The Rise of the Mobile Internet: Who Will Be Disrupted?

The Internet as we know it is changing fast.  A new report by Strategy Analytics found that global smartphone shipments are growing 35% annually.  In the third quarter alone, 162 million smartphones shipped worldwide. This rapid growth in smartphones tracks well with analyst predictions–including Mary Meeker–that the mobile Internet will soon surpass the fixed Internet in terms of the number of users.

Although those numbers are astounding, and Wall Street analysts will spill a lot of (digital) ink over what those numbers mean for smartphone manufacturers, I want to discuss what this means for the “Internet”.  After all, the Internet — although many people have come to think of it as Facebook, Yahoo, YouTube and Google — is just a universal communications protocol.  It takes the shape of what people are doing and what users want.  As the web becomes more “mobile”, it will transform to the needs and desires of end users.  With the growth of smartphones, static websites are being displaced by interactive apps (and these apps are even filtering back to the desktop world — with cool new browser apps like TweetDeck).  Two years ago, Wired opined on this phenomenon:

The Web is, after all, just one of many applications that exist on the Internet, which uses the IP and TCP protocols to move packets around. This architecture — not the specific applications built on top of it — is the revolution. Today the content you see in your browser — largely HTML data delivered via the http protocol on port 80 — accounts for less than a quarter of the traffic on the Internet … and it’s shrinking. The applications that account for more of the Internet’s traffic include peer-to-peer file transfers, email, company VPNs, the machine-to-machine communications of APIs, Skype calls,World of Warcraft and other online games, Xbox Live, iTunes, voice-over-IP phones, iChat, and Netflix movie streaming. Many of the newer Net applications are closed, often proprietary, networks.

And the shift is only accelerating… Because the screens are smaller, such mobile traffic tends to be driven by specialty software, mostly apps, designed for a single purpose. For the sake of the optimized experience on mobile devices, users forgo the general-purpose browser. They use the Net, but not the Web. Fast beats flexible.

What does this mean for the traditional Internet giants?  Well, for one thing, they are not guaranteed a seat at the table in the future.  As the NYT recently touched on:

Intel made its fortune on the chips that power personal computers, and Microsoft on the software that goes inside. Google’s secret sauce is that it finds what you are looking for on the Internet. But the ground is shifting beneath these tech titans because of a major force: the rise of mobile devices.

These and other tech companies are scrambling to reinvent their business models now that the old model — a stationary customer sitting at a stationary desk — no longer applies. These companies once disrupted traditional businesses, from selling books and music to booking hotels. Now they are being upended by the widespread adoption of smartphones and tablets….

Demand for Intel chips inside computers — which are much more profitable than those inside smartphones — is plummeting. At Microsoft, sales of software for PCs are sharply declining. At Google, the price that advertisers pay when people click on ads has fallen for a year. This is partly because, while mobile ads are exploding, they cost less than Internet ads; advertisers are still figuring out how to make them most effective.

The troubles and travails of traditional Internet companies trying to figure out revenue generating strategies for the new–and much different (as Glenn has touched on at DisCo)–mobile market are well documented as of late as the third quarter bottom line and top line estimates of the Internet giants have come in lower than expected; Google being a high profile example.  Facebook, recently criticized and downgraded because of their mobile outlook, actually had a positive third quarter earnings report–largely because they saw unexpected gains in their ability to generate mobile revenue.

What does this mean for disruptive innovation?  Paradigm shifts in technology tend to shake up markets and incumbents struggle to remain relevant, as these examples illustrate: 

• IBM misjudged the the PC (Client-Server) revolution — it instead focused on the lucrative mainframe market — and contracted out the operating system and the semiconductors.  The two companies that won those contracts, Microsoft and Intel (AMD as a contract-mandated second source), would go on to become the big corporate winners of the PC Revolution, while IBM soon teetered on the edge of bankruptcy before reinventing itself as a services company (although the legacy mainframe base still contributes a sizable chunk to the bottom line).

• Microsoft, in its heyday the highest valued company in the world (and, adjusted for inflation, its peak is still the highest peak of any company ever), was late to catch on to the importance of the Internet.  Now, online apps and the browser-cum-operating system threaten Microsoft’s revenue stream from licensed, locally-installed software.  Currently, the company is fighting aggressively to reassert itself as a force to be reckoned with in the cloud and in analyzing the “big data” created by the shift to the cloud.  (Also, the Xbox has potential to shake up the video/living room marketplace).

• Intel — as I discussed in detail a few days ago — also focused on computers and servers and ceded the emerging mobile market to ARM.  It is now frantically trying to catch up.

• Apple, which helped pioneer the desktop computer, was quickly sidelined by Microsoft and flirted with bankruptcy.  (In an ironic twist of fate, an investment from Microsoft–arguably driven by the antitrust concerns swirling around the Redmond giant–and the corollary commitment to make Mac versions of its Office software, probably saved the Cupertino company from disappearing.)  Looking for a market niche, the company leapt out ahead of customer demand (and its PC competitors) and transformed the mobile device market–and completely disrupted RIM who buried themselves with the bet that corporate users would never switch to a touchscreen phone.  An afterthought a decade ago, the company has become the current world’s most valuable company.

It is not surprising that three of the companies listed above (IBM, Microsoft and Apple) have been (or, in Apple’s case, is currently) the most valuable companies in the world.  Fast-moving technology markets are both a blessing and a curse for the companies that come out on top.  These paradigm shifts allowed Microsoft to unseat IBM and Apple to leap its archrival Microsoft and soar to great heights (and concurrently astronomic stock prices).  Unfortunately for the new market leaders, when firms figure out how to do something well, they often get stuck in that track and then become vulnerable to disruption.

However, business managers are becoming smarter, thanks to the increased understanding of disruptive innovation.  Not too long ago, the leading theory on why market leaders quickly became relics was that they simply couldn’t keep up with the pace of innovation–the “technology mudslide hypothesis,” as Clayton Christensen called it.  The problem with this view is that it counseled managers to plow all their resources into innovating in the firm’s core competencies and what their leading customers want at that moment (make more powerful chips, higher capacity hard drives, faster/bigger cars, etc).  This made them more vulnerable to disruption, as disruptive innovators hit the market leader from an entirely different angle (more efficient chips, smaller hard drives, tinier/fuel-efficient cars, etc.).

Now, as the process of disruptive innovation is better understood, market leaders are on the lookout for how to remain relevant–and not be singularly focused on their core business.  (Decentralized innovation strategies like Google’s famous 20% time or Facebook’s Hack-a-months are ways to deal with this.)  And to give credit where credit is due, IBM — who was itself disrupted by the PC revolution — completely reinvented itself as a services company, which is not easy to do for a major company with significant institutional inertia (although it was also a case of ‘desperate times, desperate measures’ that gave the corporate giant a push to overcome the inertia).

This fear of disruption is why Yahoo!, and its enterprising new CEO Marissa Mayer, have staked the company’s future on the mobile market, and why Apple, Microsoft, Samsung and Google all had high-profile product announcements for their new mobile devices within the span of 10 days (and probably the reason why Google is hesitant to make “mobile concessions” to settle their antitrust case with the EU, which could hamper the company’s ability to adjust to the mobile Internet future where the traditional “10 blue links” search engine will be a dinosaur).  As one industry analyst put it: “It’s hilarious to talk about traditional Web business like it’s been going on for centuries, but it’s last century.”  Although it is currently unclear who will be king of the next technology paradigm, if the history of disruptive innovation tells us anything, the mobile landscape will look a lot different than the traditional Internet.