Mobile UC: No Money, No Love

An interesting article in the Wall Street Journal titled “Tech Sector’s Profits Are Fueled by Mobile, Cloud” caught my attention and caused me to rethink the peculiar duopoly of mobile and cloud. For years we’ve been hearing that mobile and cloud are two of the biggest forces reshaping our industry, and this piece cited a number of performance statistics to illustrate just how big the impact is and how fast it’s growing. The only weakness I found was a vain attempt to tie the two elements directly to one another where the reality is that while mobile and cloud are both major development, the reasons for that are totally different.

The authors attempt to tie the two together with the questionable argument that, “Mobile devices are increasingly becoming people’s primary computers, which is driving demand for the cloud. On personal computers, data was often stored on the device itself, but smartphones have less memory—and the consumption of data overall has dramatically increased—requiring more information to be stored on the cloud.”

To be clear, there are a number of factors driving the migration to the cloud, but there are two factors currently driving mobility: advertising and subscription services. Advertising is far and away the dominant factor. In its most recent quarter, Facebook attributed 84% of its $6.2 billion in ad revenues to mobile ads; mobile ads represented 11% of ad revenues in 2012. The same holds true for Google where roughly two-thirds of its $21.5 billion in quarterly ad revenue is tied to mobile ads. That is particularly telling given that 89% of Google’s total revenues are tied to advertising.

Overall, Google pulls in roughly 30% of worldwide ad revenues, and 75% of that revenue comes from Apple devices- pretty impressive given that Apple devices represent about 14% of smartphones worldwide and much smaller percentage of the desktop and laptop markets.  While Apple’s profit fell 27% in the current quarter, sales of its subscription services were up 19%.

The streaming business overall is reshaping the music industry. According to the International Federation of the Phonographic Industry (now there’s an organization that could use a rebranding), streaming revenues increased 45.2% in 2015 and now represents 43% of industry revenues; of course those streaming revenues are less than $3 billion worldwide compared to the estimated $100 billion in mobile Internet ad spending expected in 2016.  Streaming however is poised to overtake music downloads whose revenues were down 10.5% and now generate 45% of industry revenues. Interestingly, in some markets downloads are still a dominant factor like Japan (75%), Germany (60%), and France (42%).

There is an old adage for guiding investigations that says simply, “Follow the money.” In mobile, the money is in advertising and to a much lesser extent, streaming services. Unfortunately, neither of those sources is available in mobile UC. With no revenue stream driving it, mobile UC has degenerated to little more than a “demo” as opposed to a “product” and hence commands the level of attention typically afforded to a new brochure.

From an enterprise standpoint, cloud offers a far greater opportunity. Revenue at Amazon’s cloud business revenue grew 58% to $2.89 billion for the current quarter, helping to fuel Amazon’s record $857 million profit; that is nearly double the company’s previous high. Microsoft’s cloud segment that includes Azure grew 6.6%; the Azure component actually grew 102%. In the meantime, the company is preparing to lay off 2,850 employees mostly in the mobile device unit following 1,850 layoffs in May. I guess there’s a “right end” and a “wrong end” to the mobile business.

Far from being wholly dependent on mobile for its success, the migration to the cloud is being driven by a number of factors. Those factors would include cost, flexibility, and increased agility along with a general trend in business to focus on core competencies while outsourcing everything else. While enterprises of all sizes are looking at migrating to the cloud for some combination of those reasons, probably the single biggest business impact will come from the new business startups that will be able to grow to scale without significant upfront expenditures that have hobbled those who have gone before them.

So while “mobile” and “cloud” are both important factors in how our industry is being reshaped, I would still argue that those are more independent phenomena than a matter of some co-dependence. For the UC vendors the lesson seems to be, “Embrace the cloud migration to be sure, but try to find a way to get in on the money machine that is mobile.”