Cellcos are finally getting payback from 3G as non-SMS data revenues soar

By Mark Newman

It’s hard to imagine an industry that generates US$200 billion in global revenues – a figure that’s growing 35% a year – as anything other than an outstanding success story. But for some time there has been a widely held view that the mobile content sector is failing to live up to expectations, 3G has disappointed and mobile operators have thrown away an opportunity to develop a revenue stream that could ultimately surpass the voice business.

If 2008 is remembered for one thing, it should be for being the year that this notion was dispelled. Until last year, the nonvoice business was dominated by SMS. For a typical European operator, SMS accounted for up to 80% of nonvoice revenues in previous years. But this figure has started to fall sharply. Operators such as Vodafone are seeing non-SMS services generating up to half of nonvoice revenues. Investment in 3G – or 3.5G – is now generating payback.

2008 was also the year that the debate moved on. It’s no longer a question of whether there will be mass-market take-up of non-SMS data services but of what role operators will play in providing these services. And the focus is on how such services will break down between value-added ones and those based on Internet access. Operators are carving out a strong revenue stream in providing Internet access – via both smartphones and dongles – but are eager to add some value, either for their own users or for the Internet-service companies themselves.

Nonvoice revenues totaled US$157 billion in 2007, according to data collected by Informa Telecoms & Media, up from US$116 billion in 2006. In 2Q08 nonvoice revenues surpassed US$50 billion for the first time in any quarter. For 2008 as a whole they are expected to exceed US$200 billion.

Revenues are heavily skewed toward emerging markets. Asia Pacific captured 39% of global data revenues in 2Q08, but the region is dominated by China – as a function of its sheer size – along with Japan and South Korea. Europe was the second-largest region, with 25% of global revenues, followed by North America (19%). Other regions contributed just 17% of global revenues.

The US tops the world in mobile data ARPU. In 2Q08, data ARPU was US$10 a month in North America, compared with a global average of just under US$5.

These figures make a mockery of the idea that the US mobile market lags behind Europe’s. It is true that it took a long time for the US to adopt SMS, but it has been way ahead of Europe – though still some way behind Japan and South Korea – in its enthusiasm for other data services.

The ratio of prepaid subscribers to postpaid goes a long way toward accounting for the differences among markets in mobile content adoption and usage. Postpaid subscriptions account for 99% of all subs in South Korea, 94% in Japan and 90% in the US. And these are the countries with the highest mobile data ARPUs. It has been the introduction of flat-rate mobile data price plans – a concept that fits better in a postpaid market than a prepaid one – that has driven the non-SMS data market globally.

Devices have played a huge role in the growth of mobile data revenues. Usage figures for the iPhone have demonstrated that there is a huge appetite for Internet browsing on mobile phones, provided that the user interface can overcome the problems inherent in small screen sizes. But it is not just the iPhone that has built the market for mobile Internet. The usability of all midrange and high-end handsets has improved significantly, and the operators themselves are positively encouraging their customers to navigate off-portal rather than keeping them inside walled gardens. In the case of mobile broadband, all services are off-portal, and customers use dongles simply as a way to connect to the full Internet.

The influence of the iPhone can be seen not just in the device market but in the relationship between operators and handset manufacturers. Apple has negotiated exclusive relationships with mobile operators, and those that are not distributing the iPhone have been eager to counter with their own devices. For example, Verizon and Vodafone both have exclusive distribution agreements in their respective markets with RIM for the touch-screen BlackBerry Storm. In Europe, T-Mobile has been the exclusive distributor of the G1 Google Android device.

When Apple first attempted to negotiate distribution agreements for the iPhone, it came up against resistance from operators reluctant to put their backing behind a handset offering services – such as music, Internet browsing and applications – in which they had no role and which, furthermore, competed with their own offerings. But the take-up of the iPhone and its ARPU figure – more than US$90 a month – are so impressive that its operator partners have been happy to take a backseat.

As Internet brands continue to expand into the mobile space and develop handset or handset-software strategies, mobile operators will find it harder to find a market for their own services. And with operators looking to cut costs in the economic downturn, there will be a growing temptation to hand over responsibility for developing new services to Internet and handset manufacturers.

But operators will continue to seek ways to profit from the services adopted by their customers, even when they are offered by third parties. 2009 will see operators investing more in their API strategies, developing communities of application developers who they hope will pay to access back-office functions in their network. And even if such revenues are relatively small, there might be a way for operators to generate advertising revenues or for these new applications to drive usage of core services, such as voice or SMS.

As the recession starts to take hold in North America and Europe, mobile operators will shift their focus away from entertainment services to more-practical applications, such as mobile payments and the enterprise market. This has always been an aspiration for mobile operators, but their ambitions have tended to be halfhearted. Machine-to-machine communications has been cited by a number of mobile operators as a key focus area for 2009, and this sits well with their API and “open mobile” strategies.

Even if the most pessimistic scenarios for the economic downturn come to pass, it seems unlikely that the mobile content sector will stop growing. 2008 saw a switch to flat-rate and mobile Internet models. 2009 will see this trend continue and will see the arrival of more-affordable mobile Internet devices. Perhaps the bigger uncertainty is whether mobile operators will accept a role as dumb pipes rather than continuing to invest in their own services and smart-pipe strategies.