Notes from Morgan Stanley Mobile Internet Report

Background - While many telecom companies did quite well over the past 15
years, at the margin, technology companies created more wealth than telecom &
media companies as global desktop Internet + voice / texting mobile markets
developed.

Outlook - The technology sector could garner outsized relative gains (vs.
telecom) as the mobile Internet market develops and a large portion of
incremental profits go to companies that drive innovation and gain scale.

It’s notable that, after years in the backwaters of global mobile development,
American companies (led by the likes of Apple, Facebook, Amazon.com and
Google) are becoming mobile internet innovation pacesetters.

Key Points:
• Mobile internet ramping faster than desktop internet did and will be bigger
than most think
• 5 Trends Converging: 3G, Social Networking,Video, VoIP, Impressive
Mobile Devices
• Within 5 years it’s likely more users will likely connect to the Internet via
mobile devices than desktop PCs

19 points & stats you should know from the report:

1. Tech cycles generally last about 10 years (slide 6), ‘mobile’ as we know it
should be over this year or by 2011. It’s difficult to know w
2. More than 10 billion mobile internet devices have been created in the
world (compared to 100 million PC units). Although Morgan Stanley does
include a lot in their description of what a mobile internet device is – not
just the iphone, but also includes wireless home appliances and car
appliances etc. (slide 7).
3. Mobile has the potential to be the biggest trend that we have seen yet
(with 5 trends converging: 3G + Social Networking + Video + VoIP +
Impressive devices) (slide 22).
4. More people will connect to the internet through mobiles than PCs within 5
years (slide 22).
5. Globally 830 million people are using Social Networking Sites – this is
seeing growth of 20% YOY – and the average time spent on Social
Networking Sites is going up by 25% YOY (slide 30). MS believe these
platforms, specifically referring to Facebook, have the capability to
become a primary communications platform for many in the future (slide
17).
6. Facebook and YouTube.com together make up over 10% of global internet
minutes (slide 31).
7. Online video is HUGE! YouTube.com has 466 million registered users
(growing at 35% YOY) who watch 73 billion minutes of video (growing at
70% YOY). MS believes this will grow, not just on PCs but also on handsets
(32% of Americans have used internet on mobile devices (April ’09
statistic), which was up from 24% in December 2007!) (slide 34).
 8. If Skype was a ‘carrier’ it would be the largest carrier in the world with 521
million registered users (41% YOY growth!) (slide 37).
9. Apple has the leading edge in Mobile Innovation + impact, say MS. (slide
41). Apple is driving the platform change to mobile. Its mobile ecosystem
should surprise on upside for the next 2 years. Long term Google android
will limit Apple’s market share.
10.In technology the availability of ‘applications’ is a huge driver of handset
choice and purchase (slide 44). (slide 44).
11. Facebook has had over 500 million downloads of its application for mobile
internet devices (slide 47) and is the most downloaded of the top free
apps (slide 49).
12. Japan social networking trends shows importance of mobile: in 2006 PCs
were the clear winner in terms of how people accessed Social Networking
sites. In Q3 2009 72% of monthly page views were accessed through a
mobile device (slide 50).
13.Mobile Internet usage per day is 3x higher on an iphone than on any other
mobile device (slide 52).
14.MS believe that Emerging Markets will be a huge market for Mobile
Internet – it may even leapfrog PCs as a way of accessing the internet
straight away (slide 71).
15.The average internet user generates $46 dollars in ad revenue(this has
grown from $nil in 1994 per user and $28 per user in 2005) (Slide 77).
16.Drive innovation and gain scale: Google, Amazon, & Skype probably will
keep dominating. Nokia & Sony-Ericsson are “potentially challenged”.
17.Smartphones will outship the global notebook + netbook market in 2010
and the global PC market (desktop + notebook + netbook) in 2012.
18.Mobile devices are remote controls for real-time cloud based services.
Facebook is the largest gainer of online usage over last 3 years. Chinese
company Tencent has earned >$35 billion from virtual goods.
19.Mobile IP traffic likely to grow 66x by 2013 (with 130% CAGR), this will
stress carrier networks and force them to compete on strength of
networks + availability of Wi-Fi. Tiered data pricing (speed, quantity) will
be key in replacing voice revenue lost to VoIP.
Some further thoughts we’ve had inspired by this report:

Services and web-based Apps

Services – The mobile internet will be stretched by ever-growing consumption of
data including video + images + content + communications. Consumers will
demand more from their wireless devices as companies seize opportunities to
serve needs of increasingly empowered mobile users.

Consumers will be insatiable in this respect. The service providers will

always get the blame.

Consumers will expect to seamlessly connect via mobile, wired and wireless
internet. 3G will form a central aspect of this but Wifi and Wimax will grow in
capability and uptake. Whoever owns this network will be in the strongest
position.

The speed of adoption of new web-based applications will continue to occur at

the fastest pace in history. One need look no further than the ramp in
Facebook/Twitter and iPhone users and the breadth/depth of related
services/content ecosystems. Whether it’s new games like Farmville, web
services on mobile like Pandora/Amazon or land-based services optimized for
mobile like Yelp, many consumers will find their online usage rises dramatically
when they have 24x7 mobile wireless access to ‘cloud-based’ stuff.

Companies that create innovative applications/ services / content that capitalize

on new mobile and computing platforms have opportunities to build large user
bases (often with recurring revenue) (Google, Amazon.com, eBay, Yahoo!,
Adobe).

Many websites today provide services beyond content and information. Google’s
Google Apps is a prime example of this, where the services provided by a web
site are directly competing with established software giants, like Microsoft. The
Nokia OVI site is another prime example of a web based service, where by
providing added services like instant photosharing, syncing and geo-specific
content, Nokia builds both loyalty and additional revenue streams.

With the mobile Internet,

many ‘traditional’ Internet
companies will capitalize on
incremental growth as they
have been early +
aggressive in focusing on
mobile opportunities –
Google in search + ad
serving + video,
Amazon.com and Rakuten in
commerce, Mixi in mobile
social networking and Adobe in mobile content creation / delivery. In addition, a
number of private mobile companies are emerging – including the likes of game
producers Zynga and Playfish (acquired by Electronic Arts in 11/09) and mobile
ad player AdMob (acquired by Google in 11/09).

Cloud computing – Already popular, we’ve seen a huge growth in the number of
free online services offering data back-up and synchronisation. Why store your
information/data/media on one device when you can store them on the cloud
and access them from any desktop, your laptop and your mobile? DropBox
recently won web app of the year, allowing constant synchronisation and instant
access to 2GB media for free.
Already popular with millions for their personal use it’s likely we’ll see this
success filter through to SME use. Small businesses are using up more
bandwidth than ever before, with applications like video conferencing, IP
telephony, media streaming and large file transfers all competing with cloud
applications for vital bandwidth. Google is in many ways at the forefront of this
revolution offering free Gmail with 5GB worth of space. Google docs to allow
people to create, collaborate and store documents externally.
Off-site backup has seen a big growth as people see the benefits of backing up to
a remote server which alleviates any issues with fires & theft. Mozy.com is one of
the biggest providers of this service. The limitations are upload speeds so slow
(even on a broadband connection) meaning it can take a week to back up 50GB
data. Broadband providers in the UK are so obsessed with download speeds they
tend to forget uploading and its importance.

Platforms Three platforms are showing especially strong momentum based on

consumer usage + developer interest: 1) Facebook (which is increasingly
becoming a desktop + mobile communications hub); 2) mobile (clearly led by
Apple’s iPhone / iTouch / iTunes ecosystem) and 3) the web (as online usage of
products / services continue to gain share vs. offline counterparts and growing
wireless usage expands market opportunities).

Facebook has the potential to serve as a communications platform / engine of

one-to-one, one-to-some and one-to-many (and visa versa) for the mobile
Internet – Facebook has already become a primary way for millions of people to
stay connected and Facebook’s lead is likely to be extended as more consumers
use increasingly powerful mobile devices (with photo / video + high-speed
access) and the communications options on Facebook (like voice / video chat and
other services) continue to rise.

Network Thoughts on How Carriers May Navigate Rapid Data Growth &
Slowing / Declining Core Voice / Messaging Growth

Congestion problems (voice + data) lie at cell site level in densely populated
areas
• Markets like London have high population density and high smartphone
penetration, and, thus, are the most susceptible to network capacity constraints.
• Wireless carriers will likely target capacity constrained cell sites in these
markets first, focusing on technology upgrades (HSPA 3.6 to HSPA 7.2) and
backhaul upgrades (T1s to fiber-based Ethernet or microwave).
As we have seen before, when consumers are empowered by the Internet, usage
changes occur very quickly.

Devices Traditional handset manufacturers have struggled over the past 2 years
due to the rapid growth of the smartphone. Over the last 18 months the number
of UK Smartphone users (iPhone, Nokia N96, T-Mobile G1 etc) has grown from
3.6m subscribers to 6.3m, a 73% increase.
The losers are Nokia and Sony Ericsson. The winners are RIM, Apple and HTC.
Tradtional laptop manufacturers like Dell are now working on phones of their
own.

In the laptop market there’s only been one growth area (apart from Apple) and
that’s netbooks. People have been happy to trade processing power for
portability and price. There’s been further growth with netbooks coming with
data contracts.
Smartbooks will be the next evolution of the laptop that has key advantages over
a netbook. They feature all-day battery life, constant internet connectivity
through the 3G phone network, rather than relying on WiFi hotspots, plus lower
costs that will encourage operators to offer them free to subscribers. Smartbooks
run on microprocessors similar to those used in mobile phones.
A whole host of impressive new devices will soon emerge all requiring constant
data connectivity:

Smartbooks
Tablets
E-Readers such as amazon’s kindle which
In-car devices
MP3/games players

Google will continue to grow in dominance in both the computing and mobile
markets. It’s now pushing it’s own web-browser, it’s own PC and mobile OS
(Android). They’re about to release their first hardware phone. This will be
platform agnostic so has the potential to carve the networks control open. Of
course people will need networks but as Wifi and Wimax coverage increases this
will be less essential. People will be able to chop and change which network
they’re on depending on where they are and their requirements. It’s quite
possible that Google will bid for network space at some point and offer free
connectivity in return for serving ads. This is unlikely to happen in Europe due to
competition issues.