The Coming Mobile-Video Deluge

businessweek.com
OCTOBER 11, 2005
The Coming Mobile-Video Deluge
By Olga Kharif

As carriers gird for an expected surge in demand for TV mobile phones, many are looking to Qualcomm to deliver the goods

When Qualcomm announced plans for a network that would deliver video over mobile phones last November, analysts met the idea with more raised eyebrows than approving nods. Qualcomm (QCOM ) had built its reputation on licensing wireless technology and making cell-phone chips. The concept, dubbed MediaFLO and championed by Paul Jacobs, who later became Qualcomm's chief executive, came across as costly and too far outside the company's core areas of expertise.
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Even though demand for TV over cell phones had taken off in Asia, it was still unproven in the U.S. What's more, the number of technologies for beaming video to wireless handsets was already on the rise. Investors wondered what would set MediaFLO apart -- and whether Qualcomm would ever break even on the estimated $500 million it would take to build the network.

Almost a year later, Jacobs's announcement is looking distinctly less odd. Early video services from providers Cingular Wireless and Sprint Nextel (S ) have attracted more than 500,000 subscribers, according to MobiTV, which provides TV services for both carriers.

BALLOONING BASE. Cingular has seen its video-user numbers surge with virtually no advertising. "It has been very popular, and that tells us that there's something there," says Rob Hyatt, executive director for mobile content at Atlanta-based Cingular, the largest U.S. wireless operator. Other providers, including Verizon Wireless, have joined the race to add customers intent on watching news, sports, and entertainment clips over their cell phones.

Mobile video is set to take the wireless industry by storm (see BW Online, 12/1/04 "TV Phones Prep for Prime Time"). The U.S. mobile video user base may balloon to more than 20 million by the end of 2007, up from less than 1 million today, says Albert Lin, an analyst at American Technology Research (ATR). Assuming each subscriber pays $5 a month for such services, that would translate to a $1.2 billion market. Worldwide, more than 250 million people are expected to be watching mobile video by 2010, generating some $27 billion in sales, vs. with $200 million today, according to market consultant ABI Research.

Why the meteoric rise? For starters, the technology has improved, and prices on video-capable handsets have dropped. In fact, now that some devices are available for less than $100, "adoption rates are going up like a hockey stick," says Key Sar, associate director of content programming at Verizon Wireless, the second-biggest U.S. mobile-phone carrier.

CAPACITY HOG. And, researchers say, mobile-phone subscribers are increasingly eager to watch video programming on the go. Surveys by market consultant In-Stat show that 1 in 8 consumers is interested in buying mobile-TV service. That compares with 1 in 9.4 who indicate a desire for wireless games. "Watching video on cell phones could eventually easily surpass [demand for games, ringtones, and wallpapers], to reach 100% of the population," says Cingular's Hyatt.

The demand surge will be a mixed blessing for mobile-phone operators. Providers currently transmit video -- ranging from snippets of news and movie trailers to program previews from popular channels such as CNN, MTV, Comedy Central, and ESPN -- over the same networks that transmit calls.

But in a few years, robust demand for video could hog capacity and overwhelm networks. If 40% of mobile subscribers watch just eight minutes of video a day, that would stretch network limits, according to a September report by researcher Analysys. Networks could become overloaded by as early as 2007.

What's an overburdened carrier to do? Many analysts believe service providers will be forced to use a separate, mobile-TV broadcasting network. Unlike a cellular network, a mobile-TV network would beam content one way to phones in much the same way TV programming is transmitted into homes.

"WONDERFUL DISCUSSIONS." Now, Qualcomm's MediaFLO is emerging as a leading broadcast candidate for some of the biggest operators. Sprint Nextel could become the first to commit to MediaFLO in the coming months, say analysts at investment bank Deutsche Bank. Dale Knoop, general manager of Sprint Nextel's multimedia services, admits his company is considering MediaFLO, though he wouldn't comment on which technology the company will ultimately employ.

"The interest is phenomenal, we're having wonderful discussions" with carriers, says Rob Chandhok, vice-president of engineering & market development for MediaFLO at Qualcomm, which should announce customer trials within 6 to 12 months. He wouldn't comment on specific providers. Executives at Cingular and Verizon Wireless say they're considering all technology options.

There's plenty of reason to take a long look at MediaFLO. Analysts say it may prove to be the most economical and to offer the most TV-like experience of all the technologies on offer. But there's no lack of competition.

CHANNEL SHORTAGE? Here's a look at what MediaFLO is up against: One option is to simply beef up high-speed networks. Carriers could implement a technology called multimedia broadcast & multicast service (MBMS), which effectively compresses network traffic and turns cellular towers into TV-broadcasting stations.

The beauty of MBMS is that it mostly requires only software upgrades, which could be relatively cheap compared to full-scale equipment overhauls. It's also an industrywide standard, which means that MBMS equipment will be available for many manufacturers, who would compete on price.

Still, MBMS is inferior to MediaFLO, analysts say. MBMS initially will allow carriers to broadcast only one to three TV channels, says Alastair Brydon, a co-author of the Analysys report. That might not sit well with U.S. consumers used to having 300 cable channels at their fingertips at home. By contrast, MediaFLO will offer 20 video channels. Carriers could offer more channels via MBMS, but to do so, they would need to acquire additional airwaves to transmit information over networks -- and radio spectrum doesn't come cheap.

Also, MBMS equipment may not become available until 2007, a year after MediaFLO's debut, says Brydon. By that time, mobile video might already be overwhelming networks, causing outages and fueling customer dissatisfaction.

TIME LAG. Another alternative is Digital Video Broadcasting-Handhelds (DVB-H), which is being pushed by cell-phone maker Nokia (NOK ) and its U.S. partner, Crown Castle (CCI )(see BW Online, 8/1/05, "Wireless-Tower Outfits: Rising High"). DVB-H is similar to MediaFLO in several ways. Just like Qualcomm's system, the DVB-H network operated by Crown Castle would specialize in video broadcasting. Wireless service providers will sign up to use the network and its programming for a fee. That means they will lose some control over the service. But they won't have to spend billions on costly network overhauls.

Compared with DVB-H, MediaFlo allows for a much better video experience, at a much lower cost. With DVB-H, changing a channel might take up to 10 seconds, says ATR's Lin. "That's almost by itself a show-stopper," he adds. "People are going to shun the services."

With MediaFLO, channel-surfing is near-instant. Plus, DVB-H will only allow users to view up to 10 channels. And because DVB-H will require transmitters to be densely seeded throughout a metro area, "it will cost twice as much in operating and capital costs" as MediaFLO, says Lin. MediaFLO will require only two to three transmitters to cover a whole city, Qualcomm claims.

THE RIGHT COMBO. A third option is beaming video to cell phones from satellites. But the example of South Korea, one of the first countries to widely adopt mobile TV, shows that good satellite reception requires setting up hundreds of so-called repeaters throughout cities, which can be costly. What's more, today's satellite-radio antennas are too bulky and power-hungry to fit into a slim mobile phone.

All in all, this is good news for Qualcomm. In fact, by the end of 2007, MediaFLO may command more than half of all mobile-video users, estimates Lin. The other half might be getting their video via cellular, MBMS, or DVB-H technologies, he figures.

But customers may prefer to mix and match, taking advantage of the unique possibilities offered by each technology. For example, users might call on their cellular networks to deliver video clips on demand -- a service that won't be possible on one-way broadcasting networks such as MediaFLO or MBMS. "I think there's an opportunity for different services to coexist, it's not an [either/or] decision," says Sprint Nextel's Knoop.

SPREADING THE WORD. Even with just a chunk of the market, MediaFLO, due to launch in October, 2006, could be lucrative for Qualcomm in the coming years. Qualcomm is mum on its pricing plans. But even if it charges only $1 a month per subscriber, that could add up to more than $120 million in revenue in 2007 alone. Qualcomm has announced plans to spin off the MediaFLO business into a separate company once it's established.

Qualcomm will certainly face hurdles. New technologies, such as a wireless broadband alternative called Wi-Max, could yet emerge as a threat to MediaFLO's dominance. Successful marketing and execution can have a huge impact on which technology succeeds as well. "It's not always that the obviously best technology prevails," says Bob Shallow, who heads Nokia's music and rich-media business.

And with a huge market like mobile TV at stake, carriers won't be making any hasty decisions. "I think we've got time to figure this out," says Cingular's Hyatt. "Nothing tells us we'll be so overwhelmed with demand that we've got to react within a very short period of time."

Best not to wait too long, though. The wireless video market is taking off, and carriers that don't figure out how to roll out the best services soon risk getting left behind.




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