Investing in the Mobile Revolution
Scott Ford, Class 11
The infrastructure supporting the mobile phone in your pocket is bracing for a digital communication revolution that will result in an economic boom rivaling any of the past developments of the information age. In fact, the mobile handset is quickly becoming the primary access point to the Internet, and this through just a fraction of nearly 5 billion current active units in the global market (four times the number of active Internet-connected personal computers).1 In three years, the comparison between PC and mobile Internet access will be completely irrelevant as the handset itself becomes a small subset of many billions of mobile connections to the Internet powered through terrestrial wireless networks.
I have been fortunate to be involved with the plans and decisions now evolving to capture vibrant consumer demand of wireless data services. An eleven-year veteran of wireless carrier operations, including the establishment of a corporate venture unit focused on strategic wireless ventures, I am now part of a wireless-focused venture capital firm, OPENAIR Ventures. My deep understanding of carrier issues and opportunities has been a great advantage in making the transition from the carrier environment to traditional venture capital. My journey from corporate and strategic venture capitalist to institutional investor has strengthened my confidence in the wireless venture opportunity; however, there is great need for collaboration between operators, venture capitalists, vendors, new entrants, and other industry constituents. User demand cannot be stopped, so it is critical that the industry makes it easy for innovation to flourish—in addition, innovators need to understand the unique nuances of the industry to find success.
In this article, I share my research and experience relating to the mobile revolution. The article describes the wireless landscape, the effect wireless will have on people and business, and the complexities of doing business in mobile, concluding with advice on early stage innovation investing in this space.
The Mobile Revolution
Information Technology is readying for its next massive growth cycle—mobility. Human lifestyle, productivity, and entertainment will be profoundly enhanced as mobile2 technologies evolve. This is likely to be the greatest business and technology growth story of our lifetime.
Cell phones are everywhere, an accepted if not vital part of modern life in the United States. Wireless technology is 90% penetrated into the U.S. population; except for the very old and the very young, nearly every person has a mobile account, most typically a cell phone. This level of market penetration will only grow: In industrialized countries the average (including the U.S.) is 133% penetration, and the CEO of Verizon Wireless recently stated that 500% penetration is likely.3 This does not suggest that each of us will carry five cell phones, but that devices and objects will be communicating through wireless networks at a rate of five per person.
This increased penetration rate will likely arrive faster than most realize. It is not hard to imagine that soon I will have more personal devices connected to wireless networks—my automobile will be connected, my home will be connected by monitors and controls, my dog will have a locator chip, and my business life will be aided further by mobile connectivity.
A 2009 analysis of computing cycles by Morgan Stanley4 described four historical cycles—the mainframe (1960s), the minicomputer (1970s), the PC (1990s), and the desktop Internet (2000s)—and the material wealth creation/destruction associated with each cycle. Each cycle since the first has grown to ten times the size of the previous cycle, and the fifth computing cycle is the mobile Internet. The wealth creation/destruction of mobile access to the Internet will be ten times greater than what we experienced in the desktop Internet boom of the early 2000s, based both on the historical growth of these cycles and on the forecast of 10 billion mobile devices in market.
Today, the typical wireless user interacts with wireless technology via a cellular telephone. As mentioned earlier, 90% of U.S. citizens have an active mobile device. Greece, for example, is experiencing a mobile penetration rate of greater than 200%—meaning that on average, every member of that population, infant through senior citizen, has two devices connected to mobile networks. Because the mobile phone represents greater than 90% of the possible points of access to wireless networks, other uses (machine to machine, data-only devices, sensors, etc.) are not yet a material factor in wireless penetration figures. These statistics are astonishing and foreshadow the explosive growth opportunity before us.
We are in the very early stages of a Mobile Revolution—much of the core infrastructure has been in use for 20 years, but the future growth prospects are of historical proportions. The confluence of faster, more ubiquitous networks; highly sophisticated devices; and the promise of more open collaboration across networks, services, and operating systems has the wireless industry poised for expansion. Beyond the growth prospects associated with the development of cell phone connectivity to the Internet, which is in process and fairly well acknowledged, much greater value creation will be related to wireless introduction of new classes of devices, equipment, and objects.
One influential company, Cisco, believes that the number of devices (chips or points of connection to the Internet) will pass one trillion in 2013.5 While the economic impact per connection will be very different with a trillion (revenue per connection today in the United States is roughly $48/month), the wealth creation/destruction impact is certainly greater with one trillion versus the ten-billion device forecast reflected in the Morgan Stanley report. (It is expected that we will reach 5 billion global wireless connections by the end of 2010.)6
Given the growth prospects of this industry and the urgent need for wireless technology innovation, venture capitalists are beginning to focus on wireless as the next big frontier.
Wireless venture investing to date has been largely unsuccessful, primarily due to the complexities and lack of patterns of success (unlike Internet investing) that new ventures can model. The market continues to be controlled by network operators who own and operate the wireless platform and devices, as well as the prized direct relationship with consumers. Most early-stage wireless business models require a carrier to support the business objectives, which rarely happens. Although wireless ventures have begun operating around the carrier, leveraging the evolution to open access, success with this strategy has been extremely limited. Navigating this market, identifying the bottlenecks and megatrends, and understanding the practicality and potential of new mobile models has been a challenge for most wireless start-ups and venture investors thus far.
The Mobile Landscape
As the statistics on market penetration reflect, humans across the globe are increasingly reliant upon their wireless connection. This reliance has educated the masses about the capabilities offered by wireless connectivity, spurring massive demand for more—more services and applications, faster speeds, greater reliability, and “cooler” devices with increased functionality. Change is afoot: The pressures of demand will deliver more, and more is achieved by change.
A key area of inevitable change is the nature of control that carriers have on the ecosystem into the future. In the area of data, they have governed the phone-top view, they control the applications that are accessible on or from the handset, some have disabled access to services that use excessive data, and some have limited or restricted the use of VoIP services like Skype. Network operators would argue that control has been necessary to preserve the health and function of networks, communication, and data consumption. Accessing the web with past-generation devices has caused major user and device issues due to processor limitations and the potential for network harm due to security vulnerabilities. The control carriers have exercised in the past, they say, has protected users, their devices, and the infrastructure. It is clear that control is less necessary today, and will continue in a less restrictive manner. The operators now realize that user demand will cause the move toward desktop-Internet-like access.
Wireless operators have invested many billions of dollars in legacy and next-generation network construction and management, and billions more to acquire spectrum. Some have over 100,000 employees, and all have impatient shareholders. Network operators do enjoy the direct and recurring billing relationship with subscribers to their networks, but they also bear the burden of care. Ceding to the pressure of open access (to networks, devices, and customers) is often at odds with the operators’ mandate to add new customers and retain existing customers in an increasingly competitive industry. The “walled-gardens” will go away, but the operators will continue to govern activity and monetize access and content.
The pressures of demand are causing operators to evolve. Allowing open access is a reality that is quickly approaching. The form will be defined and controlled by the operators themselves, but not without many points of influential pressure.
The greatest opportunity for innovation to flourish in the industry today lies inside the network. Despite the commonly experienced love affair with the device, most iPhone users have complaints about service. On December 9, 2009, the New York Times reported that “AT&T is considering ways to encourage customers to use less wireless data as its network struggles to keep up with demand”7 Users want rich services, ubiquitous connectivity, access to multi-media, and more, more, more…
Figure 1 depicts the current bottleneck created by the increasing data-traffic load on the legacy network architecture. This bottleneck can be and will be solved with investment and innovation.
Figure 1. Access Bottleneck in the Current Network Architecture.
An example of real innovation in the network can be found in the area of backhaul. Put simply, the backhaul problem is that users are increasingly demanding high-bandwidth wireless data services that the network “plumbing” struggles to support. Operators are solving this by constructing new data-centric networks (WiMAX and LTE), but the fiber8 moving data to and from the cell towers is neither always available nor an economical solution to support the increasing growth in wireless data consumption.
E-Band Communications is a San Diego start-up that has created a very efficient, high bandwidth solution allowing traffic to move wirelessly from a cell tower to another cell tower, to a telecom aggregation point or to a large building. E-Band wireless technology operates in the FCC’s newly released E-band spectrum. This uncongested millimeter-wave spectrum enables fiber-equivalent speeds over the air up to several miles in distance. Bypassing the legacy “plumbing” altogether, this approach avoids the inevitable congestion that occurs when using the existing network architecture, thus delivering a rich user experience aligned with user expectations.
The issue of backhaul has been underserviced by network operators because it is has been seen as more of a future imperative than a current crisis; however, the future is here and material backhaul investment is being made by operators. Innovative companies like E-Band are well positioned to capture this investment due to the fact that innovation is easier and faster to conceive and deploy in a start-up environment than in a big company.
Devices are getting great attention in the media today, and for good reason: The class of smartphone available today is likely more capable than the last PC you purchased. The advancement in devices has enabled mass realization of what is possible with a wireless connection.
The greatest influential development has been the iPhone—a relatively new entrant into the space. Apple accelerated the adoption of wireless technologies with the design and elegance of a single device that inspired beneficial competition and innovation among the device makers, or Original Equipment Manufacturers. The greatest benefit Apple delivered was its emphasis on user experience: Prior to the iPhone, using data services from handsets was a challenge to the user. User- experience design is not a strength of operators nor of traditional handset manufacturers. Apple has aided the entire ecosystem with its focus on the experience as the core essence of the device.
The current form factor for wireless networks is a handset of some kind. Of the 4.7 billion devices in use globally today, more than 95% are cell phones; Nokia alone sells more than 1 million handsets per day. In many areas, handsets are a symbol of status. Handset replacement cycles are apparently shortening—some Asian markets have seen 6-month replacement cycles with many sales trends coinciding with seasonal fashion cycles. The United States is experiencing approximately 14-month replacement cycles, generally coinciding with contract terms.
An unfortunate byproduct of broad distribution and short replacement cycles is the increasing number of inactive devices (and accessories) sitting in our drawers destined for a landfill. In the United States alone, there are nearly one billion inactive cell phones in the homes, apartments, and offices of people who have upgraded to keep pace with technology. Toxic batteries, plastics, and precious metals are all things that should be recycled or disposed of properly. This is a real issue that has finally caught the attention of regulators and environmentally compelled leaders.
Operators and manufacturers have a responsibility to recapture these devices, and innovation is occurring in this area as well. For example, Dallas-based eRecyclingCorps has created the first carrier-grade, carrier-scale program that allows operators to incentivize people to bring unused cell phones back to the place where new phones are sold. There are dozens of charitable campaigns designed to receive used devices, but despite good intentions, none have achieved a scale that slows the increasing number of inactive phones destined for landfills. eRecyclingCorps asserts that the only predictable, scalable, and sustainable way to encourage return of cell phones is to pay people. The majority of handsets that the company receives are reconditioned and reused (reuse is the purest form of recycling). The company equips operator retail stores and their distributors with a process and infrastructure to efficiently recapture old devices with real monetary value.
Most investors tend to pursue mobile device technology advancements (and they should), but with the current scale and future growth of this industry there are many other device-related opportunities, like the one that eRecyclingCorps is tackling, that aware investors can capitalize upon. As stated earlier, future connections to wireless networks will number in the hundreds of billions (some believe greater than one trillion) and will come in a variety of form factors—innumerable investment opportunities will materialize as a result.
The Applications and Services
Applications are all the buzz in the media today. Apple has single-handedly created mass awareness of the concept of mobile app—through the iPhone, the commercials, the full-page ads, and word of mouth. The number of quality mobile applications is destined to grow into the millions. It is exciting to follow the buzz surrounding applications, and even more interesting to follow the venture capital pouring into applications.
An application usually refers to either resident or downloaded software that is configured to the specific handset. Today, the great benefit applications bring is the usability. Apple’s success in mobile has been due to the pristine design of application clients on the iPhone. You can’t use Apple applications on any non-Apple device. However, the future of applications is in question; I strongly believe that services will be accessed “from the cloud” in the future, as operating systems and devices advance. The Apple model is a walled garden, and it will be interesting to see how, or if, it evolves in the face of cloud-based mobile service access.
Anything you can do on the Internet, you can (or will) find in a mobile version. Increasingly, new services are being created on the mobile platform (e.g., Foursquare9) with the fixed Internet used as a support for heavier input. Applications are fun, entertaining, productive, and sometimes life-changing.
One example of a life-changing service utilizing the mobile platform is presented by txteagle, a company that operates in underdeveloped countries and leverages mobile to “crowdsource” labor. There are more than 2 billion literate, mobile-phone subscribers in developing countries, many living on just $5 per day. Through the txteagle technology, and using the text-messaging function available on most active cell phones globally, corporations can distribute billions of tasks—significantly cheaper and faster than current outsourcing used today. From tagging photographs to verifying sections of a document, citizens in the developing markets can perform such tasks as a significant supplement to their income, using just their mobile phone.
Apps and services are where growth will ultimately soar: In an open mobile world, wealth will be created in services, much in the same way it was created during the steep Internet-growth years. The problem is that we are not yet in the open mobile end-state. Many entrepreneurs and investors are attracted to the hype-cycles that applications/services currently represent. Caution should be exercised during this period of transition toward “open,” as it is a question of when, not if, services will drive dramatic economic growth. This question of when is critical to early-stage cash burn rates. Many great venture-backed mobile ideas have fizzled due to the common miscalculation of market timing.
The Effect of Mobile
The impact that mobile technologies deliver is far-reaching. The mobile platform offers greater functionality and natural reach than any preceding technology. From real-time and accurate-location information to uninterrupted, in-movement consumption of multimedia, mobile will change how personal and information technology decisions are made by individuals and businesses. It is also important to note that billions of people have experienced the Internet for the first time from a mobile device or browsed the Internet from a PC connected to a wireless network.
This is particularly true in unindustrialized geographies where wireless device penetration is approximately 60% (contrasted to 133% penetration in industrialized geographies).10 Consider the growth (and investment) prospects in these markets. Industrialized countries generally have many options—fixed broadband connections, landlines, wifi hot spots, and more. In unindustrialized civilizations, the mobile phone is the only mechanism available to connect outside of small villages (not to mention a handy source of light in the dark). Fortunately, wireless network construction is a more cost-effective solution than the traditional wired infrastructure.
One example of the effect of wireless infrastructure in unindustrialized markets is the case of the Togo Internet Village.11 Enterprising philanthropists created the Togo Internet Village to help advance local access to the Internet and the rest of the world, an access that had not ever been experienced in that area. Faced with unreliable electricity and no wired telecommunications infrastructure, the group set out to bring computers and Internet access to this community. Using a wireless link to enable connectivity, the Village is up and running and changing the lives and imaginations of a community—thanks to wireless technology (and good-hearted and generous support). Fortunately, work like this is being done all over the world.
Another example of innovation addresses the fact that practical use of cell phones to access the Internet in unindustrialized geographies is difficult due to the type of devices currently in use—generally voice- and text-capable only. A Los Angeles company, Mobile XL, has created a mobile browser that works on most basic handsets. The XL Browser allows access to information like news, games, music, email, sports, finance, and more by leveraging Short Message Service (SMS) technology. Users can, for the price of a text message, access information like never before; this browser enables the first taste of the Internet for many people.
The Personal Effect of Mobile
On a personal level, wireless connectivity will complement current day-to-day lifestyles and create opportunities for greater efficiency, security, and productivity. It’s easy to see that 10X growth in personal connections to wireless networks is possible in a very short period of time. Figure 2 represents both currently available and near-future personal and household connections to wireless networks.
Figure 2. Personal and Household Connections to Wireless Networks: Current and Future.
The convergence of fixed and mobile use of the Internet will change the way we manage our personal lifestyle. Perpetual connectivity and convergence technologies will enable the seamless movement of digital consumption. The connected stay-at-home Mom will manage her family and household in real time wherever she is. Her digital control platform at home will manage schedules, homework, grocery shopping, and errands all types. Multiple instances of her digital control platform will follow her wherever she goes. Her automobile will assimilate the day’s events and provide the most efficient route or sequence based on past habits or preferences. In the car, kids can finish watching the program they left moments ago in the living room, or complete the homework assignment to turn in before they are dropped at soccer practice. The grocery store will be alerted that she is nearby so her items can be loaded into the trunk as soon as she pulls in. All of this will occur as a result of perpetual connectivity from multiple points of connection to robust wireless networks aided by software and service innovation. To most of us today, this vision seems a bit like the Jetsons cartoon—but this future is closer than we realize.
The Effect of Mobile on Business
One of the greatest under-served opportunities in mobile is the enterprise. With the unique services supported only by the wireless network architecture, mobile will have a dramatic effect on business productivity and value creation. Consider that a very small percentage of business websites are designed to be rendered on mobile phones—at a basic level, the enterprise is missing the opportunity to communicate and integrate with current and prospective clientele through the mechanism to which they pay the most attention. Layer on the ability to discretely target people and their location, and mobile connectivity emerges as the most compelling sales and CRM platform yet.
Figure 3 highlights just a few of the current uses of wireless technology by the enterprise. The figure shows a range of uses, and yet we have only scratched the surface in terms of adoption of wireless in business.
Figure 3. Current Uses of Wireless Technology by Business Enterprise.
Aside from the massive business-to-consumer opportunity, leveraging mobile technology to enhance business processes, lower costs, and increase revenues is becoming an enterprise imperative. As adoption advances and innovation progresses, enterprise IT budgets will be increasingly dedicated to mobile equipment, devices, and services.
Machine to Machine (M2M) communication has generated great media exposure in recent months.12 Achieving the one trillion connections Cisco has espoused will come in large part through M2M connectivity via wireless networks.
A simple example of the benefit of wireless M2M technologies is the monitoring and management of pipelines and oil- and gas-field production. Today, the process to monitor tank levels and productivity is largely manual and very expensive—it can mean sending a human to a remote area to check a gauge on a weekly basis. A leak or break might occur with no knowledge of the issue until the individual returns to the gauge. With an M2M solution, a machine can monitor and relay information from a pipeline through a wireless network to a database or dashboard where a single individual can monitor an entire pipeline and thousands of gauges. Real-time alerts can activate a response that will save significant time and money. All of this will occur at a fraction of the current cost of management.
Venture Investing in Mobile
Among these key components of the mobile opportunity—the network, the devices, and the applications—there are many subcategories as well as multiple stakeholders and gatekeepers that enable or limit the opportunities to invest. Although the language seems dramatic, the growth prospects are real: indicators suggest that mobile will be one of the biggest industrial growth stories of our lifetime.
The market is extremely complex. Multiple multi-billion-dollar companies have been entrenched in this industry for many years. Venture capital has been pouring into wireless start-ups and has delivered disappointing results to date (in aggregate). User demand is growing rapidly and the need for innovation is at an all-time high. Now is the time to aggressively pursue wireless venture deals.
These complexities require thoughtful preparation. The following are some key suggestions aimed at developing a successful wireless venture investing practice.
Relationships are critical in venture investing in general, but in wireless investing, broad ecosystem relationships are an imperative to success. The market will shift, settle, move, expand, and change—keeping track of the dynamic movement of this industry requires multiple points of perspective from influential decision-makers.
Develop rapport with as many decision-makers at as many operators as possible. The operator is the gatekeeper to so many areas that you cannot effectively make investment decisions without credible rapport among this group. Do not make the mistake of investing despite the carrier.
With network infrastructure as an exception, make sure the teams you invest in have sufficient experience/success in mobile and Internet ventures. Carrier-side experience is advantageous and early-stage mobile experience is a plus, but avoid an Internet-only team for mobile ventures, or augment with mobile talent.
No Pattern Recognition
There is no pattern established for mobile venture success. Avoid relying upon conventional pattern recognition other than success-tested entrepreneurial attributes.
Pay close attention to timing. Cash burn is a huge issue in mobile ventures. Relationships and carrier rapport should help with understanding the associated timing to revenue.
Understand trends in international markets. Have a good feel for cultural differences and the practicality of success across geographies.
Syndication with Expertise
Align with investors and advisors who have a specialty in wireless. Insights and relationships accessed through those who are deeply connected will help extend your own network and knowledge base.
Avoid models that are already in play. While there will be successful “me too” ventures, there are too many new opportunities to solve big problems to risk being marginalized in a crowded area. Find compelling solutions to the big problems.
This is an exciting time in wireless technology investing. We are on the verge of an amazing market opportunity. All indications are that this market will be bigger than any we have witnessed prior—in many ways, we are on the ground floor soon to embark upon a fantastic ride. If investing in a market that will be 10 times the size of the Internet is not exciting enough for you, just think about what one trillion points of connection actually means: 150 connections for every human on the planet. We are at less than one today….
Scott is a Managing Director of OPENAIR Ventures, an early-stage venture capital firm focused on the explosive growth of mobility and the associated industries impacted by wireless technology. Scott was the founder and former general manager of Sprint Nextel Ventures (SNV), Sprint’s corporate venture capital unit, and earlier led business development efforts for Sprint. Scott holds a BA from MidAmerica Nazarene University. Scott is a Desert Storm Veteran who flew more than 300 combat hours (3,000 total) aboard Navy P-3C aircraft. It is through his military experiences that he developed his passion for mobile technologies having operated sophisticated airborne electronic warfare equipment during his five years as a Naval Aviator.
1 Tomi Ahonen, 2010 Wireless Almanac (Hong Kong: TomiAhonen Consulting, 2010).
2 For the purposes of this paper, mobile (also wireless) refers to the connection between physical objects and terrestrial wireless networks.
3 Lynette Luna, “Verizon’s Seidenberg: 500 Percent Penetration Achievable,” Fierce Wireless (2009, April 1).
4 Mary Meeker, The Mobile Internet Report (Morgan Stanley, 2009).
5 Maisie Ramsay, “Cisco: 1 Trillion Connected Devices by 2013,” Wireless Week (2010, March 25).
6 Ahonen, 2010 Wireless Almanac.
7 Jenna Wortham, “AT&T to Urge Customers to Use Less Wireless Data,” New York Times, December 9, 2009.
8 Fiber refers to the existing wired infrastructure, usually buried underground, that is difficult and cost-prohibitive to extend in densely populated urban areas.
9 A location-based social networking website, software for mobile devices, and also a game. Users “check in” at venues using a text message or a device-specific application. foursquare.com.
10 Tomi Ahonen, 2010 Wireless Almanac.
11 Ben Smith, “Welcome to the Togo Internet Village.”
12 For example, M2M Magazine, “Putting Connectivity in the Driver’s Seat,” and Vivek Naik, “4G Wireless Evolution–Report: Cellular M2M Growth Set to Return In 2010,” TMCnet (2009, May 29).