Mobile Growth: Don't Bet On It

A thread today made me think a little bit about the future of the mobile internet. The person I was talking to (Dan from Ticketstumbler, an awesome YC-backed startup) mentioned that mobile was a good source of future growth for Google. I’m not exactly what I’d call bearish on the mobile web, as I think there’s a lot of potential there, but I’m probably not bullish either. Here’s why.

First, he mentioned that mobile devices outnumber PCs by something like 10:1. True. But not all mobile devices are created equal, and currently something like 80-90% are worthless for any web surfing beyond checking the weather even here in the US, and its worse overseas. That will change, but slowly because most phones are dirt cheap pay-as-you-go clamshells purchased by people in third world countries. I remember reading that the most popular mobile provider in China has more customers than there are American citizens.

China, India, Russia, Brazil, and the rest of the developing world make up the majority of mobile users (because they make up the majority of the world’s population) and are why those devices outnumber PCs by so much. Those countries are also worthless to Google (and other websites) because they have, per capita, very little money. (And because Google can’t seem to get them to use their product, but that’s presumably a problem the big G can solve, whereas their poverty is not.) That may change, but you better believe that if China grows as wealthy as the U.S., making their traffic worth real money, their ratio of phones to PCs will look about the same as ours.

I don’t know exactly what the ratio is in the developed world, but there’s no way it’s 10:1. According to a survey done by Seagate 3 years ago, 76% of Americans own a computer. It’s safe to say that 760% of the population does not own a mobile phone. According to this one survey I found, it’s 82.4%, making the ratio about 1.08:1, if you assume PCs have stagnated over the last 3 years. In reality it may be below 1:1, and even if everyone buys a cell, it will be somewhere around 1.25:1 in the developed world (i.e. where the money is).

Second, people will, until some radically new, currently unforeseen technology becomes available (and I’m talking way beyond Blackberry/iPhone here) prefer surfing on the PC over the web when both are available. The input devices are better. Keyboards on a PC are significantly easier to use than the one on a Berry, and the mouse is still a far better input device than the touch screen. And most importantly, even the smallest monitor is 4-5x the size of the iPhone, which itself is about the biggest screen you can feasibly have and still fit in your pocket.

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Because people will prefer a computer over a cell-phone, they effectively spend more time around PCs than they do phones. Most people spend a third of their day at work (possibly with a PC handy) where they generally cannot use mobile phones, and much of the rest at home, where again a PC is usually available. Mobile devices are only useful when you’re not at home and not driving, and that’s just not much of average Joe’s life. Most of his waking life is spent either near a PC at home, near one at work (or, if he’s blue collar, near neither at work) or driving between those two places.

In fact, even if some currently unimaginable technology makes people prefer Googling from their phone, it’s not growth any time they do it near a PC. It’s simply shifting from one source to another.

Also people are never going to be too keen on, say, entering a credit card on their phone in a restaurant or subway. The Internet’s cash flow, at the bottom, base level pretty much involves someone entering a credit card somewhere. Buying something on Amazon, subscribing to a porno site, loading up the account at their favorite online poker room. Run any Google search and look at the paid links. It’s almost entirely to places that you buy stuff from, or (far less frequently) it’s to somewhere that makes its money by linking to places that you buy stuff from.

That’s probably a problem that is somewhat solvable. For instance, once you’ve entered your credit card on Amazon, you can order from a restaurant without having to do it again. But it’s still just another reason for some people not to use your site and is going to detract from overall profits. That means fewer people are going to want to advertise on the mobile web, and CPMs will suffer.

So, I believe that even in 5 years, mobile device traffic will be significantly lower than good old fashioned PCs, and it will also have lower revenue per page view.

That doesn’t mean I don’t think it’s worth developing in the space. There are, certainly, some awesome things you can do on the mobile web that you can’t on a PC. For instance, a site that price compares items using bar codes would be worthless to a desktop user, but potentially great for the guy with an iPhone. I think there are some very neat gaming applications as well, and certainly lots of stuff we haven’t even imagined yet. But for the most part, the mobile Internet is just a crippled subset of the normal Internet, and people are too often near the good old fashioned web for it to be worth a lot in the grand scheme of things.

So it’s a growth area for sure, but I wouldn’t be buying Google at a 30 PE ratio because of it alone. It remains to be seen just how much people will use it as it grows in popularity. Hell, it remains to be seen just how much it will grow in popularity, since most people still use their cell phone primarily as a phone, with some SMS mixed in, and take the free (with a 2 year contract of course) clamshell.

I personally have had a smart phone since before anyone ever heard that term, and I’ve seen the mobile Internet grow from virtually non-existent to where it is today. And I have to say it’s so much better now than it was 5 years ago, and it will be that much better again in another 5. But it’s still got a long way to go before I’ll use it even 10% as much as I use my PC, and I’m on the cutting edge.

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19 Responses to “Mobile Growth: Don't Bet On It”

  1. It's worth having a look at Japan as a possible counterexample. This is a wealthy country and a valuable market, but the mobile versus PC usage patterns don't look much like the US.

    Some of the argument for the potential of mobile growth is that the world will end up looking more like Japan. That is, developing countries may grow up with mobiles and move straight to smartphones for their primary web usage, just never getting around to treating the PC the same way as the US does, where PC adoption preceded the availability of web-enabled phones.

    Not sure how valid that is, but there's a lot to be said for the power of cultural habits versus just strict usability tradeoffs.

  2. The thing that could change this is the shift in wealth from the developed economies to the hyper-growth markets where mobile is growing fastest e.g. china, india etc. Exposure to these markets is already driving a lot of value for other companies e.g. Inbev was able to buy Budweiser due to emerging market growth. No reason why it shouldn't be the same on mobile.

  3. I'd bet on a mobile device that could effectively replace a laptop in the same way the iPod effectively replaces CD players.

    Ideally though, developing for a device like that wouldn't be significantly different from developing for a regular laptop, nor would it necessarily cause any sort of explosive growth.

  4. You're assuming that the only growth that matters is smartphone growth, but I don 't buy it. Any time there is an ubiquitous communication technology there is a market opportunity.

    Virtually all cells have access to SMS, for example.

    See http://www.engadget.com/2008/02/05/finlands-roa… for some of the things those crazy foreigners do with it.

  5. You're assuming that the only growth that matters is smartphone growth, but I don 't buy it. Any time there is an ubiquitous communication technology there is a market opportunity.

    Virtually all cells have access to SMS, for example.

    See http://www.engadget.com/2008/02/05/finlands-roa… for some of the things those crazy foreigners do with it.

  6. You're making a funny assumption that mobile Internet today is more developed in US than in those so-called “developed” nations, while I disagree. In Russia, despite lower per capita income numbers, an average cell phone user owns a much more advanced device than here in US. Moreover, they tend to be more aggressive in their smart phone usage: people check weather, traffic, read e-books and waste time online on their smart phones all the time. GPRS has always been important there. I cannot say this about South America, but Asia is years ahead of US in smart phone adoption.

    And consumer Internet is mostly about that – wasting time. This is why I believe mobile web is going to be very big, we just need to wait for Americans to catch up to the rest of the developed world and start using their phones for more than just making calls.

  7. “But not all mobile devices are created equal, and currently something like 80-90% are worthless for any web surfing beyond checking the weather even here in the US, and its worse overseas.”

    Is this true? Do you have data?

  8. Obviously, you know nothing about mobile usage in 3rd world. I'd suggest you to do research for real, instead of just guessing.

  9. Matt
    Besides the points made in the comments, I'd add the India perspective.

    1. Granted 85% of phones sold in India are “dumb clamshells” as you call them. People here may not have money but they have time. Almost 45% (of the people in the 85% mentioned before) mobile phone users have only the cell phone as their source of entertainment, news, communication and information. They dont have television, computers or books. Just their cell phone. What do you think they do after playing the same Nokia brick game for the 1202323923394th time?

    2. The mobile web needs to have a voice interface (which I believe lots of companies including Google realize). Why? The illiteracy rate among the 85% cell phone users is high (30-40% in some states) in India. So, they are willing to use the cell phone but maybe not for surfing the web, but getting information from the web on the cell phone.

    3. Barter. Most of the same folks I mention above have no bank account, no credit card and no SSN#. Their identity and their transaction mechanism is their cell phone.

    I think you vastly underestimate the potential of the mobile phone (at least in India). I agree with you on the timing, but only maybe.

  10. mattmaroon Says:

    But there's no money in the developing world and won't be for the foreseeable future.

  11. mattmaroon Says:

    SMS isn't a revenue stream for Google. They've already got SMS products, accessible by nearly everyone who has a cell.

  12. mattmaroon Says:

    No, it's just that India has incredibly low wealth per-capita, and as such will has and will have very low CPMs, making them not a significant source.

    And if they grow as wealthy as we are (which is possible, but not in 5 years) they'll either have laptops, or they'll use mobile devices the way they would use laptops, which is more of a shift than actual growth.

  13. mattmaroon Says:

    Perhaps you missed the point of the article, which was that mobile isn't going to be a strong source of growth for Google (or companies like them). Roadside toilets excepted, SMS isn't going to make you buy GOOG at a higher PE ratio.

  14. You're right, I took you to be making a bigger point than “Google shouldn't bet on mobile.”

    Google's strategy has always evolved around creating markets rather than dominating them, though, so while the current mobile market can't support something like Google, I think they're betting that they can create a new market in which they'll be the leader for a long time.

  15. Shalmanese Says:

    Your post is heavily colored by your American experiences with cell phones and the American market has some structural and cultural factors which has caused it so far to lag heavily behind in several key mobile technologies.

    True, the 3rd world is not going to contribute a huge amount to the capital growth of large companies but there are some very innovative experiments going on in integrating mobile technologies into the fabric of society such as SMS money transfers (I give a money lender in Kuala Lumpur 50 ringgit, he sends a SMS to a money lender in Laos and my family gets the equivalent minus a commission).

    Where the real mobile growth is going to take off is in second world countries, especially in South East Asia. You're skeptical that China could amount to much but I'm willing to wager the average Shanghainese has a more advanced cell phone than the average Chicagoan and they use it in more sophisticated ways too.

    Experiments with integrating electronic money into cell phones in Japan and Hong Kong also prove that a credit card is not needed to perform mobile commerce. If you're already swiping your cell phone to buy milk and eggs at the supermarket, it's a very short leap to convince you to buy movie tickets or sports scores online from the same account.

    I'm not saying the mobile market is the way to salvation but it's impossible to provide an insightful analysis when you look at the space purely from a US perspective.

  16. mattmaroon Says:

    I wasn't trying to suggest that there is not a burgeoning mobile industry. Hardware makers and service providers are definitely growth companies.

    I just don't see search engines and the current big American internet companies growing much as a result. SMS payments won't need a Google Checkout or PayPal type product as an intermediary.

  17. “18.9% of mobile consumers in the United States are now toting smartphones, with 49.2% planning to pick one up within the next two years.”

    me thinky you wrongy.

    http://www.kelseygroup.com/research/mobile-mark

  18. mattmaroon Says:

    I think you missed the point of the argument.

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