October 1, 2009

Mobile: Carriers cash-in on explosive data growth; advertising & commerce revenue lag promised growth

For the quarter ending June 30, 2009, wireless data ($3.4Bn) contributed over a quarter of the total wireless revenue ($13.2Bn) for AT&T, the 2nd largest mobile carrier in the U.S. As discussed before, data revenue will be the key growth driver for mobile carriers not just in the U.S. but worldwide, as voice service increasingly gets commoditized in favor of other value-added services offered by carriers.

Continued popularity of iPhone, which has been habituating users to use their mobile phones for Internet usage, and huge growth of Internet/data friendly smartphones will further increase the share of data revenue for carriers.

While mobile data usage and the number of users going online on their cellphones continue to increase as projected, these are early days for anyone other than carriers to profit from this trend. As the eMarketer chart shows, in 2009 there will be over 70M U.S. mobile Internet users. Despite a large user base, mobile advertising and commerce revenue has not really kept pace with their earlier lofty projections.

eMarketer projects 2009 U.S. mobile advertising revenue to be $416M, much smaller than ~$24B online advertising revenue forecasted for this year. The promise of reaching very targeted audience, down to an individual cell phone user level, and "killer" location-based services/targeting that users will pay for remains un-fulfilled.

More than 2Bn iPhone applications have been downloaded, mostly free, but majority of them don't have any advertising integration (except house ads) - another example that monetization thus far severely lags usage on the mobile platform.

Nobody is denying the long-term potential of the mobile medium - given its ubiquity, reach advantage (over 4Bn mobile subs globally vs ~1Bn PCs sold), proximity to its user, and targeting ability - but it's going to take much longer than previously expected
for this industry to mature. Non-standard nature of devices, user interfaces, operating systems, and metrics are signs of an industry that is still in its infancy. Privacy issues and feared regulations also require attention, and warrants proper education for regulators and users, as well as permission-based implementations of mobile experiences by advertisers and service providers.

I believe major Internet players with existing services that can be easily ported to mobile, and those with deep pockets and staying power to heavily invest in mobile for the long-term, would have significant advantage in garner a big share of the mobile value ecosystem (apart from carriers). Companies like Google, Yahoo!, Apple can build beach-heads and gain users' mind share during the
current adoption phase. These firms already have the brand recognition and loyalty to engender trust amongst users - assets which can be leveraged to generate lucrative margins when the industry matures and monetization ultimately kicks in.


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