The Mobile Revolution: How Mobile Technologies Drive a Trillion-Dollar Impact

The Mobile Revolution: How Mobile Technologies Drive a Trillion-Dollar Impact

          
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The Mobile Revolution: How Mobile Technologies Drive a Trillion-Dollar Impact

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  • The Enablers of Mobile Innovation

    Mobile has grown faster than any other industry in history, but it is still in its early days. New applications and services are spreading rapidly, drawing consumers deeper into the mobile economy each year. 5G is coming, bringing with it a variety of new mobile capabilities. Some have already begun, such as the Internet of Things—machines or devices that communicate directly with other machines or devices. By connecting billions of devices and trillions of sensors, the Internet of Things has the potential to revolutionize consumers’ interactions with nearly every industry. (See the sidebar “Getting Smarter: The Internet of Things.”) Other capabilities have yet to be dreamed up by the innovators of the world.

    GETTING SMARTER: THE INTERNET OF THINGS

    The smartphone industry has already revolutionized the global economy, but this phenomenon represents just the beginning. By 2020, the Internet of Things is expected to rival the smartphone industry with revenues in the trillions.

    The Internet of Things is changing the relationships between consumers and the myriad objects all around them. Equipped with sensors, objects can interact autonomously with their environment or be controlled remotely by the user. Cars can communicate with other vehicles, elevators can monitor their own safety, packages can be tracked as they move from one location to the next, home appliances can be turned on or off remotely. These new features are helping people be safer, save money, conserve resources, and simplify their lives.

    The number of connected devices is growing rapidly. According to Cisco, there were 500 million connected devices in 2003 and 12.5 billion in 2010, and these numbers are expected to rise to 50 billion in 2020.

    While the Internet of Things has great promise, important technical and policy challenges must be addressed for it to reach its full potential. First, explosive growth in the number of connected devices will put a heavy strain on existing communications infrastructures. Second, new technologies must be developed to support connectivity for highly mobile objects (such as planes or cars) and extremely remote objects (such as oil pipelines). Finally, if we want to achieve a truly global Internet of Things, common standards of communication need to be established among all of these connected objects so they can communicate and “understand” one another.

    For mobile to continue its upward trajectory, conditions must remain ripe for innovation. In order to set an effective policy agenda, it is critical to understand the key enablers that have empowered the mobile industry to become a center of global innovation and economic growth in the first place.

    There is no single answer, as not all players in the mobile ecosystem thrive on the same model of innovation. As we have described before, the mobile ecosystem can be viewed as a value chain—a series of players that work together to enable smartphones and other devices to exist. At the consumer end of the value chain we have a rapidly proliferating universe of mobile applications and services, created by content developers, software companies, start-ups, and others. In the middle are the manufacturers of components, devices, and infrastructure. Underlying all of this, we have the creation of core communications technologies, without which the industry could not begin to function. All links within the chain are essential, and depend upon one another to thrive, but they rely upon varying innovation models.

    App developers, for example, thrive on staying agile and capitalizing on trends. A developer can build an app in days or weeks on a minimal budget, go live, and make changes on the fly. The market, made up of millions of small businesses, has succeeded beautifully through individual experimentation and trial and error.

    In contrast, core mobile technologies developed through industry standards follow an entirely different trajectory. These fundamental technologies are developed through decades of research, typically by a relatively small number of companies, without certainty that they will be adopted. For example, during the development and roll-out of 4G, two technologies competed for prominence in the core technology space: LTE and WiMax. A small number of companies invested enormous resources into these two 4G technologies. After nearly a decade of competition to best address the core technology needs in the marketplace, LTE has achieved significantly wider adoption and commercial value than WiMax. Such significant up-front investments in R&D push the industry forward, but the companies responsible assume significant risk with no certainty of return. Exhibit 13 details the long and uncertain process many technologies, including those built into standards, have followed on the path to widespread adoption.

    exhibit
    Fundamental Enablers of Growth in Mobile

    BCG analyzed the critical factors that have contributed to mobile’s phenomenal success worldwide. Based on this analysis, we identified seven key enablers that have spurred growth throughout the mobile industry. Because two of the enablers—IP frameworks and standards-setting—are less frequently addressed in the literature, we focus significant attention on them here; however, all seven enablers have given rise to mobile’s success.

    Strong IP Frameworks. The 3G and 4G technologies driving today’s mobile devices are the cumulative result of thousands of technological innovations over the past four decades. Tomorrow’s cutting-edge core technologies will be based upon research that began ten or more years prior to commercial launch. For example, the research behind text messaging began in the early 1980s. More than 15 years later, text messaging became widely commercialized.

    The innovation model used by developers of core technologies is very much akin to the model used by pharmaceutical companies. Large and long-term investments in multiple technologies may lead to a single widely commercialized product (while numerous R&D projects never make it to commercialization). Nonetheless, R&D investment in mobile technologies continues to accelerate, reaching almost $100 billion annually, and growing at a rate of 9 percent year-over-year since 2009. Companies developing IP in mobile technologies invest more as a percent of revenue in R&D (23 percent) than any other industry, except biotechnology (27 percent). This includes traditionally R&D-heavy industries such as pharmaceuticals (14 percent). (See Exhibit 14.)

    exhibit

    The development of core technologies requires both strong IP protection (including patent protection to incentivize innovation) and licensing to ensure broad access to these enabling technologies. The core technologies are the oxygen within the mobile ecosystem: fundamental to life, invisible to the user, and necessary for all other functions to continue. The licensing model ensures that patented technologies are universally available while providing a mechanism to compensate innovators (through licensing revenue), thereby encouraging additional investment in next-generation technologies.

    The current patent framework has proven to be highly effective at incentivizing mobile innovation and investment. According to the World Intellectual Property Organization, mobile patents have grown from virtually nonexistent to almost 400,000 families (that is, a set of patents covering one invention in multiple countries) since 1985, representing 6 percent of total patent activity (total patent activity is measured as mobile’s share of Patent Cooperation Treaty applications).

    While patent regimes vary from country to country, nations with strong patent protection tend to see more innovation than their counterparts with less robust patent frameworks. IP incentives and protections, as well as support for licensing core technologies, are key to successfully promoting innovation across the mobile ecosystem.

    Collaborative Industry Standards-Setting Processes. Standards-setting bodies are tasked to solve the industry’s most complex technology challenges. The 3rd Generation Partnership Project (3GPP)—the primary standards-setting body for 3G and 4G technology standards—unites six telecommunications standards-setting organizations from around the world in a self-driven, collaborative, and meritocratic process. While the standards-setting process has laid the groundwork for mobile’s historic rise, it is not always well understood, even within the industry.

    A standard starts out with a clear, bold goal for a future level of desired technical performance. From 2G to 3G, for example, the goal was to increase capacity tenfold. The industry works together to find effective solutions to the technical challenge.

    • A work item is proposed around a given challenge, and once it is approved by members, working groups identify industry needs and develop requirements.
    • Once consensus is reached on the list of requirements, it is submitted to the system architecture and procedures working groups.
    • These groups accept proposals for technologies that fulfill the requirements; proposals are combined and revised over the course of months of research, simulations, and debate.

    Companies across the value chain—from component design and manufacturing, to OEMs, to core technology innovators—have the opportunity to contribute to technology solutions and vote on adoption of all proposals. This same process is subsequently carried out to identify the technical protocols associated with each requirement. Once technological solutions have been drafted and specifications agreed upon, they are incorporated into the standard for publication. After publication, the standard can be tested and incorporated into products.

    As a point of reference, setting standards for 2G, 3G, and 4G required participation from hundreds of companies all over the world:

    • 2G (global system for mobile or GSM). This effort entailed 15 years spent on 2G-related standard releases, with more than 200 companies and 13 countries involved, and took approximately 866,000 person hours.
    • 3G (wideband code division multiple access or WCDMA). This endeavor involved 11 years spent on 3G-related standard releases, with more than 300 companies and 39 countries involved, and took approximately 950,000 person hours.
    • 4G (long-term evolution or LTE). This undertaking required more than nine years spent on 4G-related standard releases, with 320 companies and 43 countries involved, and took more than 1 million person hours (and counting).
    • According to 3GPP, less than 10 percent of participating companies have submitted technical contributions, with the majority of contributions being made by fewer than 15 companies.
    • Every year, more mobile companies from diverse regions across the globe participate in the standards-setting process.

    Exhibit 15 illustrates the standards-setting process using one feature within the LTE standard: device to device (D2D) communications. D2D communications—which took 400+ companies nearly 200,000 hours over 3.5 years—only represents 14 out of 492 specifications incorporated into Release 12 of the LTE standard. Moreover, Release 12 is one of five existing releases setting parameters for 4G alone.

    exhibit

    Standards benefit the entire mobile value chain. Without standards, companies that build mobile devices and services would endure significant additional technology risk. (See Exhibit 16.) By setting a standard such as LTE, technology risk is eliminated for thousands of companies around the world. The incredible improvement in performance from 2G to 3G to 4G indicates that the standards-setting process is working.

    exhibit

    Because the mobile industry depends upon competing companies sharing IP, the standards-setting bodies have put a licensing model in place. By ensuring that essential technologies can be licensed, new industry entrants can more easily enter the market and compete on an even footing, and consumers benefit through lower costs and enhanced global interoperability. Over the past five years, every segment of the value chain has grown, and competition is increasing over many segments.

    • According to IDC, global average selling prices for smartphones decreased 23 percent from 2007 through 2014, while prices for the lowest-end phones decreased 63 percent over this period.
    • The number of global OEMs grew from 71 to 172 from 2007 through 2014, with increasingly broad geographic representation, including new entrants from emerging markets such as China and India.
    • Three of the top five players in 2007 lost significant market share over the past seven years.
    A World Without Standards or Licensing

    The mobile industry depends on the streamlined coordination of many innovators to effectively develop the technologies that power mobile. Without clear industry-driven standards, many competing platforms would develop. These competing platforms would splinter off, rather than reaping the combined benefit of all global technologies, and both industry players and consumers would suffer.

    In a world without industry standards, the mobile industry’s distinct business models would be disrupted, resulting in several losses in value to industry players:

    • Competing platforms would duplicate fundamental R&D, leading to higher development costs for mobile products.
    • Innovation would slow without a mechanism to pool and build on the best technologies, decreasing the impact of mobile products and services.
    • Companies would have reduced access to the best technologies due to geographic barriers.
    • Network operators and device makers would have to bet on one platform—and would likely stick with this platform (due to high switching costs) regardless of its progress.

    Each of these factors would translate into even greater lost value to consumers:

    • Consumer choice would be restricted to a few incompatible proprietary systems, as opposed to the myriad choices in devices and services available to them today.
    • Consumers would have access to less technologically advanced products and services, reducing functionality and decreasing time and money saved.
    • High prices for the core technology would be passed on to consumers, limiting adoption, with a disproportionately negative effect in emerging markets.
    • Lack of interoperability between platforms, devices, and geographies would hinder access and usage.

    Exhibit 17 highlights many of the often subtle ways in which standards enhance the user experience.

    exhibit

    Spectrum Allocation for Mobile Data Traffic. One of the biggest constraints on more mobile data usage is the availability, allocation, and use of spectrum—the bands of radio waves over which data and voice communications (as well as other over-the-air media) travel. Spectrum is a critical resource for mobile networks—without sufficient spectrum, they cannot operate. Core technology companies use spectrum to achieve the greatest capacity and deliver the best user experience.

    There are three types of spectrum: licensed for exclusive use, unlicensed, and shared licensed. Although more spectrum of each type is necessary, exclusive-use licensed spectrum is especially critical because it provides absolute protection from interference and is therefore used to deliver wide area, ubiquitous connectivity on an interference-free basis. Fortunately, policymakers around the world recognize the industry’s vital need for this spectrum on a continuous basis, and there are many initiatives under way.

    Free International Trade and Capital Flows. Free trade in IP facilitates global adoption of superior technologies. Countries with high import taxes limit mobile penetration and reduce consumer access to the best technologies. Mobile technologies can be used as a tool for economic growth, but only if they can achieve widespread adoption. For example, Ghana has taken a step in this direction with its recent decision to abolish its 20 percent import duty on mobile phones. By eliminating this tax, Ghana expects to reduce handset costs (as taxes make up approximately 35 percent of the cost of a smartphone in Ghana) and increase mobile phone penetration.

    Likewise, low-cost manufacturing brings down equipment and device prices for consumers. When barriers to international trade and capital flows are low, customers around the world get the best technologies at the lowest prices.

    Healthy Network Operator Environment. Network operators must invest billions of dollars a year to deploy the most advanced technologies. In many parts of the world, these operators struggle to earn adequate returns on their capital investments. Operators and consumers can become ensnared in a catch-22. When network operators make substantial capital investments to meet consumer demand, prices for mobile data plans may rise, as operators seek a return on investment. Conversely, prices will be lower for consumers in areas where network operator investment is lower, but consumers may receive subpar services.

    It is in everyone’s interest to ensure that network operators are motivated to roll out 4G capabilities and invest in new platforms in order to support the integration of more advanced technologies in the future. Market structures must strike a balance in order to encourage robust network investments while delivering affordable prices to consumers.

    Dynamic Digital Services Ecosystem. The digital services ecosystem is thriving, which drives stronger investment in core technologies and infrastructure. This, in turn, drives additional investment in digital services. At very low cost, application programming interfaces (APIs) place in the hands of entrepreneurs the means to create value—and thereby reduce the cost of innovation by orders of magnitude. The use of open APIs and tools for developers feeds this virtuous cycle.

    In addition, a dynamic digital services ecosystem is fueled by highly educated, skilled innovators. To sustain the levels of technological advancement that we have seen thus far in mobile, we must support an environment rich with educational and entrepreneurial opportunities.

    Trust and Transparency. The use of mobile devices can create challenges for consumers and others that require fair resolution. One of the most important of these involves data privacy and security and how data are used. We must balance the potential value of personal data with the rights of individuals and societies to determine what are, and are not, legitimate uses of data. (See Rethinking Personal Data: Strengthening Trust, a report by The Boston Consulting Group and the World Economic Forum, May 2012.) Without a sense of trust among consumers, mobile will not live up to its full potential.




    Mobile innovators are expected to invest approximately $4 trillion in capex and R&D over the next five years. To maintain the pace of innovation and ensure that the mobile revolution continues to have a powerful economic and social impact, governments and policymakers must take action to stimulate innovation, accessibility, and growth. The right policies can incentivize investment in next-generation technologies (5G and beyond), ensure widespread access to mobile services, and promote adoption among businesses and consumers. As mobile continues to mature over the coming years, we believe these policies will become increasingly critical to the industry’s success.