4G and the shift to an ecosystem-centric device market

By Chad Pralle, Senior Consulting Analyst, WiMAX & LTE EquipmentEven without the introduction of new fourth-generation wireless technologies, the mobile device market is experiencing a fundamental shift. Users, propelled by the ease of use of new mobile data devices, are experiencing the mobile Internet in a fundamentally different way than they had a few short years ago. The new open-Internet experience is driving an explosion in new applications, which are in turn driving exponential increases in data usage. This year, carriers across the globe began their 4G deployments in earnest in order to prepare for the capacity crunch expected on the back of that increased smartphone use. Until very recently, trials and initial deployments were still utilizing pre-production devices, but first production devices have now been released and device vendors are announcing their 4G plans.  The new 4GgearTM Devices report from Maravedis analyzes the impact of 4G on the device market, detailing the benefits and complications of fourth-generation technologies, analyzing the driving forces in the device market, and profiling the leading companies in the field.

So, how does 4G affect the device market? The answer to this question depends upon your perspective. 

From the consumer perspective it might be interesting to hear that 4G, at least initially, won't provide any direct benefit. 3G networks have evolved to the point where a consumer in an uncongested cell can get a peak data rate sufficient for even the most demanding applications. Even high-definition video (e.g. Netflix video streaming in the United States) only requires about 2 Mbps. Of course we make this statement with the caveat that, in an open access environment, new network capabilities could very well result in new applications that require higher throughputs. For example, it's possible that users will become dissatisfied with 2 Mbps of HD video on newer high-definition smartphone screens. Lower network latency may result in more real-time online gaming, but again, not fundamentally different than what is already seen today.

From the carrier perspective, the benefit is capacity and, eventually, network simplification. Carriers who have been subject to the smartphone data explosion early on are in dire need of any technology that provides them with higher geographic bandwidth density (i.e. more throughput in a given area). 4G is one part of the solution to this issue, along with additional spectrum and more base station sites. 4G also provides significantly improved Quality of Service (QoS) capabilities, which will enable carriers to prioritize different types of data traffic, enabling more efficient use of their capacity.

From the device vendor perspective, however, what are the impacts of 4G? First, 4G is not likely to be a product differentiator for the average consumer. Early adopters will certainly latch on to 4G devices for the sake of 4G but, as we state above, even these consumers are not likely to encounter a significantly upgraded user experience beyond the benefits of using a new undersubscribed network. Still, as smartphones become increasingly prevalent versus traditional cell phones, how will device vendors differentiate?  This, in fact, is the fundamental shift to which we refer.

Apple led the industry back to its home field with the iPhone, a playing field in which the device is less important than its software and the ecosystem of products that surround it. In this game the hardware and even once-important individual features are hidden underneath the total product experience. As the smartphone became a personal mobile communications hub for the user, vendors continued to add features until managing said features and content became a complicated affair. Simplifying such complexity for users is Apple's core competency, and so the company built the iTunes/iPhone ecosystem that became the model for the rest of the industry.

The ecosystem is now the standard by which the smartphone is judged. Prior to this, consumers wanted to get a Nokia phone or a Motorola phone. Now the question is iOS or Android. Users previously used proprietary software to connect to their phone to download MP3s they had ripped from a CD or purchased from a 3rd-party online store. Now they click an icon on the phone and download the MP3 directly over the wireless network. 

Things are simpler for users now, or at least they'd better be. Vendors who get this right will excel in the marketplace while vendors who get it wrong will fall from grace. The troubling thing for many vendors is that the industry is changing from one in which the phone and OS were coupled, into one in which the OS is likely 3rd-party (the notable exception being Apple). This has the potential to squeeze traditional cell phone vendors between the OS and the semiconductor providers. If we look at the history of the PC industry as a similar model, it indicates that the cell phone hardware industry could see rapid margin decreases to the 10 percent level. In that model, the majority of the margin in a PC sale is provided to the operating system and silicon vendors.

If this turns out to be the case, vendors can either buck the trend by creating their own vertically integrated model/ecosystem--much like Apple did in the PC market--or get on board by retooling their business to match the new paradigm (e.g. à la Dell Computer). The real question for device vendors is how many ecosystems can survive in this new world of smartphone solutions? In the early days of the PC industry, there were numerous operating systems vying for contention. If we look only at consumer products, the industry ended with only two, and one of those was by far the leader in terms of units sold. Fundamentally, this comes down to ecosystem support. 3rd-party ecosystem members can only support so many platforms; that is, help the most popular ones to become more popular. Will ecosystem leaders Apple and Android continue to lead without faltering? Does traditional cell phone industry leader Nokia have the market penetration to create a new ecosystem on par with these? Have Samsung, LG, Motorola, and others signed a pact with the devil by developing on the Android platform? All of these are valid questions with complicated answers, and we expect new entrants to fare well while traditional leaders decrease in importance.

Chad Pralle is a senior consulting analyst for WiMAX and LTE Equipment at Maravedis, and has nearly 20 years of multidisciplinary experience in the wireless infrastructure and device business, including 15 years of experience with 4G access technologies.

4GgearTM is an ongoing research and analysis service focusing on technology and business trends among the leading equipment vendors for LTE, WiMAX and selected proprietary systems.

Maravedis is a premier global provider of market intelligence and advisory services focusing on 4G and broadband wireless technologies, regulation and markets, including LTE, WiMAX, femtocells, chipsets, radio access network, core network and backhaul. Learn more at http://www.maravedis-bwa.com.

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