Apple advantage: As smartphones become commodity, software and services will drive growth

The price-led division in the smartphone market between best-in-breed Apple [AAPL] iPhones and top-end Android devices is clear on reading the sundry market analyses breaking across the ether this day, but the focus seems set to change from device capability to software and services over near-broadband speed LTE networks across the next 12-18 months.

The future of the smartphone

LTE is a service industry

With smartphones selling in their hundreds of million on a global basis, these devices are fast becoming commodity items with little to differentiate between available devices, at least in the eyes of the average consumer.

However, the evolution of mobile services is just begun, as carriers worldwide move to introduce LTE support across their networks. While this is being marketed at present as "real mobile broadband" and offered to consumers via 'All You Can Eat' tariffs as carriers seek to secure bridgeheads in this growing new industry, this is subject to rapid change.

Why?

The rationale is fairly simple. LTE is data. Data is a two-way process, and management of the data carried across LTE networks is managed by something called Policy Control Services (PCS).

Each time your LTE device climbs aboard an LTE network, it speaks to the PCS. During that interaction, the PCS might assess what  level of subscription you have, offering up the relevant Quality of Service (QoS) provision for your contract. This should mean an enterprise user might get all the data they need, while a non-contract pay-as-you-go customer might see limitations on the QoS and data levels they enjoy.

For you as an iPhone or other smartphone user this process should be seamless. But there's so much more to what's going on than this.

Expect new service offerings

You see, properly constructed LTE networks should be able to enable your device for different bandwidth levels and higher or lower QoS provision on the fly.

Here's an example to illustrate this complexity:

  • You're travelling on public transport while watching a video you're streaming from Netflix across your LTE provider's network. You're a non-contract user and you may become annoyed at the low-res clip.
  • Your provider will already know it is serving up video to you, and will perhaps send you an on-screen message saying it is aware of what you're doing and asking if you'd like to watch your video in HD for a small fee (99 cents, perhaps).
  • If you agree, you just tap the button on your screen and the quality of your video viewing experience will near-instantly improve.
  • Your provider will immediately prioritize your traffic to enable this session.

Ignoring that for most carriers such a scenario is demanding major investment in billing, policy and analytics systems, the basic bottom line here is that all LTE users should be able to enjoy the same service provision.

"The demarcation between pre-pay and post-pay customers doesn't reflect the customer. These are just payment methods, why should these constrain the experiences you get?" asked Oracle Communication's Gordon Rawling.

One step beyond

This is also an example of how your mobile device will -- within 12-18-months -- become a true PC replacement. Software As A Service (SaaS) models put the applications you most want to use into the cloud. However, use of these services has been limited by 3G's somewhat unreliable nature and well-reported problems with contention levels. This changes with LTE, at least up to a point, as networks will likely remain heterogenous.

LTE is fast and fat enough to handle your SaaS traffic. However, the addition of PCS systems means that in the event you're working with a large document, or require fast and immediate provision of unbreakable high-bandwidth service, you should be able to rent such facility in the short term or enjoy it as part of your premium package.

This will open up opportunities for SaaS vendors to offer the full breadth of a desktop PC application, hosted in the cloud, and made available to your smartphone or iPad.

Enterprise users will be entitled to expect the QoS levels they have always required to use such solutions, while customers on different price plans should be able to enjoy the best available coverage for an additional set fee, with all transactions handled near immediately via their device.

Data everywhere

The other side of the PCS coin sits in the quantity and quality of usage data carriers will be able to access. Until now they've had a general idea of what is going on on their networks, but PCS (because it is data and demands a virtual handshake between the network and the device) will be able to give carriers real-time breakdowns of what is going on.

This means carriers will be able to at last move toward what they've hoped to offer for some time: tiered data plans and niche service provision. While most of us have enjoyed the richer mobile experience of the smartphone generation, carriers have felt supplanted by this and have been exploring to find ways to make their data pipelines smarter. LTE helps them achieve this.

While it's likely you'll still be offered All You Can Eat data price plans, it's also possible that other plans will exist offering, for example, enhanced near-100 percent QoS support. You should also see a diversity of such plans emerging: you might see carriers try to offer video bundles, Facebook bundles or service offering products for people who love to play MMORPG games. Netflix, iTunes or Spotify subscription packages should also make their appearance.

The other interesting advantage to the architecture of LTE is seen in the way it supports seamless and transparent offloading of traffic. So, in the event you are on the phone and walk into a location where your device already knows how to access the Wi-Fi network, your call will be quietly re-routed to travel across that Wi-Fi network. You won't even know this has happened.

This may seem illogical, as it means the operator won't charge for that portion of the call, but it is quite logical really -- operators want to offload traffic to make the best use of the bandwidth they have. It's unlikely (but not impossible) you'll see lag during such Wi-Fi borne chat sessions. The easy handover from carrier network to alternative (Wi-Fi, femtocell, metrocell, et al) network is made possible because LTE is inherently data: all that's changed is the pipeline that carries that conversation.

Transition in transmission

For consumers this could end up meaning higher costs for the same service, but this is unlikely as carriers are more likely to seek to secure customer loyalty by building out from the services they already offer, seeking to offer bolt-on products and services to extend the remit of what we enjoy.

Such additional services might include:

  • Business users may get the 100% QoS packages they need;
  • As noted above, gamers, video watchers and other needs may be met with supplemental offers, based on QoS or coverage guarantees.
  • Photographers may be offered packages which enable easy use of online photo-editing tools (Photoshop?) with assets reliably carried across networks.
  • Travellers may receive enhanced roaming packages, ending the big surprise of huge phone bills.
  • And you'll more than likely see M2M tariffs made available to support the connected intelligences you're going to see landing in your homes.

Apple's advantage

Now we're getting to the Apple part. Virtually unnoticed during the clamor of negativity greeting the company's financial results announcement this week were Apple's claims to fame in the nascent mobile services space:

Apple now has 250 million iCloud users sending 2 billion iMessages eachy day. While some (incorrectly) declare carriers are pretty upset about iMessage as it impacts SMS traffic revenues, the truth is that those 2 billion messages equate to a real saving in data demand. Let's face it, smartphones of any stripe are data hogs, so carriers -- and customers -- should welcome any solution which reduced demand on the network.

However, the next stage in the evolution of LTE support should see services over mobile networks becoming the key driver for smartphone purchasing. Apple's steps with iCloud and iMessage are shrewd, as it means the company's already putting its toes in the water to educate itself into what forms of mobile service its users may in future.

Apple has an advantage here in that it, unlike most of its hardware competitors, is at heart a software company. Not only this, but it has been moving toward an all digital vision for software provision for years -- this was the importance of its iPhoto and iSync releases. Apple's OS X operating system was itself birthed from NeXT, which had a vision of distributed connected computing bolted atop its Unix core.

Carriers meanwhile seek a champion to help them educate the price-conscious mass market user as to the possibility of services across their LTE networks. Google is evidently working toward a similar vision (Google Docs) but that company's achievement will be limited by its lack of control of the capabilities of the hardware made available in its Android ecosystem. Apple doesn't have this problem, and has historically always been a good route to present new technologies to consumers -- Wi-Fi, for example.

In conclusion then, for all these reasons, I'm predicting the next phase in the smartphone wars will now be focused on software and services provision. Which may even end up (forgive this speculation) involving Apple's future implementation of full-weight iTunes streaming solutions, putting that firm squarely in competition with Spotify.

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