Research Notes

Mobile World Congress 2014 – a Preview by Strand Consult

Will 2014 be the “moment of truth” when regulators finally realize the challenges posed to the by OTT players? Or will regulators be like the captain of the Titantic, ordering the orchestra keep playing while the ship sinks? On Monday 70,000 mobile industry professionals will converge in Barcelona for the Mobile World Congress.

Here are the topics of this research note

• Anticipated keynotes
• OTT grows bigger and badder than old Telco
• The disconnect between industry and regulators is increasing
• Broadband, broadband, broadband
• 10 things on the courageous will dare to say

Anticipated keynotes
For many Mobile World Conferences, the keynotes from the usual suspects – Randall Stephenson, John Chambers , Jo Lunder and Anne Bouverot – were the highlights. The ghosts of some speakers past have overshadowed many rookies. But new blood is what the conference needs, and this year’s program looks like one of the best in years with a number of fresh faces and perspectives.

A particular keynote to attend is Telenor’s Jon Fredrik Baksaas, also the new chairman of the GSMA, the organization that puts on the conference. In Strand Consult’s 2014 predictions, we observed that the GSMA needs to reinvent itself with a more aggressive approach to the political and regulatory system. To date, the organization has not been able to convince politicians and regulators how vital and important mobile is for the modern society. Baksaas still has to prove himself, but it looks like GSMA is taking a step in the right direction with this new leader.

Both Facebook CEO Mark Zuckerberg and WhatsApp CEO Jan Koum will speak. They should open their remarks with thanks to the industry for all the investments in infrastructure without which their services would not be possible.

OTT grows bigger and badder than old Telco.
The conference will feature the latest newlyweds, Facebook and WhatsApp. Their merger demonstrates that OTT development is a potent form of competition for the mobile industry, as well as a disruption of revenues. Few recognize that Facebook and WhatsApp are deeply dependent on subsidies from the mobile telecom industry, subsidies that support handset adoption, infrastructure, and marketing. If mobile operators around the world had not made those investments or sold their products (data, SMS and MMS) in the way they did, there would be a no market for WhatsApp.

Facebook is already the world’s largest communication company by users. With a market cap of $175 billion, Facebook now exceeds AT&T at $171 billion, Verizon at $135 billion, and dwarfs most of the world’s mobile operators even Telenor at $33 billion. Only because the Chinese government has blocked Facebook does China Mobile still have such a high market cap, $192 billion. As OTTs continue to cannibalize industry revenues, the reboot of net neutrality in the USA has become a farce. Instead of seeing consolidation as the natural outcome in the inevitable maturation of the cable/telco industry (as it has been accepted in other highly capital intensive industries), American regulators and the powerful net neutrality lobby pretend to protect the public interest with their tunnel vision on operators while blissfully ignoring where the real action is: OTT. Strand Consult has detailed the evolution of this issue and its stakeholders in its report Understanding Net Neutrality and Stakeholders’ Arguments.

The disconnect between the industry and regulators is increasing.
In Strand Consult’s 2014 predictions described a regulatory “annus horribilis” for the mobile industry. With the US and EU doubling down on net neutrality and creating unfair competition for the industry with illegitimate broadband subsidies, that prediction has come true. The mobile industry has never been more competitive than now. At such a juncture, it is appropriate to move away from sector specific regulation toward general competition and antitrust law. But yet it appears that telecom regulators want to dig in and fortify their turf even more, at a time when they should relinquish control to general agencies for consumers and competition.

In the case of the EU, the political leaders and the regulators have added insult to injury. Not only do they promulgate failed “managed access” regulation that drag Europe further and further behind, they want to punish the telecom industry with even more bad regulation. The disconnect between the industry that builds and operates digital infrastructure of modern society and the politicians who regulate it has never been worse.

With an EU election only a few months away, desperate politicians have become increasingly populist and blantantly expose their ignorance of how the industry works. Recently The EU issued a galling report that said the mobile industry would make money by reducing roaming prices. It’s the kind of argument that smacks of Reaganomics and the Laffer Curve: governments will make the same revenue with a tax rate of zero or 100%. There is nothing like officials without a sense of reality to tell mobile operators how to run a business. Their naiveté is stunning: the EU Commission attempts to create a digital single market without any effort to harmonize taxes or to allow companies to consolidate across 28 countries.

The EU Commission has just released a report claiming that the app economy can employ 1 million Europeans, but does not name any companies. We suspect that this report will be quickly forgotten in the glow of the recent Facebook acquisition of WhatsApp. Some $19 billion was offered for an app company just 55 employees serving 450 million users. Meanwhile OTT players such as WhatsApp and their brethren will disrupt mobile revenues some 20 times the value of the acquisition—and many good jobs over the next five years. The European telecom industry is on track to shed 10% of its workforce on account of low profitability.

Put the app economy into perspective by looking at Denmark, a highly digital country. Its most successful app company has just 29 employees. Denmark has more people with gainful employment making sushi than mobile apps. The EU’s pronouncement that mobile apps could account for 35,000 jobs in Denmark in 2018 is ludicrous, but regrettably it’s indicative of the desperation and low level of rigor that the EU brings to its proposals.

However we congratulate Facebook’s shareholders on good deal with WhatsApp. One can quibble that $40 per user is too high, but on the other side, if Facebook can use Whatsapp as a platform for a Skype clone and become an MVNO, then the price is fair, especially when looking at a sale of Swedish operator Tele2 at 35 billion SKr, or chump change of $5 billion USD. Facebook and the other American OTTs can continue to enjoy their tax breaks and tax havens in Europe. They need not worry about any EU politicians upsetting their apple carts. Telecom, on the other hand, will be contined to be taxed at 25%.

The idea of the GSM standard was to create a shared platform for global leadership for European operators, equipment providers, and handset makers. That leadership is all but a memory as LTE has emerged as the fastest growing technology in mobile history. With Microsoft’s acquisition of Nokia (the company that invented the smartphone but never succeeded to market it), the last of the European phone makers, which once accounted for half of the world’s phones, is gone.

It’s not surprising that the EU’s credibility among the telecom industry is at an historic low. There is no hope left for this roster of leaders to do much. Like any company with poor performance, it’s time to fire the management. Their attempt was so flawed, so the best thing to do is to get them out of office.

Broadband, broadband, broadband.
The conference will likely feature reports of ever exploding traffic and growth on LTE networks. There will also be speeches about the need for Wi-Fi offload, the use of small cells, and deploying LTE in unlicensed spectrum. While these are exciting and important developments, there is not enough attention and discussion to their business models. With so much emphasis on traffic and building the capacity for it, we should expect more activity for the people who sell infrastructure equipment. Strangely enough, the vast majority of these providers are under tremendous financial pressure, and there is little evidence to suggest that they have been able to monetize the growth in traffic. It’s sad fact for their shareholders.

There will also be hype about 5G. It’s like watching the same old movie over and over again, except it’s a 3G movie, now a 4G movie, and soon a hyper 5G movie. The funny thing is that the 4G standard is yet to be defined and what people call 4G is based on a 3G standard.

People waste a lot of energy debating countries’ broadband speeds and obsessing about rankings. Rankings count in the Olympics where there are only 3 medals to win, but it’s not the same with broadband. Ranking countries by broadband speed and availability creates artificial scarcity. For example, the quarterly Akamai report includes Hong Kong as a separate nation, but if it was counted as part of China which it is, it would rank much further down the list. If Akamai was consistent, it would list Washington, D.C. at #3 in the world, Massachusetts at 4th, and Virginia at 5th, and 9 other US states in the top 15. South Korea typically scores at the top of Akamai’s list, but it’s a country the size of Minnesota with 9 times the population. Broadband rankings fail to account for crucial differences in geo-demographics, and for this and other reasons should be taken with a grain of salt. If a country scores well on these speed tests, it earns bragging rights, but it doesn’t necessarily translate into productive capacity, and that is what real broadband rankings should measure.

It’s not the broadband networks themselves, but how well they can be transformed into productive capacity in the economy. By judging broadband this way, speeds matter less, and adoption and usability matter more.

The importance of broadband is invoked as a panacea to all of the world’s problems, and it is manipulated to justify winning government subsidies for broadband infrastructure. Strand Consult finds this a subversion of the public good. Precious taxpayer resources are by far better spent on educating people than on building infrastructure. There is enough cash flow in the broadband industry to provide the all the infrastructure that the society needs. In many developed countries, there is in fact a glut of broadband infrastructure. This is evidenced by the prevalence of high speeds but low adoption. Speeds are simply growing faster than users’ demand.

However there is not necessarily a market in getting people to be digital literate; this is where the government can play a role. It doesn’t matter whether fixed broadband is to brought every last corner of the earth. If people don’t know how to read or how use a computer, they will almost never use fixed broadband. Indeed there are parts of the world that will probably never have fixed broadband. It doesn’t matter. They will have mobile broadband. A class of mobile innovations and applications is emerging to make the mobile broadband experience as good if not better than fixed broadband.

Mobile has irrevocably changed computing. PC sales have fallen off a cliff, and only a small fraction of people (heavy users of word processing, spreadsheets, and computer aided design) even need pcs at all. While fixed broadband has barely budged in Africa, mobile broadband has grown 50 fold in the last 6 years.

Mobile can play a crucial role in lessening the digital divide. The key advantages of mobile over fixed broadband are its cost effectiveness and usability. While those who have yet to get online stay away because they don’t like computers, mobile devices get people online instantly and at a low cost. Mobile is also effectively substituting for many traditional fixed broadband applications such as shopping. Every year the number of Americans who shop with a mobile device over Thanksgiving weekend breaks a new record.

It’s not a coincidence that Google, Yahoo!, and Facebook are remaking themselves to be mobile first. As for telemedicine, the role of mobile is vital. Human monitors and sensors have to be designed for mobile networks, or they will almost never be used at all.

While ranking speeds is not a useful activity, it is important to review the policies to encourage broadband investment and deployment. There has been a natural experiment in the US and EU for the last 10 years in broadband policy, and the results are in. A decade ago the EU accounted for one-third of the world’s broadband investment; today that amount has plummeted to less than one-fifth. Meanwhile the US has invested at a steady rate, even through the financial crisis. While Americans comprise just 4% of the world’s population, they enjoy one quarter of the world’s broadband investment.

The US invests in broadband at twice the rate as the EU. The American approach favors economies of scale, consolidation, and private investment. The EU approach, on the other hand, focuses on managed access and price controls. Today three quarters of Europeans rely on DSL for broadband. Only 34% of Americans can say the same. Meanwhile LTE networks cover 97% of Americans but just 26% of Europeans.

To be sure, the EU has pockets of next generation access, but 24% of its households don’t subscribe to broadband at all. One exceptional country is Denmark which scores highly on many broadband measures and where private investment approaches the American rate. This is a country with two policy principles for broadband: technology neutrality (no one network is favored over another) and market freedom (the government does not meddle in the broadband market).

These two lessons are a wakeup call for the EU which is currently tortured by 28 layers of telecom regulation. While the EU Commission has made an attempt to address the imbalance with a Digital Single Market initiative, their effort relies on feel-good solutions such as free roaming and the app economy without taking on the major issues that need fundamental reform, namely eliminating the failed managed access “ladder of investment” regime, removing barriers to consolidation, and reducing opportunities for tax arbitrage.

While the telecom industry is ruins from its earlier glory in Europe, the internet industry never got off the ground in the first place. The barriers for the development of the broadband market have also hindered the development of Europe’s internet industry. Of the world’s 25 top internet companies, 15 come from the USA, just 1 comes from the EU. With 28 nations, 17 languages and 11 currencies, the EU may never be able to create the true single market enjoyed by the US today. But Europeans deserve a better shot than what EU leaders have proffered to date. Strand Consult’s report suggests a way forward.

Here are the 10 things only the courageous will dare to say at MWC.
As in previous years, the Mobile World Congress will have plenty of speakers trying to look at the bright side of the sinking ship. Strand Consult will be listening for those who will tell the truth. Here are 10 things which should be said:

1. There is a great increase in mobile traffic, but not an increase in sales of new infrastructure.

2. There is a great increase in traffic, but not an increase in the industry’s cash flow.

3. Europe’s failed approach of service-based competition (or managed access) should be decommissioned in favor of true facilities based competition and a market-led approach to broadband.

4. Telecom regulation needs to be modernized and updated. The mobile industry is highly competitive and can transition to general competition law and antitrust.

5. A level playing field for mobile services requires equal standards for telecom and OTT providers in taxation and data protection.

6. Most developed countries have a glut of infrastructure The bandwidth offered to consumers is growing faster than customers’ demand to buy it.

7. Most internet services are being engineered to make ever more efficient use of bandwidth. Using precious taxpayers’ resources to build networks so that users can stream Netflix, which takes 30% of network capacity, is simply a subsidy to rich American OTT and entertainment companies. They should pay their fair share of the resources they consume.

8. Many talk about poor mobile coverage, but few talk about the systematic barriers that municipalities and site owners create to impede the deployment of infrastructure.

9. Many talk about mobile operators’ responsibility for good mobile coverage, but few talk about the quality of handsets.

10. Many talk about what the mobile providers can do for the society, but few recognize that society also needs to create the conditions so that the mobile providers can work.

Strand Consult predicts that this Mobile World Congress will be “the moment of truth” where the names and faces of those who have created success and failures will be known. The industry players, the OTTs, the regulators, and the politicians will become visible. Above all, Strand Consult urges its audience in the rest of the world not to take the path of Europe. The problems and challenges in the EU are so great that is a question of whether they can ever be resolved.

Europe, once the world leader in mobile, now suffers from enormous economic problems and high youth unemployment. The best that European politicians can do is focus on roaming prices app economy fantasies. It is a pitiful state of affairs.

Let’s use this Mobile World Congress to make the political and regulatory system realize the moment of truth. It’s time for the GSMA to step up and for its members to demand results.

Every year Strand Consult makes a pre-conference overview on MWC as well as a post-conference review. You can read our reviews from the past ten years here.
Mobile World Congress 2013


Mobile World Congress 2012



Mobile World Congress 2011



Mobile World Congress 2010



Mobile World Congress 2009



Mobile World Congress 2008



Mobile World Congress 2007



Mobile World Congress 2006



Mobile World Congress 2005



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