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.

Data services will drive the future of mobile business

AT&T, the largest wireless carrier in the U.S. measured by number of subscribers, announced its second quarter earnings yesterday. The results include some key pointers to the future of wireless consumer services.

At $30.9 billion, AT&T’s total consolidated revenue for the second quarter ending June 20, 2008 grew by 3.6% compared with revenue for the second quarter of 2007. Comparatively, its wireless division revenue grew by 15.8% over the same period to $12.0 billion, spurred mainly by data services.

I believe data will be the main driver for wireless carriers' profits in the future. Increase in competition to gain subscribers will make voice a commodity business with limited margins. This is true for most global markets, including China and India, soon projected to be the top two mobile markets in the world. U.S. has been behind on advanced data services compared to more evolved markets in the Orient and Europe, but with the launch of iPhone (exclusively on AT&T in the U.S.), American consumers are getting a taste of the data-driven wireless future. And their initial response indicates bright prospects for these services, as a killer gadget influences mass changes in the behavior of American users who thus far have primarily used their cell phones for calls.

“Mobility, broadband connectivity and integrated services that encompass voice, data and video are driving a new world of communications," said Randall Stephenson, AT&T Chairman and CEO, during the company's earnings announcement.

Let us take a closer look at the performance of AT&T's wireless data services:

- Wireless data revenues grew 52.0% versus the year-earlier quarter to $2.5 billion, reflecting continued strong adoption of services such as Internet and data access, e-mail and messaging.

- Wireless Internet access revenues more than doubled versus results for the year-earlier second quarter, while revenues from e-mail, messaging and data access all delivered greater than 50% growth.

- Text messaging volumes tripled versus totals for the year-earlier quarter, and multimedia message volumes increased more than 170%.

- At the end of the second quarter, approximately 18% of AT&T’s postpaid wireless subscribers had an integrated device, up from 8% one year earlier. On average, these subscribers have ARPUs roughly double the company average. AT&T customers have 13 million 3G devices between them.

- AT&T expects continued strong growth in wireless data services as more customers choose data plans and advanced wireless devices such as the new iPhone 3G, which was launched as an AT&T U.S. exclusive on July 11. In the first 12 days following launch, sales of the iPhone 3G were nearly double levels achieved in AT&T’s 2007 iPhone launch.

These are pretty impressive results, especially in the current U.S. market that lacks many mobile applications or services due to carriers' stronghold on the mobile ecosystem with few incentives for content owners and technology companies to innovate. This should change going forward because the recent auction of the new wireless spectrum in the U.S. binds winning carriers to keep devices and services open. Additionally, industry's efforts like Android, the open source software development platform, should ensure that the world's second largest mobile market by subscribers can match services offered by its smaller rivals like Japan and South Korea.