By Colin Knudsen

The mobile market is experiencing a number of key milestones in 2011 with far-reaching implications.

First, the penetration of smartphones in the United States will exceed 50 percent of the handset market, probably in the fourth quarter.

While last year was the year of the iPad, 2011 qualifies as the year of the tablet with unit sales expected to approach 70 million globally, up from approximately 20 million in 2010.

In fact, in 2011 unit sales of smartphones and tablets will exceed those of PCs, laptops and netbooks for the first time.

At the same time, the U.S. carriers have introduced 4G networks enabling Internet access at much faster speeds with greater bandwidth.

Rich media content, applications and advertising are becoming Web-enabled with the increasingly more widespread adoption of HTML5.

Lastly, the foundation for an even more robust mobile commerce ecosystem is finally underway with a number of important announcements on consumer cloud services and Near Field Communication transaction technologies for mobile purchases.

This confluence of important developments positions 2011 as a pivotal year in the continued untethering of the American consumer where access to content is no longer tied to a specific, generally stationary device.

Further, we are now many steps closer to the emergence of a mobile life replete with rich-media content, advertising and offers reflecting local context and the convenience of information and ecommerce anytime, anywhere through cloud services, QR codes and mobile payments.

More data
There are currently approximately 5.3 billion mobile subscriptions globally (77 percent of the world’s population), up from 4.9 billion at the end of 2009, an 8.2 percent increase, with 73 percent of those in developing countries. Global subscriber statistics are as follows:

As subscriber penetration in the U.S. approaches 100 percent (in most developed countries penetration already exceeds 100 percent) and voice usage continues to decline, wireless carriers increasingly benefit from promoting data and Internet usage particularly as a mitigating and growing source of revenue.

Of course, the introduction of new mobile devices, operating systems and applications by Apple, Google and others opened the floodgates to innovation which contributes immensely to the growth of data and the health of the mobile ecosystem.

Global mobile data traffic in 2010 grew 2.6 times over 2009, nearly tripling for the third consecutive year.

In fact, in 2010 mobile data traffic was three times the size of the entire global Internet in 2000. This rapid growth is attributable to the continued adoption of smartphones and an increasing shift to those devices that have the highest usage profile.

As noted in the chart following, in 2010 the typical smartphone generated 24 times more data traffic than the typical feature phone.

Further, iOS, and Android devices generated four times more usage than the typical smartphone and they represent a growing share of the smartphone market.

In fact, the two operating systems comprised a 38 percent share of the smartphone market in 2010, growing to an estimated 55 percent share in 2011.

Also, as mobile-connected tablets and laptops become more prevalent data usage will increase substantially.

A February 2011 report from Cisco (Global Mobile Data Traffic Forecast Update, 2010 – 2015) predicts that global mobile data traffic will increase 26 times between 2010 and 2015.

Video is killer app in mobile
In 2010, mobile video traffic accounted for just under 50 percent of all mobile data and will likely account for approximately 53 percent of all mobile data traffic in 2011.

In 2010 approximately 25 million U.S. consumers watched video on their mobile devices, up 40 percent from 2009, while time spent watching has increased by 43 minutes per month to four hours and 20 minutes.

Netflix is the largest single source of fixed Internet traffic in North America today, accounting for 30 percent of traffic during prime time and 22 percent of daily Internet traffic.

It is also worth noting that Skype, the video and audio internet communication services company being acquired by Microsoft for $8.5 billion, is used by 170 million people around the globe, while approximately 30 million of them are mobile and 42 percent of those engage in video calls.

Finally, YouTube is currently uploading 48 hours of new video every minute.

Because mobile video content has much higher bit rates than other mobile content types, mobile video will generate much of the mobile traffic growth through 2015.

Of the 6.3 exabytes per month crossing the mobile network by 2015, 4.2 exabytes will be due to video.

The mobile market and mobile video, in particular, appears to be in virtuous cycle of increasing demand satisfied through adoption of new engaging, connected devices, the creation of new content and the emergence of new distribution outlets.

Spectrum as potential bottleneck
As data traffic increases, particularly bandwidth consumptive video and media apps like Netflix, You Tube and others, so does the utilization of spectrum licensed to the carriers for their service requirements. 

Further, as consumers grow accustomed to HD video at home they will increasingly expect HD video on their phone which requires even more bandwidth and, ultimately, dedicated spectrum.

The open question is whether the carriers already own sufficient spectrum, including anticipated efficiencies from the implementation of new technology, or will need more to keep up with demand.

That is the crux of the increasingly vociferous debate raging in Washington and in the boardrooms of the carriers and TV broadcasters today.

The National Broadband Plan (the “Plan”), first released by the Federal Communications Commission in March 2010, set forth a number of initiatives to optimize broadband availability to U.S. consumers and enterprises, including making more spectrum available for the carriers and potential new entrants to satisfy a spectrum “crunch” projected to occur by 2015.

The FCC proposes to obtain some of the spectrum (120mhz of the estimated 500mhz needed) from existing TV stations within the top 30 markets, to be achieved through a voluntary incentive auction process.

In order for the FCC to move forward with its proposal for reallocating spectrum, legislation must be passed by Congress.

Several bills have already been introduced in the Senate, while little action thus far has occurred in the House.

If and when legislation is passed, the FCC will commence a rulemaking proceeding which will take a year or longer, suggesting that incentive auctions will not likely take place, if at all, until late 2013 or 2014.

In the meantime, there are already several new entities formed to acquire underperforming TV stations in the top markets with the idea of selling all or some of their spectrum when/if the auctions take place.

Re-allocating spectrum from existing users is novel and controversial, and both the justification (spectrum shortage by 2015 due to growth in wireless data traffic) and the mechanism (incentive auctions) are the subject of competing studies and rhetoric.

For those interested and with enough free time to wade through the narrative and data coming from interested parties, the Plan, submissions of reports from the CTIA and the NAB and Cisco’s Mobile Data Forecast all make for interesting reading.

HTML5: Mobile Internet savior or alphabet soup?
HTML (hypertext markup language) is the “language” underlying every Webpage on the Internet and converts the Web to traditional or offline engagement formats.

HTML is basically a set of instructions that a Web site delivers to a browser which the browser then reads and converts to what we see, hear and experience on the Internet.

The last major HTML standard, version 4.01, was published in 1999 and HTML5 is the next revision being adopted currently.

This revision is significant and introduces a number of new attributes that update the functioning of the World Wide Web so that fewer software plug-ins and APIs are required.  The impact is a more efficient and richer Internet experience.

John Herrman, contributing to gizmodo.com, wrote that “HTML5 is a standard with an optimistic view of the future: you launch your browser and, whatever Web site you visit, whatever media you chose to play, your browser just magically supports it, without the frustration, confusion and added instabilityof a plug-in.”

HTML5 is particularly significant for mobile users as it makes Webpages, including images, video and audio, portable across devices, platforms or operating systems and form factors.

Broadly, four main areas are receiving significant upgrades – canvas, video, geolocation and offline Web applications – and all enhance the mobile experience particularly.

While developers and marketers have focused on apps these last several years, resulting in 10 billion downloaded to date, most estimate that by 2013, as HTML5 is broadly implemented, substantially all of the important differentiating attributes native to a particular device will be accessible through HTML5 Web applications.

This will reduce the cost and complexity of creating and updating unique applications for individual handsets and platforms, resulting in greater consistency of brand presentation and a substantially more engaging internet experience.

As traditional Web content discovery is transformed by mobile consumers, publishers are confronted with the need to optimize both online and mobile Web sites.

In fact, the more successful a publisher is in implementing its social and search strategies the more likely its content will be discovered from a mobile device. For example, Twitter has approximately 125 million mobile users and 40 percent of all tweets are mobile-originated, while Facebook has 250 million mobile users.

One source has estimated that more than 40 billion links are discovered monthly via mobile devices and many of these Web pages are not as yet optimized for mobile browsers.

Mobile commerce
A mega-scale opportunity, mobile commerce has received a lot of attention recently with important announcements from Google (in conjunction with Mastercard) and Visa.

Both parties revealed competing and separate initiatives around the “digital wallet” and more, using NFC technologies. Both expect to test their systems and roll-out in select markets in the fall.

Apple just announced its free iCloud service and is widely rumored to be close to making public a mobile payment solution.

In Apple’s case, more than 200 million consumers have already registered their credit card details with Apple through the iTunes store, positioning Apple as the company with the most credit card-backed accounts on the Internet.

Amazon is also rumored to be testing a NFC platform and earlier this year launched Appstore for Android and Cloud Drive.

Amazon already enables a patented one-click purchase online and is recognized for its skills in merchandizing and personal recommendations.

Amazon also offers 15 million-plus songs in its MP3 store, 850,000-plus ebooks and is estimated to have sold approximately 8 million Kindles in 2010.

Further, it is estimated that Amazon has more than 139 million credit cards on file.

In addition, eBay, through PayPal, already offers a mobile payments solution where mobile transaction volume has grown from $140 million in 2009 to $750 million in 2010 with an anticipated $2 billion in 2011.

Further, eBay has stated publicly that it expects $4 billion of mobile gross merchandise volume in 2011, a doubling from 2010.

It is Google’s intention to enable all devices running the Android OS to be capable of transmitting payments, obtaining loyalty information and receiving relevant and engaging location-based advertisements and coupons.

Further, Google predicts that by 2014 more than 50 percent of all smartphones will include NFC technology.

It is worth noting that approximately 5 percent of paid search spending in the U.S. is now in mobile, with substantially all of that accruing to Google.

In addition, Google has stated publicly that approximately 15 percent of all searches are mobile and that 33 percent to 40 percent of all mobile searches are local.

All of these initiatives to facilitate commerce in the mobile market bring retailers, publishers, marketers and the consumer one step closer to mobile’s ultimate promise: delivering the right message to the right person at the right time with the right incentive to influence a transaction at a specific location and tracking this data, including the purchase, so as to calculate ROI.  

Looking ahead
Mobile connected devices are rapidly and profoundly changing the way that we consume content and conduct commerce.

Moreover, the data generated by our consumptive behavior while using these devices increasingly affords media companies, advertisers and marketers opportunities to effectively target content, ads and offers to specific individuals at specific times, locations and even after certain behavior.

Given the ubiquity of wireless, increasing functionality and speed of connected devices and networks, ramping of mobile commerce through cloud services and mobile payments, and continued innovation in advertising technology for mobile, growth in the consumption of media, content and products on mobile will continue to ramp with advertising spend migrating in hot pursuit.

This year is proving to be a pivotal year in mobile. The foundation is secure and many of the key building blocks for future success are now being laid.

The consumer trends towards the untethered consumption of information and entertainment are profound and persistent.

These continued shifts in consumer behavior combined with steady technological innovations in content, connected devices, commerce and tools will result in even more dramatic growth in the mobile marketplace and make the next several years in mobile both challenging and rewarding.

Colin Knudsen is managing director at Coady Diemar Partners, a New York-based investment banking firm. Reach him at [email protected].