The Mobile Internet Economy in Europe

The Mobile Internet Economy in Europe

          
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The Mobile Internet Economy in Europe

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    Competition Drives Mobile Internet Growth

    In Europe as elsewhere, mobile usage is growing fast as consumers shift from fixed to mobile devices for online media consumption, commerce, information seeking, and social networking, among other activities. 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 more time) before the Internet becomes a mostly mobile phenomenon. 

    Mobile Internet Revenues Are Growing Fast

    The revenues generated by the mobile Internet ecosystem are a substantial contributor to global GDP as well—€512 billion ($682 billion) across the 13 countries that account for 70 percent of global GDP. The mobile Internet is driving significant and growing revenues across Europe—€90 billion ($120 billion) in the EU5 in 2013. Put another way, adult Europeans in these countries each spend €555 a year on phones, tablets, data plans, apps, digital content, and m-commerce. (See Exhibit 3.)

    exhibit

    By 2017, EU5 mobile Internet revenues will have more than doubled to about €230 billion ($300 billion)—an annual growth rate of 25 percent, which is comparable to the growth of these revenues in both China and the U.S. The single largest contributor to this growth will be the apps, content, and services component of the ecosystem, driven by the rapid expansion of mobile shopping and advertising. By 2017, we estimate that mobile Internet revenues will have grown to €1.16 trillion ($1.55 trillion) across the 13 countries surveyed, an annual increase of 23 percent.

    The Mobile Internet Creates Jobs, Too

    Revenues are one part of the picture. The mobile Internet is also a major job-growth engine. We estimate that the total impact for the EU5 is about half a million jobs, of which half are physically located in EU5 countries. These jobs are primarily in device sales, distribution, and production, as well as in apps, content and services, service providers, and network infrastructure.

    Across the 13 countries surveyed, we estimate that approximately 3 million people were employed by the mobile Internet economy in 2013. While many of these jobs are in Asia, where the manufacturing of mobile devices is centered, the rapid growth in device sales generates retail jobs throughout the U.S. and Europe, as well as in other regions. Network and infrastructure installation and maintenance take place worldwide. Enablement platform and mobile operating system-related jobs are based primarily in the U.S. and Europe. 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 from the mobile Internet forecast to more than double by 2017, there will be a related—and significant, if not proportional—increase in the number of jobs generated. Some of these positions will replace jobs currently found in the broader Internet ecosystem—for example, positions related to feature phones, particularly in developing economies. We expect a substantial number of new and incremental jobs to be created, too, 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 finance, health care, and education, will 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.

    Challenges in Europe

    We have argued elsewhere for EU policy makers to help fuel the growth of Europe’s digital economy. (See “Europe’s Digital Economy Needs a New Foundation,” BCG article, October 2013.) Many of the same principles apply to the EU’s mobile Internet economy, particularly with respect to advancing the goal of a single digital market through the EU’s Digital Agenda for Europe, addressing Europe’s inefficient and fragmented system of spectrum allocation, and furthering the development of a vibrant digital-services sector.

    Europe was an early adopter of faster data connections. Some 90 percent of the population is currently covered by 3G connections, 3G devices account for more than half of all devices, and the EU has the largest number of 3G SIM cards per capita globally. Data is also relatively inexpensive. Fierce competition has driven down prices to the point where the monthly cost of a 5 gigabyte mobile broadband subscription is €18 in the UK, €19 in France, €23 in Germany, €9 in Italy, and €39 in Spain—compared with the equivalent of €42 in the U.S. The European Parliament has voted to abolish roaming fees by December 2015, but the Council of the European Union still needs to approve this policy.

    That said, investments in mobile infrastructure equipment have fallen by some two-thirds since 2004, as investment in long-term evolution (LTE) technologies have not matched the heavy spending on 3G networks. European LTE spending, on a per-subscriber basis, is half that of the U.S. and Japan. In the EU, 4G connections make up only 3 percent of the total, compared with about 25 percent in North America. While there are significant gains to be had from 4G, EU carriers need greater economies of scale and scope to invest in and integrate EU-wide systems.

    One result of this lack of investment is that data connections are slower in Europe than elsewhere. The average mobile connection speed in Western Europe was 1.5 megabits per second (Mbps) in 2012, compared with 14.7 Mbps in South Korea, 10.7 Mbps in Japan, and 2.6 Mbps in North America. This data-speed gap is set to widen: the average connection speed in Western Europe will reach 7.0 Mbps in 2017, only half the speed of North America’s 14.4 Mbps.

    Another result is that European carriers lag those in other markets in their ability to generate revenue growth from mobile broadband consumption. Average revenue per user in the EU has fallen more than 5 percent in the last six years. Part of the problem is consumption: EU users consume only 415 megabytes (MB) of data per month, compared with 810 MB, on average, for U.S. users. This creates something of a conundrum: the cost per unit of data remains high for carriers, and the speed of connections (3G rather than 4G) stays low for customers. Part of the answer lies in enacting policies that provide incentives for infrastructure investment and building economies of scale for infrastructure layers such as telcos. (See “Reforming Europe’s Telecom Regulation,” BCG article, July 2013.)

    One of the biggest constraints on more mobile data usage is the availability, allocation, and use of the 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 (Groupe Speciale Mobile Association) has estimated that harmonizing data spectra across Europe would generate €119 billion in incremental GDP between 2013 and 2020 and create some 156,000 new jobs. Delaying harmonization until 2017 would reduce the impact on GDP by €16 billion and the number of new jobs by 67,000. In the meantime, some European telcos are coming up with innovative alternative solutions. (See “Crowdsourcing Wi-Fi Signals into Community Hotspots.”)

    CROWDSOURCING WI-FI SIGNALS INTO COMMUNITY HOTSPOTS

    Launched in 2006, Spain’s Fon uses an innovative crowdsourcing approach to expand the number of Wi-Fi “hotspot” connections available to mobile users. In the process, it addresses two issues. It helps users with devices such as Wi-Fi-only tablets stay connected on the go, and it reduces data traffic strain on telcos’ mobile networks. The company has hotspots in 1,000 cities in 200 countries. It offers more than 13 million hotspots, which it plans to increase to 35 million by 2016.

    The cleverness of Fon’s model lies in its crowdsourcing simplicity. Users make their home or business Wi-Fi signal available to outsiders; in return, they get free access to Fon’s other Wi-Fi hotspots. Sharing does not compromise privacy or speed. To join, users either buy a Fon router or join one of Fon’s 11 national telco partners, such as BT in the UK and KPN in the Netherlands. Users who don’t want to share their Wi-Fi connections can pay to access Fon.

    Fon hotspots are available throughout Europe and the U.S. and in most of Latin America, Asia, and Australia. In 2014, Fon launched a business service that allows small and medium-size companies that share their Wi-Fi signals to receive customer use and location data, which, in turn, allows these companies to provide users with customized promotions.

    There are wider social benefits to better mobile connectivity as well, in health, education, and government services, among other fields. Mobile health solutions can influence patient behavior, enable remote treatment of chronic illnesses, help improve diagnosis, and make health care more efficient. There are already multiple apps on the market that help patients with such diseases as diabetes and hypertension; other apps are designed to bring new capabilities to doctors, hospitals, and other health-care providers. Better m-health could benefit 185 million EU patients and cut nearly €100 billion in health care costs, according to the GSMA. In the dynamic market for online learning, most operators of massive open online courses, or MOOCs, offer mobile apps enabling students to engage in courses and coursework wherever and whenever they choose. Forward-thinking municipal governments are using mobile technology to reduce energy consumption, cut pollution levels, and improve public safety. Madrid’s integrated traffic-management system has reduced emergency services response times by 25 percent.
    The App Economy Soars

    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 to facilitate productivity and information retrieval (mobile calendars and e-mail, for example), mobile apps quickly expanded into numerous other fields, including gaming, navigation, health and fitness, media consumption, communication, and commerce, to name a few. Europe has some of the largest and most successful mobile game developers in the world, including Rovio, King, Mind Candy, Supercell, Mojang (Minecraft), and Wooga. UK-based Mind Candy launched Moshi Monsters in 2008 and now has more than 80 million registered users across 150 countries. Germany’s Wooga has more than 50 million active monthly users across its series of hit games that include Diamond Dash, Jelly Splash, and Pearl’s Peril.

    Apps are coded by developers, many of whom are app entrepreneurs, and sold through app 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 reached $26 billion in 2013 and will almost triple to $76 billion in 2017.

    Despite—or perhaps because of—this extraordinary growth, there are anecdotal signs that the app industry may be starting to mature. For example, the average number of apps downloaded across all devices per month in the UK fell from 2.32 apps per user in 2013 to 1.82 apps per user in 2014. 

    App Developers: Show Us the Money!

    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; eight of the ten most-used apps globally are given away.

    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. As a result, many independent developers earn little.

    Since apps generate revenue through up-front download fees, ads, and “in-app” purchases (of extra content like bonus game levels), a developer’s income typically depends on a large number of downloads and regular use of one or more of its apps. But only the top 200 to 300 apps are seen and downloaded by substantial numbers of users. Large developers backed with deep pockets can tilt the playing field by paying to advertise their apps through a variety of channels.

    Adding salt to the wound, some developers “copycat” apps, undermining innovation. It took more than a year for one developer to craft a popular puzzle called Threes!; copycats hit the market only 21 days after its launch. In addition, some unscrupulous developers seek to game the ranking algorithms in order to move up on lists of consumer preferences, despite the best efforts of app stores to maintain quality control.

    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.

    Developers Seek to Adapt

    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 (wedding planning, for example) in which they can charge a premium. While the market is smaller, the competition, especially from free alternatives and copycats, can be less intense—at least for now. 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.

    One area of growth is apps for business. Productivity apps are increasingly in demand, and companies are more likely than individuals to spend money on regular maintenance and updates.

    Other developers are focusing on emerging areas of the mobile ecosystem. The so-called Internet of Things (IoT)—machines and devices that communicate directly with other machines and devices—is widely expected to become a major source of digital growth, but the initial winners have been big manufacturers, such as Adidas in health and fitness, rather than independents.

    App developers, along with others throughout the mobile ecosystem, also 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 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 secondary 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.

    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 will reach $18 billion in 2014, up from $13.1 billion in 2013, and this growth will continue until 2017, when spending will exceed $41 billion. Europe accounts for about 17 percent of global mobile advertising spending, according to the Interactive Advertising Bureau.

    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.

    For example, developers are finding new opportunities to connect, monitor, and control IoT devices remotely. Some 25 billion new 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 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, among other types of 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.

    A big area of potential growth is machine-to-machine (M2M) 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 as 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).