American Marketer


Mobile, Internet and the Cloud

June 11, 2012

Colin Knudsen is managing director at Coady Diemar Partners


By Colin Knudsen

The three inter-related platforms of mobile, the Internet and the Cloud are in various stages of emergence and maturity while enabling businesses to obtain significant scale at an unprecedented pace. Each requires substantial ongoing investment in infrastructure and IT and the trends that they support are the basis for significant investment in both new and legacy businesses and new business models.

The mobile market has clearly matured with substantial penetration gains across the globe while simultaneously undergoing a fundamental and dramatic shift in consumer usage.

Once largely a voice communication medium, the mobile market is incredibly diverse and consumer usage is now predominantly Internet and data driven. Apple’s introduction of the iPhone in 2007 radically and irreversibly changed the game while the iPad and Android operating systems have further contributed to a dramatic reshuffling of the mobile market.

At the same time, the Internet is increasingly described as a mature medium. The data and statistics counter this assertion and continue to demonstrate that the Internet remains a dynamic and evolving market and platform.

Finally, with the proliferation and ownership of multiple fixed and mobile devices, consumers increasingly expect access to content, applications and subscriptions anytime, from anywhere, from any network and over any device. This is true at home, on-the-go and in the office, and the Cloud is the emerging platform to make this happen.

The Internet, mobile and the Cloud are three dynamic and increasingly inter-related platforms that will continue to drive investment and innovation and both shape and satisfy evolving and demanding consumer behavior.

Life online is constantly changing
The Internet has become fundamental to daily life extraordinarily rapidly.

Approximately 80 percent of the U.S. population has access to the Internet, up from 44 percent in 2000.

On a global basis, 2.3 billion individuals access the Internet, a 35 percent penetration rate, up from 361 million, or 5 percent penetration, in 2000.

It is forecast that by 2015 approximately 3.1 billion people will have non-mobile Internet access, a 40-percent-plus penetration rate.

Clearly, growth in Internet penetration over the last decade has been phenomenal.

The Internet is still relatively immature and consumer behavior patterns continue to evolve and shift over time.

In fact, the Web is much more complex today than a decade ago reflecting, in part, growth in mobile Internet activity and the emergence of the Cloud.

Social and entertainment driving engagement
The Web is transitioning from primarily a functional, information seeking medium to one more oriented to social engagement and entertainment.

The most significant share shifts over the last year are declining engagement with the portals and increasing engagement with social networks.

A number of the key drivers of traditional portal engagement such as email, instant messaging and homepages have shown declines in the last year.

In fact, instant messengers experienced a 40 percent decline in time spent online last year, the largest decline of all.

Further, market share of Web-based email fell below 10 percent for the first time with the most significant usage declines occurring in the age 12-24 demographic.

At the same time, mobile email usage for the same demographic experienced double-digit growth.

Social networking continued to gain momentum in 2011.

Facebook had 845 million “monthly active users” around the world as of Dec. 31, 2011, up 39 percent over 2010.

In the United States, Facebook now accounts for approximately 15 percent of total time spent online – seven hours in December 2011 – and 16 percent of all page views.

Not surprisingly, Facebook is also the leader in the display advertising market with a 14 percent share of display ad revenue.

The IPO of Facebook has focused further attention on the value of social networks, while raising substantial growth and acquisition capital for Facebook.

As a matter of strategy, Facebook has prioritized global expansion of its tightly controlled platform and user engagement relative to near-term financial metrics.

Facebook and Apple are alike in this sense. Both want to control as many dimensions of the user experience as possible. Both have built substantial walled gardens on top of the Internet park.

“The Web is dead. Long Live the Internet”
Much has already been written about this Wired magazine cover story in August 2010. The debate over the Web’s evolution continues while the mobile revolution becomes more evident.

To quote from the Wired magazine article, “One of the most important shifts in the digital world has been the move from the wide-open Web to semi-closed platforms that use the Internet for transport but not the browser for display . . . It’s driven primarily by the rise of the iPhone model of mobile computing . . . And it’s the world that consumers are increasingly choosing, not because they’re rejecting the idea of the Web but because these dedicated platforms often just work better or fit better into their lives … The fact that it’s easier to make money on these platforms only cements the trend”.

In 2008, Apple launched its iPhone App Store. The mobile app market that year generated revenue of approximately $350 million.

In 2011 the app market approximated $7.7 billion, with forecasted growth to $22.8 billion by 2015. One month ago Apple announced that 25 billion apps had been downloaded and in December 2011 Google’s Android market achieved 10 billion downloads.

Although time spent online continues to grow, much of this growth is attributable to time spent with mobile applications.

For example, the average smartphone user now spends more time on mobile apps than the mobile Web. Games and social networking account for 74 percent of consumers’ total app time with games at just over 50 percent.

Another key trend in the evolution of the Internet is the use of mobile devices to conduct commerce.

Currently, 52 percent of adult mobile phone owners use their devices while in a store to get help, with purchasing decisions and purchases from a mobile device representing approximately 3.9 percent of all online purchases in 2011, up from 1.9 percent nine months earlier.

Reports on the death of the Web are clearly premature, but there is no denying that the Internet is substantially more complex and variable resulting from device and app explosion.

As HTML5 is widely adopted consumer and enterprise experience with the mobile Web and apps will likely converge as will time spent on each.

In any event, mobile will play an increasingly important role in the evolution of the Internet and Web as it is likely that by 2014 more Internet users in the U.S. will access the Internet through mobile devices than through PCs or other wireline devices.

Mobile digital revolution
While Internet availability continues to increase globally, the penetration and use of mobile devices has absolutely exploded.

Globally, there are 5.9 billion subscriptions – over twice the number of Internet users – or 87 percent penetration.

In the U.S. there are approximately 320 million mobile subscriptions representing a penetration rate of approximately 102 percent.

Power of personal and mobile computers
Mobile devices are increasingly smart and powerful computers with the ability to access more and more information at faster and faster speeds as networks migrate from 2G through 3G to 4G.

The era of mobile computing is driving one of the largest shifts in consumer behavior in the last half-century and this shift is occurring at a much faster pace than Internet access and PC adoption.

In fact, the number of smartphones activated in the five years after the introduction of the iPhone in 2007 is two times the increase in the number of Internet users after its first five years.

Smartphones now represent 50 percent of the U.S. mobile device market. Tablet sales also increased dramatically last year, with 40 million tablets now in use in the U.S. after less than two years, significantly outpacing smartphones which took seven years to reach the same level of adoption.

Smartphone shipments are forecast to increase from nearly 500 million shipped in 2011 to 1 billion in 2015, while tablets are forecasted to increase from 63 million to just under 200 million in 2015.

A number of prognosticators think that these tablet estimates are far too low. Both GigaOm Pro and Gartner forecast tablet shipments of approximately 300 million in 2015.

Tablets are increasingly becoming the proverbial fourth screen in a heretofore three-screen market.

The four screens (TV, Internet, mobile and tablet) accounted for 81 percent of time spent on media in 2011. TV remains the dominant medium with a 45 percent share, followed by the Internet with a 26 percent share and mobile comprising a 10 percent share.

According to Nielsen data, 70 percent of consumers’ time spent with tablets occurs at home.

Forrester Research has recently reported that 85 percent of U.S. tablet owners use their devices while in front of the TV, while 57 percent of smartphone and tablet owners checked email, 44 percent visited a social network and 19 percent searched for product information while watching TV.

The rapid adoption of tablets in the U.S. and their usage in front of the TV is adding fuel to emerging TV Everywhere, social TV and tablet-TV commerce strategies.

Strong growth of mobile data traffic
Not surprisingly, traffic on mobile networks reflects the device as computer phenomena with substantial growth in the consumption of data or Web services.

In fact, data traffic surpassed voice traffic commencing in fourth-quarter 2009 and now represents two and a half times voice traffic.

Currently, mobile and connected devices account for only approximately 8 percent of the Internet traffic in the U.S. With the proliferation of smartphones and tablets and the rollout of faster wireless networks, Cisco estimates a 78 percent compounded annual growth rate in mobile data traffic through 2016, reflecting continued smartphone adoption.

In terms of use, mobile video will generate the largest share of this growth, in part because mobile video content has much higher bit rates than other mobile content types.

Cisco estimates that mobile video will grow at a CAGR of 90 percent between 2011 and 2016, the highest growth rate of any mobile application category forecasted generating over 70 percent of mobile data traffic by 2016.

A continued proliferation of mobile device form factors, increases in computing power, longer battery life, improved screen resolution and other quality enhancements will drive mobile device penetration and usage, expectations and behavior.

Consumers already expect access to their content, applications and subscriptions anytime, from anywhere, over any device and from any network.

As both fixed and mobile devices and multiple device ownership proliferates, consumer expectations for ubiquitous access to content will escalate. The Cloud is increasingly the platform that provides the foundation on which this seemless interactivity will occur.

In fact, Cloud applications globally will account for 71 percent of total mobile data traffic in 2016, compared to 45 percent at the end of 2011. Mobile cloud traffic is projected to grow 28-fold from 2011 to 2016, a compound annual growth rate of 95 percent.

Cloud and consumerization of the enterprise
The term “the Cloud” has become popularized and is most often used as a metaphor for the Internet in the sense that just as information is accessed via the Internet, it can be stored “there” as well.

The Cloud infrastructure enables the delivery of computing, software apps and information as a service where the computing infrastructure is shared and located remotely.

The availability of high-capacity networks, both wired and wireless, and the declining cost of computing and storage devices have provided the economic foundation for cloud computing.

At the same time, consumer behavior around Internet use, mobility and multiple device ownership and usage are driving rapid adoption of the Cloud.

As noted earlier, one of the important trends in consumer technology and behavior is the proliferation of affordable and powerful consumer devices.

The table following presents ownership penetration of consumer “gadgets” in the U.S. since 2006.

In addition to the devices shown, 290 million Americans own at least one TV, 253 million own a DVD player and 129 million own a DVR. It is worth noting that all of the mobile devices show substantial increases in penetration while the fixed devices have either declined (desktop computers) or stabilized (game consoles).

Adult gadget ownership over time (2006-12): Pew findings

Currently, 88 percent of U.S. adults have a mobile phone, 57 percent have a laptop, 19 percent own an e-book reader and 19 percent own a tablet, while 13 percent of U.S. adults own a laptop, smartphone and tablet. Approximately six in 10 adults (63 percent) go online wirelessly with one of those devices.

Cisco estimates that by 2015 nearly 70 percent of Internet users will use more than five network-connected devices, up from 44 percent at the end of 2011.

As relates to mobile users, 25 percent will have more than one mobile-connected device and 9 percent will have three or more by 2015.

Mobile devices have memory and speed limitations which Cloud applications and services mitigate.

For example, a consumer with an 8GB smartphone who streams video and music will consume more content over the course of two years than can be stored on the device itself.

Similarly, a smartphone user adopting Netflix, Pandora and Facebook will generate more than twice the volume of traffic generated by a smartphone user adopting only email and Web applications.

Consumer behavior trends of mobility, social network usage and ownership of multiple devices are also exerting pressure on businesses to make enterprise applications available in similar ways.

A significant proportion of the mobile devices used in the business arena today are personal devices, sourced by the employee rather than provided by the employer company.

Market researcher Forrester forecasts that 200 million of the 350 million employees who will use mobile devices for work in 2016 will use their own devices rather than devices provided by their employers, while the average business will need to support twice as many end-user devices in 2015 compared to the end of 2010.

This bring-your-own-device culture is increasingly leading to the embrace by corporate IT departments of the consumerization of the enterprise, further driving Cloud adoption.

According to Forrester, the global Cloud computing market will grow from $40.7 billion in 2011 to more than $241 billion in 2020.

A Forrester report published in mid-2011 provides forecasts for the three core layers of cloud computing – the public cloud, the virtual private cloud and the private cloud. While each segment has its own key drivers, rapid growth is forecast across all three segments.

The Cloud is a key facilitating platform for continued innovation of the Internet, the Web and mobile.

Looking ahead
The Internet, mobile and the Cloud are rapidly and profoundly changing the way that we consume content and conduct commerce.

The ubiquity of wireless connectivity combined with increasing functionality and speed of connected devices and networks will drive continued growth in the creation and consumption of media, content and products enabled by and across these platforms.

The evolving mobile market will result in more rapid Internet penetration globally, while the functionality of mobile devices will continue to increase inherently and through the Cloud.

Facebook has built a business with 900-million-plus global users in less than a decade.

Online social networking and microblogging service Twitter launched six years ago and now reports 140 million active users generating more than 340 million tweets daily.

Five years after its founding, social gaming company Zynga has 240 million users across 175 countries.

Instagram, founded less than two years ago offering a free mobile photo sharing program, ramped to 30 million registered users and was acquired by Facebook recently for $1 billion in cash and stock.

These and other companies have successfully leveraged the infrastructure and services of the Internet, mobile and the Cloud to achieve unheard-of reach and scale in unbelievably short timeframes.

The digital media and commerce markets are growing and evolving rapidly, fueled by investment in new technology and fundamental shifts in consumer behavior.

Colin Knudsen is managing director at Coady Diemar Partners, a New York-based investment banking firm. Reach him at