What shape will the wireless Web take?

[Source: High Tech Practice, McKinsey Quarterly - October 2009]

The future of the Web is up for grabs—again. It was only a few years ago that the Internet made the leap from dial-up to high-speed broadband connections. Today, another transformation looms as those wired connections give way to the possibility of a wireless Web. At the helm of this change is a fast-evolving wireless ecosystem that combines the greater speeds and higher data volumes of today’s wireless networks (such 3G-HSPA and, soon, LTE¹) with the growing numbers of smart phones boasting bigger screens, better touch pads, and more processing power.

In the early 2000s, 3G technology was seen as a failure for the mobile-phone industry. By the eve of the Internet bust, companies had shelled out billions for wireless licenses, and the resulting implosion seemed to shut down any hopes (except in Japan) for the existence of a mobile Web. Today, the use of wireless data is growing rapidly and has passed a tipping point. Surveys show that two-thirds of mobile-phone owners access data on their devices—up from only one-quarter three years ago—with 60 percent using them for basic Internet browsing. Spending on smart phones, meanwhile, has soared from barely 3 percent of new-phone purchases to nearly 20 percent in Canada, the United Kingdom, and the United States.² Consider Austria: although the country is not usually ranked among digital hot spots such as South Korea or Finland, more new Austrian Web users are connecting via wireless data cards in their PCs and notebook computers than by wired broadband connections.

If we are entering the era of the nomadic Web, a major question still remains: will most of the content, interactions, and organizing principles of the wired Web simply migrate to the wireless world? Even if the answer is, for the most part, yes, the speed of this transformation and the route it will take are far from certain. That’s because for the three big clusters of companies (mobile-network operators, operating-systems companies, and device makers) that hold a stake in the majority of Internet activity today, there is much on the line. Some of it is potentially disruptive to their current value chains—most telecommunications companies that are currently operating wireless networks also have a big hand in the broadband world, and wireless-systems operators are the same companies providing broadband search and browsing capabilities. And the companies that make smart phones and other wireless devices have a variety of complex ties to both of these groups.

Will the wireless Web resemble, more or less, the current wired version, or will it produce new and unexpected hybrids? The following questions provide some guideposts for thinking about how things may play out if the wires are indeed cut. We invite you to share your views at the end of this article.

1. Will the mobile Web become a substitute for wired access?

Clearly, this is question number one for cable Internet companies and service providers with no mobile offerings. The old phone companies faced this very issue 20 years ago at the dawn of the cell phone age. It took longer than they had expected for wired use to fall substantially, and even now it is mostly younger customers who are willing go the wireless-only route. The more dramatic change—where a real shift to wireless has taken place—has been in the amount of voice minutes consumed. Accessing the Web on mobile devices, however, may not follow this pattern. Most Web users seem to be holding on to their broadband hookups. (It’s not clear whether Austria’s experience is a harbinger. But for now, at least, Austrians are an exception.) In terms of raw data consumption, 90 percent of people trolling the mobile Web use fewer than two gigabytes a month. They use up to ten times as much data tethered to their PCs to download music, exchange photos on Facebook, or watch YouTube videos. As a result, the number of hours spent on the wired Web is three to seven times greater than on the mobile Web. These habits will take time to change, so it’s difficult to see mobile completely replacing wired usage—for now.

2. Will mobile match the performance of fixed access?

In theory, anything is possible, but the answer depends on how much new wireless spectrum the wireless players win, as well as the pace of advances in data-compression technologies. Paradoxically, all the excess 3G capacity that caused sleepless nights for telcos a few years back won’t be enough to handle the approaching data crunch if there’s a major shift to wireless. It’s worth noting, too, that current wireless technology offers, at best, an experience similar to what broadband users get in the rural United States—about two megabytes per second in speed. The wired network operators aren’t standing still either. While the average mass-market broadband speed is currently five to ten megabytes per second, the ongoing upgrade of wired infrastructure could increase those speeds five- or tenfold. Since many telecos are starting to reap more revenue from Web access than from voice, they are quickly rolling out high-speed fiber-optic lines to homes. The cable Internet industry is following suit, offering DOCSIS³ upgrades and fiber lines to preexisting cable connections.

3. Where will people go for the best content and Web applications?

Today, a wide gap persists between how most of us use the wired and mobile Internets. As Web nomads, we still cling to communications—mostly text messages and e-mail—while other forms of content, commerce, and social interactions rank far behind.

But things can change quickly. Take, for example, the abrupt shift toward wireless browsing and searching, as well as the rapid growth of social networks and video sharing on the mobile Web, due mostly to the enhanced capabilities of new smart phones, such as Apple’s iPhone. Solving some temperamental technical issues could intensify the shift even more. Safeguarding wireless transactions with better security software, for instance, could help move a sizeable chunk of Internet shopping and banking to wireless. The next evolution of wireless advertising also hangs in the balance. Some early predictions held that it would have reached the $10 billion mark by now, supporting a new brood of digital-content providers. The actual figure is closer to $200 million, which, nonetheless, suggests either a major growth in advertising yet to come or simply over-optimism on a large scale by many analysts. Breakthrough designs of wireless devices, though, could at some point make mobile screens a more inviting environment for direct marketing and wireless commerce. Companies are currently developing certain technologies that will enable customers to point their mobile devices at any item in a store and, by sending an image of the item directly through the web interface, check competitors’ prices at other locations.

4. Which software interface will organize and manage the wireless Web?

If you were making this assessment today, Apple’s success would make it the industry leader. A year after the company released its iPhone, Apple introduced a mobile-applications platform (known as the App Store), which, at its inception, hosted 500 programs, created entirely by third-party developers. The popularity of the App Store—to both consumers and developers—has resulted in a dramatic increase in the number of applications available; the store currently houses tens of thousands of them and, as of April 2009, has reported more than one billion downloads of those applications. The success and viability of this hosting platform is in part guaranteed by its associated business model. By charging fees for some of the hosted programs—and returning 70 percent back to the developers—Apple has also built a new revenue ecosystem potentially worth hundreds of millions of dollars.⁴ And as the market for smart phones continues to grow (as is expected), the opportunity for developers to increase the global distribution of their applications grows as well.

That suggests that the way in which users design and access the mobile Web’s top programs, features, and content will follow Apple’s standards and will flow through its distribution channels (or those of other device makers such as Nokia, who has also started its own application stores). Right now, this is the best way to cash in at a seat at the wireless table. But there are some contrary currents. As more developers create and upload more applications to various app stores, the average rate of daily downloads per new application starts to tail off. As a result, in the face of increasing competition among developers, many unsuccessful ones, unable to penetrate an already over saturated market, may feel frustrated and leave. That group, along with other developers who don’t want to work exclusively on one platform, may seek the alternative venue—the more open-source mobile Web, where browsers and search portals will help ferry users to their destinations. Under that scenario, the market could split between premium paid applications and a long tail (perhaps supported by advertising) for those who are unwilling to pay for downloads. If the browsing experience improves, more control of what the Web delivers could shift from app stores to mobile operating systems such as Google’s Android and others.

5. Which mobile Web are we talking about?

While much of the current debate focuses on whether wireless will supplant wired, there are alternative pathways to the mobile Web. Already, a quarter of the Web connections by mobile handsets pass through Wi-Fi networks either at home or in free and paid public spaces (including Wi-Fi access through the use of PCs would amplify this figure). The iPhone and other smart-phone devices have embedded Wi-Fi receivers that provide users with connection speeds that are sometimes better than current 3G if users are near a Wi-Fi transmitter and 3G towers are congested. Then there’s the added, and substantial, benefit of bypassing fees for data plans—particularly those that charge more for heavier use.

6. What will the pricing model be?

On the access side, pricing for wired data quickly evolved from a brief period of pay-per-minute charges to the current flat-fee rate. (Today, a portion of broadband-data pricing is tiered by speed or volume of data consumed.) Mobile operators are taking a longer time to offer flat plans for data. One reason for that resistance: they would like to keep revenue-per-user relatively high by using a pricing strategy based on microsegmentation—effectively charging more for heavy users. This approach is understandable, since for network operators, the economics of the open-data spigot can be punishing. When the voice side of the business shifted to flat fees for wireless, for example, network traffic merely doubled. But the full panoply of rich media that users want on their smart phones—videos, social networking, and location-based search, to name a few—increases data usage tenfold when wireless pricing goes prix fixe. That increase multiplied over millions of users would use up a significant chunk of wireless network capacity, slicing into margins for 3G networks and requiring major new investments.

On the application side, the current standard is the hybrid model of both free and paid-for content, as pioneered by Apple’s App Store. The wired Web is also looking to capitalize on this model but has run into difficulty because of pirated content affecting advertising revenue. The same fate could befall wireless unless interested parties can establish a global advertising scale for the consumption of free content through mobile devices.

The state of the Web is constantly in flux, and the latest shift toward a world untethered from broadband networks could have huge implications for companies—wired and wireless alike. The questions raised here only begin to scratch the surface. How do you think the Web will evolve?