LL Cool J began his 1991 song “Mama Said Knock You Out” with the famous lines “Don’t call it a comeback/I’ve been here for years.” Today in the world of telcos and wireless operators, it’s a similar time — will it be comeback or knock out?
For decades, the big telcos called the shots in their industry, but lately they are having to adjust to a new power dynamic, with the “big four” of the new establishment (Apple, Google, Facebook, and Amazon) setting the trends, and coming “over the top” to eat at their margins and consumer mindshare. Can they mount a comeback and regain more control over their destiny? From my perspective, no one should count them out.
The U.S. mobile operators’ empire of controlling content, distribution, and policy suffered its biggest blow in 2007, when Apple introduced the iPhone, which was one of the first devices in the U.S. where consumers did not start up on a carrier-owned device screen. This was a huge inflection point and symbolized the carriers, such as AT&T and Verizon, being pushed towards the proverbial “dumb pipes” they have long dreaded becoming.
But don’t count out carriers yet. They still have significant room to maneuver, huge war chests, trusted brands, and will be making some serious moves in the next twelve months to stay relevant. Let’s look at four areas in which network providers could start a comeback in 2012:
1. Operating Systems and Devices: Carriers are feeling threatened by the increasing dominance of Apple, Google’s Android, and Samsung across the mobile ecosystem. For example, Verizon and other carriers have to pay Apple billions of dollars in subsidies (Verizon alone $5B in 2011) in order to sell the iPhone. Of course, the popularity of the iPhone and iPad meant Verizon viewed these subsidies as a good investment to win subscribers and their data plans, but looking to the longer term, these big carriers do not want to sit and accept a duopoly of Apple and Google setting the rules of the game, and even dictating pricing and subsidies (all the more so as Google enters the Smartphone manufacturing business with the Motorola acquisition closed).
Look for carriers to seek ways to rebuild a third OS ecosystem as a counter-balance, starting with promoting devices from the Nokia-Microsoft alliance, like the newly released Nokia Lumia 900, in an attempt to wean some consumers off Android and iOS. And if RIM can ever make a respectable consumer device (not likely in the short term), carriers would love to see them make a comeback.
Remember that in the U.S. the carriers have big marketing budgets (look what Verizon did for the “Droid” introduction), retail stores, call centers, and pricing tools. Google tried once to sell its Nexus Android device direct to consumers, and quickly abandoned the effort, as the device cost over $500 without carrier subsidy.
2. Apps and App Stores: Carriers will also be looking to further integrate themselves into the app store game, particularly on Android. With the Android Market now crowded and unsupervised (compared to Apple’s approval process), consumers face a challenge finding quality, trustworthy, malware-free applications from some half million apps available. Carriers are launching their own app stores on device home screens as an alternate to Android Market, betting that preloaded carrier store buttons, plus a more curated, safe, and vetted-for-quality approach, will win user adoption. Verizon recently announced a partnership with app discovery engine Chomp in September 2011 to help power Verizon Apps, its recently redesigned apps storefront. (That deal may not for continue for too long, given Chomp’s acquisition by Apple.) Carriers will not want to miss the boat at being influencers and recommenders (and advertising and promotional sellers) around apps and content.
The emergence of HTML5 as a web-based platform is another boon for carriers, and will be an important trend to watch. Operators will look to use HTML5 apps to reach consumers without having to go through Apple or Android, beating them at their own over-the-top game. In fact, AT&T recently announced their own HTML5 app store at CES, with Verizon rumored to be working on the same.
3. Mobile Payments:An even bigger long-term opportunity for the carriers may lie in mobile payments. Here as well “Over the Top” players such as Google and PayPal are several years ahead of the operators in product development. Google Wallet, while very impressive, is currently only available on one phone in the US. Once again the carriers have some real leverage in their arsenal. Verizon and other carriers have blocked Google Wallet from their devices, on the grounds that the carrier expects to be compensated for selling devices with special chipset and secure OS partitions to support NFC.
Verizon AT&T and T-Mobile instead have favored their own NFC joint venture, Isis, which will launch pilot programs in Salt Lake City and Austin in 2012. The carriers will open Isis to the existing credit card issuers, and plan to generate per-device fees, and access to valuable data, coupon programs, and advertising screen real estate. Carriers want to be tied into the ecosystem (and be paid for it); they will use their leverage to ensure they are not locked out of the multi-billion dollar M-payments push.
4. Network Management: If operators want a shot at regaining control of the mobile ecosystem, they have to start with taking back control of their own network. The amount of mobile data surging through carrier networks globally will grow 18-fold from 2011 to 2016, according to the widely-quoted Cisco VNI study just released in February 2012. A tsunami of app and browsing traffic, especially from cloud and on-demand streaming video, will strain network capacity tremendously. Video will account for 71% of all wireless data traffic by 2016. Think your dropped calls and video buffering times are bad now? Just wait.
Moreover, the formats of video being popularized by players like Apple and Google are particularly hard on networks. In HTML5, for instance, the dominant video format is the MP4. MP4 is a progressive download format, which means it is the opposite of “adaptive bit rate” formats that adjust to network bandwidth availability. We estimate MP4 now accounts for over half of all mobile video and growing, which means the strain on networks will get worse and worse. In a recent study of the Alexa Top 100 Global Video Publishers, our research at Skyfire found that only 18 of 100 are using adaptive video formats.
4G LTE networks will help, but won’t solve the worsening data crunch, as data is projected to grow over 18-fold, and 4G will only increase network capacity by around four-fold. Operators can mount a comeback by turning to smart network solutions to regain control over their networks from the Over the Top assault. Carriers will increasingly deploy data and video optimization solutions that can on-the-fly detect congestion in cell zones and adapt video to the available bandwidth, ensuring a good delivery experience for all users.
To sum up, will the carriers mount a successful comeback, enough to control their destinies and avoid “dumb pipe” status? That remains to be seen. The network providers may look bloodied and down for the count, but like Rocky they are still in the fight, with the strength and will to punch back. Then again, depending on your perspective, you may also see this as The Empire Strikes Back – either way, don’t count the service providers out just yet.