The European giants that pioneered the mobile telecoms industry are now stumbling in the wake of American and Asian rivals
When Eric Schmidt, chief executive of Google, takes to the stage in Barcelona on Tuesday evening to deliver the keynote address to hundreds of mobile phone industry executives gathered for the Mobile World Congress the industry’s biggest trade show, the message will be clear: well done, Europe, for getting mobile communications this far. We’ll take it from here.
For two decades, Europe’s mobile telecoms sector has considered itself to be a world leader. It had the biggest names, the technological knowhow, the most customers. Over the past year, however, that hegemony has been smashed. At a time when Europe is mired in economic turmoil and facing a demographic timebomb, one of its great hopes for fuelling future growth is slipping away.
“Europe has become the ‘flyover states’ of the mobile industry,” says a senior European executive, referring to the disparaging term used to describe middle America by high-powered business travellers shuttling between California and New York.
“All the service innovation is being done on the west coast of the US, and all the manufacturing and technical innovation is being done in the Far East. All we’re doing is selling other people’s products.”
His customers now care only about access to services such as Google, Facebook and Twitter on their phones, and the devices they covet are the iPhone or the latest BlackBerry, which has proved a great hit with teenagers. This year’s hot handsets, the executive says, are being made by HTC, the Taiwanese manufacturer, which will use this week’s show to unveil its latest devices, featuring Google’s Android software. While Apple lords it over the high end of the market, China’s Huawei and ZTE are creating cut-price smartphones that will democratise the mobile internet in the coming years.
Sensing the change blowing in the wind, even Microsoft’s chief executive, Steve Ballmer, is turning up in Barcelona to front the software group’s latest attempt to break into a market that it was once shut out of by Europe’s gatekeepers, Nokia and Ericsson. As for Apple itself, the iPhone maker would never do anything so vulgar as actually appear publicly at the event, or have a stand in one of the eight exhibition halls; but its executives will be in town, holding meetings behind closed doors with suppliers and networks as it looks for more wireless partners to back its latest invention, the iPad, outside the US.
After a week in which the turmoil in Greece has shown the fragility of the eurozone and a new acronym, “Pigs”, has entered the economic lexicon as a harbinger of doom, the evidence the Mobile World Congress will provide of Europe’s loss of control over the mobile phone industry is a harsh blow.
It leaves European policymakers, many of whom have bought in to the idea that the future lies in the creation of innovative technologies, to pin their hopes on new areas such as green energy or fall back on old stalwarts such as biotechnology. But the green sector has yet to prove the breakout success that will give Europe its own version of Silicon Valley, while biotech has always been the saviour that never quite seems to arrive. After the dotcom crash at the start of this century, biotechnology was looked to expectantly, especially in the UK, as the next big thing. In America, meanwhile, graduates from Stanford and drop-outs from Harvard were quietly getting on with building Google, Facebook and Twitter.
The impressive lead in mobile communications that Europe once held over the rest of the world was created by the European Union. In the 1980s, when wireless communications went mass-market, America’s Motorola vied with Finland’s Nokia and Sweden’s Ericsson for dominance of the nascent global market. Europe’s players were handed the advantage when the EU officially adopted and set aside specific wireless spectrum for a digital mobile technology called GSM.
The first networks appeared in 1991 and overnight the European technology players that had helped create the standard had a huge market. Seeing its success, other countries soon adopted GSM, expanding the market for Ericsson, Nokia and others throughout the 1990s. Even America’s largest network, Verizon Wireless, is switching to the super-fast version of GSM later this year. So where did it all go wrong?
“As soon as the mobile business opened itself up in such a way that internet technology could become available on mobile networks, that was the end,” according to Mark Newman, chief research officer at Informa Telecoms & Media. “Maybe Europe had a chance but it blew it, in my view, because there are too many sets of interests, each so obsessed with their own sphere of influence that they could not co-operate.
“You had operators and device manufacturers never pulling in the same direction, and I cannot see any way in which Europe can regain the ascendancy. Essentially the future of communication services is that people want access to the cloud of services called the internet.”
The industry did see it coming. It tried several times to create a mobile internet that was not going to be beholden to the American giants. In the late 1990s, a pared-down wireless internet service called WAP was being pushed by several GSM operators. Customers, many of whom were used to dial-up internet access, were unconvinced and soon started summing up the service by replacing the “w” with “cr”.
A few years later, O2 tried to create its own mobile web by importing the i-mode standard from Japan. Again, it was a dire failure. When the “true” web started turning up on the next generation of 3G phones, the operators tried to keep their customers within “walled gardens” – as they were called – creating content portals that offered customers what the operator thought was the best of the web. Usage was paltry. Having spent billions buying licences to run 3G services, the operators had to prove to investors that there was consumer appetite for mobile internet services, so they demolished their garden walls.
Ironically, the operators’ initial intransigence over the mobile web brought both Apple and Google into the industry. The former saw a way of bringing the vertically integrated approach that had worked so well in music – where it controls both the device, the iPod, and the store, iTunes – into the mobile market. The latter made its move because it feared that the combined effect of Apple and market leader Nokia could shut it out of the mobile internet altogether.
In fact, Google needn’t have worried about Nokia because the runaway success of the iPhone changed the game. The arrival of the 3G version of Apple’s device a year and a half ago dramatically altered the mobile industry and proved that consumers, given the right device, will do much, much more than use their phone to make calls and send texts.
Nokia is still the largest mobile phone manufacturer in the world. But the Finnish giant, a former rubber boot manufacturer whose success created hundreds of millionaires and helped pull the country out of recession when the Soviet Union collapsed, has been sideswiped by the success of Apple and the encroachment of Google’s Android platform. It has been forced to make Symbian, its own software platform, free to developers and handset manufacturers, as Android is, and last month took the desperate decision to give users of its smartphones free access to its satnav services to make its devices as attractive as the iPhone. Only three years ago it spent €6.5bn on the map firm Navteq but it is now effectively giving that intellectual property away as it tries to protect its market share.
The crisis into which Nokia has been plunged by Apple has pushed it into bed with another American giant, Intel. The two companies will use Mobile World Congress to announce new microchips that Nokia hopes will help it to compete with HTC’s latest devices. Apple already has its own in-house chip design team, having bought fellow Californian company PA Semi two years ago.
Ericsson, meanwhile, spun its handset business into a joint venture with Sony. However, after initial success with ”featurephones” based on Sony’s Cybershot (camera) and Walkman (music)technologies, Sony Ericsson’s share of the billion-device-a-year market has collapsed under the onslaught of Apple and BlackBerry, halving from about 10% three years ago.
But it’s not all doom and gloom, says Olaf Swantee, who runs Orange’s mobile operations across Europe. He reckons that Europe’s big mobile phone operators, such as Orange, Vodafone and O2, have the opportunity to leverage their huge customer service bases to get themselves back into the game.
“Yes, the [US] west coast and Asia have really taken very strong positions,” he admits. “If you take equipment manufacturing, companies like Huawei have grown really strongly and we have seen traditional software manufacturers like Google and Apple enter the mobile market as it becomes a more software-driven environment. But, as the market moves to a more mature phase, what is becoming more and more important is the customer interface.”
The importance of direct customer contact, whether that be through shops or call centres, was proved this year when Google launched its Nexus One mobile phone. It sold it only through its website, and those customers who had problems with the phone had to email Google, rather than talk to its network partner, AT&T. Many found themselves waiting days for issues to be dealt with.
In the race to increase revenues – not least to pay for the network investment required to deal with the traffic generated by devices such as the iPhone – the mobile phone operators have the chance to claw back money from the likes of Apple and Google, which aggregate other people’s content through their iTunes and Android marketplace stores.
“Once the markets top out,” says Patrick Bossert, director of strategy at global billing services expert Convergys, “and growth slows and margins get tighter, then those aggregators will be looking to solutions for local-language customer care and marketing.
“They cannot afford to establish a base in every market in which they operate, but the service providers are already there. They may not have a lot of leverage now but, boy, do they have a lot of assets that are actually quite desirable.”
It’s a theme that the GSM Association, which represents all these networks, will be picking up this week as it tries to wrest some of the initiative back from Google and Apple.
“I don’t feel that we are being left behind, but there are areas that the mobile operators need to address,” says Michael O’Hara, the GSMA’s chief marketing officer. “And getting their assets into the developer world, finding a way to get into the value chain, is really key.”
Being great at customer service is hardly the white heat of technology, but for Europe it might just be the start of some sort of fightback. For now, though, the story is going to be – for home-grown talent, at least – depressingly familiar. As Informa’s Newman warns: “In 2010, Apple is going to make hay. I can’t see anyone catching them up this year.”