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Mobile Communications December 2011/January 2012 Viewpoints

Technology Analyst: Nick Evans

2011: The Year in Review

By Franklyn Wu, with contributions by Kyle M. Whitman
Wu is a consultant with expertise in mobile-communications technologies. Whitman is a senior consultant with Strategic Business Insights and monitors a portfolio of intelligent connected technologies for the Explorer Service.

Ever since Apple (Cupertino, California) launched its first iPhone smartphone in 2007, the most important developments in the mobile-communications industry have increasingly revolved around smartphones—their mass-market adoption rate, which carriers can carry them, and their operating systems and applications. Within fewer than five years, the industry has gone from being cautiously bewildered by the quick success of the first iPhone to completely embracing smartphones as the new norm of communication devices and enjoying their massive commercial success to beginning to face real and enduring network overloads from skyrocketing mobile-data traffic that smartphones and other data-centric devices have generated. Smartphone and data-service adoptions increased significantly in 2011, and progress was significant in at least one mobile application: mobile payments. But several serious episodes of outages or slowdowns of major carriers' networks in major markets also occurred, which threatened to outpace major stakeholders' attempts to improve their networks. In 2011, several major carriers maneuvered to address future network congestion by gaining access to more spectrum resources through merger-and-acquisition (M&A) activities or partnership. However, not all the exciting M&A and partnership activities (including ones that did not ultimately materialize) in 2011 were attempts at spectrum grab. For example, Google (Mountain View, California) entered the handset business by acquiring Motorola's handset unit, Microsoft (Redmond, Washington) paid a handsome sum ($8 billion) for voice-over-Internet-Protocol leader Skype, and Nokia (Espoo, Finland) set aside its own Symbian and MeeGo mobile operating systems (OSs) for its new technology partner Microsoft's Windows Phone 7 OS.

Movements in the Smartphone Market

Android: The New Leader

The December 2010/January 2011 Viewpoints lists several developments to look for in 2011: Android's becoming the leading mobile operating system, Nokia's continuing to experience significant market-share loss, and Apple's remaining one of the top five handset makers in the world. All three of these developments took place in 2011.

Back in 2007, Google's yet unannounced mobile-entry strategy was a source of much speculation. Apple had just released the first iPhone that summer, and various industry insiders swore to the existence of a "Google Phone" prototype. As it turned out, the internet search giant instead released an open-source mobile operating system—Android—as its entry into the mobile-communications market. At the time, the announcement seemed underwhelming; although the first-generation iPhone was enjoying success among early adopters, no guarantee existed that a mass market for touch-screen-based smartphones would emerge. Google took a significant risk in creating an OS for such phones when the major handset makers at the time—Nokia, Samsung (Seoul, South Korea), RIM, Sony Ericsson (London, England), and Motorola (Schaumburg, Illinois)—either did not yet have any such smartphone offerings or already had a proprietary operating system for their smartphones. But once the first Android smartphone became available in the fall of 2008, adoption by handset makers and consumers grew very quickly.

Android adoption greatly accelerated throughout 2011, helping Android to become the leading smartphone platform, edging out Nokia's Symbian and Apple's iOS. Android runs on more than 52% of new smartphones as of third quarter 2011. Perhaps equally impressive is the rate of Android's ascendancy to the top. The 52% market share that Android holds represents a 207% growth since the third quarter of 2010. Part of Android's significant growth in 2011 may result from the OS's having evolved over time into a competent and powerful mobile platform with a vibrant third-party developer community that rivals that of Apple's iOS. Additionally, unlike iOS and Windows Phone 7, Android's permissive licensing terms allow handset makers and carriers the freedom to make significant proprietary modifications to the OS. Android also has come to enjoy significant brand cachet, thanks to the marketing efforts of carriers and handset makers as well as the goodwill Google generates. These features have made Android an attractive operating system for handset makers. Google has also benefited thanks to Android's tight integration with Google's web applications, which ultimately means more traffic and eyes to the ads Google runs for its advertising clients and more ad-related revenue to Google.

Apple Still Strong Leader in Devices

Apple will likely always remember 2011 as the year Steve Jobs—its cofounder, chief executive for many years, and driving force behind its current success—died. Jobs died in early October 2011 after a long bout with a rare form of pancreatic cancer. On the business end, however, Apple was highly successful, despite being overshadowed by the explosive growth of Android mobile OS. Here are some of Apple's commercial successes in 2011 in the mobile-communications market:

  • At the end of 2010, Apple had sold approximately 73 million iPhones since the product's launch in 2007. Apple likely sold more than that number in 2011 alone. The shipment number dipped in the third quarter of 2011 in comparison with the number in the second quarter, but industry analysts tend to agree that this decline was due to consumers' waiting for the release of the new-generation iPhone 4S and holding off their purchases. The record-breaking preorder (1 million preorders in 24 hours) and initial sale numbers (4 million during debut weekend) for the iPhone 4S seem to have validated this speculation. In August 2011, Apple also overtook Nokia as the leading smartphone maker by volume. Even though a quarter later Samsung took over the top spot, the Korean electronics giant did it with a much bigger lineup of devices, and Apple's different versions of iPhones remain the best-selling—and by far the most profitable—smartphone models.
  • In April 2011, Apple ($11.9 billion) surpassed Nokia ($9.4 billion) as the leading handset makers in terms of revenue. Although in October 2011 Samsung took over the leadership in this area thanks to the strong sales of its Android-based Galaxy line of smartphones, Apple remained the top handset maker in terms of profit and profit margin (30.9%). Another example of Apple's utter dominance in the area of profit, in the second quarter, the company generated 66% of total profits in the overall handset market (in comparison with second-place Samsung's 15%).
  • The tablet market, which Apple created and dominated in 2010 with its first iPad, became more competitive in 2011. Major handset and PC makers including Samsung, RIM, Motorola, Hewlett-Packard (HP; Palo Alto, California), HTC (Taoyuan City, Taiwan), and Amazon.com (Seattle, Washington) all released new tablets in 2011. Several high-profile products fizzled quickly: RIM's PlayBook failed to gain carrier support in the United States and sold approximately only 1 million units, and HP shut down its WebOS device unit shortly after its TouchPad went on sale. By contrast, Android-based tablets have made great strides and gained 23% additional market share to reach a total of 27%. Because the overall tablet market grew so much in 2011, Apple still grew significantly in iPad shipping volume—selling close to 40 million iPads in 2011—despite losing more than 20% in market share. The latecomer Kindle Fire from Amazon.com showed some promise with innovative browser architecture, great content integration, and an attractive price tag ($199), and Amazon.com likely sold more than 1 million units of the Fire in December 2011 (the company claimed that it sold 4 million Kindles altogether in the month, with the Fire the top-selling model). However, early user complaints began to surface about some hardware problems that are not easily solvable with software updates.
  • Apple's iOS continues to be arguably the richest content environment, both for the end users and for application and content providers. Although Android is catching up, iOS still boasts the highest number of applications (500 000 versus 300 000 for Android). For developers and content providers, even though Android has surpassed iOS in smartphone market shares and average monthly data usage (582 Mbyte for Android users; 492 Mbyte for iOS users), iOS edges out Android in the percentage of users downloading apps, streaming music and radio, and watching mobile video and TV content.

In summary, even with the continuing and foreseeable strong growth of Android, the resurgence of Samsung in the smartphone segment, Microsoft's continuing development of the Windows Phone OS (and its partnership with Nokia), and the death of its charismatic and visionary founder, Apple thrived in 2011. Can the company continue its innovative edge without Jobs? Can it continue to push out great products and services to withstand the strong challenges from Google, Microsoft, and Samsung—tech giants in their own rights? Will Apple prevail in its escalating patent wars with its competitors? These and other developments will be worth monitoring in the coming years.

Nokia's Partnership with Microsoft

In 2011, Nokia still retained the position as the leading handset maker (24% in the third quarter, down from 28% in the year-ago quarter) based on its strength in the non-smartphone segment, but the company lost ground fast to Samsung in that regard. Nokia traditionally has had a hard time in penetrating the US market. This hard time, together with the company's ineffective smartphone strategy, has led to spiraling smartphone market share and steep revenue losses. Early in 2011, Nokia surprised analysts the world over by announcing a technology partnership with Microsoft, through which Nokia would use Microsoft's Windows Phone OS for all its future smartphones. The two companies will integrate Nokia's Ovi application services and geolocation capabilities (navigation and mapping) into Microsoft's Windows Phone OS, and Microsoft's Bing will be the default search engine for Nokia smartphones. To effect the strategic change, Nokia had to take some painful measures in cutting down its workforce or reassigning Symbian units to work on Windows Phone OS development or other projects. It also had to endure some brutal revenue dips during the many long months that separated the company's partnership announcement and the release of Nokia's first Windows phones.

Those phones—the Lumia 710 and the Lumia 800—were released in Europe at the end of 2011 to glowing reviews. The company has plans to release the Lumia on T-Mobile USA's (Bellevue, Washington) network in early 2012. Nokia and Microsoft have also worked to woo application developers to the relatively new Windows Phone OS. The partners provided detailed guidance to developers on how to port their applications from iOS to Windows Phone OS, and they waived the fees to the Windows Phone OS development kit for Symbian developers. Despite its early stumbles, the partnership seems mutually beneficial for both Nokia and Microsoft. In addition to adoption from Samsung, HTC, and LG (Seoul, South Korea), Microsoft needs a handset stalwart to provide a lift to the new OS in the form of hardware design and manufacturing expertise and production volume—in the same way Motorola, HTC, and Samsung did for the Android platform. In Nokia, Microsoft found a partner eager for a change of direction and in need of assistance in developing and supporting a competitive OS and fostering the application-development community, which Microsoft is very capable of doing, at least on the PC platform. Both companies are looking to a new start in the smartphone era of the mobile-communications market, and both hope to make the OS battle a three-horse race between Android, iOS, and Windows Phone OS.

Network Congestion Driving M&A Activities

As more and more people bought and used smartphones (third quarter 2011 saw a global shipment of 115 million units—a 42% growth from the year-ago quarter) and other mobile-data devices (such as tablet PCs, e-book readers, and mobile-data cards for PCs), carriers' networks experienced slowdowns and congestion with higher frequency than in the recent past. Ericsson (Stockholm, Sweden) noted in August 2010 that network traffic had tripled in the year before, and in the beginning of 2011 it projected that mobile-data subscription would double during the year to reach 1 billion subscribers. In 2011, carriers deployed several approaches to address this important issue.

Approaches to Address Network Congestion

In the short term, one obvious approach to address congestion is to ramp up over-the-air network deployment. AT&T (Dallas, Texas) and Verizon Wireless's (Baskin Ridge, New Jersey) aggressive deployment of LTE (long-term evolution) networks in the United States during 2011 is an example of this approach, which presumes that carriers have access to spectrum and the capital to deploy. Another user of this approach is O2 UK (a subsidiary of Telefonica Europe; Berkshire, England), which announced in early 2011 that it would double its infrastructure spending to migrate its 3G users to a patch of refarmed 900 MHz spectrum.

For those carriers without access to spectrum assets or large capital reserves to deploy new networks aggressively, one immediately available approach is to offload mobile-data traffic using Wi-Fi or small-cell networks. Several UK and French carriers, with Orange (a subsidiary of France Telecom; Arcueil, France) as a leading example, pursued this option actively in 2011. In fact, with LTE at least several years away (mainly because of spectrum scarcity) in many European countries, using wireless local-area networks of different forms to offload data traffic transparently is a good strategy, particularly in Europe's dense metropolitan areas.

Because the European Union is busily dealing with its financial difficulties, even major carriers with access to spectrum assets sufficient to deploy LTE are cautious and unwilling to build out their networks in isolation. Despite the pressure of congested networks and continuing strong consumer interest in data-centric devices and services, infrastructure-equipment vendors such as Ericsson, Nokia Siemens Networks (Espoo, Finland), and Alcatel-Lucent (Paris, France) did not have a banner year in 2011. Besides facing growing competition from upstart Chinese vendors Huawei (Shenzhen, China) and ZTE (Shenzhen, China), infrastructure-equipment vendors also faced the problem of major European carriers' using spectrum-procurement joint ventures and cross-border network-sharing partnerships as an effort to cut down on infrastructure spending.

Network technology is likely to progress so data transmission can be more efficient and faster, given that spectrum resource is not inexhaustible and demands for mobile connectivity still have a long way to grow before reaching a saturation point. But over-the-air spectrum remains an extremely valuable commodity. Governments around the world will dole out licenses for airwaves in the years to come, and these auctions will be highly contested and lucrative. Instead of relying solely on these government auctions to obtain spectrum licenses, some major carriers are acquiring or forming partnerships with companies that own these concessions but have no plans or capability to deploy network themselves. The year 2011 saw several successful examples and at least one high-profile failed example of this approach.

The Failed AT&T–T-Mobile Merger

In March 2011, AT&T shook the mobile-communications market by announcing its plan to acquire T-Mobile USA for $39 billion. The proposed merger would create the largest carrier in the United States, with close to 130 million subscribers, and give the merged company access to T-Mobile's AWS (advanced-wireless-service) spectrum holdings. AT&T argued that the merger would benefit the public because it would allow the joint company to use the spectrum assets more efficiently in deploying LTE networks and to provide better coverage to a larger area and more people. AT&T was so determined to complete the acquisition that it included in the proposed deal a $6 billion breakup fee ($3 billion in cash and $3 billion in spectrum holdings and roaming agreement) that it would pay Deutsche Telekom (Bonn, Germany), T-Mobile USA's parent company, in case the merger fell through.

The proposed deal provoked strong reactions from consumer-advocate groups and competing carriers (led by Sprint Nextel), as well as heightened regulatory scrutiny from the US Department of Justice and the US Federal Communications Commission (FCC). The Department of Justice sued AT&T to block the merger, and the FCC released a report in November 2011 rebuking AT&T's claim that the merger would serve the public better than the status quo. AT&T officially called the deal off in December 2011 and now needs a new plan to gain access to additional spectrum. And even though T-Mobile USA is now $6 billion richer, it has a highly uncertain and difficult path to deploying LTE using its spectrum holdings.

Verizon Wireless's Attempted Coup

While all eyes were on AT&T's struggle to acquire T-Mobile USA, Verizon Wireless quietly negotiated with SpectrumCo to buy the holding company's spectrum assets—AWS spectrum licenses that leading cable operators purchased during the same auction in which T-Mobile USA gained its spectrum assets—for $3.6 billion. The company made the announcement in December 2011. These cable operators—Comcast (Philadelphia, Pennsylvania), Time Warner Cable (New York, New York), and Bright House Networks (Syracuse, New York)—purchased these licenses in 2006 as a potential way to add wireless "quadruple-play" services to their offerings. Cox Communications (Atlanta, Georgia), a cable operator that was originally part of SpectrumCo, bought out its own share and attempted to deploy wireless networks on its own to no success. SpectrumCo partners have most recently partnered with Clearwire (Kirkland, Washington) to resell Clearwire's wholesale wireless services to retail customers, but sales have been modest at best. The sale of these AWS spectrum licenses allows these cable operators to resell Verizon Wireless's current and future wireless services to their cable customers. Verizon Wireless subsequently announced that it plans to purchase Cox Communications' share of AWS spectrum licenses for $315 million.

Verizon Wireless will try to argue to regulators that these purchases will allow the company most capable of deploying quality wireless services to take them to the public more quickly. If successful, Verizon Wireless will possess approximately 110 MHz of spectrum nationwide, which represents a significant advantage over AT&T's 90 MHz. The decision about these purchases will likely come from regulators in six to nine months.

Sprint Nextel to Keep Up

Sprint Nextel (Overland Park, Kansas) is the third-largest carrier in the United States but significantly smaller than the two leaders, Verizon Wireless and AT&T. The company also lags the two leaders in terms of deploying LTE. Even though Clearwire, a company Sprint Nextel has majority shares in, was first in the market to provide 4G wireless services using mobile WiMAX, the overall industry has clearly chosen LTE as the next-generation network standard, and the benefits of a common standard and a shared technology ecosystem are too strong to ignore. Both Sprint Nextel and Clearwire indicated in 2011 that they will deploy LTE-advanced networks, and their plans become more integrated at the end of the year. Sprint Nextel will deploy LTE using its 1900 MHz spectrum as part of its effort to refarm the airwaves that its iDEN networks currently occupy. Sprint Nextel will also help fund Clearwire's LTE deployment, starting with locations where Clearwire currently has WiMAX coverage. The two companies combined are in a very strong spectrum position.

As another part of Sprint Nextel's multiprong approach to gain access to more spectrum, the company signed an agreement with Lightsquared (Reston, Virginia), a wholesale wireless broadband service provider that uses both satellite and terrestrial base stations, to deploy LTE networks using Lightsquared's spectrum holding. Under the agreement, Lightsquared will pay Sprint Nextel to build out and operate an LTE network using Sprint Nextel's architecture and Lightsquared's L-band spectrum. Lightsquared can then sell the wireless services to Sprint Nextel and other wireless service providers. Although the proposal is still awaiting regulatory approval and can still fall through, it illustrates the value of spectrum assets and Sprint Nextel's dogged attempt to get as much as it can.

Look for These Developments in 2012

  • Google will unveil a branded device through its subsidiary Motorola as a direct competition to Apple's iPhone 5.
  • Major handset manufacturers will settle into a two-OS strategy for their smartphones, developing flagship devices on both Android and Windows Phone OS.
  • Nokia will launch a flagship Windows Phone OS device on Verizon Wireless and AT&T's networks.
  • Samsung will become the leading handset maker in the world.
  • Apple will continue to dominate the tablet market with the launch of its iPad 3, despite the release of Windows Phone 8 and Android 4.0, both of which have strong support for the tablet form factor.
  • A clear and dominant business model will not emerge in the mobile-payment segment, with banks, carriers, and content and application providers (such as Google) all still fighting for control.
  • HTC and Samsung will release LTE smartphones.
  • Cloud-based architectures will become more tightly integrated with smartphones at the hardware level as handset makers switch to multicore mobile processing solutions that dedicate a single low-power core to background tasks (such as email processing, social networking, and application notifications).