Vodafone Group Plc, France Telecom SA and other phone companies have been eclipsed by Apple Inc., Google Inc. and Facebook Inc. in one of the most lucrative pieces of the booming smartphone market: services.
Now, they’re trying to claw back lost ground.
Seeking to avoid being just pipes that carry services and applications from Apple, Google and others, operators are starting to go beyond ringtones and links to radio and television channels to offer apps of their own.
Companies like Apple “need our investment to exist, but that’s not enough for us to grow,” France Telecom Chief Executive Officer Stephane Richard said in an interview in Paris. “We need to find ways to be more useful to our clients, like through mobile banking and electronic health.”
The services tug-of-war will be discussed at the Morgan Stanley Technology, Media & Telecommunications Conference starting in Barcelona today. The stakes are high. The worldwide market for games, entertainment and workplace tools for mobile devices may balloon to $40 billion by 2014, compared with $14.3 billion this year, according to consulting firm Booz & Co.
Operators have only a small piece of this pie. Revenue at Facebook, the world’s largest social-networking site, may double to at least $1.4 billion this year. Apple’s revenue from apps sold through its iTunes Store rose 22 percent in the latest quarter to about $1.2 billion, while Google’s sales surged about 23 percent to about $7.3 billion.
In contrast, many large telecommunications companies’ revenue is stagnant or declining, with Telefonica SA, Europe’s second-largest operator, and AT&T Inc., the U.S.’s largest carrier, seeing sales slide by 2.1 percent and 0.8 percent respectively last year.
Mobile devices have become the fastest-growing piece of the telecommunications market. Smartphone shipments are set to pass 268 million units this year, from 122 million reported by Gartner Inc. in 2007, when Apple unveiled its iPhone and spawned a new industry.
Users who play games, watch video, send messages and surf the Internet are showing an insatiable appetite for such services. Phone companies have steadily increased bandwidth to enable consumers to access services at super-fast speeds. They’re discovering, however, that much of the money to be made is in add-on services.
More Than Speed
“It’s not only about the speed, it’s about what you offer with that speed,” said Olivier Baujard, chief technology officer at Deutsche Telekom AG, Europe’s biggest phone company. “The rule will be value-added services in order to maintain the same ARPU,” or average revenue per user.
In the early days of smartphones, the operators had control of the user experience. The online portals they managed typically gave users access to a selection of services such as games, ringtones and news, with the extra fees going to the operators themselves.
Apple opened the App Store in 2008, stocked with third-party software. It has since grown to include more than 250,000 apps, inspiring similar services from Google and Microsoft Corp.
Operators “had high hopes until 2007 or 2008,” said Patrik Karrberg, a researcher in the London School of Economics’ Department of Management. The hopes dimmed after the emergence of iPhones and improved data speeds that made the Internet directly accessible on handsets.
“They gave up the idea of controlling the entry point,” Karrberg said. “That was the death of the portal.”
Most smartphone users now access online services through portals operated by Google, whose Android operating system for mobile devices was the most popular in the U.S. in the third quarter, according to market researcher Canalys, or via Apple and Research In Motion Ltd.’s offerings.
Apple gives 70 percent of the revenue from App Store sales to developers, keeping the rest. Google gives developers 70 percent of Android Market revenue and takes some of the rest in a “transaction fee,” saving a slice for carriers.
Phone operators’ attempts to drum up interest for their own branded services have a mixed record of success. Vodafone, the world’s largest mobile-phone operator by revenue, last year introduced Vodafone 360, a social networking and apps portal available on specially designed handsets.
The portal has 790,000 registered users, compared with more than 500 million on Facebook. When Pieter Knook, the head of the 360 project, quit in September, Vodafone didn’t replace him.
The portal “was an attempt to regain control in this landscape, but I think it’s quite clear that it hasn’t been successful,” said Paolo Pescatore, an analyst with CCS Insight in London. “Fundamentally people just want Facebook. They don’t want to sign up to other services and platforms.”
Operators also are experimenting with mobile payment platforms and home entertainment. Verizon Communications Inc., the largest U.S. mobile operator, has developed in-home networks that allow buyers of its FiOS fiber-optic TV service watch television across their laptops, tablets and mobile phones.
A partnership that includes AT&T, Verizon and Deutsche Telekom’s T-Mobile unit is also working on a mobile-payment system that would link mobile devices with credit and debit cards, three people with knowledge of the plans said in August.
Payment platforms are a key opportunity, said Adolfo Hernandez, the president for operations in Europe, the Middle East and Africa for network equipment builder Alcatel-Lucent SA. “You could visit an online video shop and just say, ‘charge my phone bill,’” he said.
Vodafone CEO Vittorio Colao said on Nov. 9 that the company is planning to offer third-party billing, allowing other apps to charge through the company’s existing payment system.
Payment services are a logical area of focus for operators, since “they know where you are, and they’re allowed to charge you” through direct debits, LSE’s Karrberg said.
France Telecom is trying to spur growth with mobile banking services in emerging markets and branded apps including radio and TV services and a virtual tour of the Versailles gardens southwest of Paris for the iPhone.
After falling behind the technological curve, phone operators may face a tough fight to catch up.
With their resources and need for growth, “telecoms need to be the first movers,” Ulf Moritzen, who helps manage about 1 billion euros ($1.35 billion) at Aramea Asset Management in Hamburg, said by phone. “They should have thought of Facebook themselves.”