Many years back, an American friend who was visiting London from New York remarked on the odd way in which people were walking around with blocks of plastic held to their ears. “Why don’t they just use normal phones?” she asked.
That was long ago, and it feels like a galaxy far, far away. My friend is rarely without her iPhone now, and the lead that the UK and Europe held over the US is history. These days, most of the innovations and advances in mobile communications come from Silicon Valley or from South Korea and China.
I can remember when the biggest struggle in mobile was between Vodafone and Nokia over which companies would control branding and content on data-enabled phones – operators or handset makers. The answer was neither.
Two deals this week crystallised the shift in power and economic value away from Europe. Vodafone sold its 45 per cent stake in Verizon Wireless for $130bn, cutting its own assets in half; and Microsoft bought Nokia’s handset arm for €5.4bn, a fraction of its peak.
From a fragmented past, US mobile has consolidated to a near duopoly between Verizon and AT&T, which have higher margins than European operators. At the same time, Apple and Google have diverted value from handsets and networks into software and services (bundled, in Apple’s case, with its devices).
This does not mean that all North American companies are brilliant while their European counterparts are hopeless. Microsoft is buying Nokia in an effort to remedy its own failures in mobile, and BlackBerry is just as troubled. Intel has had less success in making chips for mobile phones than Arm Holdings of the UK in designing them.
Rather, it is a tribute to the US ecosystem, led by Silicon Valley, in overtaking an early European lead that was enabled by regulation and standards-setting. Its depth of capacity to innovate, and the ability of the US telecoms industry to adapt itself, turned the tables.
It was never very likely that Europe would capture all the value of the transition from personal computers to mobile devices. But think of the economic impact had it performed better. Nokia’s market capitalisation at the end of 2000 was $209bn while Apple’s was $8.6bn. At the end of last year, Nokia was worth $14.3bn and Apple $627bn – a swing of $800bn.
Several things made a difference.
One was regulation and standard-setting, which initially favoured Europe but came to benefit the US. Europe grabbed an early lead in mobile because the EU mandated the GSM operating standard and countries awarded national licences to three or four competitors, enabling a competitive but orderly market.
The US, by contrast, handed out a patchwork of local licences for cellular and did not impose any technology standard. It took a long period of industry consolidation and conversion to common technology, led by pioneers such as Craig McCaw, to create order.
That put the US behind on its rollout of second-generation and then third-generation technology. By the time 4G arrived in 2011, not only had standards been unified in the form of the LTE system but regulators had also allowed the US market to be dominated by cash-rich Verizon and AT&T (before blocking the latter’s bid for T-Mobile’s US arm).
Meanwhile, European companies were squeezed by overpaying for 3G licences. “European governments wanted their cash and they starved the operators of it,” says Cyrus Mewawalla, an analyst. Relatively strict European regulation benefited consumers but gave Verizon and AT&T a financial edge.
Second, Europe lost the platform battle. The tussle over operating standards gave way to a fight over smartphone software. First Apple’s iOS and then Google’s Android platforms beat Microsoft’s Windows Mobile and Nokia’s Symbian.
Benedict Evans of Enders Analysis says that Symbian was ideal for devices with limited memory, batteries and processors but iOS was fit for the future. “All the Symbian trade-offs that were right in 2000 were wrong in 2007 [when the iPhone was launched],” he says.
Third, Silicon Valley won. With the iPhone and iOS, Apple’s Steve Jobs defeated the effort by operators – both US and European – to maintain the mobile world as a walled garden, separate from open standards and software. Their attempt to corral content on mobiles failed.
This affected US handset makers such as Motorola and operators such as Verizon as much as European ones. But the US had the strength in software and internet innovation to exploit it. By 2009, iOS and Android were at the heart of mobile.
Mary Meeker, a partner of the venture capital firm, Kleiner Perkins Caufield & Byers, noted the size of the shift in a recent presentation. What she calls the “Made in USA” smartphone operating systems – iOS, Android and Windows Phone – rose from a 5 per cent market share in 2005 to 88 per cent in 2012, pushing aside Symbian and Linux.
The volume of data consumed on phones and tablets is rising rapidly – Ms Meeker estimates it will grow 26-fold between 2010 and 2015. That will bring new revenues to Europe’s operators and equipment suppliers. But the opportunity cost of losing its broader lead in mobile is vast.
Still, Samsung has taken Nokia’s place as the world’s biggest handset maker and China is now the biggest market for Android and iOS devices. What the US did to Europe, Asia could yet do to the US.
Letter in response to this column:
Get alerts on Columnists when a new story is published