I recently returned from Mobile World Congress (MWC) in Barcelona. MWC is the largest mobile technology conference in the world. Over 50,000 attendees were estimated to have flocked to this mobile mecca this week.
My trip started off at a dinner with a VC buddy (we had co-invested in and been fellow-board members of an Italian EUV mirror systems company that may finally be taking off). My friend has an interesting investment in privately-held Sequans, a major supplier of chips for LTE (long-term evolution 4G wireless technology) and Wimax mobile systems. LTE provides improved coverage and throughput (claims 12x increase in speed, and 6x decrease in cost versus existing 2G/3G standards today). But LTE will take time. Verizon (VZ) is the U.S. carrier pursuing LTE most aggressively today, but has limited spectrum. Western world carriers want to push out the big capex plunge into LTE, preferring to optimize existing infrastructure through HSDPA, HSDPA++. Asian carriers may lead the LTE plunge, going directly from earlier versions of CDMA/TDMA and GSM. Wimax appears to be a more limited market.
Nokia's (NOK) choice of Microsoft (MSFT) over Google's (GOOG) Android for its mobile operating system made some waves. A Microsoft design program manager said a factor could have been Microsoft's system stability relative to that of Android, which many enterprises require. He positioned Microsoft as somewhere between the closed but highly developed and stable Apple (AAPL) system, and the less-stable Android system. Microsoft also has neat integration advantages to integrate PC files and Outlook onto the mobile phone, and its SharePoint collaboration software and cloud server solution.
A broader discussion I had with my Microsoft contact and several others was whether mobile users will stay with Apps or move to Browsing. Apps make sense for tasks. If you know where you want to go, or what you want to buy, apps are great today. Furthermore, people are creatures of habit. The more they get used to apps, especially fanatically loyal Apple iPhone users, the more it becomes ingrained by a larger-and-larger user base. So, while intuitively it makes sense to browse the web on your smart phone, just like you do on a laptop or PC, this transition to browsing may take longer than expected. Two factors that may accelerate the adoption of browsing on smart phones are 1) the pace of improvement in smart phone operating systems that improve the browsing experience, and 2) Apple's proprietary ecosystem, which together could drive users toward browser-based Google and Microsoft operating systems.
While I think Apple is a great stock today, many smart people at the show concurred that Apple's iPhone will lose market share not only to Google's Android (which has happened already), but to Microsoft too. Apple has two strikes working against it: 1) Apple charges 30% commission on many apps, and are angering major media customers, who are already moving to Android platforms after their most recent flack with Apple; 2) Apple has a semi-proprietary supply chain, which over time leads to a less competitive cost structure (versus off-the-shelf components from the rest of the industry), forcing Apple to charge premium prices with lower market penetration.
A major theme at the show was how to handle the explosion in mobile bit traffic caused by the proliferation of smart phones. I have discussed this theme in my previous two articles, but the dilemma is growing. Since 2008, carrier mobile revenues have increased 2x globally, while traffic increased 25x. This is not sustainable, and will be addressed in two ways. First, consumers will have to pay more. This will be done via price-tiering such as premium services for mobile video streaming. Vendors that I visited that help enable these services include Tekelec (TKLC) and Bridgewater (BDWRF.PK) in policy management and tiered billing solutions, and Sandvine (SAND) in deep packet inspection and policy traffic switching. Second, carriers will need to offload traffic. This will be achieved via LTE (but will take time to harmonize standards and for carriers to make major capex commitments), increasing available spectrum, mobile backhaul and via femtocell and microcell technology.
Femtocells are going to be a very compelling investment theme over the next few years. Femtocells are tiny base stations used for better indoor coverage and for outdoor capacity in dense 4G networks. Femtocells enable network operators to offload data from overstretched 3G macro networks, improve customer service which has been degrading at an accelerated rate, and move to a lower cost method of building out LTE. The leader is a private U.K. company called picoChip which has won contracts with major OEMs like Alcatel-Lucent (ALU). picoChip also had built up a network of smaller system integrators that give this small-but-fast-growing chip company surprising global reach. Broadcom (BRCM) recently paid $86M for femtocell chip-maker Percello, an Israeli start-up with nominal revenues. However, Broadcom gains a system-on-chip that could help it come to market more quickly than designing from scratch. Qualcomm (QCOM) is also expected to enter the femtocell market this year.
Mobile backhaul providers that I visited at the conference were Dragonwave (DRWI) and Ceragon (CRNT), both providing low-cost microwave backhaul systems. Ceragon is the microwave backhaul market leader. Dragonwave has had a lumpier revenue stream due to a large U.S. customer. But Dragonwave has diversified its revenue base, has technically strong products, and is cheap at EV/Revs of 1.1x for longer-term investors.
Another beneficiary of the broad mobile push is Ceva (CEVA), a holding in our Quan Technology Fund. Ceva supplies digital signal processor (DSP) cores to global semiconductor companies. Nearly everybody uses Ceva's DSP cores as a base for their specific applications, whether it be Broadcom, Infineon (IFX), Intel (INTC), or other major OEMs. Any new mobile application such as LTE, 3D video, etc., will be hard to design without CEVA DSP cores; complexity rises with each generation of technical standards, making it difficult for OEMs to economically and technically provide an in-house solution. Ceva has 90%-plus gross margins, deriving revenues from licensing and very scalable royalties on each unit sold with a Ceva DSP core, akin to the ARM Holdings (ARMH) business model.
The App Forum at MWC featured Research in Motion (RIMM), a bunch of navigation companies, some mobile media firms, and even Alcatel Lucent was exhibiting in an effort to lure developers onto its platform. The app developers/content providers don't exhibit yet, aside from Manga. Research in Motion appeared to impress some attendees with its PlayBook tablet's capabilities. The mobile media and Internet companies are all enjoying very strong growth. I visited Velti (VELT) and privately-held Upstream. The most reasonably valued of these mobile media stocks is Germany-based Yoc, the most expensive is Augme Technologies (AUGT.OB). See recent blog for more details.
If you are ever in Barcelona on a Sunday night, go to Obarazal restaurant in Poble Sec. The food is good, and football on TV with the local supporters is great.
Additional disclosure: I am long YOC, short AUGT.OB.