Cell phones have come a long way. In less than 25 years, the cumbersome DynaTAC phone invented by Martin Cooper, a.k.a. “the brick,” has evolved into probably the most ubiquitous electronics device ever invented, with more than 1.5 billion users worldwide. With more than 3,000 different incarnations on the market at any single moment, today’s cell phones have been described as slick, shiny, sexy, fashionable, functional, and affordable. In the past couple of years, two other words/phrases are increasingly used to describe the device: “Swiss Army Knife” and “convergence.”
Cell phones are no longer just tools for making phone calls. Phone makers have been busy developing new models that include advanced entertainment and information features. For mobile professionals, smart phones, which function as a phone, a PDA, a camera, a computer, and an entertainment device, are becoming quite popular. In the meantime, cell phones with MP3 playback functionalities, gaming capabilities, real-time TV and video playback, and sophisticated camera functions are popping up in the market like bamboo shoots after rain. In South Korea, the three mobile carriers report more than three million MP3 phones have been sold since they appeared on the market in April 2004. The companies expect MP3 phone sales to grow to 16 million units by the end of the 2005. In the U.S., companies such as Qualcomm are designing new models with advanced gaming and video capabilities. Its Slingshot prototype offers 3D gaming, with resolution and capabilities rivaling that of first-generation game consoles.
Mobile carriers as well as other service providers are also busy seeking new revenue generators. All major U.S. operators have deployed or announced plans for mobile TV/video services, and following iTunes’ huge success, they are also planning to release their own music services. Companies traditionally outside of the mobile market are either becoming concerned or are actively looking for opportunities to get involvedâ€”Yahoo! recently announced a strategic partnership with Motorola to integrate its core services and products into Moto phones.
As these trends continue, market watchers will find cause for both enthusiasm and concern. In the convergence race, mobile phones have several inherent advantages over other portable electronics platforms.
First of all, more than 80% of the U.S. Internet users own a mobile phone compared with less than 20% for a portable digital music player and 5% for a portable multimedia player. Most consumers leave home with three things in their pockets, a cell phone, keys, and a wallet. Another important advantage is that mobile phones can leverage WWAN (Wireless Wide-Area Network) connectivity to fulfill consumer demand for instant downloading, uploading, and file sharing. Mobile service providers also have the right billing system in place to handle micropayments for services such as on-demand entertainment. Other advantages include but are not limited to the following:
* Consumers are very familiar with the platform, and most mobile phones are very easy to use;
* The high sales volume can keep the component cost low;
* The mobile phone industry has a well-established value chain; and
* Mobile carriers can subsidize the device with service revenues.
Of course, consumers will make the final judgment with their wallets. According to Mobile Entertainment Platforms and Services, a recent survey from Parks Associates, consumers have strong interest in using their cell phones for a variety of entertainment functions. Ten percent of Internet users are interested in the ability of viewing pre-recorded video, video clips, or live TV on their mobile phones, and 11% are interested in the ability to download and play music files or to listen to radio stations directly through their mobile phones. These are impressive percentages considering the dearth of such offerings in the United States. Further analysis shows that there are significant overlaps between consumers interested in video applications on a mobile phone and on a portable multimedia player. The same applies to music. Therefore, if mobile phone makers can improve screen quality, resolution, sound quality, and other imaging/video/audio features, they are in a position to make phones a competitive platform against portable music and multimedia players. If consumer interest in using an advanced camera phone as one’s primary camera serves as any indication (one-fourth of cell phone users say they are very likely to use an advanced camera phone as their primary digital camera), a large percentage of consumers are comfortable with convergence functions in an advanced mobile phone. It is even more worrisome for manufacturers of portable entertainment devices that the early adopters (the mobile aficionados and mobile workers identified in the survey) have even stronger interest in such a substitution.
Mobile phone makers are already aggressively pushing the envelope for camera phone designs. Samsung recently introduced a five megapixel camera phone that includes a 3X optical zoom, 4x digital zoom, auto focus, flash, white balance, and ISO controls. The phone also kills germs with its nano-coating.
Of course, the transition will take time. For mobile carriers to justify the inclusion of new entertainment features, they need to be able to use these features as differentiators (such as the Razr phone for Cingular) or generate incremental revenue and network traffic. They also have strong incentives to prioritize the set of features according to the potential revenue opportunities. Even the inclusion of camera features took a while to materialize in the U.S. since operators did not see incremental revenue opportunities.
Another challenge is the relatively short replacement cycle for cell phones when compared with other portable entertainment devices. More than one-half of mobile phone users replace their cell phones once every two years or even more frequently. As a mobile phone becomes a convergence entertainment platform, they can be expensive even after subsidies. Will such a change disrupt established replacement cycles and consumer behavior? On the other hand, will the high cost of cell phones give consumers more incentive to purchase a portable entertainment device for entertainment on the go and a simple phone just for voice? There must be a balance point somewhere.
There are also other challenges such as design issues, battery life, and consumer preferences for features related with specific functions (such as acoustic quality for a portable music player). For instance, David Pogue at The New York Times recently wrote a review for the new Samsung A800 from Sprint. After complimenting the device for several cool features, he started bashing the camera design. “The only way to take and send a shot is to close the phone, take the shot, open the phone, open the gallery program, find the picture and send it from there. Very, very silly.” Personally, I’ve tried to download and play NBA 2005 on my color-screen cell phone, and my vision starts blurring after just two minutes.
Despite these challenges, the convergence trend is inevitable. CE companies without a mobile phone business need to find ways to participate in the value chain or risk losing wallet and mind share. An opportunity is to become a value-added service provider for specific applications, leveraging brand name and existing service platforms. For instance, Fuji recently announced that Nextel will provide its subscribers its Get the Picture services for $2.99 a month. In the meantime, Sony Ericsson is leveraging Sony’s venerable Walkman trademark for its new music phones. Another opportunity is to become an MVNO (Mobile Virtual Network Operator) and add WWAN connectivity to portable CE devices. Companies such as Kodak and Apple, with their strong brand names and technology solutions, could certainly become MVNOs. For instance, Apple’s service can enable subscribers to have on-demand iTunes services through an iPod phone or an iPod with cellular connectivity. Consumers may have to pay $0.10 extra per song for using the cellular network, but they are compensated with instant satisfaction and the convenience factor. By becoming MVNOs, these companies can reduce the risk of being superseded by mobile phone manufacturers.
We are by no means implying that grabbing a piece of the mobile market is or will be easy. Industry giants like Intel and Microsoft have been trying for years, and neither dares to claim victory. However, the significance of this market means it cannot be ignored.
So, back to the idea of making a cell phone that kills bugs. We’ve conducted a focus group study in the office, and one-half of the people at Parks Associates are interested in paying $20 extra for such a feature. Of course, we are talking about advanced electromagnetic technologies, not simply attaching a can of “Off” to the rear end of your cell phone. So, mobile phone makers out there, when your “Bug Terminator”Â® phones make billions of dollars (of course, after the cellular carriers figure out ways to provide monthly software download to treat new breeds), just remember the folks at Parks Associates. $0.10 per cell phone sold plus $0.01 per download will doâ€¦
In Summary: Data Points
* According to South Korea’s three mobile carriers, more than three million MP3 phones have been sold since April 2004. They expect MP3 phone sales to grow to 16 million units by the end of the 2005.
* Ten percent of Internet users are interested in viewing pre-recorded video, video clips, or live TV on their mobile phones, and 11% are interested in the ability to download and play music files or listening to radio stations directly through their mobile phones.
* More than one-half of the mobile phone users replace their cell phones once every two years or even more frequently.
* More than 80% of the U.S. Internet users own a mobile phone, compared with less than 20% for a portable digital music player and 5% for a portable multimedia player.
* One-fourth of cell phone users say they are very likely to use an advanced camera phone as their primary digital camera.
About the Author
Yuanzhe (Michael) Cai is an analyst studying developments in such areas as digital entertainment and technologies for residential construction.