Is a Smartphone Bubble Building Up?

The signs are getting clear by the day. What started off as a category created by a blockbuster product, is today being heralded as the savior of the mobile handset industry. Correction, the mobile industry in itself. Smartphones, and I am referring to the genre that has unleashed itself post the advent of the iPhone, have seen a smart uptick in sales in recent years. Driven by significant carrier subsidies in the US and elsewhere, and a renewed focus on mobile applications, this category has rapidly gained, both in user acceptance, and in industry attention.

Indeed, for the first time in years, smartphones, coupled with an open mobile ecosystem where customers are not bound by walled gardens, are helping in creating an industry of their own with stakeholders as varied as advertisers, ad networks, mobile developers, and others. Of course, the carriers and the handset vendors still figure in the equation, however, they appear to be increasingly dis-intermediated by either large Internet players such as Google or by innovative device entrants such as Apple, who have successfully recreated walled gardens of a different type. While all of this portends great for the consumer, however, the manner in which the hype is building up in the smartphone space, dominated by discussions over mobile applications, makes one wonder if there is indeed a bubble that's building up, across two of the important elements of this value chain, applications and devices.

The mobile applications space refuses to show signs of any letdown in activity. First it was the spate of announcements over mobile application store launches, and now the focus appears to be on other enablers of the value chain such as ad networks. Apple's App Store sure has seen a couple of billion downloads and a catalog of over 100,000 applications, however, the marginal utility of an ever-increasing number of apps is highly debatable. And not to be outdone, Google's Android marketplace has over 10,000 applications already. Which begs the question, how much is enough? For the consumers, discoverability becomes a huge hurdle, while for the developers, the ecosystem is beginning to act as a strong black hole. Sure there are AAA app developers who've struck it rich, but then, like in the case of any other content businesses, it is only a few apps that hit the jackpot. However, the mobile apps business sure is showing no signs of acknowledging this fact. To add to the overall confusion, multiple versions (Android 1, 1.5 and now 2.0!) of OS platforms are currently out in the market simultaneously, which has significant potential to alientate customers that can't figure out why a specific app is working on their friend's Android phone and not theirs. Yet, device vendors continue to create platforms to attract developers, Samsung's Bada being the latest to join the bandwagon. And with increasing apps, comes the realization of the need for monetization. And this is where ad networks like Admob hit paydirt. Their acquisition for $750 Mn is indeed seen as a validation of the potential of the mobile advertising space, and of course, without underplaying any of the value that in-app usage data that Google gets along.

On the device side, Apple continues to see rising sales. Forecasts are now coming in on how smartphones will likely make up for the bulk of handset sales 18 months from now! Players like Sony Ericsson and Motorola have kind of decided to go away from their low-cost handset focus and invest more on high-end smartphones. And we have even more new entrants in to the smartphone space. Dell, which has been on the fence for quite a while, has finally decided to take the plunge and is launching its smartphone in two of the world's largest emerging markets of Brazil and China. Android is now in to V2, with the Motorola Droid appearing to get early traction.

Rapid growth in any industry segment is always welcome. It indicates that there is significant previously unmet customer demand that newer products are meeting. However, the risk of such rapid growth lies in the possibility of over-the-top exuberance when it comes to estimating future growth. As a wise man once said, most forecasts are over-estimated in the short-term and under-estimated in the long term. Smartphones and mobile applications appear to fit this bill. One can only hope that the current hyper-growth phase is also likely to act as a natural shakeup with the result being fewer smartphone platforms, more open standards for mobile application development, an ecosystem that offers genuine revenue prospects for developers, ad networks, and advertisers, and most importantly, a top-notch customer experience, rather than morph itself in to an uncontrollable bubble.

Update 1: It didn't take long for the next major announcement in smartphones. Techcrunch's quoting unnamed sources that claim Google is close to launching its own smartphone ! Highly doubtful why they want to do that, given manufacturers are already making a beeline to adopt Android. Would Google want to compete with its partners? And more importantly, can Google ensure rapid adoption of its services through its own phone, as opposed to collaborating through the Android ecosystem. Nevertheless, up goes the hype curve !

VoIP Redux

VoIP is back in to the big league, and who else to be in the spotlight, other than Skype! Skype has been the poster child for the VoIP brigade for quite a few years now. However, most, including me, were disappointed to see Skype find its way into eBay, for there were evidently very little synergies. Indeed, one could vividly recall some of the rather wierd monetization options that eBay could conjure up for Skype, including one in which they considered selling ringtones for Skype calls ! Finally, it appears to have dawned on eBay after over four years that they are better off focussing on their core auctions and e-commerce enablement area (the irony wasn't lost on anyone on how eBay had paid significantly less for PayPal). Nevertheless, to eBay's credit, it has let the company quietly grow in to a potent service that is now looking at hitting a $1 Bn revenue run rate and clocks over 2 Bn paid minutes. What is interesting is that eBay has retained a stake in the company, and the surprise entrants back in to the company are the original (ruthless?) entrepreneur duo who founded Skype.

However, more than the intricacies of how the deal is structured, the deal and its size throws the spotlight back on the VoIP industry. Despite its immense potential, VoIP hasn't really take off in a manner befitting. While Skype has seen success with consumers, however, the real challenge, and the big monies, lie in encouraging enterprises to sign up. The VoIP space is beginning to see renewed traction with competition in consumer VoIP picking up. Nimbuzz recently launched its paid calling service, 'creatively' called Nimbuzzout. Google's Voice service, while not being a full-fledged VoIP service, however, lays bare the Internet giant's intentions for this space. And with rumors flying around of Google's acquisition of Gizmo5, one can be rest assured of a shakeup in the VoIP industry. On the carrier side as well, there appears to be some movement. AT&T has decided to allow VoIP calls over 3G, a point of much contention when Skype for the iPhone was released.While carriers around the world have agreed on the One Voice standard making all future mobile calls VoIP, however, full-scale LTE deployment is a while away.

VoIP, and more so mobile VoIP, appears poised for an interesting future. Having come in to mainstream when mobile ecosystems were tightly closed and , mobile VoIP has historically been limited in its ability. However, recent developments which are progressively breaking down carrier walls, opening up of operator APIs and creation of innovative platforms, such as the one offered by BT's Ribbit, create the potential for an exciting and innovative future.

Update 1: The current spate of action in this space ain't done yet, apparently. Techcrunch is reporting on a possible acquisition of Jajah, and for a change, we finally have a telco in the fray.

Update 2: The news about Google acquiring Gizmo5 indeed turned out to be true. Should be quite interesting to see how Google Voice evolves, now that they have access to a strong SIP platform and a PSTN termination link. More importantly, the prospect of a communications platform that integrates IM, Mobile, Location and uses SIP as the backbone indeed opens up exciting possibilities for realizing the unfulfilled dreams of unified communication. Telcos, watch out!

This Apple Defies Newton's Laws

The title sure seems apposite when viewed in light of Apple's latest quarterly results. Despite the all-round depressed economic environment, and declining consumer spend on TME products and services, Apple has managed to drive both top-line and bottom-line growth significantly. That such stellar results have come in what is usually considered a soft quarter of the year is testament to the twin growth engines of Macs and iPhones. With the iPhone having established itself as the benchmark in the smartphone space, and Macs increasingly finding mainstream acceptance, Apple now appears to be setting sights on creating future revenue streams.

In this backdrop, it is interesting to see how Apple is increasingly using content to create and sustain its future growth. While the iPhone with its staggering 100 K+ apps (leaving aside the quality/quantity debate) forms a key part of Apple's long-term competitive edge in the smartphone space, its attempts to use the iTunes platform as the gateway for digital content into the home merits a deeper look.

Recent reports indicate that Apple is now negotiating with TV networks on introducing a monthly subscription product. The idea being that for an amount of ~$30, consumers could get access to TV content through iTunes. Internet TV is steadily raising its profile, with the rising success of Hulu. However, treating it at par with traditional TV platforms is some time away. Broadcasters and cablecos have begun to feel threatened over such over the top services. However, Apple's entry has the potential to raise the stakes and enhance the reach of Internet TV services. Unlike a Hulu, which is largely viewed on PC (forgetting the Rokus of the world), the prospect of using iTunes as the enabling platform, as opposed to a device, poses a tricky situation for the TV networks. In putting iTunes as its front. Apple's leaving the door open for a device-agnostic future, where content can be viewed/purchased on PC/mobile/E-book/Netbook/what-have-you. With a rising interest from both device vendors and software players in embedding applications directly into next-generation large-screen TVs, the prospect of Apple embedding iTunes in to a TV doesn't sound that much more preposterous. Now compare this offering from Apple with that of a traditional operator like Comcast. And suddenly, Comcast's digital TV offerings sound obscene with monthly rentals of over $60! And yes, out goes the "TV Everywhere" initiative as well, given the fact that it requires customers to have a regular cable subscription in order to view the content on PC.

iTunes has had a more than significant role in hastening the demise of the traditional music labels, with its a la carte pricing model. If Apple is able to bring a similar proposition to the TV space, that could significantly impact cablecos who thrive on creating bundles and where a host of also-rans piggyback on one or two premium channels. Of course, there is the key issue of one of the large networks actually signing up with Apple, but it is more likely a question of when and not if anymore. Internet TV of course has still to better its overall user experience, given the significant bandwidth requirements, and the renewed debate in US and other developed economies on metering usage. And there's also the issue of shifting consumers to a different screen other than the TV. However, Apple does have a dark horse in there in the form of its relatively-neglected Apple TV line of products. A la carte pricing of TV channels, and a more robust Apple TV can precisely replicate Apple's success in the music business in TV content. And Apple's success is defined not by the margins that it is making in its music sales, but by the strong vertical control that it has over the customer experience, including billing and provisioning. Music labels who initially treated iTunes as just another distribution platform are now realizing that the middleman (Apple) today exerts more influence over the consumer, than them. Video could be the next market.

Economy and Internet Trends Presentation

Mary Meeker from Morgan Stanley comes up with a data-rich presentation every year at the Web 2.0 summit. Some of the panels from this year's presentation are pretty telling. For instance, the massive drop in mobile Internet traffic to operator portals! True indeed, mobile is going to play an increasing role in the lives of consumers, and location adds the ideal topping. Mobile broadband is likely to hit its inflection point in developed countries, and find its feet in emerging markets in the coming year. Social network sites are rapidly replacing horizontal portals as the landing pages and walled gardens appear set to be relegated to being a relic of the past.

Check out the complete presentation below.

Economy & Internet Trends - Morgan Stanley Presentation

View more presentations from kvjs.

Internet Radio: Fresh Breath of Life or Last Nail in Coffin

The recent agreement between SoundExchange and various online streaming companies begs the question whether webcasters can now heave a sigh of relief or if it is time for them to down their shutters. The music industry has been in a tailspin for a while with the demise of the CD, and the rise of snacking. Add music piracy, and increased consumer demand for DRM-free music, and you have an industry that is increasingly looking at a black hole. No wonder then, that the current agreement is being viewed in many channels as a victory for the music industry. A way to monetize what is increasingly being seen as the future of music.

While the specific terms of the deal in themselves are highly skewed against smaller webcasters, what with a minimum $25,000 guaranteed payout, it has not given large streaming players such as Pandora a free hand. An immediate visible step that Pandora took has been to cap the number of free hours of listening down to 40, bringing its freemium model into play. While that may offer the solution for the short-term, however, the moot point is, whether this whole debate realizes and recognizes the direction that digital music is taking. Music has been one of the earliest content categories to be impacted significantly by digitization, with the high-priced high-margin physical music falling out of favor with consumers. Rise of media players such as the iPod together with the iTunes ecosystem also hastened the demise of the CD. Now, the same thing seems all set to repeat in the space of a few years. Music labels are increasingly looking at online streaming as the next cash cow, and current pricing levels appear to be pointing towards that direction. Evidence such as those coming from Sweden where labels are making more money from Spotify, than from iTunes, are clear indicators of the future of the music industry.

Rising penetration of mobile devices, coupled with high-speed wireless networks, present a market that is potentially larger than any of the earlier music consuming markets. Working with Internet and telecom players in creating compelling music streaming services, and ramping up uptake of streaming by consumers is the need of the hour. Indeed, evidence is also coming in of how streaming not only has the potential to reduce piracy, but on the contrary, lead to increased consumption of physical music. The music industry could do well to look at Internet streaming in a more holistic way, than just as another revenue stream where they need to adopt a skimming strategy. Whether the recent agreement represents a rising of the phoenix from the ashes or a step towards a pyrrhic victory for the music industry is something that will be keenly seen.

The Online Video Shakeout

Online video is a great service offering. That Google continues to plough money into YouTube is more than enough validation for many that online video is the way to go for the future. Club that with rising viewership online, and you have a potent combo of an online service. However, the troubling part is, online video is not a great business to be in, at least currently.

The recent demise of Joost should serve as a warning to the fledgling industry that all's not well. Despite having a top-notch starcast (started by Kazaa & Skype founders), and being pre-funded to the tune of $45 million, Joost has consistently struggled to make the cut, be it in terms of being a preferred destination for the viewer or for the advertiser. The company has now decided to shut down its consumer offering and offer 'white-label' services to other content providers (a fiercely competitive space where Yahoo! just ditched its $160 million acquisition of Maven Networks). So, what did it in? While there are a lot of reasons, in a nutshell, lack of compelling content. Hulu, on the other hand, has consistently ensured that content is something that it doesn't lack. Luring away Disney from a possible Joost deal was probably the last nail in the coffin for Joost. Likewise, Veoh, another video aggregator that topped $70 million in funding, recently cut its staff and changed its focus to a browser-based plug-in. Other aggregators such as Metacafe have moved on to focus on professionally-produced content, while Crackle cut off user-uploads a couple of months back. And Microsoft, of 'em all, has acknowledged that user-generated content might not really have a major role to play in the future. The Redmond giant has decided to re-focus Soapbox, its long-time also-ran in the online video space.

There appears to be a tangible shift away from user-generated content towards professionally produced content. The success that Hulu is seeing, it is estimated to now account for over 10% of all online video ad revenues, coupled with YouTube's losses, is encouraging video aggregators to move towards professionally produced content. It also helps that consumers are increasingly showing clear preference to consuming long-form video content on the Internet. Media companies are increasingly watching the action unfold with glee. Unlike the long-drawn battle that music labels have been having with online music streaming, large media houses are increasingly preparing for a future where they are the distributors themselves, or own portions of aggregators such as Hulu. And till the time that Google or anyone else can figure out an easy, and inexpensive way of monetizing user-generated content, and compelling content is made available by large media players at a fair revenue-share, online video sites will continue to flounder.

Free

Chris Anderson, the popular editor of Wired, is back with his second book, Free. And despite all its recent controversy over sourcing/plagiarism, the "Long Tail" author remains a compelling read, if not for the theories that he espouses, but for the manner in which he does so. His current book is all the more relevant in the present context when certain content categories, such as music, are showing clear signs of movement to a zero-pricing model. And keeping in line with the theme of the book, the author and his publisher have made the digital book free.

Update: The free, as in free beer, offer for 'Free' is over, and you'll need to pay up to understand how giving free stuff away is great for businesses

Functional Ecosystems: The Need of the Hour?

In recent times there has been a lot of noise around ecosystems, and how open ecosystems, given Google's flashy entry, are now here to stay. In the mobile space, the transition to open mobile ecosystems appears to be happening rapidly, with traditionally open Symbian, having had to re-position itself, and older consortiums such as LiMo trying hard to tell people that they've been around for a while. Android in particular is increasingly being touted as the platform of the future. With reports coming in of Android deployment not just on smartphones, but on netbooks/set-top-boxes and what not, the clamour around the potential of these open ecosystems appears all set to rise further.

However, amidst this cacophony, it will be pertinent to take a step back and see what lessons existing systems have for us. Arguably, one of the most successful ecosystems in recent years has been the iPod-iPhone-iTunes combo. Apple has successfully created a completely vertically integrated system that made the user-experience a stroll in the park. Consumers were offered a simple way of downloading content/apps with billing tightly integrated. On the supply side, Apple maintained a stranglehold on pricing, availability and distribution. It stood up to content majors in deciding the pricing of single tracks, and it made the app store proposition attractive to mobile developers by keeping only a flat 30% retainer. The results are out for everyone to see. The iPod has become one of the best selling portable devices of all time, while the iPhone has set the cat amongst the device manufacturers aflutter.

The other successful ecosystem example in recent times has been the Amazon Kindle. The Kindle, in both its iterations, has consistently been sold-out, with varying sales estimates. Again, the Kindle too offers a vertically integrated ecosystem with mobile connectivity built into the cost of the device, and content availability driven by Amazon. Despite the high price tag, the simplicity of the offering, is attracting customers in droves. And like the Apple ecosystem, Amazon too exercises tight control over what can and cannot be viewed. And it is to Amazon's credit that by limiting, rather inconveniencing, usage of the Kindle, they can even charge for pulling RSS feeds !

In both these cases, consumers have shown a clear preference towards a simplified usage-experience, and one that is devoid of roundabouts. Consumers do not want to be bothered about confusing options around content discovery or billing. And this is something that device vendors, telcos and content players alike need to imbibe in future offerings. While early adopters will always be willing to go through a couple of hoops, however, hitting the mainstream will require players to bring elegant integrated and transparent solutions. Players along the value chain will increasingly need to collaborate in driving uptake. Traditional models that have worked in the past will not work in the future. For instance, while telcos have been able to get away with high revenue share for any third-party service in the past, increasingly, they will have to come to terms with the changed reality and accordingly price their role in a ecosystem. A delay in doing so will hurt everyone involved in the process. Amazon's attempts at launching Kindle in Europe have apparently been stalled due to breakdown of talks with telcos on revenue-share and pricing of connectivity. Likewise, Nokia's attempts at easing consumer hassles by having integrated carrier billing are slowing up their rollout of Ovi Store, giving its competitors strong headway.

It is indeed true that advent of digital media has had a strong impact on existing business models, however, the true benefits of digital media can only be achieved if and when competency-based collaboration kicks in the industry. End of day, as the Kindle and iPod/iPhone examples have shown, consumers are least bothered with the question of an open or closed ecosystem, all they crave for is a functional ecosystem which meets their needs!

Is Apple Making its Biggest Push for Enterprises Ever?

Is Apple getting ready to finally change gears and look beyond the consumer market? That is what appears on the surface given some of the recent moves coming out of 1, Infinite Loop.

In the rapidly evolving smartphone space, Apple's version 3.0 of its iPhone software marks Apple's biggest move to challenge RIM's domination in the enterprise space. With support for push email, Exchange, voice memos, and (finally!) copy/paste support, the iPhone now appears an option that enterprises can consider. Add to that, support for remote data wipe, hardware encryption, and tethering, and you now have a compelling smartphone, that can finally do all that has been done by a lot of other phones, but in a much more smarter and user-friendly manner. 

The App store that Apple has built also brings a key differentiating point to the table in its favor. While RIM and Microsoft are now making moves into the app store arena, Apple's app store already offers a straight-forward and tightly integrated solution for downloading apps. While enterprises will continue to have security issues around making available their internal apps on a public list, however, it is quite possible that Apple can create customized app stores that allow enteprises the security and privacy that they so desire in creating and pushing applications to their employees. 

Sure, there are a host of challenges that Apple still needs to surmount if its devices/software can even be considered for an enterprise-deployment scenario. However, Apple has its best shot at gaining a foothold in enterprises with its iPhone. With mobile workers requiring increasingly 'smart' devices, and the growing appreciation of vertically integrated solutions, such as the iTunes-iPhone combo, it is only but natural that enterprises consider the iPhone as a compelling alternate to the Blackberrys. It also helps that the iPhone has been seeing what can probably be described as the best growth ever for any smartphone. Apple, though, will have to ensure that it does away with its current adhoc approach and bring more transparency, and a sense of stability to its software release process if it hopes to convince enterprises to sign up.

Bharti+MTN: One Hurdle Too Many?

Bharti's renewed attempt at creating an Indo-African telecoms giant appears poised to face several roadblocks, some due to the inherent differences, and some due to the externalities surrounding such large deals. While Bharti has seen strong, in fact tremendous growth, in India, the company is limited in its geographic presence across the globe. MTN, on the other hand, has seen growth outside its home market of South Africa. However, there exist significant differences between the kind of markets that Bharti and MTN serve. India is a low ARPU, high usage market while markets where MTN operates typically are low ARPU, low usage. Competitive dynamics are yet to kick in pricing of services which continues to remain high in multiple African markets. While prices are expected to fall down in the coming years, however, increasing reach to the low-income rural communities will be a significant strain on their balance sheet. 

The contours of the how the deal will likely be structured, although this could change, also point at significant complexity. Bharti is looking at raising close to $4 bn in debt. Given the fact that 3G spectrum auctions in India are round the corner, and Bharti's necessity to participate heavily in them, Bharti could end up facing an uphill task in raising funds. 

And lastly, a key point in the whole proposed merger, and which was largely responsible for the breakdown of talks last year, is the nationalist feelings that are stoked through such large cross-border deals. Opposition could arise from labor unrest. Regulation in many emerging markets in Africa as well appears to be dictated by nationalist feelings, particularly in matters involving international operators. France Telecom's problems in Egypt, and, Vodafone's troubles with the local regulator in South Africa suggest caution.

In a nutshell, the path to a combined MTN-Bharti is riddled with potholes, however, the prospect of a combined entity having over 200 Mn subscribers appears too enticing for not overcoming these challenges.