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Tuesday, 21 September 2010

Smartphones and Millennials

Lady Gaga, Mark Zuckerberg and Paris Hilton; we’ll stop right there, otherwise this would become an extremely long list. This trio is among the most famous representatives of the Millennial generation. Millennials are usually defined as those born between 1981 and 2002. In America there are 92 m Millennials, which according to the Census Bureau, makes this the largest section of the population.
Over the coming years, as more Millennials reach adulthood and enter the jobs market they will reshape society. On the early evidence Millennials might not be quite as selfish and self obsessed as the Baby Boomers who brought us Rock & Roll and birth control. In a reaction to their parents Millennials are said to be more respectful of rules and more interested in community. By contrast Baby Boomers were more into psychoanalysis and frivolous consumption.  Nonetheless, Millennials are proving to be a revolutionary force.
On average Baby Boomers are said to spend 7hrs a week reading work related emails. By contrast, Millennials spend just four hours, according to Accenture, the management consultancy. Millennials prefer to spend their time texting and communicating on social networks. No surprise then that Millennials are the most connected generation in history: eight out of ten of them sleep with a cell phone glowing by their bed. You might not be able to reach your doctor when you need him, but the odds are you can phone a Millennial. Don’t lend them your car though. Two-thirds of Millennials admit that they text while driving. The average Millennial is really quite manic when it comes to staying in touch.
Re-wiring society
The long march of Baby Boomers through the workforce changed the way business was done. Baby Boomers killed the mainframe computer and replaced them with personal computers and the internet. Just as rock music rewired our ears, the internet and GSM rewired society. Now Millennials are quickly taking the internet to the next level and making it borderless. 
If you are confused by what that might mean, consider the following numbers, which come from the CTIA, a non profit wireless industry organization. The CTIA estimates that in the US alone there were 257 m data capable devices in circulation at the end of 2009, compared to 228 m in 2008. Included in this number will be digital cameras, music players, personal computers, games consoles and the like. If a device is data enabled there is a likelihood that it can connect to a network. This is what is happening now. 
World wide Cisco and Forrester estimate that in 2007 there were more than 500 m devices that were connected to a wireless network. The iPhone was launched in August 2007 so most of the devices connected would have been Blackberries, a tiny number of smartphone and personal computers with a WiFi or 3G data card. This equates to about 1/10th of a device for each person in the world. By the end of this year the estimate rises to 35 billion devices, or about 5 per person. This number will include mobile phones with some kind of data connection, computers, printers and a growing number of sensors and other pieces of invisible electronics that are connected wirelessly. At the same time, using several different industry estimates, there are likely to be around 265,000 different mobile applications in use worldwide. 
These numbers are already striking but if the current trend continues it is expected that by 2013 there will be one trillion wirelessly connected devices. This equates to 140 devices for each person on the planet! By that time there is likely to be more than 600 m smartphone in operation and even with the extraordinary rise in tablet computers, such as the iPad, it takes quite a leap of imagination to get anywhere near 1 trillion devices. However, lets begin by considering the following - what would an average American college student now take away to college? At least one smartphone, an MP3 player, such as the Apple iTouch, a lap top computer, a digital camera, digital video recorder, E-reader, a digital television and two games consoles, one handheld the other fixed. Over the coming years most of these devices will come with a WiFi Direct chip that will enable them to connect directly with each other, without a wireless hotspot. Likewise, over the coming years the number of sensors that are WiFi enabled will rise exponentially. The world’s electricity grids are steadily being rebuilt using networked digital electronics and the same stead march towards the networking of sensors is taking place in oil, water and gas pipelines. Automobiles, medical instruments, road sensors, numerous monitors, sensors and meters within households and offices are now also being connected to the internet.
AT&T’s last set of quarterly results allow us to glimpse the future. In the second quarter AT&T saw 100,000 new data enabled devices, such as e-readers and a variety of monitoring systems, connected to its network. The estimates for connected devices is mind boggling and may prove to be far too high. However, when we look at the growth of data enabled devices they usually exceed forecasts. The sudden rise of the smartphone and tablet computers have taken most analysts and forecasters by surprise. 

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Source: US Gov Stats and Cyke Global Estimates

The chart above is based on a well known one produced by the US Department of Commerce, which examines the time it took new technologies, such as cars, TVs, radios and telephones to reach 100 m of the population. The main point to take from this chart is that in an age of networking, new technologies and new types of behavior spread more rapidly than before. Facebook is a powerful demonstration of this trend. The service was launched on Harvard University campus in 2004 and was opened to the general population in 2006. The site now claims to have 500 m registered users and recently overtook Google as the US site with the most internet traffic. A network gives a device power and in the modern world power resides in community and the ability to access applications and content. Today we live in a world where the private and public space through which individuals move is immersed in radio waves: we are always connected. There is now a small industry dedicated to examining and speculating on how all this connectivity might be reshaping human brains and behavior.
Baroness Susan Greenfield’s book ID, is an early example this genre; a more recent one is The Shallows: What the internet is doing to our brains, by Nicholas Carr. No surprise then that one of the most in vogue areas of scientific study today is neuro dynamics and mirror neurons. What this type of research strives to understand is how brains function in a society that can increasingly be described and understood using the terminology of complex networks. The discovery of mirror neurons at the University of Parma in 1995 reveals how much of human behavior is a result of sub-conscious mimicking of others in our social group. A famous experiment by VS Ramachandran, the noted neuo-scientist, examines what these neurons may mean for the destiny of Mankind. A taster of his exciting work can be seen at the following linkTED lecture  One area of research, which is generating interest addresses the question of conscious will and our idea of self. Daniel Wegner, one of the leading scientists working in this area has written a book called, The Illusion of Conscious Will. The title gives a flavor of where all this is leading us. An excellent tour d’horizon can be found in a work I have mentioned before called Herd, by Mark Earls. Rather than being an academic, Earls is a senior advertising executive. He therefore manages to show how recent breakthroughs in neuro dynamics and the study of social networks has a commercial endpoint. As someone who has always been rather skeptical about the use of charts in stock analysis I am being forced to review my prejudice. Earls’ main contention, which summarizes recent scientific work and comes from his own experience in advertising, is that that society is not made up of individuals who exercise free will. Although he doesn’t mention Mirror Neurons, he, like scientists who are examining them, has  arrived at the conclusion that very few of us are individuals, mostly we function as part of a herd. This is why stock charts are useful, they plot group behavior. They many not always be right but, as many experienced and successful investors know, often they are on the money. In my experience some investors are extremely skilled at reading them.
  
Now consider the following finding, which came from Accenture’s study: 45% of employed Millennials use social networks while at work, but only 32% say that this is supported by their IT departments. Millennials are addicted to being connected. The table to the left comes from another study carried out by Cisco, which examined how its customers use Facebook. It found that 7% of them spent an average of 68 minutes a day playing a popular interactive game called FarmVille. Mafia Wars was the second most popular game.
This underlines a theme that will be familiar to 5th Column readers - IT has become consumerized. Today, even the enterprise, once the bastion of the IBM mainframe and Microsoft compliant PCs, is becoming dominated by consumer choice. This explains the success that Apple is enjoying with the iPad and iPhone. Both products were aimed at consumers but more companies are being forced to adopt them because their employees use them. This goes for social networking too.We saw the same pattern with the adoption of the personal computer which, as we discussed last week, took place despite the protestations of corporate IT departments. They correctly saw that the PC would undermine their power. 
What is cool for Millennial consumers is also cool for business. This is why the giants of the PC era face a daunting problem. Their shares have underperformed the likes of Apple over the last decade. It is not just that they are falling behind in  consumer markets, it is that consumer markets have begun swamping business.  Microsoft spotted this trend a decade ago, which is when it teamed up with two companies, Sendo and HTC, to produce smartphones. Microsoft’s  plan was to topple the Black Berry and Nokia and dominate the enterprise. It has not happened and now it is never likely to. Androids and iPhones are sweeping in from the consumer plane, like the Mongol hoards and are storming the Great Wall of Enterprise. 
There is gold to be found by studying how groups use social networks and other types of communication technologies. Over the last five years IBM for one has spent $11 bn buying up companies that provide network analysis software . IBM says that its annual sales of such software will exceed $15 bn by 2015 and is growing at a double digit rate. By one estimate there are more than 100 programs now available for network analysis. Gartner ranks this type of software as number two in its list of strategic business operations meriting significant investment this year. 
Mobile phone networks are at the forefront of those who use this software. As mobile networks carry more services like Facebook and Twitter, this software can be used to create a completer picture of how large populations of subscribers function. The aim is to examine how subscribers operate within their social network. A recent article from the Economist gives us a taste of what is to come. 
The police department of Richmond, Virginia, has pioneered the use of network-analysis to predict crimes. Police officers know that crime increases at certain times, such as on paydays and when there is a full moon. The software lets them analyse the social networks around suspects, such as dealings with employers and collection agencies. The goal, according to Stephen Hollifield, the department’s technology chief, is to “pull together a complete picture” of suspects and their social circle.
Richmond’s police have started monitoring Facebook, Myspace and Twitter messages to determine where the rowdiest social gatherings will be. On big party nights, the department now saves about $15,000 on overtime pay because officers are deployed to areas that the software deems ripe for criminal activity. Mr Hollifield claims that crime has declined as a result.
Investment Opportunities 
So far we have surveyed how demographics and technological innovation are combining to create a society that is networked. We have also seen that the number of devices linked to networks is rising exponentially. In last week’s Fifth Column we looked at some estimates from Cisco, which underline that the place where the networking of human society will happen at the most rapid pace will be wireless. From 2009 to 2013 Cisco believe that wireless network traffic will increase more than 30 fold, compared to just over a four fold increase in fixed network traffic over the same period. 
Due to this the number of mobile broadband subscribers is expected to rise to 2.7 bn. This is the number of subscribers who are expected to be using the high speed data variety of 3G known as HSPA. By that time another 100 m are also expected to be using LTE, which is a mobile technology specifically designed for high speed wireless broadband in dense urban areas. Within five years, close to 40% of the world’s population will be using wireless data over mobile networks. Now look at the chart below. What this illustrates is the speeds achieved by mobile networks compared to fixed line networks.Despite the improvements in wireless technology there is still a gap of ten years separating what a fixed line network can offer compared to what is available on a mobile network. Two of the most successful ways to invest in technology is to find bottlenecks and also to invest where the pace of innovation is the greatest. Wireless lives up to both of these rules



Let me explain. In the fixed line world, which is where the personal computer industry resides - bandwidth is not a constraint and neither is memory size, or power consumption. Another constraint that is lacking in the fixed wire world is human bandwidth. When someone is sat at a desktop they are able to concentrate better on the task at hand, even if that is a user manual.
If power and memory are not a problem, and neither is human bandwidth then electronic and software design can be loser. Microsoft is free to write bloated software and Intel is able to pack billions of transistors onto a piece of silicon without needing to worry too much about power consumption.
None of this works in the wireless world. Yet a growing number of wireless consumers will expect to receive the same services and applications over their mobile networks as they do on a fixed wire network. However, there is less bandwidth, less power and less memory than the fixed world can offer. This represents a barrier to entry and goes a long way to explaining the problems that PC centric companies, such as Microsoft and Intel, face when attempting to move into the wireless domain. By contrast, the constraints of the wireless domain represent the moat around ARM’s business. Arms’ devices were designed from the beginning with wireless in mind. As we saw earlier, with the number of electronic devices rising exponentially this puts ARM in a position that closely resembles that of Intel’s in the PC domain.  Thanks to Moore’s Law each year Intel has been able to add more value to its microprocessors at the expense of other parts of the PC value chain. ARM is following the same progression; like Intel it has added graphics to its microprocessor cores. Over time other functions will follow. This is why Arm attracts takeover speculation.
The constraint in the speed of mobile networks  explains why mobile operators can charge more for data delivery compared to an operator in the fixed world. Today, mobile voice and SMS represents about $800 bn globally. Data will eventually take most of this and also add new revenue. It will also increase margin.

Operator Capex+Opex Costs to deliver 1GByte of data


low ratings and typically offer yields of more than 5%.
The chart below, which was compiled by Rysavy Research plots data and voice usage over 3G networks. In the US data  already represents just over 20% of the ARPU for the leading operators. However, 
  as the chart on the left illustrates, the speed of increase in data volumes is accelerating. The reason is not hard to locate - the availability of high speed mobile data networks is growing, the penetration of smartphones is rising and the number of Millennials who are entering the working population, and therefore have more money to spend is also increasing. Ingredient X, which feeds off of each of these developments, is that the pace of innovation in the mobile data domain will continue to accelerate.
By 2014 the number of 3G subscribers in the world is expected to be more than 3.3 billion, of whom 2.7 billion will use high speed data services delivered over the higher speed versions of 3G. The chart at the bottom o this page concentrates solely on mobile data volume and so gives a clearer picture of what is taking place. Over the coming few years the speed of growth will accelerate. By 2014 there will be more than eight times as much mobile data.
Over previous issues of Fifth Column and before that, when I wrote the Mash, I have often addressed the subject of smartphones and mobile operators. It must by now be clear that the key to successful investment in technology is to understand the characteristics of the Millennial generation and the dynamics of mobile data growth. As we saw last week, the estimates for the number of smartphones has been increased yet again; currently the market for these devices is growing at more than 50%.
Now it is time to look at some other areas where investors may want to consider investing. In a world dominated by wireless networks and social networking services, such as Facebook, it is clear that  security becomes a more serious concern than it was when PCs dominated the IT environment.  Security has become so important that the computer hackers themselves have taken to patenting their own technology. 
The latest version of the Zeus banking Trojan, which has long been a threat to financial institutions and delivers lucrative financial information back to a botnet command and control server, includes the type of copy protection that one usually finds in enterprise software. The creators of Zeus have added a hardware based licensing system to the Trojan builder kit , which only allows the kit to be copied on a single computer.  



The creators of SpyEye, which competes with Zeus, have now also included a hardware lock, developed by a Russian programming team, in their software.
Over the last few months Intel has launched a takeover of McAfee, a security software company and Hewlett Packard has announced the acquisition of ArcSight, another US based computer security company. Both Checkpoint Systems and Radware, two Israeli security companies quoted on the Nasdaq, have leapt in the wake of these bids. Symantec, another US security stock has also risen. In Asia, Trend is one of the big security companies, while in Europe F-Secure is another company that specializes in anti virus software. 
We have looked at mobile operators on numerous occasions  just as we have discussed the prospects for Apple, Google, Arm, Imagination, Mediatek, Cambridge Silicon Radio. Broadcom and many others. An investment in the right lithium battery company is another option. However, it is time to revisit a theme that I have not looked at since April 2009, and that is new screen technologies. A number of the new devices that link to wireless networks will use screens. Remember, one of the rules of investing in technology is to locate a bottle neck. Handheld devices are battery powered so energy consumption is an issue. At the same time, these devices are also required to run high quality video images, which represents a drain on power consumption.