, who were late to join the streaming party, are vying to make up for lost time by launching Apple Music as a subscription only service with long free trials and exclusive content. The undoubted leader in the download market, will they be able to do what their predecessors are struggling to and make a profit through music streaming?

One big problem for music streaming is that it doesn’t benefit from economies of scale in the same way that video streaming does. Netflix pay a fixed cost for content, so the more subscribers, the lower the cost of content per subscriber (Netflix were rumoured to have spent around $3bn on content in 2015, approximately 45% of revenue.) However, Spotify and Apple Music are obliged to pay 70% of revenue to the record companies and artists for the content, meaning that regardless of the number of subscribers, the amount they pay for content per subscriber stays exactly the same. This leaves them with 30% of revenue to cover all other costs. So to make a profit in 2014, Spotify would have had to of generated a revenue of £1.17bn, an increase of 33% on the actual figure; it is hardly surprising that Spotify are making a move into the video streaming market. Though considering the market leader Netflix are only making a 2% profit margin, Spotify’s move isn’t going to make a massive dent in counteracting their 15% loss margin.

The main problem for the current streaming model, both video and music, is that the subscription price being charged is not high enough to compensate the high cost of creative content. Unfortunately, this problem is a direct impact of the piracy market. Though people are reluctant to admit it, there is an upper limit on how much we are willing to pay for a service which basically just provides user friendly and convenient access to content which we already have access to through the darker side of the internet. Netflix have potentially combatted this to an extent with their move into original content production; would it be a smart move for Spotify to launch their own record label?

In which other industries would a shift from content ownership towards unlimited renting make sense? Sheet music, books and computer software are potential candidates. Amazon has recently launched the ‘streaming’ service kindle unlimited, initiating the disruption of the eBooks industry. Is this going to trigger a migration through the entire industry, and what factors will govern its success?

TMT news roundup (w/c 14th March)

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Ben Lee, Business Analyst

ben.lee@redshiftsc.com


Last week’s news roundup – Sky and Sony focus on VR and Benedict Evans discusses the growing importance of AI..

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TMT news

3rd party blog posts

TMT news roundup (w/c 7th March)

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Ben Lee, Business Analyst

ben.lee@redshiftsc.com


Another interesting week for TMT: Sky Q finally launches, VoD battles continue & some disruptive startups worth following..

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TMT news

3rd party blog posts

Redshift TMT news roundup (w/c 29th Feb)

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Ben Lee, Business Analyst

ben.lee@redshiftsc.com


Here are the stories we shared around the office last week. VR appears to be a particularly hot topic in the aftermath of MWC2016..

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TMT news

Redshift blog posts

3rd party blog posts

VR: Transformative?

HannahSimmonds

Hannah Simmonds, BA
hannah.simmonds@redshiftsc.com


Every year at Mobile World Congress there is one theme that rises above the others. This year that theme was virtual reality (VR). It was impossible to turn a corner without seeing an Oculus Rift or a Samsung Gear VR (powered by Oculus) offering an interactive experience for those willing to queue.

The abundance of VR might lead you to assume the number of use cases being demonstrated in Barcelona was as numerous as the stands adorning the headsets. You would be wrong. The use cases being pushed were overwhelmingly orientated towards gaming and entertainment – be that Samsung’s forty seat ‘rollercoaster’ experience or KT’s ski-jump simulator. My view is that the application of VR to gaming and entertainment is obvious, easy and uninspiring. Of the 2,200 companies exhibiting at MWC, I didn’t see a single one that had come up with a truly disruptive use case for VR. My question is this: will VR become a transformative technology, and what will it transform?

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The three key areas for VR are education, news delivery and smartphones. In order for VR to truly disrupt these areas, it will need to be set at a lower price point and be compatible with smartphones. Samsung have cottoned onto the latter by giving away the Gear VR headset with each pre-order of their latest Galaxy S7 smartphone. The smartphone design has stagnated, most new features are simply updates to the black boxes we now call our phones. However, combine smartphones with VR headsets and there is a product transformation. Your phone is now no longer your phone, it is a further extension of your entertainment device, your news provider and your ability to go anywhere in the real or imagined world.

VR can also transform the education sector. Imagine teaching kids about marine life from the Great Barrier Reef itself, or the history of King Henry VIII from the Tower of London, or even physics from the moon. Suddenly school kids will be able to truly immerse themselves in the environment that they are learning about. VR could have a huge impact in benefitting the education sector and transforming schools into interactive learning environments where kids really can explore and discover new things.

A similar thing goes for news delivery. VR enables viewers to actually be taken to where the news is happening as it unfolds. This would totally change the way people emotionally and socially connect with the news and react to the latest stories.

For VR to have these massive impacts I have talked about, it cannot be a $500 headset requiring a surround-sound system and a moving chair to give the user a ‘4D’ experience. It needs to be a cheap, readily-available headset similar to those offered by Google Cardboard. In a world where the majority of people own a smartphone, the only real cost becomes the headset and if that is $20 then VR will be transformative.

VR has the potential to be a disruptive and transformative technology but not if the community that is developing it only looks to gaming applications. We need to be much broader in our thinking not just about applications but also about what VR will be as a product. Will it be an expensive high-end creation, a cheap mass market headset, or will there be a spectrum of VR products that cover a range of applications? My view is that there will be a range of VR products that will accommodate many use cases, just as there are a range of smartphones available. This will only be possible if developers don’t march down a single track just as we reach a possible inflection point.

For more about Redshift, visit our website and our twitter page

Mobile enables everything

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Sam Evans, Partner
sam.evans@redshiftsc.com


“Mobile is everything” – this year’s tagline for Mobile World Congress. I think we can agree that mobile is approaching ‘everywhere’ status, but to say that it is everything is probably overstated. I would rather say: mobile enables everything.

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The mobile ‘everything’ is the ever expanding digital ecosystem which is well recognised for its disruption of traditional business models through technology innovation. Uber isn’t a mobile service, it’s a taxi service enabled by mobile; AirBnB isn’t a mobile service, it’s an accommodation service enabled by mobile; Apple Pay isn’t a mobile service, it’s a payments service enabled by mobile… the list goes on.  So, although mobile might not be everything just yet, let us not understate its value as an enabler.

Today, mobile is an internet connection directly into the pocket of almost every consumer; it is the guarantee of wireless connectivity between machines; it is the platform on which to deliver a whole new generation of services driving socio-economic growth.

To have a world in which mobile enables everything, we need an ecosystem full of diverse players with specialisations at each layer of the digital stack. The majority of players in this ecosystem do not, and do not need to, invest in asset-heavy businesses or compete subject to local licence conditions. The players use the platform that the infrastructure creates to provide a service to their customers wherever they are in the world. These players rely on the infrastructure of operators’ networks to provide the mobile connectivity that enables their business, their ‘everything’.  As services increasingly rely on seamless real-time access to customers across all devices, the value of mobile connectivity will increase.

Significant focus at Mobile World Congress in the coming days is likely to be on the extent to which mobile operators’ business models are being disrupted by internet players.  In this regard, mobile operators are in no different position to any other industry that has been disrupted through technology innovation over the past ten years. Just ask the camera industry, the movie rental business and the music industry…

When I go to Barcelona next week I will be interested to see not only the impact of this disruption, but how mobile operators are re-evaluating their core assets and business models to ensure that they can sustain their growth through this disruption. By changing our perspective to ‘mobile enables everything’ we can have optimism – operators own the networks that are the enabler of a wide range of services. Operators can look to generate growth by building on top of connectivity with services such as personal identity, content and the billing relationship. They can maximise the value of local distribution networks and leverage the positive benefits of having a relationship with the local regulator.

Mobile, the internet connection in your pocket, is fundamentally changing the way we communicate, the way we shop, the way we consume content and the way we interact with our surroundings. All of these changes have come from beyond the traditional boundaries of the mobile industry but they have all relied on the networks that lie at its heart. Technology disruption will continue and, to retain relevance, connectivity providers’ business models will need to evolve. Whilst mobile operators may struggle to be everything, the opportunity to enable everything is just as critical for the future growth of the digital ecosystem.

Sam Evans, partner at Redshift, will be moderating a conference session on Thursday at Mobile World Congress looking at the way that mobile has enabled the transformation of content (e.g. news, video, music) production and consumption. Speakers at the session will be representing Conde Nast, Ericsson, Sky News and AOL.

For more about Redshift, visit our website and our twitter page