Turbulence in the Wireless Industry: Who Benefits?

On the back of the wireless spectrum auction results, I just wanted to share some ideas that I had penned almost two months ago about how to make sense of the rapid changes going on in the wireless industry. More specifically, what I believe is happening is the evolution from Internet and wireless as two separate entities to a more unified, Wireless Internet. However, we’re still in the putting-the-infrastructure-pieces-together stage.

I think it’s best to describe the trends briefly and then see who stands to benefits from such trends:

The opening of networks

As wireless networks begin to open up (this will take time before it really happens), the carriers should stand to benefit from the ability to monetize their networks via new revenues from non-subscribers. Much like the interconnect fees, the consumer will end up paying more in the short-run, and all the open networks will win in two ways: you’ll have to open up to compete, monetizing cross network traffic

Right now, Apple (Nasdaq: AAPL) has made a commitment to only one network in the U.S. The device is so compelling that it may not matter but if the device ever loses some of its luster, Apple may need to think about making its device work on other networks.

Qualcom (Nasdaq: QCOM) loses. As networks open up, it will be hard for Qualcom to continue to collect its royalties on its closed-technology. Competitive pressures at both the device level and the network level will push Qualcom to find other revenue streams.

Google (Nasdaq: GOOG) wins. I never believed Google was bidding to win wireless spectrum. Instead of owning spectrum, Google has already won by pushing/lobbying the opening of competitive networks. Android and the Open Handset Alliance will allow Google to run the advertising OS of the mobile industry, just like it has become the Web’s Advertising OS.

Sprint (S) seeking a strategy and what’s really happening in WiMAX

I see Sprint’s reworking of its WiMAX strategy as less a call on WiMAX and more specific to the Sprint situation. Sprint has internal issues it needs to shore up before it can think about any new audacious network rollouts. The fact that Ceragon (Nasdaq: CRNT) and Alvarion (Nasdaq: ALVR) are just continuing to knock the ball out of the park in terms of new WiMAX deals won (Alvarion has over 220 plus 40 in mobile WiMAX) shows that the for the rest of the world, WiMAX isn’t going to happen, it’s already started to happen. When WiMAX reaches critical mass, companies like Alvarion are in on the ground floor.

Retail sales move away from Big Box retailers as products unbundled

If the hardware ever is truly unbundled from network service contracts, then I think everything points to retail sales immediately taking to the Internet. Contracts and bundles are so complicated that you need local stores and the Big-Box operators to man sales forces to sell these. Once you can purchase a phone and a network contract separately, look to Amazon (AMZN) to become a major force in wireless sales.

I don’t think retail sales go away entirely, but you’ll see a chink in the armor once direct sales become more feasible. eBay (EBAY) and comparison shopping sites should begin to take over this field as they have in other fields where the products are more straight-forward, and more commoditized.

Personalization

We’ve seen just the early innings of the personalization movement on the mobile device. Ringtones have become a $6 billion/yr business. The next stage here is video usage (less than 20% of U.S. mobile subs use video on their handset). Private companies like Vringo and public companies like Electronic Arts (ERTS), which bought Jamdat (one of the early casual gaming firms focused on the mobile) should benefit.

As more value-added services roll-out, companies like Comverse Technologies (CMVT.PK) (estimated to have almost 50% of world market share in voice mail services) and Amdocs (NYSE: DOX) will play a big role at the carrier level for running the content/technology/billing environments. If services don’t go the carrier route and instead work at the handset level, we’ll see tons of startups in this area.

I think iTunes will play a big role in delivering music to the phone and other products will follow suit, though not nearly as successfully.

Music firms, like Universal, who get it (albeit just a little) will begin to see opportunities for distribution online beyond just selling buckets of ringtones. Companies like Jupitermedia (Nasdaq: JUPM) are assembling large royalty-free libraries of music and this may begin to get interesting.

Hardware

I’m not that knowledgable on the equipment side but I do think Synaptics (Nasdaq: SYNA) will continue to see design wins as the device takes more center stage in the future as we get closer and closer to a true computing+mobile device. Input devices, as clearly demonstrated in the iPhone UI, are getting more creative and more useful.

Disclosure: The author’s fund has positions in ALVR, DOX, and CMVT.PK as of March 24, 2008.

Comments

[Ralph F:]

Nice overview. This focuses on developed markets, particularly the US. But in developing markets, where the opportunity is arguably much larger, the race is for basic voice access, not for data services.

2008 Mar 25 07:37 AM

[squawk:]

I think you need to better understand the existing pervasiveness & applicability of QCOM's technology and licensing before making the presumption that QCOM is all about "closed-technology." Due diligence of QCOM's technology suggests otherwise.

2008 Mar 27 05:02 PM

[BrotherMaynard:]

RE: QCOM

QCOM is not "closed technology"...quite the opposite. "closed technology" and "standardization" are two oft confused, though totally seperate ideas. QCOM sets standards for baseband chips much like android will set standards for mobile OS. QCom has to be open, otherwise no one could use their chips! In fact, they are a member of the open handset alliance. Qcom gets a bad name because they charge people to use the CDMA standard...but that does not make qcom's solutions "closed"...the blueprint for cdma is wide open...you just have to pony up the dough to use it.

2008 Mar 27 09:49 PM