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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    The Mobile Internet Stack

    The mobile Internet ecosystem is big and complex, involving thousands upon thousands of individual companies and organizations that interact with one another in countless ways. Some of these entities are global in scale and reach, employing thousands of people and generating billions of dollars of revenue—telecommunications providers, device manufacturers, and software companies, for example. Many have multiple products, services, business units, and profit centers—think Apple, Google, and Amazon. Others are as small as an individual app developer working on a PC (or tablet) at his or her kitchen table. 

    A Multilayered Stack

    To illustrate the structure of the mobile Internet ecosystem, and how all these disparate players fit together and interact, we have borrowed from network engineering the concept of the “stack,” a set of layered software and hardware that work together to drive a computer or other device. Each layer of the stack is made up of competitors and collaborators, interacting among themselves and with the other layers to provide services to the layers above and ultimately to the end user. The skeleton of the stack is a set of rules, usually technology paradigms, laws, and government and industry regulations that define how groups coexist and co-participate. Stack architecture is typically found in information services, but it is now starting to emerge in health care and other industries.

    The foundation of the mobile Internet stack is the physical infrastructure—the mobile and backbone networks that provide the necessary connectivity and bandwidth, without which the stack could not function. Next come the mobile and broadband service providers that facilitate network access for users. Mobile devices, manufactured and marketed by OEMs in partnership with the companies providing the mobile operating systems (and sometimes also with telcos), occupy the next layer. The mobile operating systems that power smartphones, tablets, wearables, and other devices occupy their own layer of the stack, followed by enablement platforms, which handle everything from hosting to security to billing and payment. (Some vertically integrated companies, such as Apple, operate at multiple layers of the stack.) Near the top of the stack stand the app developers, content creators, software providers, and social networks. At the very top are consumers and communities—the people and organizations that make use of all the layers below in their interactions with one another. (See Exhibit 9.)

    exhibit

    The economics and nature of competition vary considerably within layers of the stack. The app market, for example, is international in scope, but a significant portion comprises apps that are entirely local in nature (for such reasons as language and culture). There are several big, global names in content (music and video, for example), but also some strong national and regional players—as well as millions of users. Dailymotion.com, a French video website, has 20 million unique visitors who generate 2.5 billion video views each month. M-commerce has both big international names (Amazon and eBay are two) and strong local and regional flavors (such as Alibaba in China and Flipkart in India), thanks to differing consumer tastes and supply chain considerations. Traditional retailers are rapidly blurring the lines between digital and brick-and-mortar commerce, adding further complexity to the mobile stack. (See “The Mobile Internet Takes Off—Everywhere,” above.)

    The enablement platforms layer consists of services such as ad placement, billing and payments, identity verification, and publishing tools; it involves global companies like SAP, Spring Wireless, IBM, and Woodwing. Likewise, device manufacturers tend to be global businesses, with a wide range of companies (Samsung, Apple, LG, Nokia) competing across countries and regions. For legacy and regulatory reasons, the service providers—telcos—are primarily national or multilocal companies. Some are developing regional strength—four carriers are active across multiple European countries, for example.

    The Mobile Operating System Layer

    The center layer of the mobile stack is occupied by the operating systems that make smartphones smart and that enable the convergence of computing power and portability in tablets and turn wearables into something much more than a wristwatch or an article of clothing. This layer is particularly dynamic and fast changing. Understanding distinctions among the major operating systems, each of which has its own goals, strategies, and impact, is essential to grasping how the mobile Internet industry works.

    The operating system and device layers of the stack are both very fluid, and the size, roles, and influence of the various players have shifted dramatically over time. (See Exhibit 10.)

    exhibit

    Nokia and BlackBerry accounted for more than two-thirds of smartphone sales in 2008. As recently as 2010, four major operating systems (Nokia’s Symbian, Google’s Android, Apple’s iOS, and BlackBerry OS) shared 93 percent of smartphone unit sales in the EU5—with BlackBerry and Symbian accounting for more than 45 percent. (See Exhibit 11.)

    exhibit

    Today, Android accounts for 69 percent of devices sold in the EU5 and iOS accounts for 21 percent, while BlackBerry and Symbian have fallen to 4.2 percent and less than 0.5 percent, respectively. Android and iOS also account for most of the value generated in the EU5. (See Exhibits 12 and 13.)

    exhibit
    exhibit

    Each of these operating systems has very different goals and strategies. Android aims to increase mobile Internet usage with an open-source operating system that is given away free with few restrictions. Android’s ultimate goal is to provide as many users as possible with access to the Internet, thereby maximizing revenues through the use of Google’s search and advertising services. Because device makers can install the operating system at no cost and differentiate on top of it, Android furthers competition among manufacturers and lowers costs for consumers. Its open-source architecture means it has many partners across multiple layers of the stack.

    While Android supports a diverse set of devices, many at low price points, Apple focuses on selling premium devices that perform at a high level through the tightly controlled vertical integration of Apple computers, phones, tablets, other devices, and the apps they run. To deliver on its brand promise, Apple develops innovative products that depend on the tight control of the user interface and experience. Its highly integrated model imposes exacting design criteria and standards on its partners. The resulting products appeal to many users: Apple is the world’s most valuable company by market capitalization.

    Two other operating systems together share about 10 percent of the EU5 market. Microsoft is building a third major ecosystem with its Windows Phone by leveraging the strength of its brand, its powerful desktop operating system, and its vast experience and capabilities in software design. It also aggressively promotes its cloud-based software and services. BlackBerry, once the market leader in corporate or “enterprise” mobile services, aims to sell devices, software, and services to the enterprise market based on its secure operating system and messaging services as well as a predictable user experience. Its recently announced partnership with Amazon Appstore signals an intention to focus resources on enterprise services and phones, while relying on Amazon to address the consumer side.

    Today’s lineup will almost certainly change as current players and other competitors develop new technologies and services. Newer operating systems, such as Amazon’s Fire OS, Nokia’s X platform, Xiaomi MIUI, Firefox OS, and Tizen, are increasing both user choice and competition in the stack while decreasing prices. Fire OS and X platform are both Android “forks,” or altered copies, that legitimately use variations of the open-source Android operating system to pursue their own directions. In fact, few device OEMs today use a “pure” version of Android. Google makes the entire source code freely available for modification through the Android Open Source Project, and each OEM can decide whether it wants to include Google Mobile Services (Google Play, for example) on its devices. Those that do must have their device and operating system specs checked (using Google certification tools) to ensure that all app programming interfaces are supported. Although OEMs can still make modifications to the user interface and user experience to differentiate their devices in the marketplace, Android’s baseline compatibility standards aim to reduce fragmentation.

    Other OEMs take a different route, choosing to install their own versions of these apps or services instead of Google Mobile Services. To do so, they must have access to an alternative source of apps, and no further interaction with Google is required. Examples of this approach include Amazon’s Fire OS, which seeks to create its own ecosystem of devices and apps built around its e-commerce model, Nokia’s X line series of devices, and MIUI, the brainchild of China’s largest smartphone vendor. (MIUI does not include Google apps in the Chinese market, but they are included in other Asian markets such as India, Singapore, and Indonesia.) MIUI pursues a low-cost, low-margin model that is engendering intense competition across Asia and will likely expand beyond the region to increase competition elsewhere.

    The Firefox and Tizen operating systems are both based on Linux. Like the popular Firefox Web browser, Firefox OS was developed by Mozilla. It is designed to compete in price-sensitive markets, and the first Firefox OS phones are intended to bring better performance to the low end of the market. Mozilla and its partners are also expanding into midtier devices. Intex Technologies has launched a $33 Firefox OS smartphone in India in an attempt to undercut affordable smartphones from Google’s Android One program, which retail for closer to $100. Tizen, sponsored by Samsung and Intel, among others, serves two purposes: it provides its sponsors, which include device makers, semiconductor manufacturers, and telecoms, with an alternative to Android, and—by developing a well-resourced and strongly backed competitive open operating system—it encourages Google to preserve the openness of Android.

    The Great Debate: Open Versus Closed Systems

    In recent years, competing operating system strategies have emerged, each with variations on open or closed models. Android grants OEMs full access to its operating system code. Windows is available on Microsoft phones and on those of licensed third-party OEMs. BlackBerry’s proprietary system is available only on BlackBerry handsets. Finally, Apple iOS is a vertically integrated operating system available only on iPhones and iPads. Industry participants debate which is preferable, and each offers advantages and disadvantages to consumers, device makers, and developers. The attributes of each determine how the company behind the operating system interacts with other participants in the stack. (See Exhibit 14.)

    exhibit

    Broadly speaking, open-source operating systems, which can be modified and adapted by OEMs, have many participants involved in system development, device manufacturing and marketing, and app development and marketing. Each device manufacturer does business independently of the operating system developer, and multiple app vendors operate under more loosely controlled standards and testing. The leading example, of course, is Google’s Android and its many device manufacturers.

    In closed systems, by contrast, proprietary code is not made available to OEMs or other participants. There is tight vertical integration across the system developer, device OEMs, and app vendors. These operating systems typically involve only a single or small number of device manufacturers and a single app store with strictly controlled standards and testing.

    Open systems generally provide consumers with greater choice when it comes to operating systems and devices (remember that there are more than 18,000 Android-powered device models). These include “pure” Android systems, Android-compatible OEM modifications, and Android “forks.” Consumers also have more opportunity to customize the device experience (for example, by personalizing the look, feel, and features of their smartphones). And app developers are often able to more deeply integrate with open systems, creating further differentiation and customization. The various “launcher” apps that are available on Android enable users to opt for a completely different user interface than the one that comes preinstalled on most devices. Finally, open systems tend to lead to a greater range of price points, since multiple OEMs control the pricing of their respective devices. (See Exhibit 15.)

    exhibit

    Open access to source code and device features promotes innovation, but it can also mean that features are not fully tested on all devices and may be less reliable. The forking of an operating system can reduce its scale of use and hence developer interest, and consumers can find that forked systems don’t run all apps properly. There is also a higher potential for security flaws on noncompatible forked operating systems (malware, spyware, privacy violations), and multiple app stores create more potential sources of security attacks.

    Closed systems, in contrast, offer consumers a limited number of one-size-fits-all devices that are typically made available at few—and often premium—price points. Apple, for example, offers two sizes of its iPad tablet, which is available in black, white, or—as of 2014—gold. Many features are not customizable, but since all have usually been fully tested on all devices, they are always reliable. Apps are available only from a single app store, which can limit choice but is an effective means of reducing security attacks and risks for users.

    Whether the operating system is open or closed, consumers’ priorities are in certain respects consistent: they want a ready-to-go, out-of-the-box experience combined with the flexibility needed to download supplemental apps. (See Exhibit 16 for the preferences of consumers in the EU5.)

    exhibit

    For developers, the greater consumer choice provided by open systems leads to a more segmented market that spans many price points. With open systems, no single app store is the sole “gatekeeper,” with the power to control market access for a developer’s app; developers have multiple options to get their apps onto devices. The fragmentation of devices and operating system forks, however, adds complexity. Developers often must create multiple versions of the same app for each operating system flavor, and app performance may vary across devices. As a result, fragmentation can easily and quickly drive up development and support costs.

    The often more focused ecosystem of a closed system can be attractive to developers, especially since users are often paying a premium for devices and apps. At the same time, the single gatekeeper app store can determine whether any single app gets access to the ecosystem. One large app store with exacting standards for a small number of devices means that developers typically only have to create one or a very few versions of a given app.

    Competition among open and closed systems furthers innovation and keeps the mobile ecosystem thriving. In Europe and elsewhere, it drives rising revenues, the growing consumer surplus, investment, and jobs.