Tech Boom

Posted on by Roger Entner

Qualcomm is the quintessential American tech company steeped it engineering excellence. Its genesis was the development of a new wireless standard called CDMA. Initially, it was written off as a failure, often ridiculed by its larger global rivals. It created a niche by getting American mobile providers like Verizon, Sprint and South Korean mobile providers like SK Telecom to adopt its technology. Qualcomm found redemption as the mobile providers often had the best networks in their respective countries, better than the globally dominant GSM standard. It found salvation when a variant of its CDMA standard was adopted as the global 3G standard called Wideband CDMA or to those who still harbored old animosities UMTS. It then became the global leader in 4G by holding most of the patents on the OFDM technology that underlies LTE.

By the late 2010s, Qualcomm that engineered itself through superior technology to unprecedented success was faced with five major problems that no engineering solution could easily fix.

  1. Despite being the premier mobile technology company growth had slowed down as upstarts like MediaTek was gaining market share, first in the entry level, highly price sensitive segment but was closing the performance gap between the solutions of the two companies. Qualcomm still dominated the flagship segment, but MediaTek dominated the entry level.
  2. Broadcom launched a hostile takeover to buy Qualcomm as investors were frustrated with low stock returns. Broadcom was only thwarted through the intervention of the US government.
  3. Qualcomm’s largest customer Apple with the support of the Department of Justice was using the courts as a price negotiation tool.
  4. The Android smartphone market was increasingly concentrating with Samsung and Chinese providers driving other manufacturers out of the market. Former mobile phone giants like LG and HTC exited the market.
  5. The relationship between the United States and China was becoming increasingly hostile. The US government instituted unprecedented sanctions against Huawei and imposed trade restrictions on semi-conductors.

Qualcomm CEOs are engineers at heart, Irwin Jacobs, the legendary founder; his son Paul, and Steve Mollenkopf. While Cristiano Amon is also an engineer has cut his chops as President of Qualcomm by spearheading the diversification of Qualcomm into more business segments and therefore to enable Qualcomm to participate in more growth sectors.

Under Cristiano Amon the company is continuing to focus on mobile and IoT but is expanding into computing and automotive. By doing so Qualcomm has expanded its addressable market from $15 billion to over $700 billion. The impact has been almost immediate. Qualcomm has now a $30 billion design win pipeline until 2030.

How did he do this? Qualcomm purchased several companies to strengthen its position in the respective sectors. It bought Cellwize and Augmented Pixels to improve its positioning in mobile, Clair AIR to strengthen its capabilities in the AR/VR area. But most importantly, Qualcomm bought Nuvia, a company focusing on ARM-based computing solutions and Arriver, a company with particular strength in advanced driver assistance software and hardware. And just a last week, Qualcomm acquired Autotalks, a fabless chipmaker making silicon and systems-on-chip for automotive safety.

The Nuvia acquisition is laying the ground work to strengthen Qualcomm’s core base of computing, just like the acquisition of P.A. Semi in 2008 did for Apple. P.A. Semi focused on low power processors and brought to Apple the expertise to build first the A-series chips that have powered iPhones since 2010 and now the M-series chips that were launched in 2020. If Apple’s success is any indication then ARM-based processors are going to be the processors of the foreseeable future. The power envelope of compute power, electric power consumption and heat generation are not on the side of x86 processors, but ARM-based processors. It could also help Qualcomm to close the mobile processor speed gap between itself and Apple A-series processors and increase the gap between Qualcomm and MediaTek processors. Faster, more powerful processors will also help in Qualcomm’s greatest growth market: automobiles.

Where Qualcomm is most likely to replicate the strong position it has in mobility is in electric vehicles. Qualcomm has created a comprehensive solution for automobile manufacturers called Snapdragon Digital Chassis. It combines safety and connectivity with entertainment, customization and upgradability. It takes the basic lessons of a smartphone and takes it to the automobile. The parallels and similarities as the car becomes essentially a mobile server are striking. Qualcomm is coming into this market at the right time when other’s have laid a foundation for the demand, but Qualcomm has the more comprehensive and elegant solution. Qualcomm has also the opportunity to provide a solution that rivals that of Apple. Apple’s Carplay service is viewed by many car manufacturers as a bear-hug take-over of a large part of the user interface between the drivers and passengers of the car most of the navigation and entertainment interface. Automobile manufacturers are especially sensitive due to the long-rumored Apple project to build their own electric car and Google’s Waymo autonomous car company. The car manufacturers know Apple and Google do not come in peace and do mean harm to them. Car manufacturers have to own the user interface between the vehicle and the customer, but know their solution has to be on-par if not better than that of Apple and Google. Working with Qualcomm gives them a chance to do that and so much more. In addition, while there exists significant brand loyalty for traditional car buyers with more than 50% of owners of one car brand to own a car from the same car brand, this loyalty does not exist when it comes to the switch to an electric vehicle. This levels the playing field and is an incredible threat to incumbents and opportunity for new market entrants. Tesla is the embodiment of this new generation of automobile manufacturers. While Tesla had to pioneer a lot of the systems themselves, the next generation electric vehicles can rely on integrated solutions from a company like Qualcomm. Car manufacturers like General Motors, Cadillac, Stellantis, and Mercedes-Benz as well as BMW, Hyundai, Nio and Volvo are in varying degrees of partnership with Qualcomm. Such an array of car manufacturers and a solution that offers breadth and depth gives Qualcomm critical mass to win the automotive market. Who would have thought three years ago?

Posted on by Roger Entner

As China has become a major global economy and grows more assertive on the global stage, the country has discovered the power of anti-trust legislation. While created on three common pillars of fighting anti-competitive agreements between companies, the abuse of a dominant position, and mergers that may eliminate or restrict competition, the implementation is increasingly different. There have been hundreds of cases where Chinese authorities have looked at mergers between Chinese companies, and not one has been objectionable to the authorities. But if it doesn’t matter that two separate companies are owned by the state or merged, how can a merger between state-owned businesses be anti-competitive?

In a state capitalist system, as we have now, Communist Party groups are part of every company, including private domestic or international joint-ventures and all foreign investment is in the shape of a joint-venture with a Chinese partner with three or more employees. While they have long-established formal power in state owned enterprises (SOE), for joint ventures there is increasing pressure to allow party groups to approve all critical matters before they are presented to the board based on the 2017 Communist Party Directive entitled “Notice about firmly promoting writing SOE party building work into company articles of association.” Following this logic, reviews of intra-Chinese mergers have always been approved.

Mergers in the last decade

As you can see from the chart above, there are no outright merger rejections and only a small number of approvals with conditions. Interestingly, the only mergers that have come under scrutiny are mergers without Chinese involvement. Due to the extraterritorial nature of Chinese anti-trust law, even mergers of companies outside China fall under its purview when it involves companies with a substantial amount of business in China. For example, in 2019, the five cases that were approved with conditions were KLA Tencor (US)/ Orbotech (Israel), Cargotec (Finland)/ TTS (Norway), II-VI incorporated (US)/Finisar (US), Zhejiang Huayuan Biotechnology (PR China)/Royal DSM (Dutch), and Nevelis (US)/Aleris (US). In addition, there are cases like Qualcomm (US) / NXP (Dutch), where instead of denying the application, Chinese anti-trust authorities just ran out the time. After two years of waiting for the acquisition of NXP by Qualcomm to be permitted, the companies reached the end of the contractual merger period and were forced to give up. This de facto denial was never recorded as a denial, as the Chinese anti-trust authorities simply did not rule. Due to the small size of China’s anti-trust authority, the country has plausible deniability when it delays ruling on a merger. At face value, China’s perfect record of only approving mergers remains intact, when in reality the merger was forcibly abandoned.

What’s really at stake

Cases such as those mentioned above create the appearance that Chinese anti-trust concerns are not directed at protecting Chinese consumers but protecting Chinese industrial policy. The approval with conditions of the Marubeni (Japan) acquisition of Gavilon (US) and Glencore (Swiss) of Xstrata (Swiss/UK) demonstrates that China’s industrial policy leads anti-trust merger enforcement. In both cases, China was concerned about the supply of vital commodities, copper and grain respectively, and the merger was approved only after significant divestitures that alleviated these concerns.

With this in mind, the acquisition of ARM Technologies (UK) from Softbank (Japan) by Nvidia from the US will be another interesting case. Most casual observers would conclude that Chinese anti-trust authorities would not be involved. Au contraire, mon ami! Almost all smartphone central processors are using ARM instruction sets, and Chinese companies have built their AI and neural processing technology on them. Huawei even went a step further and built its Ascend AI and Kunpeng general purpose processor programs entirely on ARM. The increasing reliance is due both to technical and to political reasons.

President Trump’s moves to use American intellectual property in trade battles with China, as well as restricting their use in military and dual-use applications, has complicated the lives of Chinese high-tech companies and it is likely to continue during President Biden’s administration. As a reaction, China has accelerated its Made in China 2025 project focused on reducing its dependency on foreign technology and products and shifting to non-American suppliers. If the Nvidia acquisition of ARM goes through, another key technology will be more closely under the control of US authorities, giving them another potential tool to assert pressure on China. It would also give Nvidia a significant boost in the AI competitive race that China considers one of its highest priorities. Nividia is a leader in network-based AI and ARM a leader in device-based, also known as edge AI. Combining the two companies makes them a much more formidable competitor, allowing to cross pollinate network AI with edge AI technology and vice-versa. Both companies have substantial business in China and hence fall under Chinese anti-trust laws and are subject to review.

Considering China’s track record, it is almost inevitably going to either block or just refuse to approve the Nvidia/ARM transaction to protect its domestic industry from further US sanctions and restrictions and to prevent a stronger competitor in the AI marketplace. It is more likely that China will simply run out the clock on the merger, while a more aggressive and higher profile move would be an outright denial of the merger. This would send a much stronger signal to the United States than passive aggressive non-approval and would be a harbinger of a more adversarial phase in the relationship between the two countries.

Posted on by Roger Entner

When Nvidia announced that it was in the process of buying Arm from Softbank, many analysts and industry observers were exuberant about how it would transform the semiconductor industry by combining the leading data center Artificial Intelligence (AI) CPU company with the leading device AI processor architecture company. While some see the potential advantages that Nvidia would gain by owning ARM, it is also important to look at the risks that the merger poses for the ecosphere at large and the course of innovation.

An understanding of the particular business model and its interplay highlights the importance of the proposed merger. Nvidia became the industry leader in data center AI almost by accident. Nvidia became the largest graphics provider by combining strong hardware with frequently updated software drivers. Unlike its competitors, Nvidia’s drivers constantly improved not only the newest graphics cards but also past generation graphics cards with new drivers that made the graphics cards faster. This extended the useful life of graphics cards but, more importantly, it also created a superior value proposition and, therefore, customer loyalty. The software also added flexibility as Nvidia realized that the same application that makes graphics processing on PCs efficient and powerful – parallel processing – is also suitable for other heavy computing workloads like bitcoin mining and AI tasks. This opened up a large new market as its competitors could not follow due to the lack of suitable software capabilities. This made Nvidia the market leader in both PC graphics cards and data center AI computation with the same underlying hardware and software. Nvidia further expanded its lead by adding an parallel computing platform and application programming interface (API) to its graphics cards that has laid the foundation for Nvidia’s strong performance and leading market share in AI.

ARM, on the other hand, does not sell hardware or software. Rather, it licenses its ARM intellectual property to chip manufacturers, who then build processors based on the designs. ARM is so successful that virtually all mobile devices use ARM-based CPUs. Apple, which has used ARM-based processors in the iPhone since inception is now also switching their computer processors from Intel to ARM-based internally built CPUs. The ARM processor designs are now so capable and focused on low power usage that they have become a credible threat to Intel, AMD, and Via Technology’s x86-based CPUs. Apple’s move to eliminate x86 architecture from their SKUs is a watershed moment, in that solves a platform development issue by allowing developers to natively design data center apps on their Macs. Consequently, it is only a matter of time before ARM processor designs show up in data centers.

This inevitability highlights one of the major differences between ARM and Nvidia’s business model. ARM makes money by creating processor designs and selling them to as many companies that want to build processors as possible. Nvidia’s business model, on the other hand, is to create its own processor designs, turn them into hardware, and then sell an integrated solution to its customers. It is hard to overstate how diametrically different the business models are and hard to imagine how one could reconcile these two business models in the same company.

Currently, device AI and data center AI are innovating and competing around what kind of tasks are computed and whether the work is done on the device or at the data center or both. This type of innovative competition is the prerequisite for positive long-term outcomes as the marketplace decides what is the best distribution of effort and which technology should win out. With this competition in full swing, it is hard to see how a company CEO can reconcile this battle of the business models within a company. Even more so, the idea that one division of the New Nvidia, ARM, could sell to Nvidia’s competitors, for example, in the datacenter or automotive industry and make them more competitive is just not credible, especially for such a vigorous competitor as Nvidia. It would also not be palatable to shareholders for long. The concept of neutrality that is core to ARM’s business would go straight out of the window. Nvidia wouldn’t even have to be overt about it. The company could tip the scales of innovation towards the core data center AI business by simply underinvesting in the ARM business, or in industries it chooses to deprioritize in favor of the datacenter. It would also be extremely difficult to prove what would be underinvesting when Nvidia simply maintained current R&D spend rather than increasing it, as another owner might do as they see the AI business as a significant growth opportunity rather than a threat as Nvidia might see it.

It is hard to overestimate the importance of ARM to mobile devices and increasingly to general purpose computing – with more than 130 billion processors made as of the end of 2019. If ARM is somehow impeded from freely innovating as it has, the pace of global innovation could very well slow down. The insidious thing about such an innovative slow down would be that it would be hard to quantify and impossible to rectify.

The proposed acquisition of ARM by Nvidia also comes at a time of heightened anti-trust activity. Attorney Generals of several states have accused Facebook of predatory conduct. New York Attorney General Letitia James said that Facebook used its market position “to crush smaller rivals and snuff out competition, all at the expense of everyday users.” The type of anti-competitive conduct that was cited as basis for the anti-trust lawsuit against Facebook was also that of predatory acquisitions to lessen the threat of competitive pressure by innovative companies that might become a threat to the core business of Facebook.

The parallels are eerie and plain to see. The acquisition of ARM by Nvidia is all too similar to Facebook’s acquisitions of Instagram and WhatsApp in that both allow the purchasing entity to hedge their growth strategy regardless of customer preferences while potentially stifling innovation. And while Facebook was in the driver’s seat, it could take advantage of customer preferences. Whereas in some countries and customer segments the core Facebook brand is seen as uncool and old, Instagram is seen as novel and different than Facebook. From Facebook’s perspective, the strategy keeps the customer in-house.

The new focus by both States and the federal government, Republicans and Democrats alike, on potentially innovation-inhibiting acquisitions, highlighted by their lawsuits looking at past acquisitions as in Facebook’s and Google’s case, make it inevitable that new mergers will receive the same scrutiny. It is likely that regulators will come to the conclusion that the proposed acquisition of ARM by Nvidia looks and feels like an act that is meant to take control of the engine that fuels the most credible competitors to Nvidia’s core business just as it and its customers expands into the AI segment and are becoming likely threats to Nvidia. In a different time, regardless of administration, this merger would have been waved through, but it would be surprising if that would be the case in 2021 or 2022.

Posted on by Roger Entner

A new report called “Broadband 2020” by Recon Analytics shows that over 40% of employees in the United States are able to telecommute. The Department of Labor’s Bureau of Labor Statistics defines the professional workforce as all workers in the “management, professional, and related occupations” colloquially known as white collar workers, which make up 41.2% of all jobs in America. This means that basically every white collar worker is able to telecommute. This highlights the dramatic change that the American workplace has undergone during the pandemic.

The pandemic also has the potential to halt or even reverse the decades-long migration of Americans from rural to urban settings. A slight majority (50.9%) of Americans that can telecommute are contemplating moving to a smaller city or town as the pandemic has prompted many Americans to reevaluate their priorities and living conditions.

What is surprising is that even 31% of Americans that cannot telecommute are considering moving to a smaller city or town. It shows that the luster of metropolitan areas has been waning.

But not all new places are equal, so we asked what factors would stop people from moving to a new place. The results were equal parts predictable and surprising:

More than a third of Americans do not have any reasons that would prevent them from moving to a different place. Where it gets interesting is the reasons why people would not move. The number one reason for not moving to a different town or village is a pay cut – 31.6% of respondents. Companies like Facebook have announced that employees who work from home from lower-cost areas – and everything is lower cost than Silicon Valley – would receive a pay cut. A move that ties compensation to location rather than contribution would prevent a significant number of employees from moving away from Silicon Valley, which already is experiencing a severe housing shortage and overloaded roads. Facebook’s reasoning also allows a glimpse at its compensation philosophy, which seems to focus more on competitive factors than what is good for the community or the employee. Almost as many, 31%, would not move to a town or village without broadband, which is just ahead of access of quality health care with 30.1% – and that in the midst of a pandemic. One has to recognize the magnitude of this finding: Availability of broadband, access to quality healthcare, and a pay cut are equally important in the mind of Americans during a pandemic and recession.

At 36.3%, the 45-54 age segment considers the lack of broadband to be the most significant barrier to moving, followed by the 25-34 age segment with 35.8%. More than a quarter of seniors (26.1%) will not move to a new location if broadband isn’t readily available.

Broadband is even more important than politics. While 22.5% of Americans would not move to an area with what they consider an incompatible political climate, which is significantly less than the importance of broadband. The  45 to 56 age segment is most focused on  politics with over 30.9% citing an unwillingness to move due to an incompatible political climate. The next most polarized age segment is those over the age of 65, where 22.1% mention an incompatible political climate prevents them from moving.

The lack of a nearby airport or a buzzing nightlife was the least important in people’s minds. Only 13.7% of respondents thought that not having an airport within a 50-mile radius would prevent them from moving there. A buzzing nightlife or restaurant scene is even less on people’s minds. Only 9.6% of 18 to 24-year-olds find it an obstacle to move, whereas 13.1% of the 25 to 34 age segment needs a buzzing nightlife and restaurant scene.

We asked people what they considered broadband. The median American considers 50 Mbit/s download and 5 Mbit/s upload as broadband. The people’s expectations are leading the FCC’s definition of broadband which currently sits at 25 Mbit/s download and 3 Mbit/s upload.

The reason for this becomes apparent when we look at the use cases. In our survey we looked at several use cases, but the prevalence of video conferencing has driven bandwidth requirements upwards, especially on the upload side. A HD video stream requires a minimum of 5 Mbit/s upload and download per stream. With more than 25% of Americans now frequently using video conferencing for work and another 21% using sometimes for work the bar has effectively been raised.

While the lack of widely available broadband is a significant hurdle for cities and towns to attract new residents, it is almost outright disqualifying for housing options: 77.5% of respondents would not move to a place, like a house or apartment, that does not have broadband. This makes the availability of broadband one of the key selection criteria when choosing a new residence. When almost half of the population has to be sometimes or frequently on video conferencing, having broadband becomes a job requirement. The pandemic, for the good and bad, has made our homes places of work with the IT and connectivity needs that were traditionally reserved for places of work. These are just some of the highlights of the new Recon Analytics Report “Broadband 2020.”

The results of the report are reinforcing the data from FCC’s 2020 Broadband Deployment Report which represents the most recent government data on the topic and the progress the industry has made from 2014 to 2018.

As of 2018, 94.4% of the Americans have access to broadband as the FCC defines it, 25 Mbits download, 3 Mbits upload (25/3). In urban areas, it is even 98.5%, but as we look towards rural areas and tribal lands, the availability is significantly less. In rural areas 77.7% of Americans and in tribal lands, 72.3% of Americans have access to 25/3 broadband. In higher tiers, access in urban areas drops only slightly, but much more significantly in rural areas and in tribal lands. At the 250/25 Mbps tier, 94% of Americans in urban areas have access, a drop of 4.5% from the 25/3 level. In rural areas,  51.6% of American have access to 250/25, which is 26.1% less than 25/3. In tribal lands, 45.5% have access to 250/25 which is 26.8% less than 25/3.

The numbers make it clear that there is still more than enough to do in urban, rural and tribal areas to provide connectivity for essential tasks. As it looks increasingly unlikely that children in every school district will be able to go back to school, we need to ensure that every child in the United States can access the internet to be able to participate in school and classroom work. If only one child cannot participate, the progress and grades for the entire class are not counted. While fixed broadband deployment is a time-consuming endeavor, mobile broadband can and should close the homework gap. T-Mobile has announced that as part of its merger commitments it will deliver mobile broadband to 10 million households we have only a few weeks to turn this promise into a meaningful difference as the new school year starts. The other mobile operators, in conjunction with the FCC and federal funding, should seize the opportunity and close the homework gap as quickly as possible.

In order to recover as quickly as possible from the current economic slump, we should put money where it has the biggest impact. Different technologies are able to achieve the same goals but have strengths and weakness in different areas. This means that any funding has to be technologically agnostic and look at the performance characteristics. The United States has wisely always used performance characteristics such as download and upload speed as well as latency as its selection criteria rather than being tied to a technology regardless if it is fiber, hybrid fiber coax, VDSL, satellite or whatever generation of wireless standards.

If you would like to buy the underlying report, please give us a call at 617.823.3363

Posted on by Roger Entner
The-4G-DecadeDownload

4G wireless networks powered remarkable economic growth and transformed the way Americans live and work, according to a new report by Recon Analytics and CTIA, the wireless industry association. The study shows the powerful impact of wireless on our economy as American providers begin to rollout next-generation 5G networks, which will create a new 5G economy over the next 10 years.

The report’s key findings include that nearly 10% of the GDP increase of the entire U.S. economy from 2011 to 2019 was due to the growth of the U.S. wireless industry, and that U.S. 4G networks support 20 million jobs, drove nearly $700 billion in economic contribution last year alone, and save consumers $130 billion each year.

“Our 4G success didn’t happen overnight: investment dollar by investment dollar, cell site by cell site, America’s wireless industry brought the benefits of high-speed mobile broadband to communities across America, creating  jobs, powering economic growth and spurring innovations that make our lives better,” said Meredith Attwell Baker, CTIA President and CEO. “Over the next decade, our emerging 5G economy will unleash even greater consumer benefits and maintain America’s position as the world’s innovation hub.”

Today, 4G networks are widely available and there are more 4G subscriptions in the United States than people. As the study shows, however, this was the result of ten years of gradual network improvements, industry investment, spectrum auctions and innovation.

Additional highlights include:

  • Between 2011 and 2019, U.S. wireless industry GDP grew 253%. In 2019, the industry contributed $690.5 billion to U.S. GDP, which would make America’s wireless industry the world’s 21st largest economy.
  • At the start of the decade, the wireless industry enabled 3.7 million U.S. jobs. By the end of the 4G decade, wireless-enabled jobs grew to 20.4 million—one out of every six U.S. jobs, which makes wireless the largest job contributor across all industries.
  • In 2010, an unlimited data, talk and text plan cost $113.87 on average for one line. By 2019, that same plan cost $64.95. That means U.S. subscribers now save $130 billion annually in wireless plan costs, without considering the added value of faster speeds, superior network availability and more powerful mobile devices available today.

“The report’s findings make clear that 4G’s impact in the U.S. can be felt across every meaningful measure, from job growth and network speeds to data traffic and GDP contribution,” said Roger Entner, Analyst and Founder of Recon Analytics. “The trajectory of U.S. 4G development should serve as a guide to consider—and to enable—the full transformational power of the coming 5G decade.”

Download this new report from Recon Analytics and CTIA.

The-4G-Decade-1Download
Posted on by Roger Entner

The IAB just published its 2016 advertising revenue figures. It was a banner year with record setting revenues of $72.5 billion, 22% higher than last year. This makes digital advertising the number one advertising medium in the United States as TV advertising according to eMarketer came in at $71.3 billion. Seventy-five years after the first TV commercial and 25 years after television became the largest advertising medium, a new king of advertising has been crowned. We cannot underestimate the significance of this event. Advertisers demanding efficiency and effectiveness measurements have voted with their wallets to make digital advertising the biggest spend category. But even within digital advertising, we are seeing major shifts away from “traditional” desktop and fixed digital advertising towards mobile advertising. Growing from basically nothing ten years ago, mobile advertising is now a $36.6 billion segment and represents 51% of digital advertising

Ad Format in millions
2015 Revenue
2015 Share
2016 Revenue
2016 Share
Growth
Growth percentage
Search
$20,481
34.4%
$17,756
24.5%
($2,725)
(13.3%)
Classified & Directory
$2,757
4.6%
$2,345
3.2%
($412)
(14.9%)
Lead Generation
$1,756
2.9%
$1,989
2.7%
$233
13.2%
Mobile
$20,677
34.7%
$36,641
50.5%
$15,964
77.2%
Display
$13,881
23.3%
$13,790
$19%
($91)
(0.6%)
Total
$59,552
 
$72,521
 
$12,969
21.7%

Source: IAB 2017
What is hidden beneath the numbers is that mobile advertising is taking more than the entire growth of digital advertising. Advertising is clearly going where Americans are spending more and more of their time and where most of the data traffic is being consumed. Advertising is also moving into the segments dominated by Google and Facebook, which are dominating mobile advertising to a much greater extent than the fixed internet.
As we can see below, the combined share of Google and Facebook increased from 2015 to 2016 from 67.4% to 71.2% as the mobile strategy of both companies paid off. Google and Facebook, the two largest players, represented a combined 89% of the entire growth of the digital advertising market. The Herfindahl-Hirschman Index (HHI), a commonly used metric to measure market concentration, is well north of 3,000. Markets with an HHI of 2,500 or higher indicate high concentration. If the current trend continues, Facebook will have a higher market share by the end of 2017 for digital advertising than all remaining competitors, excluding Google, combined.

Ad Revenues in millions
2015
2015 Share
2016
2016 Share
Growth
Share of Growth
Google
$31,300
52.5%
$37,600
51.8%
$6,300
49%
Facebook
$8,900
14.9%
$14,100
19.4%
$5,100
40%
Everyone Else
$19,400
32.5%
$20,800
28.6%
$1,400
11%
 
$59,600
 
$72,500
 
$12,900
 

Source: Digital Content Next
Just as a comparison, another other big internet company, Netflix, had $5.1 billion is US sales in 2016 – the same amount by which Facebook grew in just one year – from 2015 to 2016. This demonstrates how significant advertising-driven digital businesses are in the TMT sector. Google and Facebook capture 89% of all growth in digital advertising, which impressively counters the Google narrative that “competition is only a click away.” While this might be true in theory; in reality when a company grows as fast as all other competitors combined, the narrative sounds hollow and self-serving. This is especially true when the only competitor that is half way keeping pace with Google – Facebook – does not rely on search engine recommendations for its traffic.
Even more concerning is the loss of diversity of sources of advertising revenues. In 2007, Google generated just over 60% of its advertising revenue from its own sites, showing a reasonably healthy advertising ecosystem when one considers that most of its advertising revenues came mostly from search. Ten years later, Google derives more than 80% of its advertising revenues from its own websites and services.

Global Revenue in Millions
2014
2015
2016
Google Properties
$45,085
$52,357
$63,785
Google Network Members
$14,539
$15,033
$15,598
Total
$59,624
$67,390
$79,383
Google Properties Percentage
75.6%
77.7%
80.4%

Source: Alphabet
The increasing percentage of Google’s revenue being derived by its own properties combined with very lackluster growth for non-Google properties raises questions of potential search engine bias or a precipitous decline in the ability of Google Network members to monetize their sites. Either way, it is not a healthy trend
As they have become increasingly successful and dominant, Google and Facebook have been able to increase their revenue per user. Google has increased ARPU by about a third, whereas Facebook has been extremely successful by more than doubling ARPU in the US and Canada within 24 months.

US/Canada ARPU
2014
2015
2016
Google
$9.59
$10.68
$12.76
Facebook
$9.00
$13.70
$19.28

Source: Facebook, Alphabet
Especially Facebook, which now considers all of its customers to be wireless users, has increased its ARPU into the range of a traditional prepaid wireless subscriber. We should consider these significant monetization advances by Facebook and Google combined with their wireless overlap. Verizon is planning to emulate this with its new Oath business unit – the combined AOL and Yahoo properties. Verizon will have the same reach as Google or Facebook with a programmatic advertising engine. The fundamentals are in place for Verizon to become a serious competitor to Google and Facebook. It all comes down to execution now.

Posted on by Roger Entner

By now a three screen strategy is a must for anyone in the business of media consumption. It’s certainly one of the ways broadband providers are participating in the market place. Some see three screens – TV, mobile, digital – as the objective, but they don’t realize that three screens is just an intermediary step to full market engagement. Ultimately, broadband providers are going to pursue a five-screen solution, and advertisers will pursue a six-screen solution (advertisers see outdoor signage as an additional screen).

The first additional screen – the 4th screen – is in the autonomous car. Once we have autonomous cars, in all likelihood autonomous electric cars, the up to 46 minutes per day[i] we spend in a car will be a new peak period of intense mobile data usage. Suddenly, mobile connectivity that was mostly about streaming video to keep the kids quiet in the backset will transmit and receive massive amounts of information to keep the car running smoothly, avoid traffic and accidents, adjust engine functions and more. It’s called datamotives. That it is the logic behind Apple’s electric vehicles (EV) initiative and its focus on autonomous driving. The Americans aren’t the only ones thinking like this. The Chinese company Le Eco is active with two EVs and likely enter the market with a more comprehensive vision than anyone else on how the five screens will fit together. While Tesla is the clear leader in EVs, it needs to partner to match the complete system integration for end-to-end solutions.

The second additional screen – the 5th screen – is Virtual Reality (VR) and even more importantly for mobile, Augmented Reality (AR.) While anyone who has tried VR with an Oculus Rift or HTC Vive gets it and appreciates who it transforms home entertainment, the use cases for the customer equipment are unclear outside of protected spaces. VR’s strength to replace reality with a virtual one is also its weakness as it makes the wearer oblivious to the real world. Good luck crossing that street with it. Augmented reality on the other hand is the perfect overlay of a virtual information canvas on the real world. Anyone how has a newer car with HUD display instinctively gets it. The HUD display superimposes automobile speed, directions and station names when you switch radio stations on the windschield reducing distractions while driving. There is no more need to take the eye off the road because all the car displays all the info on a single screen. Once you drive a car with HUD AR, it is quite noticeable when you drive a car without it and you have a little surge of joy when back in the car with the augmented reality. While we see a sputtering start with Google Glass, the success of Pokemon Go is lowering the barrier for other companies to enter the AR space. Google Glass was ahead of its time – especially socially – by being an engineer’s answer to the problem. Releasing it before it was ready was probably not a great idea, especially with how transformational such a product can be. The AR glasses dramatically raised awareness of the technology and, as with every revolutionary technology, there was both excitement at the prospect – and fear – of what we can do with it.

While interweaving what we see in the real world with a series of data sources to create positive outcomes ranging from restaurant reviews over city guides making you a native in any city to facial recognition overlays for law enforcement to capture a criminal on the run. At the same time we need to recognize the additional creepiness of someone with video recording capability in a public bathroom. I am a strong believer that we will overcome the creepiness through a combination of personal etiquette (yes, I still believe in it) to a significant endeavor to make, for example bathrooms, non-recordable areas through beacons.

The positive argument for AR is so overwhelming that it’s a miracle we needed Pokemon Go to raise awareness again. Augmented reality is a little bit (at least for people not growing up with one) like owning a cell phone. When you never had one, you ask yourself what the fuss is all about. Once you had it for a short while you wonder how you ever lived without it. The key is the hardware form factor: HUD display in a car? Awesome. Glasses (hopefully less intrusive)? Awesome. Holding your phone up like an aiming device? Not so awesome. Companies like Google, Facebook through Oculus, HTC, Samsung and Le Eco that have already made strides in VR are well positioned for AR success. Apple could enter the space using the same thought-process that lead them to make the Apple Watch.

The burgeoning trend of separating electronics from the screen has become a significant driver for the television ecosphere as it allows treating the screen and especially the sound bar as separately upgradable. The sound bar will evolve to become the home of all the intelligence around the TV, a Roku, Apple TV, or Chromecast with sound capability. Suddenly, the barrier of entry and success for non-screen companies has been lower and makes it easier to disrupt this space. While there will hardware differentiation around the speakers – as some want better speakers than others – and more or less powerful computing capabilities, the true differentiation comes through the software on the sound bar as we are entering a software centric world.

While the TV world is currently stuck in a 10- to 20-year replacement cycle, the dislocation of consumer equipment from electronics especially allows the evolved sound bar to be updated a lot more quickly. Companies such as Apple, with its integrated software, hardware and Beats audio capabilities or Le Eco through its acquisition of VIZIO, the number one player in sound bars in the United States, are especially well positioned, but we should also not forget Samsung.

The shift to five screens will expand and disrupt the traditional business model of advertising companies, consumer media/communications equipment, and content and network providers. Integrated content delivery companies of all sizes have an opportunity to participate in shaping this expanded but more integrated world. The emergence of the five screen world is a rebuke of the viewpoint that innovation has left the network provider universe. The market trend for engaging consumers in more broadband is unmistakably focused on pushing content to and from five screens. Companies that successfully serve all five screens across the consumer universe will see their businesses expand and revenues rise.

[i] AAA, American Driving Survey, April 2015. https://www.aaafoundation.org/sites/default/files/2015AmericanDrivingSurveyFS.pdf

 

Posted on by Roger Entner

They say a picture is worth a thousand words. If that’s the case, then the Twitter header image for Microsoft CEO Satya Nadella demonstrates that perfectly. Just look at Nadella’s tortured smile then try to make sense of the picture in the header. It resembles some kind of hellish, hopelessly complex landscape that maybe someone at Microsoft understands and loves. But, for a company that wants to solve problems, it’s the wrong way to start. Nonetheless, it does provide the perfect illustration of what is and isn’t happening at Microsoft.

 

Nadella Twitter July 2015

The decimation of its handset business is just the latest symptom of the fundamental lack of clarity when it comes to Microsoft’s role in the world. For a company that says it’s “mobile first” the 7,800 layoffs are a striking admission of the utter failure of its mobile strategy. This moves essentially shuts the door on all but a few remaining Microsoft employees in Finland.

It is a classical “the emperor has no clothes” moment.

Nokia’s fate was sealed when mobile devices started doing more than “connect people.” With its life on the line, the organization could not find a new reason to exist in the significantly changed—and still changing—world. Microsoft’s fate will be similarly sealed if it cannot provide a clear vision and an elegant implementation of its vision of how consumers will use technology—from “mobile first” over nomadic laptops and stationary desktops.

As the consumer reemerges as the focal point of technological innovation, Microsoft seems to be hopelessly stuck in an antiquated, we-do-it-this-way-so-like-it-or-lump-it, corporate-centric approach.

During briefings, when I asked Microsoft how it plans to differentiate its products and services from Apple’s and those of the Android ecosphere, company representatives consistently replied unflinchingly with, “We make consumers more productive.” I was taken aback. “No, seriously, how will you differentiate?” I followed up. The reply? “Seriously, we’ll lead with making the consumer more productive.” I remain flabbergasted by the wide disconnect between how consumers think, what they want, and what Microsoft plans to force for them—especially from a company that surveys the living daylight out of consumers. How many consumers have ever woken up in the morning and declared they want to be 2.3% more productive today through the use of Microsoft products and services. You might sell a CIO on that, but definitely not a consumer. The lack of vision and understanding of what “mobile first” actually means beyond the tag line that an 8-year old could recite at a school play will turn off CIOs even more so.

Looking at it in hindsight, the handset group never had a chance as a full portfolio device manufacturer. The lack of a clear and concise vision at Nokia was replaced with an empty shell around the “mobile first” term. Mobile devices produced by the handset group have been very good devices—competitive with or even superior to devices that have significantly outsold them.

The lack of success for Microsoft in mobile is not because the division didn’t know how to make excellent devices. Rather, it comes from the lack of a compelling, holistic value proposition. Why would someone buy into the Microsoft ecosphere when they have so many choices? The company’s lack of a value proposition is glaringly apparent in the most competitive and newest segment (which, of course, cares the least about incumbency power): Mobile. The retrenchment into a core device team that creates fewer phones, but is hampered by a lack of corporate focus, will merely reduce the mobile price tag of a poorly defined overall corporate strategy.

Microsoft needs to realize that this “mobile first” world requires that its pace of innovation and attention to detail accelerate to mobile speeds company-wide.

That means it must produce new releases annually. Poor product releases like Windows 8—the equivalent of panicky software jambalaya, packed with reactionary knee-jerk features and devoid of attention to detail—cause a staggering amount of damage.

It would be okay for Microsoft to have a conceptual and executional meltdown once a decade. But Microsoft manages to do this with every other release of Microsoft Windows. Windows 10 looks like a good release. But let’s have a look back: Windows 8 was just plain bad, Windows 7 was good, Vista was abominable, Windows XP was good, and consumers responded to Windows ME with a resounding “not me!”

History repeats itself if you look further back. To add insult to injury, the average upgrade cycle is 30 months, which means that unless you are forced to use a bad OS because it’s the only one that comes with your new computer, or if you just can’t take it anymore and switch, you have to wait 5 years for an innovative step forward. Why not just save a lot of money and aggravation and just skip over other release and pour the resources into the successful update? No wonder Apple has taken so much market share from Microsoft with this two steps forward one step back product release cycle. The only saving grace for Microsoft is its huge imbedded base and the lack of a serious competitor in the business market.

But if the only reason why people purchase your product is that they have always purchased it and there is no viable alternative, one shouldn’t be surprised if there a competitor emerges. An initial stream businesses are already migrating toward Apple and if Apple shows some love and care, the stream will turn into a raging torrent. As Apple is on its path to integrate the user experience across hardware platforms, its success in mobile is expanding its beachhead in laptops and desktops, where it is continuously increasing market share, despite offering only computers $899 and above.

The most pertinent lesson is close to home: It took only a few years for Nokia to go from 50% global market share to 2%. Now Microsoft’s handset group faces the unenviable task of explaining to other handset manufacturers why they should build more Windows Phone devices, even as Microsoft pulls back in spectacular fashion.

Microsoft will fail if it continues to be a confused conglomeration of businesses units with terrible track records getting their products to work together. It would be a good start if all of their products and services would come together and work seamlessly across hardware platforms. That very fact would make the lives of their custome

Posted on by Roger Entner

Over the last two years, in addition to attracting new customers, most of the wireless industry has focused on better serving its existing consumers with products and services those consumers want. We all watch more mobile video and play mobile games. As a result, an unsung hero—in form of the tablet—has emerged. Launched only 4 years ago by Apple, the iPad was quickly imitated by others. Initially, the main focus was on Wi-Fi-only tablets, which are only connected close to a hotspot. But now, as Wi-Fi-only tablet sales slow, LTE-connected tablets have gained in popularity and have become a significant growth source for carriers as the traditional mobile phone business weakened and shifted considerably.

Exhibit 1: Postpaid branded net additions by device category, Q4 2013 to Q3 2014

2014-Tablet-Exhibit1

This trend culminated over the last four quarters, with 61% of the branded postpaid growth of the four nationwide operators coming from tablets. This development shows the tremendous change that the mobile industry is continuing to undergo and identifies a significant driver of the growth in data consumption by the most suitable device—tablets—for media consumption and gaming.

Why have consumers, who in years past mostly ignored tablets with wide-area connectivity, suddenly shifted their purchasing behavior? Three factors led to this significant change:

1)     The cost of service has declined: The introduction of mobile share plans has made tablets economically possible for consumers. Before mobile share plans, adding a tablet meant a separate data plan with a separate data allotment for $40 or more—in addition to paying $100 or more for the tablet with wide-area connectivity compared to a Wi-Fi only device. With mobile share plans, adding a tablet is typically only $10 per month, still within the realm of impulse buying or cheap enough justify it as a way to pacify a child in the back seat of the car or a husband needing to watch NFL Sunday games just about anywhere.

2)     The cost of tablets has declined: A substantial decrease in the cost of wide-area connected tablets from various manufacturers has made them more affordable. While wide-area Android tablets were as much as $500 when they were first introduced as a lower-cost alternative to Apple iPads, the unsubsidized retail cost has come down to roughly $250 without a contract or commitment. If a consumer enters a 2-year contract the cost of the device is $100, but even that is frequently discounted down to zero.

3)     Equipment installment plans have made devices even more affordable: A $250 tablet is generally about $12.50 per month on an installment plan offered by the nationwide operators. As many Americans generally prefer to pay over time instead of upfront, the addressable market for tablets increased substantially.

Not every operator is, or has been, equally dependent on tablets for their growth. Tablet promotions have become the operator’s weapon of choice to make their quarterly postpaid branded subscriber growth number. When we look at how dependent operators are on tablets for growth, quite an interesting picture emerges.

 

For Sprint, a Beacon of Hope

Even as Sprint went through a sea of troubles attracting new subscribers to their network, its success in tablets served as a beacon of hope for the company. The company jumped aggressively on the tablet trend and succeeded in satisfying customer demand.

Exhibit 2: Sprint postpaid branded net additions by device category, Q4 2013 to Q3 2014

2014-Tablet-Exhibit2

While Sprint lost almost 2.4 million branded phone connections in the last four quarters, it gained almost 1.8 million new tablet connections. Losing 600,000 postpaid branded connections is nothing to write home about, but without its tablet sales, results would have been even more devastating.

 

AT&T, the Balancing Pioneer

AT&T was at the forefront of meeting customer demand for tablets. Because it was ahead of the market and other carriers in satisfying consumer craving for entertainment on the go, it initially struggled with the profitability of selling subsidized tablets. After developing the market and volumes, the overall market moved in AT&T’s direction. As a result, other operators shared the efficiency gains that come from higher sales volumes.

 Exhibit 3: AT&T postpaid branded net additions by device category, Q4 2013 to Q3 2014

2014-Tablet-Exhibit3

AT&T achieved the second most branded postpaid phone additions in the industry by capturing 1.65 million new phone customers, slightly ahead of Verizon Wireless but less than half of T-Mobile. It also added 1.45 million tablets, which represent 45% of its net additions for the last four quarters, giving AT&T the most balanced growth of the nationwide carriers. Slightly behind AT&T in recognizing the trend towards tablets, Verizon Wireless’ results show that more focus often leads to better results.

 

Verizon Adds Almost as Many Tablets as the Other Carriers Combined

With a slightly larger customer base and slightly less new phone customers (1.64 million), Verizon Wireless added twice as many new tablet connections as AT&T with 3.5 million, compared to AT&T’s 1.3 million.

Exhibit 4: Verizon postpaid branded net additions by device category, Q4 2013 to Q3 2014

2014-Tablet-Exhibit4

With more than two thirds of its postpaid branded net additions coming from tablets, Verizon Wireless had the highest net postpaid branded subscriber net additions. Since the majority of the growth was meeting the needs of current customers rather than new customers, it significantly overestimates the strength of the customer acquisition engine of Verizon Wireless. While Verizon Wireless can be satisfied that it added more connections than anyone else, being number three in branded postpaid additions in its core segment must be a wakeup call in Basking Ridge.

 

T-Mobile’s Lack of Tablet Focus Hides Future Growth Potential

T-Mobile’s relentless drive to innovate—sometimes more substantive than at other times, combined with a CEO that has almost become a Jesus-like figure to some—has yielded spectacular new branded postpaid customer growth. T-Mobile added more than 3.8 million new phone customers, growing faster than the rest of the industry in new phone customers combined. The operator was near death before John Legere arrived. He changed the rules of the game in wireless, revitalized the organization and took it to previously unknown heights.

Exhibit 5: T-Mobile postpaid branded net additions by device category, Q4 2013 to Q3 2014

2014-Tablet-Exhibit5

The only weakness in T-Mobile’s performance was its lackluster additions of tablets. Despite being the only operator that offers free data for life for tablets, T-Mobile added only a small fraction of tablets compared to its competitors. The company, which focused on new customer phone growth, largely ignored tablets as it added only 665,000 new postpaid branded tablets, a third of what Sprint achieved with roughly the same subscriber figures. But this apparent weakness in tablet sales now also gives T-Mobile the opportunity to go back to its current customers like its competitors and, with sufficient focus, add one to three million more tablets in future quarters.