In both developed and developing markets, mobile usage is growing fast as consumers shift their online media consumption, commerce, information seeking, and social networking, among other activities, from fixed to mobile devices. Increasing mobile access everywhere is leading to new uses of the Internet—in fields from banking to education and from health care to the delivery of public services—further propelling its growth. Companies, governments, schools, hospitals, not-for-profits, and NGOs, among other organizations, increasingly realize that they need to interact with their stakeholders not just online but via smartphones and tablets. It is only a matter of time (and perhaps not much time) before the Internet becomes a mostly mobile phenomenon.
The revenues generated by the mobile Internet ecosystem are a big contributor to global GDP. We estimate that in 2013, they amounted to $682 billion in the 13 countries that account for approximately 70 percent of global GDP, or a substantial portion of the $2.9 trillion a year in revenues generated by all mobile technologies worldwide. (See Exhibit 3.) Smartphone users in the U.S. currently spend an average of $1,450 per year on their phones, data plans, apps, and content. Their European counterparts spend $740 per year, while in the Japanese market, annual per user spending amounts to $1,220.
By 2017, we estimate that mobile Internet revenues will have grown to $1.55 trillion across these 13 countries, an annual increase of 23 percent. Even in the economies where the mobile ecosystem is most mature, such as Japan and South Korea, annual growth will still be around 10 percent. In the major economies of the U.S., China, and the EU5, growth will be around 25 percent a year or more. The single largest contributor in the future will be apps, content, and services, fueled by the rapid expansion of mobile shopping and advertising.
Revenues are only one part of the picture. The mobile Internet is a major job-growth engine as well. We estimate that it has created employment for about 3 million people in the 13 countries we studied. Many of these jobs are in Asia, where the manufacturing of mobile devices is centered. But the rapid growth in device sales has also generated retail jobs throughout the U.S. and Europe, as well as in other regions. Network and infrastructure installation and maintenance take place worldwide. Jobs related to mobile operating systems and enablement platforms, which handle everything from hosting to security to billing and payment, are based primarily in the U.S. and Europe. Most employment is associated with devices and with apps, content, and services. These jobs tend to be created in countries with well-educated and skilled workforces, and their numbers will grow as activity in these and other segments of the ecosystem expands. A significant proportion of these positions are entrepreneurial and situated in small enterprises—young (or maybe not so young) men and women hoping to impress users with the next big thing and hiring others when they do.
With revenues across the mobile Internet ecosystem forecast to more than double by 2017, there will be a related—and a significant, if not a proportional—increase in the number of jobs generated. Some of these will replace jobs currently found in the broader Internet ecosystem—for example, positions related to earlier generations of feature phones, particularly in developing economies. We also expect a substantial number of new jobs to be created as the demand for apps, content, and services rises disproportionately with the increase in the installed user base. The advent of new apps that automate and enhance existing activities, in fields such as health care and education, should help fuel this growth. Many of these jobs will require a high level of technical skill and creativity, and it will be important for governments to support appropriate education, training, and mobility programs to ensure that their workforces are in a position to take advantage of the opportunities that will be generated by the mobile Internet.
Rapid growth in developing markets stems from fast-rising penetration rates and increasing 3G and 4G coverage, both of which are propelling growth in apps, content, and services. India is growing at almost 40 percent annually; China and Brazil are growing at more than 25 percent a year. This growth is having a measurable impact on GDP, a direct effect on employment, investment, and consumption, and an indirect impact on productivity, entrepreneurship, and information flow. (See “Developing-Market Snapshot: The Mobile Internet in Brazil.”)
Among the markets that the GSMA categorizes as fast growers, Brazil exemplifies the kind of impact that the mobile Internet can have on a national economy. There are more mobile connections in Brazil than people (266 million connections in a population of 203 million). Some 75 million of these connections are used by smartphones, a 42 percent increase over 2013. By 2017, three-quarters of the population is expected to own a smartphone. We estimate that the mobile Internet contributed $13 billion to Brazil’s GDP in 2013, an amount that will grow to $37 billion in 2017. Mobile Internet activities add about $3 billion to public funding through tax receipts.
Brazil’s national broadband plan has helped increase affordability, spur investment, and advance broadband penetration. New legislation provides tax exemptions for smartphone handsets. In 2012, Brazil successfully auctioned spectrum licenses to the four major mobile operators for mobile broadband in the 450 MHz frequency band (for rural coverage) and the 2.6 GHz frequency band (for urban coverage). Mobile 3G services now reach 3,400 municipalities in all states, covering 90 percent of the country’s population. Mobile broadband has exploded from 7 million lines in service in 2009 to 70 million today. Mobile 4G services were launched in April 2013 in major state capitals. Brazil’s recently reelected president, Dilma Rousseff, has promised to double Brazil’s broadband connections and to increase average Internet connection speed to 25 Mbps by 2018.
Analysis by the Groupe Speciale Mobile Association (GSMA) shows that a 10 percent increase in mobile broadband penetration raises GDP by 1.4 percent in low- and middle-income nations. A doubling in mobile data use increases GDP per capita by 0.5 percentage points. Faster connections also bring benefits. A 10 percentage point increase in 3G versus 2G use raises per capita GDP by 0.15 percentage points.
None of this, however, reflects the economic impact of local entrepreneurs’ ability to take their ideas global and generate increased revenues through their access to new customers and markets, a transformative benefit for small and medium-size businesses. (See “A Chinese Game Developer Goes Global.”)
Launched by two friends in Beijing in 2008, Papaya was one of the first app developers to bring social gaming to mobile devices. The company has opened its platform to all developers of social games for mobile devices and offered monetization tools to help developers profit from their endeavors. It also launched AppFlood in 2012 to sell marketing and advertising tools and Papaya Studio, an incubator for game developer teams.
Growth took off after Payaya opened up its platform. Today, the company has 110 million users and more than 1,000 games, up from 15 million users and 350 games in 2013. AppFlood connects users with 82,000 apps and delivers more than 800 million impressions daily. The company has 150 employees and offices in London and San Francisco. Papaya Studio produced Kakapo’s Slots Fever, the top-grossing game on Google Play in 2013.
Not all developing markets are experiencing similar levels of growth. The GSMA has identified two categories in the developing world. “Fast growers” include countries such as China and Brazil, where a quarter or more of mobile Internet connections are made on smart devices and where 3G networks are growing quickly. More than 100 million smartphones were sold in China in the second quarter of 2014, according to The Economist, and eight of the top ten smartphone manufacturers were Chinese companies. “Discoverers” include many countries in Africa and Southeast Asia where smart devices represent less than 10 percent of mobile connections, and 90 percent of users rely on 2G networks.
In the discoverer category, three hurdles to higher penetration rates are lack of affordability, limited network coverage, and an unfavorable investment climate, and these can be formidable. Low income levels in many developing markets are the largest constraint on adoption. Extending networks to rural areas with little or no infrastructure is costly and promises little financial payback, since populations in which incomes are low generate low returns. Unpredictable regulation, high taxes, and high spectrum prices raise costs and slow adoption. In these developing countries, in particular, governments that take the long view can realize significant benefits. For example, a number of countries have policies that encourage digital and mobile technologies to leapfrog those of nations with more developed tech industries. (See “South Korea: The Impact of Open Competition.”)
South Korea highlights the benefits of policies that encourage innovation and competition. Before 2010, local manufacturers dominated the mobile handset market as regulation discouraged foreign companies from competing. Almost 80 percent of handset sales in 2009 were generated by Samsung and LG Electronics. Despite state-of-the-art technological capability (including a well-developed 3G network), smartphone sales were limited by high prices, poor user interfaces, and a lack of Korean-language apps.
The removal of regulatory restrictions was followed quickly by the entry of foreign OEMs. Apple launched the iPhone in Korea in late 2009, and Android-powered phones appeared shortly thereafter. Competition, both between the two ecosystems and among Android-device manufacturers, has been intense. Today, more than 73 percent of South Korea’s population of 50 million owns a smartphone, and South Korea is the only country in the world whose entire population can access 4G connectivity. As of the end of 2013, more than 50 percent of all actual connections were 4G. The South Korean government’s Mobile Gwanggaeto Plan 2.0 (named for a fifth-century king) aims to accommodate rapid growth in the number of LTE subscribers by quadrupling the bandwidth allocated for mobile carriers by 2023.
Thanks in part to these kinds of supportive policies, exports have grown quickly. Samsung and LG are now leading device manufacturers, shipping their products around the world. South Korea is also fast becoming a hub for start-ups in the Asia-Pacific region. The number of Korean Android app developers has tripled over the past two years, and South Korea is now one of the top five countries in the world for app developers using the Android operating system. Numerous rising stars are achieving global prominence. With more than 65 million downloads, ColorNote is the top note-taking app in Google Play in 50 countries. Almost 95 percent of its users are based outside of Korea. Users of the KakaoTalk free calling and messaging platform can follow their favorite brands and celebrities, receive coupons, and purchase goods. KakaoTalk has 140 million users in 15 languages. NHN Entertainment, a builder of mobile games that is owned by Naver Corporation, which runs South Korea’s largest Internet portal, has more than 20 million users.
Big business is benefiting as well. Samsung and LG Electronics have become multinational mobile technology leaders in handsets and other devices. Samsung manufactured more than 30 percent of the smart devices sold in 2013 in the 13 countries we surveyed (up from 7.7 percent in 2008). LG shipped almost 5 percent of the devices sold in 2013 in the surveyed countries, compared with 4 percent in 2008. The company was an early innovator in dual-core processors.
South Korea is also home to many companies that design and manufacture the components that go into all kinds of smart devices and other consumer electronics, such as touch screens, LCDs, antennas, and modules for cameras and keyboards.
National broadband plans can have a big impact as well. Research by the International Telecommunication Union (ITU) and Cisco Systems shows that such plans lead to 7.4 percent higher mobile Internet penetration, on average. History also shows that competitive markets speed both broadband and mobile penetration. The ITU/Cisco study found that countries with competitive markets have mobile penetration rates that are 26.5 percent higher than average.
One of the biggest infrastructure constraints (common to both developed and developing markets) is the availability, allocation, and use of mobile spectrum—the bands of radio waves over which data and voice communications (as well as other over-the-air media) travel. Lack of harmonization at the regional and international levels—meaning, for example, that the same operator’s 3G network operates on different bands of spectrum in different countries or in different regions of the same country—leads to significant inefficiencies and higher costs. The GSMA estimates that by 2020, better harmonization could add $370 billion to GDP and 112,000 new jobs in Latin America, and $49 billion to GDP and 506,000 jobs in sub-Saharan Africa. North Africa could realize an additional $50.5 billion in GDP and 4 million jobs by 2025.
Beyond the direct economic impact, there are also social benefits stemming from greater mobile Internet penetration and usage. These include improved education, health care, and nutrition. By 2017, better distribution of life-saving information could save 1 million lives in sub-Saharan Africa through avoided malaria, HIV, and perinatal conditions. Using mobile technologies to track food deliveries, monitor food temperature, and optimize delivery routes could save enough food to feed 40 million people (the population of Kenya) in 2017—simply through reduced spoilage.
Mobile apps—the software programs that perform designated functions on a mobile device—may be the fastest growth story in recent history. Originally designed primarily for productivity purposes (mobile calendars, for example) and information retrieval (e-mail), mobile apps quickly expanded into numerous other fields, including gaming, navigation, health and fitness, media consumption, communication, and commerce, to name a few.
Apps are coded by developers, many of whom are entrepreneurs, and they are sold through distribution platforms such as the Apple App Store, Google Play, the Windows Store, Amazon Appstore, and BlackBerry World. App developers have made 1.3 million apps available through both the App Store and Google Play, some 255,000 through the Windows Store, 240,000 through Amazon, and 130,000 through BlackBerry World. In 2013 alone, apps were downloaded 102 billion times globally (of which 9.2 billion downloads were of paid apps), a 60 percent increase over 2012. Downloads are forecast to rise to 269 billion (15 billion paid) by 2017. Although many apps are given away free of charge, app revenues in our 13-country sample will nearly triple, from $26 billion in 2013 to $76 billion in 2017.
Even with the astronomical growth in the app economy, many app developers still struggle to monetize their endeavors. The vast majority of app downloads continue to cost nothing: nine out of ten downloads in 2013 were free, and eight of the ten most-used apps globally are given away, although many popular “free” apps generate income through advertising or in-app purchases (of extra content such as bonus game levels).
Developers are faced with a challenging business environment: a hit-driven market, in which relatively few apps gain critical mass, and low barriers to entry, with copycats and knockoffs of successful apps an all too common phenomenon. Large developers backed with big resources can tilt the playing field by paying to advertise their apps through a variety of channels. As a result, many independent developers earn little. More than half of all developers earn less than $500 a month per app, and the top 1.6 percent of developers earn more than the other 98.4 percent combined.
App developers, along with others throughout the mobile ecosystem, face continuing challenges in such areas as security. Threats are on the rise. Reports of mobile malware rose 167 percent in the 12 months ending in June 2014, with some 15 million mobile devices reportedly infected in 2014, up from 11.3 million in 2013. Just as Windows has been the target of most malware aimed at desktop operating systems, the most popular mobile operating systems are targeted because they are where the largest number of users can be found. Fragmented open-source code can be more vulnerable to malware, and third-party app stores are key targets. One response from entrepreneurial developers has been new apps designed to secure phones (such as MobileIron, Samsung Knox, and XenMobile), but these usually rely on installation and updating by users rather than by device manufacturers. There are signs that consumers are purchasing apps on the basis of security and privacy. Threema and Telegram are two popular chat apps that stress their encryption and security.
In the face of these and other challenges, developers are using a variety of strategies to adapt. For example, some are choosing to specialize, producing niche apps in narrow fields (such as wedding planning) where they can charge a premium. On average, developers that focus on “mass-market reach” apps earn half as much as developers that build niche apps for consumers willing to pay for the service.
Building sustainable revenue models for independent developers continues to be a big challenge. We expect developers to focus on two primary approaches.
Advertising-Supported and “Freemium” Revenue Models. More and more advertiser spending will shift to mobile over time, as consumer usage continues to increase and targeting technology improves. Global mobile advertising revenues are expected to have reached $18 billion in 2014, up from $13.1 billion in 2013, and this growth will continue until 2017, when spending will exceed $41 billion.
About 90 percent of Apple’s global App Store revenue in 2013 was attributable to freemium apps—which are free to download but can ultimately lead to in-app purchases—up from 77 percent in 2012. Freemium apps have demonstrated their profitability but some have also come under criticism for allowing users to incur unexpected costs, such as through any in-app purchases that they wind up making.
Building Apps for Others. One area where developers are demonstrating success is building apps for other businesses. Some 70 percent of developers say they are profitable when doing contract work for others. Demand for app development is growing as industrial applications increase. Companies often do not have their own in-house developer talent and are willing to pay for functionality that can increase sales and profits.
Developers are finding new opportunities in the Internet of Things. Some 25 billion new IoT devices (including cars, heating and air-conditioning units, lighting systems, farm equipment, wearables, and security systems) will come online from 2015 to 2020, doubling the current number. (See “The Next Big Thing: The Internet of Things.”)
The long-anticipated, much maligned Internet-enabled fridge is actually a reality. The Internet of Things brings inanimate objects online and enables them to communicate their internal state and other information to humans and other “things” through the Internet. Many of these objects are things on the move, such as cars and aircraft; they use mobile technologies, sensors, and software to stay connected. Once an object can represent itself digitally, it can be controlled remotely.
The number of connected devices is growing fast. There were 500 million of them in 2003 and 12.5 billion in 2010; these numbers are expected to rise to 25 billion in 2015 and to 50 billion in 2020 as costs, especially for sensors, fall. A sensor that cost €50 in 2009 sold for €15 in 2013.
The potential applications are endless. A few examples: airplanes that warn of component wear and potential failure; cars that automatically schedule their own maintenance; buildings with HVAC systems that can be controlled remotely; buses that update their performance against schedule in real time; tracking devices in farm animals that monitor food intake, temperature, and movements. In almost every sector, the Internet of Things will vastly lower costs, improve safety, and heighten efficiency for consumers and businesses alike.
Already companies such as Italy’s Solair Corporate are designing company-specific apps for the Internet of Things. Using Solair technology, manufacturers can monitor machine performance to optimize production, streamline maintenance plans, identify faults early, and reduce costs. The company provides an automated app platform that helps connect and automate machines and activities in such areas as fleet management, maintenance, and health and safety in six markets: retail, industrial machinery, smart buildings, energy, transportation, and health care.
Another example is OnFarm, an app that helps farmers increase crop yield and quality while reducing costs. OnFarm provides real-time data and an analytics dashboard with which farmers can monitor weather, soil moisture, fertilizer levels, insecticide applications, and the location of crops and equipment on the go. The app is being used by almond farmers and vineyard owners in the U.S. and is being piloted by potato, corn, and wheat farmers. Its developers used crowd-sourced funding to raise $800,000 (twice their target) from six investors in 30 days in 2014.
A big area of potential growth is machine-to-machine communication—networked devices of all kinds, in such industries as automotive, consumer goods, and utilities, that exchange information and perform functions without the physical assistance of humans. An aircraft engine that monitors and reports operating data in-flight is one example; buses and trucks that continually report their location, speed, and other information is another. Research organization IDATE expects the M2M market to reach €40 billion by 2017, with Europe being the biggest geographic market in terms of revenue. The EU had 52 million M2M connections in 2012 (about a quarter of the global total), and these are expected to grow to 295 million in 2017 (30 percent of the global total).