Why 3G Embedded Notebook Forecasts are Overhyped
We're delighted to be working more closely with Dean Bubley, one of the most insightful analysts on wireless technology and author of the superbly acerbic Disruptive Analysis blog. Dean will be helping us to create more tangible roadmaps to the two-sided business model.
After our upbeat post on embedded broadband, we asked Dean to share some of his detailed analysis and give us a 'reality check':
The last few weeks have seen much fanfare about notebooks shipping with built-in 3G modules. Vodafone announced it was selling Dell's new Mini 9 netbook, while T-Mobile is working with LG, Acer and Asus on embedded notebooks of various types. The GSMA has just announced its "Mobile Broadband" certification scheme and sticker for PCs, backed by $1bn of marketing. It hopes this will emulate the past success of the WiFi Alliance and Intel's Centrino badging in driving the "attach rate" of embedded connectivity. In the background, various silicon and module providers (notably Qualcomm and Ericsson) have been loudly evangelising their products.
Disruptive Analysis has been working on a new report, due for publication soon, on Mobile Broadband Computing, which examines the various options for connecting PCs and new "MIDs" (Mobile Internet Devices). One early finding of the research is that embedded-3G (and, for that matter, embedded-WiMAX) notebooks will not follow the rapid growth trajectory of WiFi. Instead, the overall proportion of PCs attached to mobile networks will grow relatively slowly, and those that do will use a mix of dongles, embedded modules and other options.
Really, there are two separate questions here:
What percentage of notebook buyers really want or value mobile broadband at all? This defines the addressable market as a subset of overall laptop shipments.
For those that want mobile broadband, is an embedded module better than the alternatives?
The first point to make is that a sizeable proportion of notebook users have little need for mobile broadband in any form, or little ability to justify it on cost grounds:
23% of notebooks are sold to emerging markets - a figure that will likely rise to 30%+ over the next few years. At present, there's no 3G in China or India yet, and it will still be immature in 2010. There is little point putting in expensive, unused, functionality into PCs being sold to cost-sensitive markets. 60% of notebooks are sold into businesses. Corporations are still only slowly adopting mobile broadband, and the majority of employees still do not warrant the extra cost. Senior executives, and frequent travellers who would otherwise rack up large ad-hoc WiFi bills are the key targets - not the average worker who occasionally takes his PC home at the weekend.
A sizeable fraction of notebook buyers purchase large "desktop replacement" PCs, and leave them in a static location at home or in the office. These have little need for mobile broadband at all, especially in regions with poor indoor 3G coverage.
Overall, the realistic overall "addressable market" for mobile broadband remains well below 50% of all notebook purchasers. Within this segment, it is then worth considering the strengths of embedded options, against alternatives like dongles, or 3G handsets used as "tethers". Disruptive Analysis believes that the comparison of the uptake of embedded 3G, with that of WiFi from 2003, does not bear close scrutiny, despite the industry rhetoric that the two are analogous:
When launched, Centrino included considerably more than just WiFi - it also significantly improved battery life and heat dissipation, enabling thinner and lighter laptops. There is no equivalent "side benefit" from 3G modules. The price premium of integrated WiFi capability essentially fell to near zero in 2003. Conversely, integrated 3G in notebooks still commands premiums of $100+, and even though new modules are getting cheaper, Disruptive Analysis believes it will take several more years to fall to $20 or below, particularly for the most up-to-date chips.
WiFi adoption was catalysed by a variety of access models - especially private WiFi in homes and offices and one-off public hotspot access. While 3G offers greater general coverage, it not useful for home Internet-sharing, or use as a LAN extension inside corporate offices. The main competing form-factor for embedded WiFi was PCMCIA cards. These were expensive, fragile and required complex driver installation. Today, USB dongles are cheaper, easier to use/install/sell and relatively robust. Phones acting as 3G "tethers" are also becoming more practical.
Put simply - embedded 3G in 2008 does not add as much to external 3G, as embedded WiFi added to external WiFi in 2003. It is also critical to recognise that only around 10% of WiFi notebook owners generate services revenues through hotspot use.
The industry's motivations for wanting 3G notebooks are understandable - operators and the GSMA want to get further momentum for HSPA ahead of the imminent launch of WiMAX-enabled PCs. They feel (probably correctly) that more users will be tempted to sign up for services if the capability is in the PC when it leaves the shop. They're also very keen on charging €35 a month for a full notebook, rather than just €15 for a 3G dongle on the same data plan - especially if their auditors allow them to book it all as "data services" revenue, rather than equipment resale, or if the customer continues to pay at the same rate after the end of the contract.
The PC OEMs are looking hungrily at the operators as new distribution channels, with billions in the pot for subsidies - and the possibility of moving PC users to a 2-year upgrade cycle. And the silicon vendors want to sell high-end chips - and stimulate demand for their network-infrastructure products as well.
For end users, the benefits of embedded modules vs. dongles or tethered 3G phones are less clear-cut. Potentially, radio performance and battery life can be better. Maybe there will be some new pre-installed PC-based operator applications that are seen as valuable, perhaps even based around forthcoming Telco 2.0 business models, but these are still in their infancy. Most of the other advantages are generic to all forms of mobile broadband - even the option of subsidised or "free" PCs is possible by bundling the notebook with a dongle.
And these benefits are set against downsides. Some operators' data plans for embedded notebooks are more expensive and use slower modems than their own dongle offerings. Built-in 3G notebooks risk users being tied to specific operators on long contracts, perhaps with onerous "fair usage" policies, difficult-to-remove operator-custom software, or even application blocking. Where they are sold via operator channels, there are huge outstanding questions about the quality of technical support. Roaming is expensive, and switching SIMs to those of a different provider while travelling may cause glitches.
Nevertheless, there will certainly be a good number of consumers tempted by embedded notebooks and netbooks, especially as the price delta versus "unconnected" ones falls to perhaps $30 or less. One possible factor which could drive greater uptake is the availability of innovative business models and payment methods - something already seen in PCs sold with fixed broadband via Microsoft's FlexGo proposition. On the other hand, any shifts in perceived reliability of HSPA as networks get more congested - or embedded notebooks start to be used in homes with poor coverage - could put a brake on the market.
If all goes well, consumer notebooks sold in developed markets could enjoy WWAN attach rates of 15% in 2009 - especially lower-end netbooks. Given innovation and acceptable network performance, this could potentially grow to 50% by 2013. However - not all of these will necessarily be "activated", or if they are, use could be occasional rather than a typical monthly subscription.
For enterprise customers, the total cost of ownership (TCO) is still too prohibitive to offer mobile broadband as a default option for all staff. And using external modems enables them to maintain a single low-cost notebook "build", but give broadband selectively to those that justify the extra spend. They can also easily switch to other operators if they choose, or even use WiMAX if it becomes available. As an estimate, for business laptops overall, we will maybe get a 7% attach-rate of embedded 3G in 2009, perhaps increasing to 25% in 2011, and more beyond that point.
Overall, the industry needs to see beyond the PR blizzard about embedded 3G in notebooks. Yes, it will be an important trend. But it won't happen ubiquitously, and it won't happen overnight. And there is also an open question about what proportion of embedded 3G will ever actually get activated and used - or generate meaningful mobile broadband services revenue.
[Ed - you can meet Dean at the Telco 2.0 event on 4-5 Nov, London.]