FT SPECIAL REPORT The Connected Business

Monday March 2 2015 www.ft.com/reports | @ftreports

Inside Developers see future Telcos seek on smaller screens Consoles are losing out to mobile devices in the fight for gamers’ hearts to redefine Page 2 Venture capitalists bet on start-ups High valuations of companies have their role in attracted investors Page 3 Music industry hails new ‘white knight’ Streaming overtakes digital era downloads, but income will be slower Competition from the likes of Google and Apple to disrupts traditional models, writes Daniel Thomas follow behind Page 4 elecoms is fast becoming a ing to the challenge, helped in regions dirty word for companies such as Europe by regulators encourag- that want to become much ing industrial growth through consoli- more than providers of dation. This, alongside better economic T basic connections in a conditions, is leading to higher profits digital world in which technology is andrisingshareprices. Artifical intelligence underminingtraditionalrevenues. Now companies have the breathing Companies in the sector are still at spacetoinvestintheirfuture—andvar- and the fridge riskofbeingleftbehindorbeingpushed ious strategies are emerging among Why milk-buying robots tothemarginsassimpleprovidersofthe managements keen not to be left could mark the end of pipework that technology groups use to behind. Illustration: Oivind Hovland maketheirfortunes. Hans Vestberg, chief executive of the world as we know it And even the latter holds dangers if Ericsson, the Swedish telecoms equip- of options — some will go into TV and content such as TV and music. Page 6 the telecoms groups cannot keep up ment maker, says the biggest risk is not media,othersintocloudservices,others In this market, the distinction with ever increasing demands from making the right decisions on strategy, the connected car and home. Some will between mobile or fixed-line access to customers for instant videos and giventhatthemarketismovingsofast. ‘You need to move now dothemall.” the internet becomes immaterial. On FT.com entertainment by investing heavily in “You need to move now to where you At the heart of most strategies Instead, the consumer gets to choose next generation networks capable of want to play in future,” he says. “Ten to where you want to remains the desire to become the whichscreenstowatch,playorworkon, Video: rise of the mobile carryingvastquantitiesofdata. years ago, they all did the same things. play in future’ gatekeeper of the internet — and with from a smartphone to a tablet or TV. on-demand economy Thesignsarethatmostgroupsareris- But now carriers have suddenly got a lot it, the provider of services and Continuedonpage4 www.ft.com/appeconomy Year of substantial progress instoreforpayment systems

Mobile wallets institutions that issue credit, however, the rise of smartphone-enabled paymentshasrisks. Apple Pay is shaking up the Banks profit when consumers use market, but others are vying theircards,butasconsumersstoremul- for attention in the same tipleaccountsontheirphonesitispossi- ble that the brand identity associated space, reports Sarah Mishkin witheachbankcouldweaken. As networks such as Apple Pay cap- turemoreofthemarket,theycouldalso Foryears,thestoryhasbeenthatmobile raise the portion of the profit on each isfinallyabouttotakeflightandfulfilall transaction they take, or otherwise stop its potential — in the process bringing using banks or existing parts of the wealth to a new set of entrepreneurs, chain of companies that currently inventorsandinvestors. handlecardpayments. Mobile payments, for example, have Doug Brown, who works on ebanking long been hailed as the next big thing, and mobile at FIS, a banking and but this year retail and payment indus- payments technology company, says: try leaders say that — finally — 2015 is “Thisisthedefiningmomentfor[finan- goingtobedifferent. cial services groups], for their brand “Every year since about 2009 has identityandrelevance. been the tipping point year for mobile “If all the value is managed by an payments,” says David Hodgkinson, a oligopoly, whether that’s Apple, Sam- consultant at KPMG in London, but he sung, or a payment network, and at the adds: “If I’m really honest, the quanti- end of the day everything accrues value fiedmarketprojectionsvarywildly,and to only a few entities, then for the thou- they’refairlymeaningless.” Adding it up: Apple’s mobile payment sands of financial institutions that we Yet he and others say developments system at work — Eric Risberg/AP workwith,thatwouldbeafail.” indicate that 2015 will be — if not a Thereisstillabestcase,hesays.Some breakthroughyear—thenatleastayear banks, as well as many big retailers and banksareworkingtointegratepayment of substantial progress. The factors app makers, thereby ensuring that the capabilities into their own apps, so behind this are the launch of Apple Pay, vastmajorityofiPhone6usersintheUS consumerscouldusethosetopayrather the efforts by ecommerce companies to canstoretheircardswithApplePayand than Apple’s app. To make their apps give consumers better ways to buy regularlyfindplacesthattakethem. more useful, some banks are also goods with mobile devices, and the real- Apple’s push into payments has installing systems on ATMs that allow isationbybanksthattheywillloseoutif helped drive the development of secure customers to use their smartphone to theydonotfocusonthetechnology. technology to store cards on phones. withdrawcashwithoutacard. The key event, says nearly everyone Visa, MasterCard and others use the Even if Apple Pay leads the market, in the industry,was the launch last year technology and say it is highly secure others will still have a chance, analysts of Apple Pay. This feature allows users against theft and fraud, although its say. Speciality wallets could still serve a to store their credit or debit card infor- defences have yet to be tested. Few card niche, such as ones that store bitcoins, mation on their iPhone and then either detailswillbehandledbytheretailerso, or credits for video games or ones that tap the phone on a special receiver to as it is bugs in retailers’ in-house soft- are linked to and give rewards at a pay for goods in a shop or buy online particular store such as Starbucks, with one click while shopping on an app which already has one of the more suc- thatusestheservice. cessfulmobilepaymentapps. Apple is not the first to make a so- Apple’s push into payments Regulators in the US and Europe are calledmobilewallet.UStelecomstrieda has helped drive the also likely to ensure that Apple keeps its similar wallet named Isis, later platform open so that other mobile rebranded as Softcard. Google had secure technology needed wallets can operate on its iOS mobile Google Wallet. Square, a start-up led by to store cards on phones operating system, says Mark Thomp- Jack Dorsey,a founder of Twitter,which son,apartneratlawfirmSidleyAustin. makes credit card readers and small ware that often allow hackers to steal “My expectation is Apple cannot just business software, also tried a similar card data, this represents an improve- say ‘we’ll only allow this payment app product. None were popular. The inter- mentforconsumers. onourphone’,theywilleventuallyallow facescouldbeclunky,andtoofewretail- For in-store payments, the require- other wallets [to use the platform],” ers accepted the wallets to get consum- ment of a fingerprint will also cut down saysMrThompson. ersusingthemregularly. on“friendlyfire”fraud—whencustom- However, he adds, just because Apple But Apple is Apple. The design of ers fraudulently report their cards have cannot be anti-competitive and keep Apple Pay has been widely hailed and been stolen and someone else has used others from using its phones, this does well reviewed. More crucially, Apple them to purchase goods, says one not mean those competitors will be partnered with nearly all the leading US person in the industry.For the financial successful. 2 ★ FINANCIALTIMES Monday 2 March 2015 The Connected Business Developers see the future of games on much smaller screens

Entertainment Consoles are being supplanted by mobile devices, reports Tim Bradshaw

hen King Digital Enter- sophistication, growing numbers of Soda Saga to the top of Apple and Activision’s chief executive, said there King, for example, adjusts the Party poppers: tainment launched playersspendmanyhours—anddollars Google’s app download charts globally was nothing that had driven any sizea- difficulty of Soda Saga’s levels every few actress Molly its eagerly awaited — on addictive titles such as Clash of for November. In its earnings report, bleamountofoperatingprofitinmobile weeks. The first “cohort” of players was Sims at the follow-uptothepopular Clans, Minecraft and GameofWar:Fire Kingsaiditsetanewquarterlyrecordof gaming. But in its recent earnings call, looking for something more difficult launch of King’s W mobile game Candy Age. 1.5bn average daily game plays in the Activision’s chiefs admitted mobile and than the original Candy Crush, Mr Zac- Candy Crush Crush Saga, it looked far beyond Apple’s “The first wave of mobile games was threemonthstoDecember. tablet gaming had “moved up on our coni says, while newer players want Soda Saga on AppStoretopromoteit. simplistic—thegameplaywastherebut But King has an advantage other priority list” after finding success with a somethingeasier. Broadway last Videos heralding the arrival of the the polish wasn’t,” says Julian Farrior, games makers do not. As well as the Warcraftspin-off,Hearthstone. Despite the different dynamics, Mr November Candy Crush Soda Saga blitzed 100m chief executive of Backflip Studios, the external advertising, many people In the console world, developers Farrior says mobile studios such as Bryan Bedder/Getty Facebook newsfeeds in a single day. TV mobile gaming company behind Drag- downloading Soda Saga did so because create games and leave it to publishers, Backfliparehiringconsolegamesdevel- spots aired in 20 countries and digital onVale and Seabeard, which is now they saw an ad in the original Candy such as EA and Activision, to work with opers in much greater numbers. “We’ve billboards were flooded with fizzy majorityownedbytoymakerHasbro. Crush game, which has been down- Sony, Microsoft and Nintendo on had to hire truly talented experience, bubblesaroundtheglobe. But, Mr Farrior adds: “Over time, the loadedhundredsofmillionsoftimes. distribution. Mobile games are usually and the bulk of that experience was in The multimillion-dollar launch illus- polish has increased, the budget has Electronic Arts, a veteran console free, with revenue generated from ads shiftingfromconsoletomobile.” trates that mobile gaming is no longer a increased and revenue expectations games maker, has franchises that are orin-appsales. Backflip is planning to use Hasbro’s poor relation of video games. Newzoo, a haveincreased.” just as well known as King’s, including “When you’re thinking about that brands and characters to help its games research company, forecasts that the In the App Store’searly days, barriers John Madden NFL football and Fifa transition, it isn’t wholly intuitive to stand out. But even names that could mobile games industry, which it says to entry were low. But, as it has become Soccer. Even so, EA is only just starting console developers who are reliant on include My Little Pony and Transformers has predicted global revenues of harder to be noticed in an overcrowded tofinditsfeetinmobile. publishers for distribution,” says Mr are not enough to guarantee a hit in the $30.3bn in 2015, is poised to overtake market, promoting and distributing a Andrew Wilson, EA’s chief executive, Activision’s Farrior. “In mobile, you own the distri- mobilegamingworld,MrFarriorsays. consolegamessalesforthefirsttime. hit game has become an expensive but says the company had a “breakout per- chiefs now bution and the development of the “A brand is important, but a brand Underlining the transition, Newzoo importantpartofthemarketingmix. formance” in mobile over Christmas, piece. That’s . . . outside the comfort alonewon’tgetyouthere,”hesays. said in a report that Apple’s forecast “It’s a very competitive market,”says generatinga“record”$121minsales,up say mobile zonefortraditionalpublishers.” To succeed, he says, you need an $4bn in gaming revenues — made Riccardo Zacconi, King Digital’s chief 25percentovertheprioryear. gaming Another challenge for console devel- “absolutely killer game”, with high from just hosting and selling other executive.“The‘topgrossing’chartsare Its rival, Activision Blizzard, whose opers is that mobile games are created retention and conversion from free developers’ games, for which it takes a very stable. It’s a handful of developers Call of Duty and World of Warcraft fran- has ‘moved and updated very differently. Console downloads to paying customers. “You 30 per cent cut — is likely to be almost there and the conditions for succeeding chises have dominated console and PC up’ their games are typically left unchanged, but need to marry the good math with the doubleNintendo’ssalesthisyear. areveryhard.” gaming,hasbeenevenslowertomobile. mobile games, once on a device, can be good brand and have a really talented, As mobile games have increased in Despite this, King’s marketing drove In late 2013, Bobby Kotick, priority list updatedalmostconstantly. aggressiveuseracquisitionteam.” Privacy concerns Low cost of emerging market apps colour success of offers benefits to developed world launched in Kenya in March 2007 by it accessible, and reduces the opportu- Services Safaricom,aVodafoneaffiliate. nity for error,”Mr Brett says. “It’smuch the smartphone Meanwhile, some 14,000 small-scale easier to teach someone to use a mobile There is a need for products cocoa farmers in Ivory Coast are using a phone app than to cope with the com- that are intuitive and easy mobile phone app to access farming plexitiesofaPC.” Advertising bodies argue such information should advice, details of training sessions and Coping with the developing world’s be classified as “pseudonymous data” to use, writes Jane Bird real-timeinformationonmarketprices. constraints has led to a branch of andbesubjecttolighterregulationthan Theycanalsorecordtheirusageofferti- engineering known as “frugal innova- Lawmakers are increasingly data such as telephone numbers, email lisers, check their cash flow, and gain an tion”, says Abhijit Kabra, global lead in turning their attention to the addressesormedicalrecords. Emerging markets are fuelling growth accurate measurement of their farm’s mobile applications at Accenture collection of data on mobiles, Until now, the mobile advertising inthemobilephonemarket,butforapp sizebywalkingtheperimeter. Mobility. industry has largely escaped state inter- developers this presents big challenges. The service is run by Olam Interna- He adds: “Emerging markets are reports Robert Cookson vention.Theregulationofcookies—the Direct hit: adverts can be targeted Almost 80 per cent of the 1.8bn people tional, an agricultural business that breaking new ground in creating apps technologyusedtotargetadvertisingon expected to acquire handsets in 2018, supports smallholders in 14 emerging that can capture video content when websites—hashadrelativelylittleeffect accurate information about their accordingtotheInternationalDataCor- markets. The aim is to reach more than networktrafficisatitslightestandstore For advertisers, the smartphone is a on mobile, as smartphone users mostly movements. poration, live in areas where network 500,000farmersby2017,andtoexpand ittoplaybacklate.” dream come true. No other medium useappsratherthanbrowsetheweb. “We’re able to look at consumers who coverageispatchy,budgetsaretightand to include growers of coffee, cashew This avoids buffering and losing con- offers the same targeting capabilities — The industry has, however, launched have been near specific points of inter- smartphonesarerelativelyrare. nutsandcotton. nectivity and can also be used in devel- includingthepotentialtotrackconsum- self-regulatory schemes to address pri- est, such as a supermarket or a sports App developers need to take into ChrisBrett,headofcorporaterespon- oped markets to improve customer sat- ers as they move around the world with vacy concerns, including several recent venue, and retarget them accordingly account the smaller screen size and sibility and sustainability at Olam, says. isfaction and make use of networks at anaccuracyofjust10metres. developmentsfocusedonmobile. based on that information,” says Mr reducedcapabilityoflow-costphonesin “We want to make [these small farm- quietertimes. It is also a fast-growing sector. Adver- “It doesn’t matter what technology Malachard.“That’squitepowerful.” emerging markets, says India-based ers] more stable, because the supply Another problem with the large scale tisers are forecast to spend more than youuse,”saystheIAB’sMrSchwarzbart. To protect customer data, Weve Neha Dharia, a senior analyst at Ovum, chain is highly fragmented and ineffi- of app rollouts in developing countries, $60bn buying ad space on mobile “From our perspective, you should be assigns each mobile subscriber an atelecomsconsultancy. cient, with the risk that farmers will and the diversity and fragmentation of devices this year, up from $40bn last given transparency about what data are anonymised identifier that is visible To be popular in these areas, mobile stopgrowingstaplecrops.” handsets, is that it is hard to develop year. Research group eMarketer reck- collected and why, and then have the only to the company’s own services. apps also need to overcome the cultural Theappisfree,easytouse,inthelocal secure apps that remain up to date, says onsthatspendingonmobileadvertswill choice over whether to allow that or These identifiers are never revealed to barriers of language, literacy and local language and has symbols rather than MrKabra. surgetoabout$160bnby2018,account- not.” publishers, advertisers, or technology content, Ms Dharia says. “They have to wordswherepossible. In response, app developers are using ing for almost a quarter of all advertis- Google, Microsoft and most other intermediaries. be more intuitive and easy to operate, “Restricting the options helps makes crowdsourcing — inviting computer ingspending. largeadvertisinggroupshaveforseveral Another innovative company seeking with fewer interactions required. And enthusiasts to help test and enhance Butastheindustryhasgrown,sohave years operated a scheme called Ad- to take advantage of data without theyneedtominimisebatteryusage.” computer systems. These techniques privacy concerns. Regulators world- Choices, which allows internet users to infringingprivacyisAdTruth.Thecom- Emerging markets are not just catch- will lead to the creation of more robust wide are seeking to introduce rules to opt out of behavioural targeting on the pany,whose clients include King Digital ing up with established ones, says Serpil applicationsinthedevelopedworldtoo, protectconsumersandrestricttheways web. The industry plans to extend this Entertainment, says it has developed a Timuray, chief executive, Africa, Mid- MrKabrasays. in which advertisers use mobile data. tomobileinthecomingmonths. tracking technology that includes “pri- dle East and Asia-Pacific region for Emergingmarketsarealsousingapps The industry itself is also working on vacybydesign”. Vodafone. “In some ways, they are leap- from developed markets. “WeChat, the technological solutions to give consum- Rather than tracking a device’s froggingthem.” successful China-based competitor to ersgreatercontrolovertheirdata. unique identifier or using other tech- Take the example of the tablet-based WhatsApp [a messaging service that IntheEU,legislatorsplantointroduce ‘You should be given niques that provide 100 per cent accu- mobile app developed by Vodafone for doesnotuseupdatatimeonphonecon- data protection regulations by 2016, transparency about what racy for tracking purposes, AdTruth tea farmers in Turkey, which digitises tracts], is becoming more than a plat- toughening up on and replacing the collects less sensitive information, such soil audit procedures and has led to a formforchatting,”saysMrKabra. existing legal framework, which dates data are collected and why’ as a device’s screen size, operating sys- significant reduction in costs. The app He adds: “It has moved into gaming, backto1995. temandtimezone. replaces a day-long manual audit with shopping and banking, allowing its While Yves Schwarzbart, who deals Victor Malachard, chief executive of Using these variables, the company real-timedatacollection,whichisfaster 500m users to send digital cash and with regulation matters at the Internet Byyd, a mobile advertising platform, generates its own “probabilistic” identi- andmoreaccurate,MsTimuraysays. makepurchases.” Advertising Bureau (IAB), a UK trade says that, when done correctly,targeted fier for each device. The idea is that, on Not surprisingly, given the huge However, one of the toughest chal- body,agreestherulesneedupdating,he advertising is good for consumers as it average, the identifiers are highly accu- opportunity, mobile app designers are lenges facing mobile app developers, says the European Commission’s pro- deliversadsthataremorerelevant. rate for targeting purposes, but that rising to the challenge. And because particularly in emerging markets, is posedrulesaretoo“blackandwhite”. One of Byyd’s biggest customers is they are not permanent and cannot mobile technology does not rely on making money. “Emerging markets are The Commission has proposed that Weve, a joint venture created in 2012 by guaranteeaone-to-onematch. infrastructure such as fixed lines, com- very price-sensitive,” says Stephen mobile device identification numbers, the UK’s biggest mobile operators — James Collier, regional managing puter hardware and good electricity Kennedy, chief executive of Magpie, IP addresses and most other data used Vodafone, EE and O2 — to mine their director for Emea at AdTruth, says: supplies, it can be introduced quickly which identifies apps suitable for use in to target advertising should be regu- customers’ data for use in targeted “Many of our clients don’t want us to be andcheaply. China,MexicoandIndia. lated as “personal information”. That advertising. morethan85percentaccurate,because In advanced economies, mobile pay- To take off, services need to cost less would mean companies cannot collect Weve holds a vast repository of data they believe that the 15 per cent [error ment for goods and services is in its than$10ayear,MrKennedysays.Butat the data unless they have obtained about more than 22m smartphone rate] gives them enough coverage in infancy, says Ms Timuray, but in east such low prices — which will spread to explicitconsentfromtheconsumer. users, including demographic details terms of legislation changes and in Africa, millions of people use the Agri app: Olam is targeting its mobile thedevelopedworld—itwillbehardfor However, the IAB and other industry such as age and sex, as well as highly termsofhonouringconsumerprivacy.” M-Pesa mobile payment service services at Ivory Coast cocoa farmers appproviderstoreapbigprofits. Monday 2 March 2015 ★ FINANCIALTIMES 3 The Connected Business Backers bet The value of mobile Investment trends and data predictions on start-ups as hopes of

Mobile venture capital investments and deal volume trend Mobile data traffi profits rise 24.3 Q1 2013-Q4 2014 Billion gigabytes per month, by region Deals Investments ($bn) Latin America 155 Venture capital High valuations of companies 150 150 146 145 Middle East and Africa have attracted investors, writes Richard Waters 16.1 125 Central and eastern Europe 115 Western Europe n all-pervasive mobile processor just about everywhere,” says 106 computing platform has theBenchmarkpartner,whowasspeak- North America 10.7 been the great hope of tech ing at a Goldman Sachs conference last Asia-Pacific investorsforthebetterpart month. “It’s what’s behind a company 6.8 A of the decade: a successor suchasUber.” to the PC-and-server world, it would If smartphones have put processors 4.2 provide the foundation for the next intomorethan1bnhands,thenthenext generationofGooglesorebooks. extension of the mobile platform — 2.5 Now, as that promise starts to show “wearables” such as smartwatches and signs of being fulfilled, the money is glassescarryingsensorydevices—could 0.7 0.8 1.1 1 .1 0.9 2.6 1.2 3.1 pouring in. In the US, the amount of soon make them inescapable, adding to Q1 2013 Q4 Q1 2014 Q4 2014 2015 2016 2017 2018 2019 venture capital investment in mobile therevolution’smomentum. more than doubled last year, hitting It has been long expected that mobile FT graphic Sources: CB Insights; Cisco Photo: Cesare Ferrari/iStock $7.8bn, according to CB Insights, which businesses will take off, but it has taken gathers start-up data. That represents someeye-catchingvaluationsofcompa- The conspicuous success of other online service for organising petitions, out a place in the mobile world will pro- 16 per cent of all the money invested by nies to convince investors that big prof- early mobile leaders has also attracted raised $25m late last year, much of its duce a return for their investors is venturecapitalistsduringtheyear. itsarefinallyupforgrabs. investorinteresttootherpromisingcat- motivation was to extend its mobile another matter. WhatsApp had barely Payment companies such as Square, The emergence of Uber as Silicon egories.Facebook’s$22bnacquisitionof reach. Already, half of all interactions scratched the surface in experimenting delivery services such as Instacart, and Valley’shotteststart-upsinceFacebook, WhatsApp last year, for instance, has withtheserviceareonmobiledevices. with ways of producing revenue before mobile security providers including for instance, has caused an investment confirmed chat apps as one of the hot- “Therehasbeenahistoricfalsedivide it was acquired; Facebook has since put Lookout and social media apps such as stampede into many other services that testareasofmobileinvestment. between web and world, which is the question off and shifted its focus to Yik Yak are all part of a wave of mobile- have modelled themselves on the ride- Last year, partly encouraged by Face- collapsing with mobile,” says Ben usergrowth.Fewcanaffordthatluxury. first start-ups that have tapped into hailing company.Most style themselves book’s acquisition, venture capital Rattray, Change.org’s chief executive. ‘There has Advertising, the main source of reve- investor enthusiasm for businesses that as “on-demand services” — using investors put $1.41bn into mobile mes- By adding a geolocation tag to its peti- nue for many desktop internet compa- arepreparedforthisparadigm. mobile handsets to address a want and saging companies, CB Insights says: tions,forinstance,anyonewithamobile been a nies, is growing fast on mobiles, albeit “When the platform shifts, we get a then supplying it by means of offline from Snapchat’s vanishing messages to device would be able to see all of the historic fromalowbase.Bythefirsthalfof2014, new opportunity,” says Bill Gurley, a fulfilment. Slack, a service for teams of workers Change.org campaigns taking place it had reached $5.3bn, or 23 per cent of partner at venture capital firm Bench- Excluding Uber, companies that fit withaheavymobilecomponent. near them, potentially bringing much false divide all US digital advertising, according to markandabackerofUber.Thecar-hail- this description raised $1.46bn in ven- The investment boom is spreading more publicity and support for local between theInteractiveAdvertisingBureau. ingservicerecentlyraised$1.2bn,oneof ture capital in the 12 months to Septem- well beyond mobile-first companies. events. Yet, with the most successful compa- thebiggestfundraisingroundseverfora ber 2014, CB Insights says. The rising Many whose histories date from well “You can engage people where they web and niesinmobileattractingsky-highvalua- privatecompany,givingitavaluationof tideofso-called“UberforX”companies before the smartphone boom are also are in the world or in real time,”says Mr world, which tions,itcouldtakeyearsforthebusiness $40bn. That makes it a powerful state- (because many style themselves “the shifting their focus towards mobile and, Rattray — things that could add to both fundamentals — the elements that ment of the sort of opportunity Mr Uber” of a particular industry) includes in some cases, putting substantial relevance and immediacy for a wide is collapsing genuinely reflect the values of Gurleyclaimsforthesmartphoneera. rival taxi app Lyft, as well as delivery investmentsbehindtheirplans. rangeofinternetservices. with mobile’ companies in the mobile industry — to “The mobile platform puts a servicessuchasPostmates. For instance, when Change.org, an How many of the companies staking catchup. Fears of a spectrum shortage spark networks’ bidding frenzy

says the telecoms industry will “find a Wireless communications wayofusingspectrummoreefficiently”, just as the modern hybrid engines that While US telcos race to buy Staying online powertheToyotaPriususelesspetrol. more airwaves, others have Cooper’s Law Nokia Networks recently suggested taken a different approach, that existing spectrum could be made a thousand times more efficient by 2020, writes David Crow Spectral efficiency Marty by deploying new technology and using Cooper, pictured on the phone newfrequencybands. below, formulated the law of So why are telecoms companies When US telecoms groups spent spectral efficiency. willing to pay so much for spectrum? $44.9bn snapping up airwaves in a “Cooper’s Law” states that the The industry insists it needs to grab as record-breaking auction of govern- efficiency of spectrum has doubled muchaspossibletosatisfyusers’hunger ment-owned spectrum last month, it every two-and-a-half years since formobiledata.ButMrCoopersuggests tookmanyintheindustrybysurprise. Marconi made the first transatlantic that they could be “hoarding” it to Most analysts had predicted the wireless transmission in 1901. stop competitors from entering the auction would raise a fraction of the Dismissing an imminent spectrum market. amount, with some pencilling in crunch, Mr Cooper says: “Spectrum While the big US telecoms group are estimatesaslowas$15bn. is 1tn times more efficient than it engaged in a race to buy more airwaves, Thetotalhaulismorethandoublethe was at the start of the century. some companies are taking an entirely amountthegovernmentraisedlasttime “We know enough to keep us different approach: building mobile it auctioned airwaves in 2008, when the going for another 50 years at least.” phone networks that use no wireless smartphone revolution was still in its spectrumatall. infancy. Since then, there has been a Cablevision, the US cable operator, surgeinthenumberofconsumersusing If steel and oil were the commodities last month launched Freewheel, a theirmobilephonestodownloadvideos that defined the 20th century, then mobile phone service that allows and music, prompting fears that the US wireless spectrum is arguably the one customers to make voice calls and and some other developed countries needed by the internet industries that download videos and music by solely couldbefacingaspectrumcrunch. will dominate the next 100 years. And, usingthecompany’sWiFihotspots. Mobile data traffic has been growing as with oil, there is a finite amount. Yet The service has huge limitations: the at a blistering pace. By the end of last analystsandexpertsaresharplydivided minute customers are outside the range year, traffic stood at 2.5 exabytes a onwhetheritwillactuallyrunout. of one of Cablevision’s hotspots, they month, according to Cisco, more than According to the US Federal Commu- will be unable to use their phone. They double the amount in 2013. By 2019, nication Commission’smodels, demand must also use a specially modified Ciscopredictsthatitwillhavegrown10- for spectrum will eclipse supply some Motorolaphonethatisdesignedtowork fold to 24.3 exabytes a month. An exa- time in 2018. Mr Chaplin says Verizon, onthesystem. byteisequalto1bngigabytes. the largest wireless group by market Yet the trade-off is partly reflected in The primary reason for the predicted share, is in the worst position. It the price: $9.95 a month for Cablevision explosion in mobile data traffic is accounts for about 40 per customers, on top of their regular the shift in how people consume cent of industry revenues, monthly bill, or $29.95 for non-custom- video. Generation Z — shorthand but controls 17 per cent of ers. That is a fraction of the cost of the for those born from the mid-1990s spectrumcapacity. most basic $50 plans on offer — which onwards — are abandoning their The situation is not as are also subject to strict caps on data parents’ television sets and desk- acute in developing mar- usage. top computers in favour of kets, where smart- Craig Moffett, an analyst at Moffett mobile phones. Content pro- phone penetration is Nathanson, says of Freewheel: “The ducersarefollowingthem. still in its infancy, or in best way to view [it] is as a proof of con- Jonathan Chaplin, an ana- Europe, where a cept. The service itself is unlikely to be lyst at New Street Research, greater share of the financially material for either Cablevi- says this has prompted a population lives in sion or the wireless industry. The “fundamental step- urban areas. Cities concept,however,isabigdeal.” change” in how the likes of and towns would be If a larger cable group, such as Verizon and AT&T view in a better position to Comcast, were to follow suit with a their ability to cope with copewithanyspectrum service that was predominantly pow- thesurgeinmobiledata. crunch, because lots of ered by WiFi hotspots, it would have This explains why they traffic can be offloaded on “the potential to attract a meaningful weresowillingtoshellout toWiFinetworks. numberofcustomers”,MrMoffettsays. billions in the auction, However, Marty Cooper, a “Ifpricedaggressively,itcouldalsobe even though they have US engineer who is widely cred- enormously deflationary for traditional had to take on more ited with inventing the first real cellularproviders,”headds. debt and sell assets mobile phone, is adamant that That is a sobering thought for those to fund the pur- thereisnotgoingtobeaspec- companies that have just shelled out chases. trum crunch. Instead, he billionsonspectrum. 4 ★ FINANCIALTIMES Monday 2 March 2015 The Connected Business Industry hails streaming as ‘new white knight’

Music The uptake of Downloads v streams Winners and losers tier, which will distinguish the service from Spotify: the Swedish group uses its services will not replace free service to convert listeners to pay- lost revenues just yet, Top five on-demand Top five ingsubscribers. streams digital songs Apple will have to employ other means to attract customers. A lower says Matthew Garrahan Audio and video, 2014 Sales, 2014 price point has been mooted, with the companyreportedlyconsideringa$7.99 igital downloads — once monthly fee in the US, compared with seen as the salvation of a $9.99 for Spotify. It also has the advan- music industry ravaged by tage of having hundreds of millions of online piracy and falling CD 268m 6.5m iTunes customers, existing music fans D sales — are in decline, and Total on-demand Total sales to whom it can promote and market the recordlabelsareworried. streams streamingservice. Amid great promise, downloads The absence of a free tier may also became the main way to listen to music, work in its favour. Spotify has in recent but a decade of growth came to a shud- Katy Perry feat. Pharrell Williams months found itself embroiled in a war dering halt in 2014 and sales are set to Juicy J Happy of words with singer-songwriter Taylor fallfurtherin2015. Dark Horse Swift, who pulled her albums from the Enter streaming, the latest white servicetoprotestagainstthefreelevel. knight with potential to return the “WithBeatsMusicandRhapsody,you music industry to the good times. A have to pay for a premium package in range of companies led by Spotify and ordertoaccessmyalbums,”shesaidina including Apple and Google, are betting 265m 252m 236m 235m 4.7m 4.4m 4.4m 4.0m Time magazine interview, adding. “I music fans will migrate to new services think that people should feel that there that give listeners all the music they is a value to what musicians have cre- wanttohearforafixedmonthlyprice. ated,andthat’sthat.” Access, not ownership, is the order of Spotify paid four-fifths of its reve- the day and Spotify is the operator lead- Iggy Azalea Meghan Trainor John Legend Idina Menzel John Legend Katy Perry feat. Meghan Trainor Iggy Azalea nues, equivalent to €605m, in royalty ing the charge. The Swedish company feat. Charli XCX All About All Of Me Let it Go All Of Me Juicy J All About feat. Charli XCX and distribution costs to artists in 2014. added2.5msubscribersattheendoflast Fancy That Bass Dark Horse That Bass Fancy As more people turn to streaming, that year and now has 15m paying custom- figure should rise. But — as Spotify’sdis- ers, with 60m people around the world Number of on-demand music streams* Number of digital music sales pute with Taylor Swift shows — stream- usingitsservices. Total audio and video Annual % change, 2014 Annual % change, 2014 ing remains a nascent business: there 2014 2013 Its growth is attracting investor inter- Track 2014 may be more bumps in the road for an 163.9bn 1,259.3m est. It recently hired Goldman Sachs to 1,102.5m industry still desperate to return to the raise about $500m, a new round of halcyondaysofhigh-marginCDsales. financingthatisexpectedtovalueSpot- ifyatasmuchas$8bn,accordingtopeo- 2013 49.3% 60.5% Album -12.5% -9.4% Video Audio Track Album plefamiliarwiththematter. 106.1bn 106.5m 117.6m Spotify’s investors include Sean Parker, the founder of Napster, and FT graphic Source: Nielsen * Includes audio and video data from AOL, Beats, Cricket, Google Play, MediaNet, Rdio, Rhapsody, Slacker, Spotify, Xbox music, YouTube/Vevo Technology Crossover Ventures, the Silicon Valley investment firm that led Despite the growth of streaming, no exclusive deals with labels and big acts entrepreneur Jimmy Iovine and hip- its most recent fundraising at the end of one in the music industry is yet popping — anything to give them an edge over hopstarDrDre.ThedealgaveApplethe 2013, when it secured $250m. Record the champagne. Even if it continues on theircompetitors. Beats brand, which has cachet among labels Universal Music Group and Sony ‘Google, its growth trajectory,streaming will not One record executive commented: young music fans, but will ditch the MusicalsoownsharesinSpotify. Apple, replace revenue lost by declines in “Think about it: Google, Apple, Spotify namewhenitlaunchesitsownsubscrip- It is easy to understand why investors downloading for two or three years. and others are all converging on this tionstreamingproductthisyear. do not want to miss the boat. Consumer Spotify Still, it is a model the record labels love, space. And what do they need? Our Due in the summer — the release date behaviour is shifting: global digital and others because it replaces one that depends on music.” has slipped back from the spring — the downloads of albums slipped 9 per cent hits with one that delivers steady, Apple is — unusually, given its size Apple streaming service has the advan- in2014andsalesofindividualtracksfell are all recurringrevenue. and pedigree in digital music — an tage of a vast installed base of devices. 12 per cent, according to Nielsen Music converging Downloads may be falling, but 2015 underdog in streaming: its iTunes store Applewilleffectivelypre-installtheapp data. Around the world, demand for still ranks as a pretty good year to be a istheworld’slargestmusicretailer. on new devices, including it on an streaming services is increasing, rising on this music label. Technology groups are The company took steps to change upgradeofitsiOSoperatingsystem. morethan50percent,with164bnsongs space’ launching competing music streaming thislastyearwhenitpaid$3bnforBeats Mr Iovine, who Apple retained after Premium rate: streamed in the US alone in 2014. services and are on the lookout for Electronics,theaudiogroupfoundedby buyingBeats,isopposedtohavingafree Taylor Swift Telecoms companies seek to redefine role as digital competition intensifies

Continuedfrompage1 launched in autumn 2014. This trend is being played out in Thenetworkoperator,inotherwords, mergers and acquisitions in the sector, is losing control of the customer, and for example in the £12.5bn acquisition with it the ability to make more money ofmobilegroupEEbyBTintheUK. than by just providing a basic level of But,inevitablyduringoneofthemost connectivity. tumultuous periods of change for tele- But Bain & Company, the manage- coms since European deregulation of ment consultancy, sees a chance to the sector two decades ago, there are maketelecomsservicespremiumagain. risks — not least that some overstretch, Astudybythegroupfoundthatthefight or others under-reach, in setting out formarketsharehasdrivendownprices businessstrategies. for network services such as voice, text Mr Vestberg predicts a segmentation and data as well as devices. This has of the industry, as some concentrate on taught customers to make price the network provision, while others look to main criterion over factors such as open new markets. But, he says: “It’s networkquality,brandorservices. new turf. There will be competitors in Laurent-Pierre Baculard, partner the technology industry wanting the with Bain, says: “As connectivity costs samecustomers.” have fallen, customers have begun to Some still ask why telecoms groups think of telcos as mere providers of worryaboutmaintainingthestatusquo. pipesandhaveshiftedtheirperceptions On the face of it, there is little cause for of value from the network to their concern.Mobilerevenuesareestimated mobiledevicesandcontentproviders.” atcloseto$100bnamonth,accordingto Mr Baculard says that telecoms research by The Mobile World, an voice, messaging and network services. groups need to invest in their networks industry database provider. This is Network operators still control certain toprovidebetterconnectivityandmon- generated by rising global mobile parts of the customer relationship but itoring of sensors and other connected connections,morethan7bnatpresent. thesearecomingunderattack. objectsandbecome“enablersofaninte- The telecoms market generated One obvious area is customer billing, grated,premiumdigitallifestyle . . . not nearly $2tn in revenues in the past 12 which has been crucial for telecoms only entertainment and communica- months, Mobile World said, with 61 per companies as the trusted provider of tion, but also smart and connected cent from mobile services. These grew communications and digital services. homes and cars, security, healthcare almost4percentinthepastyear,evenif However, the introduction of services andotherdigitalservices”. fixedrevenuesslidalmost1percent. such as iTunes, Google Play and Ben Verwaayen, former chief execu- Buttheoverallpositiveindustrynum- Amazon have disrupted this link with tive of BT and Alcatel-Lucent, similarly bersbelieamoremixedpictureinmany thecustomer. sees an important role for telecoms developed markets, in particular in Meanwhile, control of the technology companies—iftheywanttotakeit. Europe,whererevenueshavefallenand for directing communications in IP- But Mr Verwaayen says that while profitsbarelycoverinvestmentcosts. based networks is being challenged by telecoms groups are all about providing More importantly, the bigger risks various technology-led services, while individualservices,preciselywhatthese are ignoring what is happening else- even the trusty Sim card — the piece of willbewillbedecidedbycustomersand where, in particular as the technology plastic that gives a phone its identity notthenetworksthatservethem.Asfor sector looks to compete directly with and connection — is being challenged the original use of the phone, he says: telecoms groups in internet-based by Apple’s own electronic version, “Voiceisnowjustanapplication.”

Contributors

Daniel Thomas Richard Waters Adam Jezard Telecoms correspondent West Coast editor Commissioning editor

Sarah Mishkin Matthew Garrahan Steven Bird Tim Bradshaw Global media editor Designer San Francisco correspondents Jane Bird Andy Mears Robert Cookson Jessica Twentyman Picture editor Digital media correspondent Freelance technology writers For advertising details, contact: David Crow Maija Palmer James Aylott, +44 (0)20 7873 3392. Senior US business correspondent Social media journalist All FT reports are available on FT.com at ft.com/reports Monday 2 March 2015 ★ FINANCIALTIMES 5 6 ★ FINANCIALTIMES Monday 2 March 2015 The Connected Business SMEs at risk of falling behind the digital curve Technical advantage Not every small business is able to recycling services to SMEs, uses an handle its customers’ payment prefer- Android-based mobile app when Businesses that exploit ences so readily. A study in five Euro- members visit businesses in London mobile best grow faster pean countries by Visa Europe found and Birmingham to gauge their interest small businesses push about one in four insigningupforitsservices. than their rivals, says clientsawaybynotacceptingcards. The app, linked to a customer rela- Companies such as iZettle, Payleven tionship management system from Jessica Twentyman and SumUp use mobile technologies to cloud-based services provider Sales- deliver low-cost competition to tradi- force.com, gives the team a map show- pop-up shop at the tional card payment services, which ing which businesses they need to visit Boxpark mall in London’s often have long contracts and monthly inaparticulararea. Shoreditch is a fashionable feesthatdetersmallbusinesses. After each visit, they use the app to starting point for a small It is not just in the area of payments score that prospect according to a A business hoping to start a that small businesses may lose out. A “warmness rating”. A “hot” lead is fol- trend. Newcomer Wines aims to popu- Boston Consulting Group study of small lowedupbytheoffice-basedsalesteam, larise Austrian wines by whetting the and medium-sized enterprises (SMEs) “colder” leads are flagged up for auto- appetitesofyoungercustomers. found the 25 per cent of SMEs that use matedemailmarketingcampaigns. Daniela Pillhofer, the company’s co- mobile services most intensively have BruceBratley,FirstMile’schiefexecu- founder, says mobile technologies have revenues that grow up to twice as fast as tive, says the company quadrupled its a big role to play in educating shoppers their peers and create jobs up to eight field sales in a matter of months using on the pleasures of Austrian wine — and timesfaster. the app, which paid for itself within a intakingpayments. The report says SMEs behind the monthofitslaunchinJanuary2014. In-store tablet computers show digital curve “are at risk of being left Streets ahead: Kate Lester, chief The company uses mobile provider the road, it is easy for office staff to alert Patrick Rusby, an analyst at Analysys videos about winemakers, and furtherbehind”. executive of Diamond Logistics Vodafone’s One Net platform for small them, via a mobile app, to new collec- Mason, agrees that better use of mobile purchases made by credit or debit cards Mobile technologies underpin the businesses that integrates landline and tions they need to make for same-day technologies can transform a small are processed on a mobile phone or franchisestrategyatDiamondLogistics, mobileconnectivityintoonesystem. and next-day delivery services. A company’sprospects. tablet via a card reader and app from a courier company in Surrey, England. Using this, Diamond keeps its distrib- feature in the One Net platform “Mobile opens up new horizons for Swedish mobile payments specialist The scheme, launched in 2012, has seen uted network of franchisees and drivers automatically diverts customer calls to SMEs, giving them better access to iZettle. the company open 14 locations in the working as a single, customer-focused thepersonbestplacedtohelpthem. better tools, which enable them to com- “About 80 per cent of our customers past two years and it plans to increase team,sayschiefexecutiveKateLester. The field-based sales team at First pete on a level playing field against wanttopaythatway,”saysMsPillhofer. theseto40bytheendof2015. This means that, when drivers are on Mile, a London-based provider of muchlargerrivals,”hesays. Milk-buying robots may be the end of us all

now there is an extra £20 in the INSIDETECH prepaid account. Does that belong to you? Will there be anything to stop an Maija advanced, AI-enabled fridge opening a online bank account and depositing the Palmer money there without your knowledge? Should banks have a “humans-only” policy to stop this happening? And what would a rich machine buy? Could an internet-connected thing — a A group of Swiss artists have smart fridge, a thermostat or a home- experimented with this idea, creating help robot — become a millionaire? the Random Darknet Shopper, an This is not as ridiculous a question as it automated online shopping bot that may seem. was given an allowance of $100 a week If we do indeed move toward a world in bitcoin and instructed to make one in which devices are connected to the random purchase a week from an internet and performing mundane online marketplace. The items were chores, it is likely that many of them displayed in an exhibition at the Kunst will be connected to some kind of bank Halle in St Gallen. account. To the consternation of the For maximum efficiency, the smart performance artists — and the Swiss fridge that orders your milk should police — the purchases included 10 also be able to also handle the ecstasy pills and a false Hungarian payments to the supermarket. You passport. This prompted debate over may not hook the fridge directly to a who was liable when a robot broke the current account — worried perhaps a law on its own initiative, a debate the software glitch might cause the fridge police sought to clarify by seizing the to accidentally put you in debt by contraband goods. ordering £20,000 worth of dairy The idea of the shopping robot adds products in a single day. But you might another dimension to the discussion set up a pre-paid account with a set about what a robot-filled future will be amount of milk money that the fridge like. Last month, an open letter, signed can access. by scientists and entrepreneurs What happens if the fridge is able to including Stephen Hawking and Elon buy your milk for 1p a litre cheaper Musk, urged us to begin considering than you have budgeted? Perhaps it is some of the ethical dilemmas and able to join with other networked potential dangers posed by artificial fridges to buy in bulk, lowering the intelligence. Who is liable if a robot has price. Or its ability to search hundreds an accident, for example? How will a of thousands of prices allows it to do self-driving car choose what to do if the some bargain hunting. The milk only way to avoid a head-on collision is account grows a surplus. But is this to veer on to a crowded pavement? money yours? Scientists at places such as the As the owner of the fridge you would Future of Life Institute based in the US, assume so. But is this always clear? the Centre for the Study of Existential What if you do not own the smart Risk at Cambridge university and the fridge, but rent it? Or if it has been Machine Intelligence Research supplied to you, free of charge, by Institute in California (yes, these its manufacturers or by the dairy? really exist) are also considering Who owns the surplus then? what might happen if we are Would it be like the deals some eventually able to create machines solar panel companies offer, where far more intelligent than humans — they install the equipment for superintelligences that may free on the understanding break out of the bounds of that they keep the their programming and money from any begin to disregard electricity generated? human controls. At the very least, you In science fiction, this will need to read the scenario — called ownership contract “singularity” or carefully. “transcendence” — And what happens usually leads to robot when the artificial versus human war and intelligence a contest for world capabilities of domination. appliances increases But what if, rather markedly and the than a physical battle, fridge is capable of it was an economic one, making more complex with robots siphoning decisions? What if, rather off our money or destroying than keeping the milk funds the global economy with in the prepaid account, it out-of-control algorithmic connects to an online stock trading programmes? market trading site, invests Perhaps it will not make for the money and makes a a great movie, but it seems profit? the more likely outcome. It still buys the milk, but After all, the financial crisis of the past decade has I bank, therefore I am?: shown us how easily it could a still from the science be done, even by dumb fiction film ‘I, Robot’ humans.