85
Convergence markets:
Digital economy and structural change
August 4, 2011
Smartphones and triple play continue to erode sector
boundaries
Convergence being driven by omnipresence of internet. Over the past
few years the convergence of the information technology, telecommunications,
consumer electronics and media sectors has gathered pace. Given wider
availability of fast internet connections – both fixed-line and mobile solutions – it is
becoming increasingly convenient to call up online services on various webenabled end-user devices such as TVs, smartphones and tablet PCs.
Stiff competition across sector boundaries. Companies that originally
operated in discrete industries are now fiercely competing with one another for
market shares in areas such as broadband infrastructure and smartphones. In
addition, the market for end-user devices is marked by high innovation rates, with
a stable distribution of the market shares nowhere on the horizon.
Makers of standard consumer electronics products are losing market
share. Since smartphones are mutating into all-rounders and integrating, say,
MP3 players and digital cameras without any drop in quality, makers of standard
products are condemned to seeing their market shares dwindle. The ―losers‖ thus
need to rise to the challenge of finding strategic solutions, e.g. by scaling their
products towards the higher end of the line.
Impetus for mobile internet use and services. Going forward,
smartphones and tablets are set to become part of everyday life. For this reason,
consumers will expect companies to offer mobile solutions for online services, too.
Such services will have to appeal to users and deliver real value added if they are
to hold their own in the surge of new applications flooding the market. Apps may
generate income in the publishing sector, but they are not a panacea for the
latter‘s revenue problems.
Separation of content from physical media gathering pace. The rising
Author
Antje Stobbe
+49 69 910-31847
antje.stobbe@db.com
Editor
Stefan Heng
number of households with broadband, the convergence of internet and TV as well
as the growing use of appealing mobile end-user devices will boost on-demand
consumption of music, videos, news, games and books – at the expense of their
physical sale and rental.
Smartphone sales to hit
10 million in 2011
Mobile internet popular
Use of mobile phones in Germany for
wireless web access (2010, %)
Unit sales (million), DE
12
Technical Assistant
Sabine Kaiser
All age groups
10
Deutsche Bank Research
Frankfurt am Main
Germany
Internet: www.dbresearch.com
E-mail: marketing.dbr@db.com
Fax: +49 69 910-31877
16-24
8
25-34
6
35-44
4
45-54
55-64
2
Managing Director
Thomas Mayer
0
2008
2009
2010
2011
Sources: EITO, IDATE, 2010
Over 65
0
10
20
Sources: German Federal Statistical Office,
DB Research
30
85
20
In recent years, more efficient infrastructures and technological
innovations at the end-user level have triggered an appreciable
change in the way people use the internet. Mobile internet use via
smartphones and tablet PCs as well as access to the worldwide web
via TV will shape user habits substantially going forward. Today,
more and more end-user devices are internet-enabled: not only
mobile phones and TVs, but also game consoles, radios and MP3
players. Experts suggest that in the near future a network
connection – either wireless or fixed-line – may be standard
1
equipment on most consumer electronics devices. Networked
devices offer additional functionalities and services, enabling
consumers to use them in new situations: banking via mobile phone,
searching for products online while watching TV shows, or reading
newspapers and books on an iPad are only a few examples. This
gives companies new ways of reaching their clients: additional
services can supplement current services via existing channels (e.g.
submitting damage reports via an app) or tap new revenue models
(news apps), but also pose a threat to existing distribution channels.
This report analyses the current state of the technological change
and points to the implications for the consumer electronics,
information and communications technology (ICT) markets as well
as for service providers.
15
What is convergence?
10
Over the past few years the markets for information technology,
telecommunications, consumer electronics and media have
increasingly grown together, and in many areas they have become
virtually inseparable. This holds for example in the area of
telephony, where 3.8 m Voice over IP (VoIP) connections (as of
2009) document this technology‘s emergence as a serious rival to
conventional telephone operations. This growing together of the
telecommunications, information technology, consumer electronics
and media sectors, which originally operated largely independently
of one another, is referred to as convergence. A certain amount of
differentiation is called for, however: convergence can take place at
different levels, i.e. at the level of the infrastructure, end-user
2
devices and/or services. We define convergence as a process of
qualitative change that connects two or more existing, previously
discrete markets. The driving force behind this phenomenon is
predominantly the refinement of one technology or the integration of
various technologies, enabling infrastructures, end-user devices or
services to acquire new functionality. Another important source of
market convergence is the change in product features resulting from
new technologies.
Germany remains DSL
territory
Million connections
30
25
5
0
01 02 03 04 05 06 07 08 09 10*
DSL
Wireless broadband access, FTTx, cable
modem, powerline, satellite etc.
* Estimate
Sources: German Federal Network Agency,
DB Research 2010
1
Buoyed by higher-performance infrastructure and
appealing end-user devices
One key prerequisite for convergence is the full digitisation of
networks and end-user devices. Digitisation of end-user devices is
already well on its way: in 2009 some 95% of the consumer
3
electronics products on the market were digital. Furthermore, the
expansion of broadband infrastructure plays a key role in the spread
1
2
3
2
See Schidlack, Michael, Klaus Böhm, Benjamin Libor and Gregor Schmidt (2010).
Die Zukunft der digitalen Consumer Electronics – 2010. BITKOM, p. 4.
For more on this subject and further details on definitions, see Stobbe, Antje and
Tobias Just (2006). IT, telecoms & New Media: The dawn of technological
convergence. Deutsche Bank Research. E-conomics 56. Frankfurt am Main.
See Schidlack, Michael, Klaus Böhm, Benjamin Libor and Gregor Schmidt (2010).
Die Zukunft der digitalen Consumer Electronics – 2010. BITKOM, p. 6.
August 4, 2011
Convergence markets: Smartphones and triple play continue to erode sector boundaries
of attractive services in both fixed-line and mobile internet solutions.
In Germany, close to 27 million households (approx. two-thirds of
the total) had broadband in 2010 (see chart 1), with nearly 90% of
them equipped with DSL technology. The second most important
technology is internet access via cable-TV modem (3 million
connections at the start of 2010). This segment is witnessing
unbroken strong growth. The share of fast fibre-optic connections (at
least 50 Mbit/s) totalled barely 1% of all households (approx.
255,000) at end-2010. More than half of the households are still
surfing at much lower transmission rates of some 6 Mbit/s at the
maximum (see chart 2). The sharp climb in the volume of data
transmitted (see chart 3), driven by data-intensive applications such
as video on demand (VoD), underscores the necessity of further
expanding the telecommunications infrastructure.
High-speed internet not yet
common
DSL connections by downstream bandwidth (%)
0.9
7.0
13.8
39.6
38.7
Over 50 Mbit/s
16 to 50 Mbit/s
6 to 16 Mbit/s
2 to 6 Mbit/s
To 2 Mbit/s
2
Source: DIALOG CONSULT/VATM, 2010
Demand for broadband
services growing
Volume of broadband traffic, bn gigabytes
3
2
1
0
01 02 03 04 05 06 07* 08* 09e
*Updated values
Source: German Federal Network Agency, 2010
3
Smartphone sales to hit
10 million in 2011
Unit sales (million), DE
12
10
8
Over the last two years, the mobile internet has gained much
greater acceptance, meaning that the momentum of convergence
has also gathered pace at the mobile level. The trigger was the
boom in smartphones, which represented the growth market of 2010
– at the expense of conventional mobile phones. The European
Information Technology Observatory (EITO) estimates that
smartphone sales were up by 33% on the previous year to 7.2
million units in Germany in 2010; in value terms, turnover totalled
EUR 1.6 bn (+23%). For 2011, EITO forecasts that sales will
4
surpass the 10 million unit threshold (see chart 4). On a
conservative estimate, probably about 20% of all Germans now own
5
a smartphone. Today, smartphones are the most important
convergent end-user device: ―users are seeking – and finding –
6
experiences that are intuitive, seamless, and fun.‖
In general, smartphones illustrate the advances being made on enduser devices: over the past few years they have become easier to
operate, smaller and more powerful. Besides, today they have better
displays and perform a larger range of functions. This is driven by
the trend towards miniaturisation, i.e. the steady reduction in the
size of components for technical equipment to boost not only
performance and speed, but also to reduce weight and energy
requirements, some examples being storage chips, GPS receivers
and batteries. However, there are limits to this development if it
restricts the functionality of the devices. Take, for example, the size
of keypads or displays. The new smartphones attempt to mitigate
this restriction by combining a larger display with a touchscreen and
improving operability, enabled not least by more intuitive user
navigation.
The high-performance end-user devices can increasingly build on
high-speed infrastructure, so users are able to enjoy the easy
operation of sophisticated mobile services. Various estimates say
that in H1 2010 about 70% of the locations offering mobile/wireless
network access were equipped with 3G technology (UMTS or
7
HSDPA). However, there are very substantial differences in the
4
6
4
5
2
0
2008
2009
2010
August 4, 2011
7
2011
Sources: EITO, IDATE, 2010
6
4
See BITKOM (2010). Smartphone-Absatz 2011 über der 10-Millionen-Marke.
Press release. November 10, 2010. This suggests that 1 in 3 new mobile phones
sold will be a smartphone. Unit sales of mobile phones are set to hit 28.4 million
(+6% yoy) in 2011.
The estimates of smartphone numbers in Germany vary quite considerably
depending on source and definition. They range from 40% to 60% for internetenabled mobile phones and from 20% to 40% for smartphones.
IDC Press Release, May 7, 2010.
For German statistics see http://www.hsdpa-umtsverfuegbarkeit.de/blog/2010/07/07/halbjahresbericht-2010-zur-umtsverfuegbarkeit-70-netzabdeckung-erreicht/. Accessed on May 26, 2011. Availability
3
85
Data volume increasing
exponentially
Wireless data volume, m gigabytes
70.0
70
60
50
40
33.5
30
20
11.5
2005
10
0.8
0.2
2006
3.5
0
2007 2008 2009e 2010e
Sources: German Federal Network Agency,
EITO, 2010
5
ICT & consumer electronics:
EUR 715 bn turnover in
Europe
Revenue breakdown, 2011
Consumer
electronics
8%
IT
44%
Telecommunications
48%
Source: EITO, 2010
6
German ICT market
returning to growth
EUR bn (left), % yoy (right)
160
140
120
100
1.4
0.7
2.0
80
60
-4.8
40
20
0
2008
2009
2010
5
4
3
2
1
0
-1
-2
-3
-4
-5
2011
Telecommunications
IT
Digital consumer electronics
% growth
Sources: BITKOM, EITO, PAC, IDATE, IDC, 2010
7
level of coverage depending on operator and region. So far, supply
has tended to be poorer in rural areas. But they are currently likely
th
to benefit from the rollout of 4 generation mobile infrastructure
(long-term evolution, LTE) to unserved areas, which various
providers say is to be completed by the end of 2011.
The volume of data transmitted via mobile phones has also jumped
8
in recent years (see chart 5). Cheaper tariffs and the increasing use
9
of flatrates for the mobile internet have played their part. The
popularity of mobile, internet-enabled end-user devices and complex
applications that require more bandwidth (e.g. games, videos) will
lead to a greater burden on network capacities in future. Therefore,
there will need to be further investment in network expansion over
the next few years in order to meet users‘ increasing demands for
high-speed transmission rates and problem-free service. According
to estimates from the industry trade association BITKOM, the
expansion of the mobile telephony network with LTE alone will
require investment totalling EUR 8-10 bn up to 2015.
ICT market has overcome the crisis
The convergence of the markets for IT, telecommunications,
consumer electronics and media paves the way for companies to
tap new customer markets. However, this also represents a threat to
established products, as numerous examples from the CD to the
DVD right through to print products show. Convergence gains its
significance not only from the size of the affected sectors, but also
from the – in some cases – rapid growth of individual segments
along with the related structural changes. These may quickly
devalue existing products and business models. Therefore,
companies struggling to retain market shares need to assume the
role of the innovation leader or at least be among the early
followers.
The IT, telecoms and consumer electronics sectors are
heavyweights in Europe. Combined, these sectors will probably
generate total revenues of roughly EUR 715 bn in 2011 (see chart
6). In Germany alone the figure is EUR 145 bn. Thus the sectors
taken together are just as large as the chemicals industry in
Germany. The German ICT market was also among the sectors that
had to cope with losses in the 2008/09 economic slump, but since
2010 it has returned to growth (see chart 7). In this respect, crisisrelated and fundamental structural effects have overlapped over the
past few years. However, the trend towards mobile, networked and
IP-based modes of living, working and communicating is emerging
clearly in the business development of vendors and service
providers:
— The IT hardware segment accounted for close to 30% of total
ICT revenues in 2010, and did not perform nearly as well as the
software and services segments over the past few years.
However, mobile computer devices are currently registering
strong growth; unit sales of notebooks, netbooks and tablet PCs
rose by 16% in 2010, to 9.5 million. Tablet PCs are particular
customer favourites: BITKOM estimates that about 450,000
8
9
4
increased by 3 percentage points over H2 2009. The evaluation is based on
160,000 locations in Germany equipped for mobile telephony.
This includes all mobile end-user devices, such as smartphones, laptops and
netbooks.
Tomorrow Focus Media has found that 58.5% of those surveyed already have a
flatrate for mobile internet use. See Tomorrow Focus Media (2011). Mobile Effects
– wie geht die mobile Reise in 2011 weiter?
August 4, 2011
Convergence markets: Smartphones and triple play continue to erode sector boundaries
tablets were sold in Germany last year. For 2011 the association
forecasts that unit sales will reach 1.5 million. Therefore, apart
from smartphones, tablet PCs will probably become the most
important driver of mobile internet use and of convergence for
end-user devices and services in this segment.
Data services march ahead
Share of non-voice revenues in wireless
turnover, DE, %
30
12.7
12.3
25
— In Germany‘s telecommunications market about 85% of revenue
20
is generated by network services, primarily telephony and data
services. In this context, mobile communication has gained
considerable significance in recent years: the share of revenue
generated by mobile telephony increased from 22% in 1998 to
10
about 40% in 2010. Furthermore, over the past five years data
services have claimed an ever larger share of mobile turnover.
More than half of non-voice revenue was generated by mobile
data services in 2010 (see chart 8). In fact, according to
estimates from VATM, the Association of Telecommunications
and Value-Added Service Providers, the data volume is likely to
have tripled in 2010 vis-à-vis 2009. Lower end-consumer prices
and the increasing spread of data flatrates are reasons for the
11
difference to revenue growth. In spite of the unfavourable price
development, data services revenues are probably going to
increase further for the telecommunications companies in future
and assume a key role in a market where revenues as a whole
are shrinking.
11.9
13.1
15
13.8
14.4
10
8.9
6.0
3.3
15.9
11.9 13.9
5
0
05
06
07
Data
08
09
MMS
10*
SMS
*Estimate
Source: DIALOG CONSULT/VATM, 2010
8
Consumer electronics:
Stable revenues
DE, EUR bn
14
12
10
8
6
4
2
0
2007
2008
2009
2010 2011e
Source: EITO, 2010
9
Prices falling
Retail sales of consumer electronics,
incl. VAT (% yoy)
0
— Consumer electronics revenues have been flat on average over
the past few years (see chart 9). Fundamentally, the sector has
to get to grips with the price deterioration dilemma (see chart 10).
Consumer willingness to pay for services is generally higher for
innovative products. However, short innovation and product life
cycles rapidly erode any pricing latitude. In recent years, the
digitisation of products and the integration of microprocessors
and storage chips have subjected the market to a high rate of
innovation and rapid changes. BITKOM estimates that over 80%
of the industry‘s turnover in 2009 was generated on products that
12
did not exist a mere 10 years ago. Innovative products such as
smartphones are repeatedly sweeping the market and devaluing
existing technologies and products (disruptive technology,
product substitution). Market shares can therefore change
sharply within a foreseeable period.
Moreover, there is evidence of so-called ―technology preservation
strategies‖ in the market: this means that vendors upgrade their
products along the lines of established performance criteria by
integrating new technologies. It is precisely the many product
areas with a high degree of household penetration, such as TVs,
where new generations of equipment are being rolled out that,
unlike the existing appliances, offer higher-grade technology and
extended functionalities (e.g. flat-screen TVs that support hybrid
TV). These devices enable the use of new, convergent services.
-2
-4
-6
-8
00
02
04
06
08
10
Source: German Federal Statistical Office
10
10
11
12
August 4, 2011
See Dialog Consult / VATM (2010). 12. gemeinsame TK-Marktanalyse 2010, p. 5.
See VATM (2010). VATM and Dialog Consult unveil report on telecommunications
market in 2010. Press release, October 7, 2010.
See Schidlack, Michael, Klaus Böhm, Benjamin Libor and Gregor Schmidt (2010).
Die Zukunft der digitalen Consumer Electronics – 2010. BITKOM, p. 6.
5
85
TVs and cameras claim largest market shares
TV and mobile phone have
greatest penetration
Revenues (% of total), 2009
Share found in private households,
DE, 2009 (%)
MP3 / MPEG4
player
4.0
TV (all types)
Digital set-top
boxes
Digital
4.0
recording
media
5.1
Mobile phone
CD player
PC
Digital camera
Car navigation
Game
systems
consoles
5.6
6.1
Desktop PC
Mobile PC
MP3 player
Navigation device
Other
13.7
TVs
47.9
Digital
cameras
13.7
Source: EITO, 2010
12
Flat-screen TV
Game console
Convergence markets – where do we stand today?
0
25
50
75
100
Source: Destatis
11
Companies come from different
sectors
In converging markets it is difficult to demarcate sectors. Today, a
smartphone is a telephone, music and video player as well as a
navigation device all in one, besides offering internet access.
Converging markets are often served concomitantly by established
companies from several concerned sectors with differing roots. The
biggest providers in the European smartphone market now come
from the sectors for IT end-user devices, telecoms end-user devices
and IT services. Moreover, convergence markets are marked by the
fact that knowledge leads are rapidly eroded and competition is very
intense. The makers of end-user devices and service providers are
much more exposed to this trend than the infrastructure providers,
since sunk costs in infrastructure act as barriers to market entry.
Over the past five years since we published our first report on
13
convergence markets there has been progress in the convergence
process at all levels (infrastructure, end-user devices and services)
– albeit at differing paces.
Convergence market of triple play: Slowly making inroads
Triple play: Major investment
required
Triple play, i.e. the provision of television, telephone and internet
services across a common infrastructure based on IP protocol, is
slowly making advances in Germany. As the development of the
past five years shows, this requires heavy investment in
infrastructure and cooperative ventures. The telephone companies
and cable operators in particular compete head-on in this field.
The cable operators have created the technical prerequisites over
the past few years to enable them to offer triple play functionality. To
do so they have invested huge sums in the upgrading of the cableTV network in order to digitise the network and set up reverse
channel capability. At present, 24 million households are equipped
for this service. The number of contracts signed is much smaller,
though: in early 2011 a total of 3 million households used the cableTV network for internet access; a similar number used it for
14
telephone calls. Despite the currently still limited customer base,
the cable operators are a major challenger for Deutsche Telekom
AG (DTAG) nonetheless since they have recorded high newcustomer growth in the broadband internet segment. According to
13
14
6
See Stobbe, Antje and Tobias Just (2006). IT, telecoms & New Media: The dawn of
technological convergence. Deutsche Bank Research. E-conomics 56. Frankfurt
am Main.
See ANGA (2011). Das deutsche Breibandkabel. Infrastruktur der Zukunft.
August 4, 2011
Convergence markets: Smartphones and triple play continue to erode sector boundaries
ANGA, the Association of German Cable Operators, these
companies claimed nearly 40% of the market for new customers in
2010. As offered by the cable network providers, triple play is
frequently not only more appealing to customers on price, but is also
associated with relatively low technical hurdles. Besides, the
consumers hardly have to change their media consumption patterns
at all.
Moving images popular on
the internet
Video downloads, at least occasionally,
DE, 2010 (%)
Video (total)
Video portals
Time-shift TV
Live TV on the
internet
0
25
50
All age groups
75
100
14-19
Source: ARD/ZDF-Onlinestudie, 2010
13
Nonetheless, the cable operators are also being confronted with
new competitors in their traditional market, television. Offers such as
web TV (see chart 14), VoD and the growing use of video platforms
such as YouTube and MyVideo (see chart 13) are bringing about a
fundamental change in the market situation and are likely to further
reduce the effective range of conventional TV programming going
forward. Even if the users do not forgo a cable connection, there is
―in-house competition‖ for the most attractive content offers. Users
are increasingly watching TV content directly on the internet and
15
thus circumventing all ―real‖ TV infrastructure. TV and video offers
via mobile phone are set to join the fray, further intensifying the
battle for users‘ attention. For this reason, the cable operators intend
to establish innovative (digital) TV services in future, too. These
include, for example, home entertainment such as VoD or interactive
TV.
Convergence of internet and television
IPTV
Closed network (Ecosystem)
Web TV
Open internet
Hybrid TV
TV
Internet
Platform
Platform
Platform
Consumer
Consumer
Consumer
Content received and sent via
broadband connection
End-user device: PC
TV programme and additional
services transmitted via broadband
End-user device: TV
= Access to content
= Reception of content
Broadband internet and TV are
combined
End-user device: TV
Source: Deloitte, 2010
14
In developing these offers, the cable operators are also attempting
to position themselves for the increasing competition with telecoms
providers in the video segment. Several telecoms providers have
upgraded their product and now provide linear TV programming via
closed internet platforms (referred to as IPTV, see chart 14). In
addition they are offering VoD, an archive of shows from selected
broadcasters and further additional services such as time-shift TV.
IPTV, whose market debut was about five years ago (Alice TV was
launched in May 2006), is only slowly gathering pace in the German
15
August 4, 2011
See von Wichert-Nick, Dorothea (2010). Wirtschaftsfaktor Kabel. Solon
Management Consulting, p. 26.
7
85
IPTV slowly making inroads
IPTV households (million), DE
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2008 2009 2010 2011 2012 2013
Source: PwC, 2010
15
market, though. It is estimated that there were roughly 1 ½ million
subscribers to IPTV at the end of 2010. One reason for the rather
sluggish start is an issue of requisite infrastructure: the customer
requires a fast internet connection in order to use IPTV in high
16
quality or high-definition (HD) mode. In 2010, only 8% of all
households had connections with a data transfer rate of more than
16 Mbit/s in the first place. Market forecasters are optimistic about
the further take-up of IPTV. PwC, for instance, expects there to be
17
2.5 million IPTV households in 2013 (see chart 15). What this boils
down to, however, is that IPTV is still gaining market share at a
much slower pace than cable operators‘ triple play offers.
Cable operators and telecoms providers have fleshed out their
product in various areas and are now offering customers similar
packages of services. In a largely fragmented market, competition is
generally fought on price and content. As media consumption
becomes more geared towards on-demand selection, independent
of linear TV programming (trend towards non-linear media
consumption), and the importance of video platforms increases, the
providers will find themselves facing further competitors in the
content segment.
Convergence market of VoIP: Greater acceptance
VoIP providers gaining market shares
So far, triple play has only been made available by a few providers
and it has spread rather slowly. By contrast, internet telephony
(voice over IP, VoIP) already enjoys much greater acceptance. VoIP
is based on the principle of speech being converted into data
packets for transport across an IP network. In 2009, the providers of
the 38.9 million telephone connections in Germany made VoIP
available to roughly 10% (3.8 million) of them via unbundled DSL.
Virtually all of these connections are offered by DTAG‘s
18
competitors. There are also another 3 million connections via the
cable-TV network that are used for voice telephony. Furthermore,
special providers of VoIP, such as Skype, are continuing to slice into
the market shares of the market leader, e.g. in the area of longdistance calls abroad. The company says that 12% of all calls
19
abroad are now made via Skype. Going forward, the specialised
provider is poised to challenge the telephone companies for ―voice‖
business not only in the fixed-line but also in the mobile segment.
Flatrates continuing to make inroads
The significance of the conventional telephone connection is likely to
take a hit also from the growing use of flatrates for mobile voice
telephony. Roughly 50% of total voice minutes in Q1 2009 were
already billed on a flatrate basis. This is likely to reduce the
importance of home-zone tariffs, too. Some experts expect that the
higher performance capability of mobile networks following the
expansion of LTE will result in households doing away completely
with their fixed-line connection and subsequently phoning or
20
accessing the internet solely via the mobile network. What argues
16
17
18
19
20
8
HDTV is currently offered from a downstream rate of 16 Mbit/s; standard TV quality
is available starting at 6 Mbit/s.
See PwC (2010). German entertainment and media outlook: 2010-2014, p. 64. In
fact, Detecon even expects 5 million IPTV customers by this juncture. See
Detecon Consulting (2009). Mehr als 5 Millionen IPTV-Kunden in 2013. Press
release. February 25. 2009.
See German Federal Network Agency (2010). Annual Report 2009.
See ―Skype-Chef: ‗Deutsche Netzbetreiber behindern das mobile Internet.‘‖
February 26, 2010. FAZ-Blogs, Netzökonom. http://fazcommunity.faz.net/blogs/netzkonom/archive/2010/02/26/netzbetreiber-duerfenihren-kunden-nicht-vorschreiben-wofuer-sie-ihr-handy-nutzen.aspx. Accessed on
26.5.2011.
See PwC (2010). German entertainment and media outlook: 2010-2014, p. 34.
August 4, 2011
Convergence markets: Smartphones and triple play continue to erode sector boundaries
against this, though, is that in densely populated areas, for instance,
the data transfer rate declines at peak times, thus reducing the
appeal of mobile surfing. Moreover, fixed-line telephony is probably
going to retain its standing in the household as a product bundled
together with TV reception.
End-user devices as convergence driver: Hybrid TV
Internet enters the living room
The topic of hybrid TV focuses on the marriage of internet and
television, too. In this case, the convergence drive is being initiated
by manufacturers of end-user devices. Makers of TVs in particular
are intent on distinguishing their products from those of the
competition by offering internet capability in connection with content.
Hybrid TV is the term used to describe the combination of television
and set-top box which, apart from receiving TV fare, also pipes the
internet into the living room. The reverse channel capability of hybrid
TV paves the way for interactive offers, e.g. in the areas of
21
communication/product information, e-commerce and advertising ,
thus enabling the provider to tap new sources of revenue.
Hybrid TV driven by the
manufacturers
The functionality of hybrid TV will gradually be established in the
market by equipment suppliers when consumers need to replace
their TVs. According to a survey conducted by GfK, a market
research company, about 1.2 m web-enabled TVs were sold
between the March 2009 market launch and mid-2010. They
22
account for over one-third of revenues in the flat-screen segment.
However, the households that have already purchased a flat-screen
TV over the past few years will also need to be won over to hybrid
TV. This is nearly half of all German households, no less. They
would have to buy a (further) set-top box if they wished to use hybrid
TV.
TV suited for presentation of other
content
For the media consumer the new offer is most certainly of interest
since it allows the integration of TV and internet services. Television
is well established in the household. It can easily be used for further
applications from the internet, such as video downloads or games.
At the same time it is also suitable for online infotainment, such as
news or sport, as well as for personal multimedia content. According
to a BITKOM survey, nearly 50% of those approached said they
would be keen on their television offering additional options, such as
downloading films from the internet or surfing. In the 14-29 age
23
group the share totalled no less than 94%.
With this offer, the makers of hybrid TVs change their business
model: they become portal providers and thus extend their value
chain. This builds them a lasting relationship with the end-customer,
and also makes them service providers. For product makers,
offering content is a step into unknown territory. They are faced with
the challenge of having to collaborate with a large number of content
providers and aggregators to be able to create an attractive offer for
users at an early stage. This is likely to be a major purchase
criterion for the end-user device.
21
22
23
August 4, 2011
Products seen on TV programmes may be viewed and ordered. If the ―red button‖
symbol appears on the TV screen, the viewer is able to call up a URL that leads to
a website with the respective information.
See BITKOM (2010). Hybrid-TV wird zum Senkrechtstarter. Press release, July 29,
2010. http://www.bitkom.org/de/themen/54918_64709.aspx.
However, it is interesting to note that many consumers are apparently not aware of
the additional functionality of the TV and do not use it. A BITKOM survey in mid2010 found that only 4% of the respondents said they owned a TV with hybrid
functionality; 25% of them, no less, said they planned to purchase such a TV. See
BITKOM (2010). Survey on consumer electronics, p. 13.
See BITKOM (2010). Survey on consumer electronics, p. 11.
9
85
Apps – the new hype
Apps (from ―applications‖) are small user
programs for smartphones and tablet PCs.
Content-wise, they range from media
offerings, games, tools and augmented-reality
simulations right through to healthcare
applications – there is a long list of possible
examples and it continues to show dynamic
growth. The spread of apps has gathered
pace with the market launch of the various
generations of iPhone. The Apple app store
has established itself as the market leader for
now: the 10 bn downloads and 300,000 apps
thresholds were reached in only 2 ½ years.
One caveat bears noting, however: a small
number of apps are used heavily, but there is
also a notable long tail, i.e. a sizeable number
of seldom used apps. Apart from Apple, other
app stores have also set up shop, e.g. those
of Android and Microsoft.
The advance of apps is not entirely
uncontroversial, however. For one thing, the
ecosystems of the app stores have come
under fire because they contradict the
philosophy of the open internet and with their
specific programming requirements raise
costs for providers. For another thing, apps
will probably face competition from free offers
that are to be found on the mobile internet.
Current empirical analyses show that, even on
the iPhone, browser use still accounts for a
large share of total time on the mobile
internet. One-third of all users say they use no
apps whatsoever; nearly half spend 50% of
their time with apps at most.*
* See Tomorrow Focus Media (2011). Mobile Effects – wie
geht die mobile Reise in 2011 weiter? p. 16.
Quality makes a difference
"Which functions on your mobile do you
not use because you consider the [...]
quality of a different device to be superior?"
(%)
Digital camera
40
E-mail
35
MP3 player
33
Internet
30
Videos
25
GPS
20
0
10
20
30
Source: Deloitte, 2010
40
16
For the online content providers of, say, videos, games or news,
hybrid TV is a chance to gain direct access to living rooms and thus
increase their reach. Ideally, this boosts their attractiveness for
advertisers and their revenue potential. So far, though, no mature
revenue models have taken root. For broadcasters, hybrid TV
represents both an opportunity and a risk. On the one hand, the TV
is upgraded as a means to access the media world. Going forward,
the media consumer will be able to tap directly into offers from
media providers and the internet that are complementary to TV. This
will give conventional television a shot in the arm. But, on the other
hand, there will also be increased competition for the available
online content that the media consumer will put together as desired.
Content providers will need to hold their own in the face of
intensifying competition, and offer users appealing content and
formats.
End-user devices as convergence driver: Smartphones
Like in the hybrid TV segment, end-user devices are the primary
drivers of the convergence process in the mobile internet sphere,
too. This is already obvious today with smartphones. With tablets, by
contrast, the PC makers are only just starting to ring the changes.
One thing is clear: ―The [mobile] phone market is fast becoming
24
synonymous with the smartphone market.‖ Nonetheless, the
market is still far from being in a state of stable equilibrium. The
introduction of the latest generations of iPhone has boosted the
smartphone market onto a steep trajectory. However, rival makers
are hot on the heels of the market leader, so there is bound to be a
further shifting of market shares in future. One thing that the growing
popularity of smartphones is radically changing thanks to
substitution relationships is the landscape for end-user devices.
Another is a quantum leap in terms of services.
The increasing diffusion of smartphones comes at the expense of
other end-user devices from the consumer electronics and
conventional telecommunications segments. Progress on the
integration of various technologies in one single end-user device
and improved handling concepts enable functions from a range of
devices to be integrated into the smartphone – with the quality
criterion for everyday use largely satisfactory. These include, for
example, the PDA, MP3 player, digital camera, digital camcorder
and mobile sat-nav unit. Stand-alone products that allow simple
integration with no loss of quality are showing corresponding
declines in unit sales.
— This is patently obvious taking the examples of the MP3 and the
MPEG4 player. Since turnover of these devices fell by about 11%
yoy in both 2008 and 2009, EITO estimates that the decline
probably even exceeded 20% in 2010.
— Unit sales of navigation devices pointed south in the last two
years (-15% yoy in 2010). In combination with persistent,
profound price erosion, revenues declined by a double-digit
percentage over the past few years. Owing to the trend towards
all-in-one devices, this segment is also likely to remain under
pressure. Some of the new smartphones can also be used as a
car navigation device given added software and a proper holder.
— With digital cameras, by contrast, the effect is not clear. While
sales revenues were down by 8% yoy in both 2008 and 2009,
24
10
See Fogg, Ian (2010). Mobile World Congress 2010. Smartphones are the new
phones. Forrester Research Inc.
August 4, 2011
Convergence markets: Smartphones and triple play continue to erode sector boundaries
25
there was a slight upturn of just over 1% in 2010. This is
probably due to the interplay of several developments. On the
one hand, many consumers are satisfied with the quality of
smartphone cameras. This hurts prices and unit sales in the
market segment for products of comparable quality. On the other
hand, there is a trend towards higher-quality products for
customers with more exclusive tastes (see chart 16). This is the
route camera makers are taking in efforts to at least partly offset
substitution effects in the lower market segment.
Growth market: Mobile
games
Market volume, EUR m
90
80
70
60
50
40
30
20
10
0
2005 2007 2009 2011 2013
30
25
20
15
10
5
0
Expenditure, EUR m (left)
% yoy (right)
Source: PwC, 2010
17
Mobile internet popular
Use of mobile phones in Germany for
wireless web access (2010, %)
All age groups
16-24
25-34
35-44
Landing new services
45-54
55-64
Over 65
0
10
20
30
Sources: German Federal Statistical Office,
DB Research
18
Searches, communication
and news top the list
Top ten of the offers/content regularly
used by men on smartphone
Search engines
67
E-mails/chat
59
Weather report
59
News
57
Reference material
47
Entertainment
38
Navigation, LBS
40
Social networks
33
Online shopping/
banking
33
Apps for hobbies
20
40
The increasing spread of smartphones and tablet PCs fosters
mobile internet use and the emergence of new services. 16% of
internet users in Germany surfed on a wireless basis in 2010 – and
there is a steep trend to the upside (see chart 18). Today, however,
smartphone owners still mainly use familiar applications from the
fixed internet. Besides using search engines some 60% of the men
surveyed say their primary focus is on communicating by e-mail and
calling up news or weather services (see chart 19).
However, small application programs referred to as ―apps‖ (see box,
p. 10), which are activated by an icon on the smartphone user
menu, have recently also rapidly attained popularity – particularly
with the younger generation (see chart 20). They are regarded as
drivers of convergence. All the hype today about ―smart‖ end-user
devices and the apps that can be run on them can only hint at the
new possibilities they could theoretically open, e.g. in the
entertainment segment or targeted information about so-called
location-based services (LBS). In particular, there is going to be a
rapid change in the ways many companies gain access to their
customers. At present, though, the companies are still at the
experimental stage, for apps and the high-performance mobile
internet are still too new on the market for a stable pattern of
customer usage to have become established.
Various trends are emerging. First, the companies bearing the brunt
of the digitisation process are hoping to find a new way to access
customers via mobile end-user devices who are willing and able to
pay for the new services. Second, the increasing spread of highperformance end-user devices will probably intensify the structural
29
0
60
Source: DTAG, 2010
August 4, 2011
The trend towards product upscaling will also materialise in other
branches of the economy, e.g. in the case of mobile game consoles.
For the foreseeable future, mobile games will account for the
smallest share of revenues in the video games segment; however,
with average growth of close to 20% over the next few years they
are said to have the greatest upside potential (see chart 17). Higher
bandwidths in connection with high-performance end-user devices
and a growing supply of gaming content will continue to boost their
appeal. Tablets will give the market an additional fillip due to their
larger displays. This is likely to weigh on mobile games consoles.
However, there will be further justification for their existence given
more complex games. This example also goes to show that, at least
in areas where quality differences play a big part, there will not be a
trend towards all-in-one devices, but rather towards different devices
that meet consumer demands in more varied ways. Nevertheless,
the currently rapid pace of innovation will result in a steady shifting
of market shares in the consumer electronics segment.
80
19
25
Source: gfu, BVT, GfK, Consumer Electronics Market Index Germany (CEMIX),
Jan-Dec 2010.
11
85
As always: Young people
take the lead
Use of apps, DE (%)
100%
23
80%
48
29
60%
21
40%
30
20%
24
17
7
0%
14-29 years
30-49 years
I've never heard of it
I only know it by name
I've heard of it, I am familiar with it
I already use it
20
Source: TNS Emnid Digitalbarometer, 2010
Majority do not want to
spend money on news apps
Question: How much would you spend
per month for a news app at the maximum?
(%)
Absolutely nothing
69
< EUR 1
3
EUR 1 - 2
9
EUR 2 - 3
9
EUR 3 - 4
3
EUR 4 - 5
1
> EUR 5
6
0
20
40
60
80
Basis: All respondents who use the news apps on an
iPhone
Source: IFAK, 2010
21
Video on demand: Business
booming
Revenue from digital downloads, DE,
EUR m
350
300
250
200
150
100
50
0
2008
2010
Buy
2012
2014
Rental
Source: PwC, 2010
22
change in certain sectors towards digital products. Tablets will
become established as a popular device for viewing films and
games. Third, companies are currently experimenting on how they
can better reach their customers – regardless of whether they use
apps or a browser.
— For publishers, the apps are a glimmer of hope in the battle to
make money on the content they produce, which so far they have
posted on the internet largely for free. They hope that customers
will be prepared to pay for news if they can get the latest update
at any time. However, the media groups are currently running up
against their limits since the production of applications is costly
and the app stores of the various providers have to be served
separately. Accordingly, not all (local) editions can be transported
to the various end-user devices. Besides, the users of mobile
devices also show only limited willingness to pay for service:
according to a survey conducted by the IFAK Institute, a German
economic research institute, only 30% of the respondents with an
iPhone were prepared to pay for news apps; nonetheless, 20%
would pay EUR 1-3 (see chart 21). So providers will have to
intensify their efforts to overcome the internet‘s widespread
―freebie culture‖ in the mobile context. But whether the media
groups will be able to tap a real additional source of revenue on
this basis is up in the air. 70% of the respondents stated that they
no longer used print media at all, or more seldom than before the
26
news app was installed.
— A rising number of households with broadband, the convergence
of internet and TV as well as the growing use of appealing mobile
end-user devices such as tablet PCs will boost on-demand
consumption of content (e.g. videos, music, games and books).
PwC estimates that revenues from video on demand, i.e. the
rental and sale of digital copies, are likely to rise to about EUR
300 m by 2014 (see chart 22). On the losing side in particular will
be the conventional businesses that physically sell and rent out
films on DVD (video outlets) as well as online rental businesses.
The rapid proliferation of smartphones and tablets is likely to
accelerate the trend towards a separation of content from
physical media, as in other content categories such as books and
games.
— Furthermore, numerous providers are offering customer loyalty
programmes or services via mobile devices. These include
services such as price comparisons, manufacturer information,
projections of furniture in living areas or virtual tours in hotels.
Moreover, apps are being deployed for marketing purposes or for
mobile-based direct selling. In this context, a further interesting
area is the provision of location-based services. For example,
retailers want to guide customers to their branches with the aid of
location-based services. LBS also give rise to new product offers:
travel guides may be tailored for mobile end-user devices and
linked with LBS so that tourists can call up local travel
information on such devices. In any event, a key factor for the
success of mobile services is that companies clearly define what
additional benefit is generated by the new offer (mobile use
case).
26
12
See IFAK Institut (2010) News-App-Analyzer 2010.
August 4, 2011
Convergence markets: Smartphones and triple play continue to erode sector boundaries
Apps still not a stable source of
earnings
It is virtually impossible today to assess the full extent of the
economic implications linked with the increased use of mobile
applications. As things stand today, most apps do not represent a
stable, additional source of revenue. For one thing, BITKOM
surveys found that in 2010 about 90% of the apps downloaded in
27
Germany were free of charge. The remaining 10% generated the
providers sales revenue of EUR 357 m (+88% yoy). For another
thing, uncertainty remains as to the appropriate way to price the new
service. Apps that cost money will probably become a component of
revenue portfolios in future, but perhaps at the expense of revenues
28
from other (conventional) offers.
Customers will come to expect
mobile offers
However, mobile offers may result in the medium term in the cost
efficiency of certain services and processes being increased, e.g. if
damage reports are recorded on mobile end-user devices. Besides,
sales of certain physical products and non-mobile services may
decline further if good alternatives can be offered in a mobile
context. The spectrum ranges from video rentals to travel guides
right through to game consoles. Initially, innovative companies in the
mobile services segment are likely to be able to seize advantages
over their competitors. Similar to the fixed-line online offers that for
most companies are a ―must‖ today, apps and mobile internet
access are also likely to become the new standard within a short
time. So companies will have to rise to the challenge of developing
online offers that are optimised to fit the respective access channel.
Companies face major uncertainty operating in rapidly
growing markets
Multi-technology strategies very
costly
Companies operating in converging markets face high levels of
uncertainty. In the case of many innovative products it takes time for
a dominant design to emerge. Standards are also often missing;
these still have to be developed by committees. In such a phase it
may initially make sense for companies to pursue multi-technology
strategies. However, these involve considerable expense. Multitechnology strategies are also necessary for companies
collaborating with other companies that have established their own
so-called ―ecosystems‖. The apps segment shows that service
providers develop different solutions for the respective app stores
owing to a lack of compatibility. From the standpoint of service
providers this exercise is linked with high costs and today‘s still
uncertain revenue prospects.
A further key phenomenon in convergence markets is cooperation.
In some cases, cooperative ventures cover numerous market
players and straddle traditional sector boundaries. Companies
concentrate on the parts of the value chain that dovetail with their
core competences. They collaborate so they can offer a
sophisticated product whose in-house production or development
would be prohibitively costly. Often, these cooperative ventures are
set up for only a limited period. Alternatively, some companies may
pursue acquisitions to supplement their existing expertise on a
permanent basis. Cooperative ventures can be found in the area of
hybrid TV, for instance, where inter alia content providers and
27
28
August 4, 2011
BITKOM (2011). Zahl der App-Downloads explodiert. Press information. Berlin,
February 14, 2011.
For more (in German) on revenue problems and consolidation trends in the
publishing sector see Heng, Stefan, Eric Heymann and Marion Müller (2010).
Verlage im Umbruch: Digitalisierung mischt Karten neu. Deutsche Bank Research.
Aktuelle Themen 496.
13
85
aggregators, platform operators and TV makers join forces. These
ventures result in what are known as ―value creation networks‖.
Which factors influence
convergence?
Benefit for
provider
Standards
Convergence
Benefit for
users
Obstacles to
integration (memory
capacity, power
supply, battery
performance,
complexity)
Challenges for providers and consumers alike
Environment
(Peer strategies, regulation, financing,
infrastructure etc.)
Source: DB Research, 2006
23
HbbTV – a standard for hybrid TV
HbbTV stands for ―hybrid broadcast
broadband TV‖ and is a standard for hybrid
TV which was adopted by the European
Telecommunications Standards Institute
(ETSI) in June 2010 (www.hbbtv.org). HbbTV
evolved from a pan-European initiative and is
supported by numerous companies from
various sectors, e.g. equipment
manufacturers, satellite operators, TV
broadcasters and software houses.
Hybrid broadcast broadband TV is an open
standard enabling consumption services to be
configured via the controls of a TV. The
interoperable standard allows various enduser devices to be operated in this way. The
international HbbTV consortium aims to
maintain and foster the ongoing development
of the standards.
Consumers are spoilt for choice
14
The objective of numerous cooperation strategies is to expand
supply via the addition of content or services. This enables the
provider to offer customers a package deal. Content is refinanced
either via advertising and/or by directly charging for articles or
applications. In any event, the development of an offering with a
broad reach is the prerequisite for boosting their attractiveness for
advertisers. Therefore, it is key that providers rapidly expand their
market shares in developing markets. The competition for new
custom even intensifies when ecosystems trigger lock-in effects on
the customer side, i.e. the customers show little willingness to
change provider once they have opted for a given provider.
Convergence is influenced by a complex set of factors (see chart
23). These include the potential benefits for users, sustainable
business models and the overcoming of technical obstacles to
integration. The interoperability and standardisation factors, in
particular, play a significant role in the progress of convergence.
This holds, for example, if as in the case of hybrid TV a new
standard has to be established in order to establish the supply (see
box). Furthermore, there is ongoing work in committees, as for
example in the Digital Living Network Alliance (DLNA), in which
makers of computers, mobile phones and consumer electronics
collaborate at international level in order to ensure the
interoperability of consumer electronics products from various
manufacturers.
There are huge challenges to be faced in the area of
standardisation. Even though users currently accept ecosystems
when these are offered by innovation leaders, consumer demands
for open systems are likely to become louder in the medium term.
This will probably also be driven by changes in the demands/tastes
of consumers who would like to access familiar content, such as
videos, photos or media content, via the growing number of different
(mobile and fixed-line) devices. For one thing, this will require open
industry standards for content formats and interoperable hardware
interfaces. For another, the providers of media content are
challenged to make available both content and apps that are tailored
to various end-user devices and respective use scenarios. This is
crucial not only for user acceptance and users‘ willingness to pay for
services, but also in terms of attractiveness from the viewpoint of
advertisers. Finally, cloud-based solutions are likely to become more
popular as a way of storing data, as these enable users to access
music, videos or documents in the cloud from different end-user
devices.
In this context, consumers face the challenge of having to learn their
way around an increasingly complex market. Complexity is driven
here by a great variety of products, equipment and services that
operate in differing ways, large numbers of product innovations and
the networking of devices and their applications. For example,
before smartphones can be operated it is first necessary to register
them on the internet and set up the payment method. In such a
market it is of key significance for the providers that they clearly
identify the value added in the product or service they offer. If they
have a poor service mindset or no uniform standards – which curbs
the use of the product – people may be reluctant to pay for them as
a result.
August 4, 2011
Convergence markets: Smartphones and triple play continue to erode sector boundaries
Outlook
Networked services are the future
Over the past few years there has been an increasing degree of
convergence between the information technology,
telecommunications, consumer electronics and media industries.
This convergence is being driven by the omnipresence of the
internet. Given the increasing availability of fast internet connections
– both fixed-line and mobile solutions – it is becoming increasingly
convenient to call up networked services on various web-enabled
end-user devices such as TVs, smartphones and tablet PCs.
Market shares will be reshuffled
The competition between market participants has intensified at all
levels. Thus, there is now competition between established rivals
that originally operated in different sectors and are now thrashing it
out with one another in a battle for market share, e.g. in the area of
broadband infrastructure or smartphones. In addition, the market for
end-user devices is typified by high innovation rates, with a stable
distribution of the market shares still nowhere on the horizon. This
applies not only to the market for smartphones or tablets itself.
Since the small handheld devices are mutating more and more into
all-rounders and integrating, say, MP3 players and digital cameras
without any drop in quality, makers of these standard products are
condemned to seeing their market shares dwindle. The ―losers‖ thus
need to rise to the challenge of finding strategic solutions by, for
example, upscaling their offers towards higher product quality or
sophistication. But the result could instead be a market shakeout.
Extension of value chain to include
services
The service aspect is playing an increasingly important role in the
strategies pursued by the suppliers of end-user devices and
infrastructure. Companies are seeking to gain an edge over their
competitors by extending their product offers. This holds, for
example, for triple play from a single telecommunications company
and for cable operators with a focus on TV, video (in various forms)
and the internet or for hybrid TV, which is being pushed by TV
makers. New services are also in focus in the case of smartphones
and tablet PCs: vendors are offering app stores in tandem with the
end-user device.
Create value added for customers
The rapid proliferation of smartphones and tablets, which will
probably have become a part of everyday life over the next few
years, are going to give mobile internet use and the related services
market a sizeable boost. In future, consumers are going to expect
these in addition to the fixed-line internet offers. The service
providers face the major challenge of having to hold their own in the
surge of new applications flooding the market. They have to deliver
real value added for the user and create appealing entertainment
offers in order to raise customer willingness to pay for content.
Furthermore, they will have to plan the provision of their offer via
various channels (TV, fixed-line and mobile internet) even better,
especially since consumers‘ media use is likely to be further
fragmented by the increasing number of end-user devices. Mobile
services can generate additional income, for example, in the
publishing sector – but they are surely no panacea for the sector‘s
revenue ills.
Separation of content from physical
media gathering pace
Moreover, several segments – such as travel guides – will probably
experience new competition from mobile applications. All in all, the
separation of content from physical media is poised to gather pace.
Given a rising number of households with higher bandwidth, the
convergence of the internet and television as well as the diffusion of
smartphones and tablets, on-demand consumption of music, videos,
games, news and books will continue to spread. This will weigh on
August 4, 2011
15
85
physical sales and rental businesses. Thus, structural change in the
services segment will be given additional impetus.
Antje Stobbe (+49 69 910-31847, antje.stobbe@db.com)
© Copyright 2011. Deutsche Bank AG, DB Research, D-60262 Frankfurt am Main, Germany. All rights reserved. When quoting please cite ―Deutsche Bank
Research‖.
The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the author, which do
not necessarily correspond to the opinions of Deutsche Bank AG or its affiliates. Opinions expressed may change without notice. Opinions expressed may differ
from views set out in other documents, including research, published by Deutsche Bank. The above information is provided for informational purposes only and
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August 4, 2011