How the mobile industry sets itself up for failure in mobile data

I saw a great example recently of the problems caused when mobile companies don't understand the structure of the market for mobile data. A report by Research and Markets gave a somber view of the current status of mobile data in Europe:

"Only about 14% of subscribers use MMS/picture messaging, and only 10% of mobile users across Europe who have access to mobile Internet make use of it....In areas such as mobile TV, successful trials have not yet translated into general consumer acceptance."

This led to very skeptical commentary at Muni Wireless, where Esme Voss pointed to horror stories about European mobile users who accidentally compiled monthly bills of up to 10,000 Euros by misunderstanding the billing on their mobile data plans. "A complete failure" was how she described mobile data in Europe.

I think Esme's right about the data charges, which is why Europe's new flat-rate plans are a step forward. But I think the biggest problem isn't the data charges. It's the industry's misuse of the word "only."

If you expect a single mobile data application to conquer the entire mobile market, anything less than overwhelming adoption is going to be viewed as a failure. Getting "only" 14% or "only" 10% of the market is a crushing disappointment.

But as I discussed in a recent post, the mobile data market is heavily segmented. It's very hard for any single solution to appeal to more than about 12% to 15% the population, because that's the maximum size of each market.

The problem isn't necessarily with the services, it's with our expectations. Let's rewrite that Research and Markets report based on the real structure of the mobile data world:

Mobile companies in Europe have successfully pioneered several new mobile data segments. MMS messaging has rapidly saturated virtually everyone who's willing to pay substantial amounts of money to send low-resolution pictures to their friends. Mobile browsing is establishing a solid niche, with as many as ten percent of people who were given an Internet-capable handset using it to access online content. Meanwhile, mobile TV trials have tapped into the segment of mobile users who are willing to pay to watch TV on a screen the size of your belt buckle.

Doesn't that feel a lot better? It's also a lot closer to reality.

There are several lessons to take away from this if you work at a mobile-related company:

Think small. If you're building a new service or product, make sure it'll be cash flow positive even on a small user base. It doesn't necessarily have to pay back all of the sunk cost all at once, but if you need to get 20% penetration of the user base in order to break even on your day-to-day operating costs, you might as well start preparing your resume now, because you are going to fail.

Set realistic expectations. Make sure your management chain understands that there are no killer apps in mobile data. The market's made up of narrow segments, and getting five percent of the users to be passionate about something is actually quite a success. Cable TV programs thrive on that sort of viewer base all the time; that's the type of world you're operating in.

Learn on someone else's nickel. Since 5% of the market is a success, that means you'll need to run a lot of experiments in order to get a portfolio of successful services. Rather than funding all those experiments yourself, it might be a lot better to allow a bunch of software developers to make all the mistakes, and then you participate in the billing for the most successful ones. An open garden is a method for you to minimize your risk.

Reading between the lines on patents

A reader sent me a note asking if I had seen the thread on Treo Central discussing some patents Palm received on mobile devices with folding screens. Several people have been speculating online that this design might be the new category of device that Palm's developing.

The product designs depicted in the patents are intriguing. They show a device that looks like a mobile phone:



...but opens to reveal something that looks, well, almost exactly like I've always imagined an info pad would look:



There's a flexible screen on the inside, so you get one continuous writing or viewing surface when the device is opened.

Alas, the patents tell us almost nothing about what Palm might be developing today. If you look carefully, they were filed in January 2001, when Palm had a completely different senior management team.



Some of the inventors don't even work at Palm anymore. Frank Canova is mentioned in one of the patents. He was head of advanced technology at the time, but left the company in 2002. Rich Gioscia is on several of the patents. He was driving industrial design at the time, and is still with the company.

The patents can't be early prototypes of Jeff Hawkins' secret project, because he was not working at Palm at the time. It is possible that the ideas filed for by Canova and Gioscia and the others were incorporated into Hawkins' project, but it's just as possible that the patents represent an old idea that the company abandoned years ago.

This sort of thing often happens with patents -- many tech companies pay bonuses to their engineers to file for patents on almost anything they can think of, because patents are used like trading cards in industry negotiations. It's helpful to have a big collection of them. Even if a patents was for a real product that was being developed at one point, by the time the patent's granted the company may have changed its plans completely.

But I will say this: I want that folding device so badly that it makes my teeth hurt.

Where people use mobile data

My kids have a phrase they use whenever their parents share embarrassing personal details: "Too much information!" I think that's what the folks at Astraware must have thought when they recently asked their users to describe where they play Astraware's mobile games. You know where this is going, right? "In the bathroom" was the most common reply.

I don't think the Astraware responses were unusual. If you do a web search for the phrase "mobile phone in toilet," you'll find all sorts of sad stories about mobile phones, iPods, and other devices that took an unscheduled swim. Supposedly utility fees in Helsinki are going up in part because of all the phones that end up in the sewers there.

Which applications the users choose to use depends on which usage segment they're in. The entertainment-focused users play games and listen to music. I was at a focus group once where a communication-centric user admitted that he likes to send e-mails while using the facilities. "My wife hates it," he said.

So don't feel guilty about using that application while you're, uh, otherwise occupied. Just make sure you keep your device away from the water. And if it does take a swim, and you're tasteless enough to want to re-use the device, don't dry it in a microwave oven.

The shape of the smartphone and mobile data markets

With all the new mobile devices coming out, I thought it would be useful to give an overview of the market for mobile data. I covered some of this information in a post written about a year ago, but this one has a lot of new information, plus diagrams.

I believe the market for mobile data devices (smartphones, PDAs, mobile game machines, iPods, etc) is not structured the way most people think it is. A lot of new mobile products fail because they're not designed for the real market, or because they target imagined customers who don't really exist in large numbers.

There are two big erroneous assumptions that I think many people make about mobile data:


First incorrect assumption: Mobile data is for everyone. Most people assume that mobile data devices like smartphones will eventually be used by everyone. The idea is that they're being bought by early adopters now, but as prices drop they'll soon be adopted by the whole population. The market is supposed to look like this:



Higher prices are to the right. Smartphone sales start with the early adopters at the right, and then as prices drop everyone switches to smartphones and starts using all their features.

The only problem with this idea is that there's no evidence to indicate that it's true, at least not in the US and Europe (where I've done research). In fact, almost all of the evidence I've seen to date shows that the market is deeply divided into two groups. When surveyed, most people in the US and Europe say they will not pay anything extra for mobile device features other than voice and SMS. They'll use those features if you give them away for free, but as soon as you ask them to pay, about 65% of the population drops out. This makes them very unpromising targets for device companies that want to sell value-added devices, operators who want to sell advanced services, and software companies that want to sell mobile data apps.

Fortunately, the other 35% of the US and European population is willing to pay extra for mobile data features.

So the real market looks like this:



The people I labeled "value-added users" are the mobile data market. But that's only the beginning...


Second incorrect assumption: There is one smartphone market. Most people assume that there's just one market for smartphones, and that eventually we'll see the emergence of a single ultimate smartphone that everyone uses. I can't tell you how many times I got that question from press people and analysts when I worked at Palm: "Which is the device that everyone's going to use?"

The answer is, that device doesn't exist, because the people who are willing to pay extra for mobile data features don't all want the same features. They want conflicting things, and are very unwilling to pay extra for the features they don't want. The ideal hobile device for me might be completely repulsive to you, and vice-versa.

This misconception has fueled an uncounted number of online debates in which people argue why the device they like ought to be adopted by everyone. What they're really arguing is that everyone else should think and feel like them, which is why these online debates never reach a conclusion.

Rather than looking for the mobile market to "converge" the way that most PCs converged to Windows, I think we should expect mobile devices to diverge into different segments. The right analogy for the mobile market isn't PCs, it's cars. As the car market grew in the 1900s, it stratified into trucks and minivans and SUVs and sports cars and so on.

The same divergence is already underway in mobile data.


There are at least three segments in mobile data

If mobile data isn't for everyone on the planet, and if the market is divided into segments, the most important question to ask is what those segments are. What are the equivalent of the sports car, SUV, and minivan for mobile?

We researched that extensively at PalmSource, in a series of surveys that eventually talked to more than 12,000 people in the US, France, Germany, and the UK. In that research, we found at least three big groups of mobile data customers, each with different needs and tastes: people who focus on communication (e-mail, messaging, conferencing), people who focus on entertainment (games, video, music), and people who focus on managing information (databases, documents, note-taking). Each was about 12% of the population.

The results were very consistent across countries, so I'm comfortable that the same segments probably exist in most European countries. The only significant difference was Germany, where the percent of the population who said they were willing to pay for entertainment features was smaller. I don't know if that's a real difference in usage, or if folks in Germany are just less willing to admit that they might use a computing device to play games.

The results probably can't be projected to other places like Japan and China; somebody else needs to do that research (or I'll do it if you want to fund it ;-) .

Here's a little detail on each of the three mobile data segments:

The entertainment-focused users are generally younger than average; many are in college or their 20s. They see a mobile device as a lifestyle choice, and they're willing to pay extra for a device that'll help keep them entertained. Different people want different forms of entertainment, so there are sub-segments in the entertainment mobile market. The biggest division is game-playing vs. media (music and video). But entertainment can also include things like social messaging with your friends. It's anything you do for fun rather than a paycheck.

The communication-focused users are extroverts who live to communicate with others. They're often in people-facing jobs like sales. They're willing to pay extra for a mobile device that lets them keep up with others in multiple ways. E-mail, SMS, voice, conferencing, video calling -- basically, anything communication-related is compelling to them, and they will pay extra for a device that does it well.

The information-centric users are more introverted. Rather than focusing on their dialog with others, they tend to do a lot of thinking on their own, and want their mobile device to be a memory supplement and a means to capture new information. They're not by any means recluses, but ideas rather than social interaction are what really gets them energized, and so they're willing to pay extra for features that help them capture and remember ideas and information. What they really want is a brain extender. They often work in information-heavy jobs like medicine, law, science, and academia.

Of course, there's always some overlap between markets -- for instance, you might have a doctor who also wants to stay entertained when off work. So if you draw the three mobile data markets, they overlap a bit, like one of those Venn diagrams you drew in primary school:





Understanding the products

Now that we've mapped the customer landscape, we can start plotting various products on the chart. This is where we'll start to get some interesting insights. But first, we have to add one technology overlay: in the mobile world, some mobile devices have phones built in and some don't. So add a gray circle in the center:




Now let's chart some products.


The communicators:



This is the most crowded market (in fact, I left off a number of products because I ran out of space on the chart). Although there used to be communicators without phones built in (RIM's early products were an example), putting all communication in one place is a huge benefit to a communication-centric user, so merging the phone and communicator was an obvious move in this market.

I classify the Danger Hiptop as a borderline product between the entertainment and communication markets because it's focused on social communication for young people. Sony Mylo is another borderline product, this one without a phone.

The Palm Treo, SonyEricsson p900 line, and touchscreen Windows Mobile products are on the border between communication and information management. They all have touch screens and a lot of information management features, but also attempt to deliver robust e-mail. At this point, they are being outsold by the much more communication-specialized RIM Blackberry line.


In the entertainer market, you can see the strong role of sub-segments. The game-player market has been dominated by Nintendo's GameBoy, with the recent addition of Sony's PSP. The media market is ruled by the Apple iPod.



The iPhone is an attempt to create a phone + media entertainment device. It'll be interesting to see how the iPhone does in the market -- it was an obvious move to combine a communicator with a phone, but it's not as obvious that the entertainer is a natural match with a phone. The danger to Apple will be if users see iPhone as the worst of both worlds: a phone that lacks a good keypad and an iPod with very small memory.


Information managers are an underserved market. Early PDAs targeted these users, but the device features were too limited to build a lasting franchise. The main champions of the PDA market, Palm and Microsoft, have now both focused most of their effort toward communicators. As a result, information manager innovation has basically ground to a halt, and the users in this space are very frustrated.




What it means: Opportunities and dangers

Some types of convergence are better than others. Combining phone technology with a mobile data device can be very successful when you stay within a single usage market. You tailor both the phone features and the data features to the needs of that particular type of customer. But trying to converge two markets is an extremely risky idea, something mobile companies should avoid. The needs of the markets conflict, so there is an extremely high risk that you'll end up being cannibalized on either side by products designed specifically for the needs of single markets.

The communicator market is over-crowded and therefore risky. When you realize that the communicator market is only about 12% of the population, there are probably more communicator products shipping now than the market can support. Communicators are likely to face price pressure, and some of the products will probably sink like a stone. The RIM and Palm OS products are probably a little safer here because they have more unique features and loyal customer bases, and Nokia may do okay if it can add some differentiation. But Windows Mobile communicators are likely to be a happy market only for mobile companies that can live on commodity margins.

This is not a place where I'd be looking to build new devices, but many companies are introducing new communicators because they'd rather pursue an established market than build a new one.

The iPhone is not a Blackberry killer. One of the things I like about this chart is that it shows immediately why the iPhone is not a major threat to Blackberry sales. They're in very different markets. If RIM is hoping to move into the entertainment market with devices like the Pearl, iPhone definitely interferes with that. But the immediate impact of the iPhone is on the products closest to it, meaning Microsoft Zune and the SonyEricsson music phones.

If you don't fit in one of the segments, it's very hard to sell. One of the messages of the market segmentation is that people will pay extra for great solutions to the needs they have in a particular segment. If your product doesn't solve any of those problems, there's not a market for it. Many failures in the mobile data market have been products that focused on features rather than solving specific problems. They may be beloved by technophiles, but there aren't enough of those people to drive a lot of sales. See Nokia's 770 Internet tablet for a good example.

The biggest opportunity is in information management. This market is about the same size as the communicator market, but no major player is investing in it today. This segment is out of favor because of the decline in PDA sales, but remember that people thought the MP3 market was a backwater until Apple introduced the iPod. I can tell you from personal conversations, and the market research, that there's a substantial market here, and the people in it are very frustrated. I think the ideal product for this market would be a minitablet note-taker, which I refer to as an "info pad." You can read more about it here.


What about the middle of the chart?

The other segment we haven't discussed is the center of the chart, the place where information management, communication, and entertainment all come together. Some people like to think of this as the home of the ultimate converged device, and every now and then you'll see a hardware company try to tackle it.

They all fail.

In reality, the center of the chart is a market dead zone. To use the car analogy, designing a mobile data device for all three markets simultaneously is like trying to build a sports car that doubles as a minivan and a tractor. The result is not pretty, and won't be bought by anyone except gadget enthusiasts like me. Unfortunately, there aren't enough of us to make a significant market.



That's my view of the mobile data market. I'm sure other people have different perspectives; please post a comment and share yours.

Is Vista the end of Windows?

In case you're interested, I wrote a short commentary on this subject for the newsletter of Rubicon Consulting, the consulting company where I work. An excerpt:

At the end of 2006, Gartner Group predicted that Vista would be the last major release of Windows, with future updates being delivered on the fly, in modular format. "The era of monolithic deployments of software releases is nearing an end," Gartner said. "Microsoft will be a visible player in this movement and the result will be more flexible updates to Windows and a new focus on quality overall."

The annual predictions from the major analysis companies are like hors d'oeuvres at a drunken New Year’s party -- quickly consumed, and generally forgotten the next day. Their role is to generate publicity (that's why they are given away for free). But this prediction is worth thinking about because if true, it would have a profound impact on the computing industry...

You can read the rest of the article here.

________

By the way, I wanted to thank TomSoft for including my post on the Impact of the iPhone in the latest Carnival of the Mobilists, a weekly collection of mobile-related commentary.

The iPhone is not a phone

Concluding thought on the iPhone (for a while):

Usually I take a few days to think about a mobile announcement before I write it up. That gives me time to read other comments and get my own thoughts settled. But there was so much attention on the iPhone that I posted ideas as I went along. I hope you didn't mind the stream of consciousness approach.

So now it's a week later, and I've come full circle to where I was when I first heard the announcement: I think it's not a phone. It's an entertainment-focused mobile computer.

If you judge the iPhone first as a phone, it's very hard to justify. I think this has driven some of the skepticism that we've seen in online commentary about the iPhone in recent days. The lack of a keypad makes it harder than a regular phone to dial, and SMS will be awkward to use. That's a substantial barrier in the US, and an even greater drawback for a phone in Europe and Asia. (Hey, mobile phones have failed in Europe just for having the keys poorly arranged.) The battery life also looks like it may be disturbingly short.

The price of the iPhone is uncomfortably high for a phone, and Apple's forecast of 10 million units shipped by the end of 2008 is very hard to justify when you look at the total number of mobile phones sold at that price point. Richard Windsor of Nomura, a telecom analyst I respect deeply, predicts that Apple will sell only two million iPhones this year, and at most five million more in 2008. If that happened, Apple could be stuck with more than half a billion dollars in unsold hardware. Windsor writes: "Apple has arrived in the smartphone market but how long it stays remains to be seen."

But if you look at the iPhone first as a mobile computer for entertainment, with phone features added in where convenient, things look very different. The lack of a keypad then becomes a reasonable compromise to get a large screen (great for video and browsing) in a tiny device. The price is still high, but Apple has continuously offered iPod products in the $400-$500 range. The iPhone is close to the price of a high-end iPod, and has a host of additional features. iPod sales have been running at about eight million units a quarter, so ten million iPhones in 18 months is not a ridiculous number. If Apple can get a reasonable percentage of loyal iPod owners to step up to the iPhone, it won't have to attract all that many new users to make its 10 million number.

Remember, Apple owns its own retail channel. So it has a very good idea of what its customers like and dislike.

Far from revolutionizing the phone, what Apple's doing is launching the most ambitious mobile entertainment device in many years. Here's hoping they succeed -- if they do, some other companies might feel encouraged to try bold mobile computing experiments of their own.

Vote for the best mobile post of the month

The folks at the Carnival of the Mobilists give an award to the best mobile-related post of the month. But it looks like they must have forgotten to do it since August, because they just opened the voting for the best posts in August through November of last year. You can find the voting forms here. Just scroll down to see each month.

Here's how I voted:

November. I thought the best nominee was VisionMobile's post on the right data strategy for operators. It was well argued, and I agreed with it. An excerpt:

"Operators should realise that consumer service innovation most often comes from 3rd party service developers....Operators should develop platforms that link service providers with advertisers and consumers (and do it faster than Yahoo, Google and Nokia) -- in other words be service pipes, to avoid being bit pipes."

It's amazing how many of the nominated posts were commentaries on what the operators are doing wrong. You might almost say the mobilists are obsessed.

October. Although my post on whether the smartphone will kill the PC is one of the nominees, I think the best post of the month was All About Symbian's fantastic overview of Internet radio. So I voted for that one.

September. Two posts from Mobile Opportunity were nominated in this month, so I'll refrain from making any recommendation here.

August. I think David Beers deserves credit for an insightful analysis of Palm's OS plans. He spotted some subtle wording in the company's financial disclosures, and broke the story of Palm buying back its OS several months before it became common knowledge.

Full disclosure: The winning authors get $250 each from Khosla Ventures, so I guess I have a vested interest in encouraging you to vote for my stuff. But actually, I think you should vote for the posts you think are best.

There's also supposed to be a vote on the best post of the year, sometime later this month. I'll let you know when that vote begins.