Amadeus’ highlights from

Mobile World Congress (MWC) 2015

This year – our 15th year at Mobile World Congress – Amadeus attended in full force, alongside many of our portfolio companies and investors. We also welcomed our new Partner, Bhavani Rana, who is based in Bangalore.

During the Congress we hosted the eleventh Amadeus Wireless Dinner, described by the local press as “El clasico” (a term normally used in Barcelona to describe the Barcelona – Real Madrid football match, something for our team to live up to!). At this private, invitation-only event, CEOs, investors and analysts speak freely and unreported, but we highlight some of the themes of those conversations at the end of this report. 

 


At the main MWC event, there was one key leitmotif: Mobile as a key fabric of our lives.

This was well depicted by the GSMA marketing video that opened the keynote sessions. The lyrics of its catchy theme song confirmed “we are part of a new beginning” whilst the video showed various facets of “MOBILE ME” in images: communicating (mostly messaging), sharing (particularly images), health tracking, shopping, paying, securing my digital identity, learning, consuming all types of media (from news to music and video). Mobile is quickly becoming a core fabric of our lives and the smartphone is its remote control, as shown in this AT&T clip.

This leitmotif had multiple expressions and themes, as shown in Ericsson’s film here.

For Amadeus, these are the themes that we consider to have real (or continuing) potential:
  • The continually changing role of the mobile operator
  • Internet of Things – IoT
  • The 5G/Connected Car
  • “Network Softwarization”
  • Chinese Hardware Differentiation
The continually changing role of the mobile operator: The operator’s role is rapidly shifting from communication provider to digital life’s service enabler. The speed of the shift was highlighted by the headline-grabbing comments of John Chambers, Cisco’s CEO, who predicted that 50% of today’s service providers would be irrelevant in ten years, having failed to adapt.

In a similar vein, Ericsson’s Hans Vestberg described this evolution in three eras. The 1990s were the “vendor era” during which vendors could charge healthy margins whilst carriers rolled out networks for coverage; in 1990 Ericsson’s gross margins were north of 50%. The 2000s were the “carrier era”, with carriers moving from coverage to capacity and affirming pricing power over vendors; by 2010 Ericsson's gross margins had fallen to 36.5%. Finally, today is the “partnership era”, with the OTT players at the table and a partnership-led business model being the only way to enable both carriers and vendors to survive. Ericsson is itself adapting to this change and last year it split its network division into two groups: Radio and Cloud+IP. This year it launched Digital Telco Transformation, which combines system integration, mobile analytics and OSS/BSS to help carriers adapt faster to the changes.

Google went one step further, announcing the launch of an MVNO in the US. This seems to be the last step of a long experiment by Google X in the access space which started with Project Loon. The MVNO will be an “experimental” Google-branded access service provider. It will showcase the services that it is now possible to deliver to consumers when you vertically integrate the device platform (Android iOS), with the information platform (Google search), the computing platform (Google services) and the access platform (supposedly Google Nexus, which is the only device it is reported to work with). For those of us who have been investing in the industry for many years, it is “back to the future” as DoCoMo (and iMode) originally executed this strategy in Japan almost a decade ago, but failed to export it and thus conquer the mobile world. Maybe starting from Search will be easier.

Internet of Things – IoT: This year the focus on IoT seemed to be much more about connected consumer devices – probably because they are easier and more interesting to demo. Most implementations were around 1) sensor-enabled consumer devices with short range connectivity to smartphones; 2) smartphones collecting and routing data to a server in the cloud for computing; and 3) service providers in the cloud analysing data and displaying them on the smartphone. This model allows premium pricing for the new connected consumer device, leverages the presence of the smartphone as remote control of our digital life, and allows the application provider in the cloud to offer a service and collect usage data (to be monetised later). Last year we had the connected toothbrush; this year it was the connected tennis racket!

Korea is at the forefront of the mobile industry and Korea Telecom (KT) is one of the leading digital life service innovators. If you want to live the future of IoT, you could move to Giga Island, a remote “mobile utopia” island off South Korea which KT is equipping with super-fast gigabit connectivity and the most advanced IoT services in the market (from home security to remote education and entertainment), showing how mobility can enable digital life even on a remote island.

Somewhat less remotely, AT&T shared their consumer IoT experiences in the home automation and security space. The US carrier has set up a separate IoT division AT&T Digital Life to address the market opportunity more effectively. The company highlighted the need for a strong own retail presence to sell these services to the consumer, with home security as the “anchor service”, for which most others are an upsell (door unlocking, energy monitoring, etc). The most popular “real service” in the US is motion sensor-triggered video clips of the outside of your home between 12:30am and 4:00am, sent to your mobile.

What impressed us, however, was the fast adoption of IoT in industrial sectors. Many industrial companies are adding sensing and connectivity capabilities to their devices to migrate their business models from “product only” to “service rich products”. For example, robotics companies, such as ABB, are IoT enabling their products to offer services such as remote monitoring, assets’ location and utilisation tracking, and proactive maintenance and support services. Some current applications of this technology feel like science fiction. Two we particularly enjoyed were Semios, for precision farming, particularly orchard network management, and Moocall for mobile calving sensors.

Carriers firmly intend to be the key direct channels to the enterprise for these IoT services and the standardisation of multi-carrier embedded-SIM is enabling this (Consumer devices will emerge from the production line with embedded, carrier-agnostic cellular connectivity that can be activated remotely post-purchase as an a additional service.). Some carriers are going as far as acquiring their partners in key industry verticals.

IoT in general seems to be going through the traditional Gartner hype cycle – market analysts seem to compete in this space for the “bigger number of connected devices” accolade, with numbers ranging from 5bn to 20bn by 2020 and growth rates ranging from 100% to 300% year on year. However, when we spoke to the management of one of the top three hardware module vendors in the cellular IoT space, they confirmed that they would be “very happy” with yearly growth rates of 25% over the next three to five years. As always at this stage of wireless technology adoption, there is a big disconnect between top-down analyst forecasts and bottom-up industry practitioners’ budget expectations (seldom marketed lest they dampen the hyped sector multiples).



The 5G/Connected Car: Given that world-wide LTE (4G) coverage is still only 25% and penetration less than 10% (the US has achieved 50%, but Europe doesn’t expect to reach this level until 2020), most observers asked themselves: “why do we need 5G”? Enter the “connected car” – and, even better, if self-driving and electric. How else can we justify developing a new air interface with 10X capacity and 1millisecond latency (almost reaching its physical limits)?

The CEO of Huaweii came up with an “interesting” example: with current LTE latency, a data “round trip” (from sensor in car to network computer-in the cloud and back to the car) to a self-driving car travelling at 100 kph will take the equivalent of close to two meters before it could stop the car if needed, with 5G latency this would be less than 2 cms – “The difference between life and death” in a world of self-driving cars. Although thinking of 5G-enabled self-driving cars with cloud-triggered emergency stop time of milliseconds sounds scary, it assumes a different light when compared to being driven on the motorway by my ageing mother-in-law whose “data round trip” time between brain and foot on the brake pedal sometimes feels like minutes rather than milliseconds! While vendors couldn’t resist showing off 5G “early trial preliminary results” (“don’t try this in a network”), this still feels a long way off – unless you live in Korea.

The CEO of Nissan/Renault – probably one of the most advanced car makers when it comes to introducing new technology and the market leader in electric cars – mentioned that he doesn’t expect driverless cars on the road for at least ten years. But we should expect traffic-jam autonomous driving cars by next year, highway autonomous driving (including lane changing) by 2018 and autonomous city driving by 2020. For us, the main problem being solved by the connected car in the next five to ten year is traffic – i.e. better road utilisation. In Atlanta (and probably soon in Norway), car connectivity will solve the “where is the closest free recharge station for my electric car?” problem; it's in this US city where Nissan has sold a third of all its electric Nissan Leafs. The rest of us would be more than happy with some of the simpler services being developed in the AT&T Drive Studio, such as finding a free parking space in the mall’s parking lot, opening the gate or garage door automatically as you approach your house, briefly starting the car alarm as you get close to your car in a big parking lot when you have forgotten where you have parked it (obviating car selfies with parking level number in background). On the other hand if you live in a terraced house in central London with no off-street parking this might be much more useful.

“Network Softwarization”: Given the speed at which carriers need to evolve from communication service providers to digital life enablers, they can no longer be tied to the roadmap speed and new product release cadence of their hardware equipment vendors. Gone are the days of twice a year product releases by these equipment vendors. Today, the industry is migrating to network function virtualisation, where the old proprietary network nodes (big dark grey boxes doing one thing very well at huge scale) are being “virtualised” and their functionality distributed on multiple generalist computing nodes. This is leading to lower-cost network architecture and more flexible service creation. If “Software is eating the world”, it is certainly already digesting the old communication networks.

Infrastructure vendors at MWC went a long way to highlight their credentials in this space, digging into the ETSI acronym soup of the day (NFV – Network Function Virtualization, SDN – software defined networks, MANO – management and orchestration of NFV – see here for a short tutorial). With Cloud-RAN virtualisation (C-RAN), we appear to be reaching the “hardest” frontier of mobile networks – the Radio Access Network (RAN), i.e. the hardware boxes you see hanging from mobile towers or in locked cabinets at their bases. The idea here is that you can virtualise and “centralise” all the computing in a mobile network (the brains) by separating it from the radio transmit and receive layer (the mouth and ears – apologies for the scary Singularity metaphors). Of course whilst solving with C-RAN the computing bottleneck at the edge of the networks, you create a need for “fat” connectivity (the nerves) between core and edge of the network, but this only works with large physical fibre networks.

A few mobile operators have the foresight in preparing for this. At MTN, for example, the CTO is sometimes jokingly referred to as Chief Trenching Officer, owing to the number of trenches they are digging to lay fibre to enable their customers in Africa to leapfrog from voice and SMS messaging to a wide range of digital life services.

Chinese Hardware Differentiation: Fortune Magazine’s issue in MWC week covered this with a great article titled “Enter the Dragons”. Whilst over the past five years we have seen the rise of Huaweii from nowhere to battling the network equipment market leadership against Ericsson, more recently – in the past five quarters – we have witnessed the amazing growth of the Chinese smartphone makers. As one of the charts in the Fortune article shows, Chinese smartphone makers have gone from ODM manufacturing to developing their own brands, from sub-5% market share to close to 35% and they have achieved this by actually innovating. They were out in force at MWC with large stands announcing their arrival in the industry.

We met Xiaomi and OnePlus and were truly impressed. These are more akin to e-commerce companies with smartphones as a product than phone manufacturers. Both sell mostly online (Xiaomi also through carriers) and they don’t have retail presence. Xiaomi has its own community of users – BBS – which has reached 30m, of whom 579k post daily and one million have signed up to be beta users willing to test the phone software beta versions and provide feedback to the company. The company markets only through social media and every product has a social hub. Whilst hundreds of Apple lovers queue up outside one of its stores to get their hands on the new iPhone, Xiaomi creates scarcity value by doing online flash sales of new models with tens of thousands of customers virtually queuing to get their hands on the product. OnePlus has taken this model even further: it sells its handsets “by invitation only”, requiring a potential buyer to have an invitation code, often from an existing customer, before an order can be placed. An alternative way to get “an invitation to buy” is to take part in the company’s social media contests and share OnePlus-related updates on their own social media accounts, so forcing the potential customer to market for free the product they want to buy in exchange of an invitation to buy (amazingly turning gross margins into virtual marketing spend). In the long run, the sustainability of these business models will depend more on developing great products than on playing on young customers’ social desire to belong to an exclusive club with scarce access. In the meantime, they are building a market share and social network of highly-engaged users that might just be large enough to provide a platform for success. These Chinese vendors are showing us that innovation, particularly in large volume markets, doesn’t necessarily have to be at the technology and product level but can be equally significant at the business model level.



Away from the main event, at the Amadeus MWC Dinner, opinions – sometimes controversial – were, as always, freely shared over good food and wine. Gratifyingly, there was continued optimism about both the fund-raising and exit markets. Some of our guests were surprised by the number of hardware start-ups raising money on Kickstarter; others discussed whether Samsung is going to reverse its fortunes in the market with the new Galaxy 6 phone. People explored which mobile companies could help solve the financial and digital inclusion problems; others discussed odds on what market share Mediatek would be able to take away from Qualcomm as emerging markets adopt low-end smartphones in earnest. And there was an interesting discussion about what other services, beyond mobile payments, tokenisation might lead to. An informal poll showed the three hottest new companies which our guests thought worth getting to know at the show (all of whom had pitched to us!)

And finally, for the fun, the two most impressive DEMOS of the WEEK for us were:
  • IMMERSION – which is adding Haptics effects (think sounds effects through your fingers) to mobile games and video

  • PEEL – the company’s product elegantly turns your smartphone into a remote control for all your IR enabled home devices (no more searching the back of the sofa for that DVD remote control).
Three of Amadeus' portfolio companies had stands at the event:

CBNL(Cambridge Broadband Networks)
High speed mobile access and backhaul equipment

www.celltick.com
Mobile home screen marketing network

ip-access
small cells wireless infrastructure systems
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