New neighbors, new threats -- an all-cloud mobile future?

The battle continues: Device manufacturers, Web services players and traditional telcos are expanding their product and services footprint to occupy key customer control points. Apple and Google are smashing traditional revenue models and providing new mobile content services. Today’s game is online versus device players; tomorrow’s game is software versus Internet industries.

Market caps tell the story best: Apple, Microsoft, Amazon, Google and the like are trading at multiples of AT&T, Vodafone and Deutsche Telecom. Nokia’s recent earnings plunge of 40% lies in stark contrast to the 78% rise of Apple’s profits. The trend will continue, and the gaps will only widen between old and new business models.

The battle for cross-platform ecosystems

What’s really driving these mega-shifts? Players are trying to benefit from new online revenue streams to counter the revenue declines and fierce competition on their own turf. Device manufacturers such as Apple, Research In Motion, Nokia and Samsung are developing proprietary platform software and have opened app stores to create pull for their devices.

Online players are capturing new value from advertising and cloud services and are pushing the development of on-screen offerings. They are the epicenter of innovation, with Apple, Google and Facebook as the most prominent examples. While Apple and Android-based phones today represent a handset share of only 15% of 2010 shipments, their combined share of mobile HTML page views and ads served on their devices is close to two-thirds of all smartphones. Although this is only a snapshot, it demonstrates where new revenue streams will be unlocked.

Mobile operators are fighting back by joining forces to gain scale with developers; however, it remains to be seen if they can coordinate globally to make this happen. The online services game is not about taking the biggest piece of the revenue pie; it is about creating robust, defensible ecosystems that span devices. Both device manufactures (e.g., Apple, Nokia), online players (Google, Facebook) and mobile operators (Vodafone) are all looking for ways to create their own cross-platform ecosystems.

Three futures: Share-and-share-alike, converged chokehold, or all cloud

How will this all play out? From our client work in this domain, we pose three likely scenarios that will drive winners and losers.

Share-and-share-alike. In this scenario, mobility will become the all-dominating service, and mobile operators as well as the Web economy will find a balance in leveraging the strengths of their assets. New business models will emerge as partnerships between telcos, equipment-makers and Web players are forged and revenues are shared within the ecosystem. Mobile operators will monetize their billing relationships, deep customer knowledge and location information, while the Web players will continue to drive innovation, while not dominating customer relationships.

Converged chokehold. This world is the mobile operators’ dream. They will become the center of the communications ecosystem and drive development of converged services by steering Web, media and IT services provider partnerships. Operators will capture the majority of the value, bypassing equipment-makers by dealing directly with design manufacturers, and keep tight control over devices through subsidies. Fixed/mobile convergence will happen through full services and network integration, and operators will drive strong industry innovation. Operators will also continue to acquire media assets to push for ownership and distribution of content.

All cloud. This is the telcos' nightmare. Over-the-top players will win, while traditional telecom providers are relegated to the role of the bit-pipe provider. There is rich, sophisticated demand for services sitting in the cloud offered by the all-out Internet economy. Software and online services players will succeed in the online services battle, thus capturing the majority of the profits, whereas equipment-makers and operators will be driven out of new income sources. Handsets will become commodities like PCs, and innovation will happen entirely on the services and software side. Every value chain participant will focus on core capabilities: Telcos will efficiently manage bandwidth; scale matters with typically three in-market network infrastructure providers highly consolidated across the globe. Only a few global network operators will survive. Although mobile network operators will continue to capture the majority of the revenues, they will operate at razor-thin margins, as all the value goes to the Web economy.

The Web economy is best positioned to win: Timing is the question

In the mature markets of the U.S. and Europe, things are already moving toward an all-cloud scenario. Massive investments in cloud-based services by Amazon and Apple confirm this trend. The Web economy is best positioned to win, as it seamlessly integrates services across all screens, increasingly controlling value-added customer touch-points, driving innovation and offering true convergence. Keeping up with the speed of the Web economy will be hard for operators, as they focus on optimizing delivery and the best monetization of the bandwidth explosion. However, an all-cloud world is still far-fetched. As long as Net neutrality is only a discussion topic, super-high-speed networks are still in the making, and customers continue to prefer long-term relationships with operators aided by subsidies.

Make no mistake, operators need to watch out for signs of the shifting powers. To become a winner in the ecosystem battle will require an intelligent partnership approach, leveraging and combining operators’ unique strengths and capabilities, such as billing relationships or deep customer information. The battle is not lost to the Web economy, yet.

Bernhard Kickenweiz is a principal in A.T. Kearney’s Communications, Media and High Tech practice in New York. Contact him at bernhard.kickenweiz@atkearney.com.