Foryears, thestoryhasbeenthatmobileis finally about to take flight and fulfil allits potential — in the process bringingwealth to a new set of entrepreneurs,inventorsandinvestors.

Mobile payments, for example, havelong been hailed as the next big thing,but this year retail and payment indus-try leaders say that — finally — 2015 isgoingtobedifferent.

“Every year since about 2009 hasbeen the tipping point year for mobilepayments,” says David Hodgkinson, aconsultant at KPMG in London, but headds: “If I’m really honest, the quanti-fied market projections vary wildly, andthey’re fairlymeaningless.”

Yet he and others say developmentsindicate that 2015 will be — if not abreakthrough year — then at least a yearof substantial progress. The factorsbehind this are the launch of Apple Pay,the efforts by ecommerce companies togive consumers better ways to buygoods with mobile devices, and the real-isation by banks that they will lose out iftheydonot focusonthetechnology.

The key event, says nearly everyonein the industry, was the launch last yearof Apple Pay. This feature allows usersto store their credit or debit card infor-mation on their iPhone and then eithertap the phone on a special receiver topay for goods in a shop or buy onlinewith one click while shopping on an appthatuses theservice.

Apple is not the first to make a so-calledmobilewallet.UStelecomstriedasimilar wallet named Isis, laterrebranded as Softcard. Google hadGoogle Wallet. Square, a start-up led byJack Dorsey, a founder of Twitter, whichmakes credit card readers and smallbusiness software, also tried a similarproduct. None were popular. The inter-facescouldbeclunky,andtoo fewretail-ers accepted the wallets to get consum-ersusingthemregularly.

But Apple is Apple. The design ofApple Pay has been widely hailed andwell reviewed. More crucially, Applepartnered with nearly all the leading US

banks, as well as many big retailers andapp makers, thereby ensuring that thevast majority of iPhone 6 users in the UScan store their cards with Apple Pay andregularly findplaces that takethem.

Apple’s push into payments hashelped drive the development of securetechnology to store cards on phones.Visa, MasterCard and others use thetechnology and say it is highly secureagainst theft and fraud, although itsdefences have yet to be tested. Few carddetails will be handled by the retailer so,as it is bugs in retailers’ in-house soft-

ware that often allow hackers to stealcard data, this represents an improve-ment forconsumers.

For in-store payments, the require-ment of a fingerprint will also cut downon “friendly fire” fraud — when custom-ers fraudulently report their cards havebeen stolen and someone else has usedthem to purchase goods, says oneperson in the industry. For the financial

institutions that issue credit, however,the rise of smartphone-enabledpaymentshasrisks.

Banks profit when consumers usetheir cards, but as consumers store mul-tipleaccountsontheirphones it ispossi-ble that the brand identity associatedwitheachbankcouldweaken.

As networks such as Apple Pay cap-ture more of the market, they could alsoraise the portion of the profit on eachtransaction they take, or otherwise stopusing banks or existing parts of thechain of companies that currentlyhandlecardpayments.

Doug Brown, who works on ebankingand mobile at FIS, a banking andpayments technology company, says:“This is the defining moment for [finan-cial services groups], for their brandidentityandrelevance.

“If all the value is managed by anoligopoly, whether that’s Apple, Sam-sung, or a payment network, and at theend of the day everything accrues valueto only a few entities, then for the thou-sands of financial institutions that weworkwith, thatwouldbeafail.”

There is still a best case, he says. Somebanks are working to integrate paymentcapabilities into their own apps, soconsumers could use those to pay ratherthan Apple’s app. To make their appsmore useful, some banks are alsoinstalling systems on ATMs that allowcustomers to use their smartphone towithdrawcashwithoutacard.

Even if Apple Pay leads the market,others will still have a chance, analystssay. Speciality wallets could still serve aniche, such as ones that store bitcoins,or credits for video games or ones thatare linked to and give rewards at aparticular store such as Starbucks,which already has one of the more suc-cessfulmobilepaymentapps.

Regulators in the US and Europe arealso likely to ensure that Apple keeps itsplatform open so that other mobilewallets can operate on its iOS mobileoperating system, says Mark Thomp-son,apartnerat lawfirmSidleyAustin.

“My expectation is Apple cannot justsay ‘we’ll only allow this payment appon our phone’, they will eventually allowother wallets [to use the platform],”saysMrThompson.

However, he adds, just because Applecannot be anti-competitive and keepothers from using its phones, this doesnot mean those competitors will besuccessful.

Year of substantial progressinstoreforpayment systemsMobile wallets

Apple Pay is shaking up themarket, but others are vyingfor attention in the samespace, reports Sarah Mishkin

Adding it up: Apple’s mobile paymentsystem at work — Eric Risberg/AP

T elecoms is fast becoming adirty word for companiesthat want to become muchmore than providers ofbasic connections in a

digital world in which technology isunderminingtraditionalrevenues.

Companies in the sector are still atrisk of being left behind or being pushedtothemarginsassimpleprovidersof thepipework that technology groups use tomaketheir fortunes.

And even the latter holds dangers ifthe telecoms groups cannot keep upwith ever increasing demands fromcustomers for instant videos andentertainment by investing heavily innext generation networks capable ofcarryingvastquantitiesofdata.

The signs are that most groups are ris-

ing to the challenge, helped in regionssuch as Europe by regulators encourag-ing industrial growth through consoli-dation. This, alongside better economicconditions, is leading to higher profitsandrisingshareprices.

Now companies have the breathingspace to invest in their future — and var-ious strategies are emerging amongmanagements keen not to be leftbehind.

Hans Vestberg, chief executive ofEricsson, the Swedish telecoms equip-ment maker, says the biggest risk is notmaking the right decisions on strategy,giventhat themarket ismovingsofast.

“You need to move now to where youwant to play in future,” he says. “Tenyears ago, they all did the same things.But now carriers have suddenly got a lot

of options — some will go into TV andmedia,others intocloudservices,othersthe connected car and home. Some willdothemall.”

At the heart of most strategiesremains the desire to become thegatekeeper of the internet — and withit, the provider of services and

Telcos seekto redefinetheir role indigital eraCompetition from the likes of Google andAppledisrupts traditionalmodels, writesDaniel Thomas

content such as TV and music.In this market, the distinction

between mobile or fixed-line access tothe internet becomes immaterial.Instead, the consumer gets to choosewhichscreenstowatch,playorworkon,from a smartphone to a tablet or TV.

Continuedonpage4

Apple’s push into paymentshas helped drive thesecure technology neededto store cards on phones

The Connected BusinessFT SPECIAL REPORT

www.ft.com/reports | @ftreportsMonday March 2 2015

‘You need to move nowto where you want toplay in future’

Illus

trat

ion:

Oiv

ind

Hov

land

InsideDevelopers see futureon smaller screensConsoles are losing outto mobile devices in thefight for gamers’ heartsPage 2

Venture capitalistsbet on start-upsHigh valuations ofcompanies haveattracted investorsPage 3

Music industry hailsnew ‘white knight’Streaming overtakesdownloads, butincome willbe slowertofollowbehindPage 4

Artifical intelligenceand the fridgeWhy milk-buying robotscould mark the end ofthe world as we know itPage 6

On FT.comVideo: rise of the mobileon-demand economywww.ft.com/appeconomy

2 ★ FINANCIAL TIMES Monday 2 March 2015

The Connected Business

For advertisers, the smartphone is adream come true. No other mediumoffers the same targeting capabilities —includingthepotential to trackconsum-ers as they move around the world withanaccuracyof just10metres.

It is also a fast-growing sector. Adver-tisers are forecast to spend more than$60bn buying ad space on mobiledevices this year, up from $40bn lastyear. Research group eMarketer reck-ons thatspendingonmobileadvertswillsurge toabout$160bnby2018,account-ing for almost a quarter of all advertis-ingspending.

But as the industry has grown, so haveprivacy concerns. Regulators world-wide are seeking to introduce rules toprotect consumers and restrict the waysin which advertisers use mobile data.The industry itself is also working ontechnological solutions to give consum-ersgreatercontrolovertheirdata.

IntheEU, legislatorsplanto introducedata protection regulations by 2016,toughening up on and replacing theexisting legal framework, which datesbackto1995.

While Yves Schwarzbart, who dealswith regulation matters at the InternetAdvertising Bureau (IAB), a UK tradebody, agrees the rules need updating, hesays the European Commission’s pro-posedrulesaretoo“blackandwhite”.

The Commission has proposed thatmobile device identification numbers,IP addresses and most other data usedto target advertising should be regu-lated as “personal information”. Thatwould mean companies cannot collectthe data unless they have obtainedexplicitconsent fromtheconsumer.

However, the IAB and other industry

bodies argue such information shouldbe classified as “pseudonymous data”and be subject to lighter regulation thandata such as telephone numbers, emailaddressesormedical records.

Until now, the mobile advertisingindustry has largely escaped state inter-vention. The regulation of cookies — thetechnology used to target advertising onwebsites — has had relatively little effecton mobile, as smartphone users mostlyuseappsratherthanbrowsetheweb.

The industry has, however, launchedself-regulatory schemes to address pri-vacy concerns, including several recentdevelopments focusedonmobile.

“It doesn’t matter what technologyyouuse,”saystheIAB’sMrSchwarzbart.“From our perspective, you should begiven transparency about what data arecollected and why, and then have thechoice over whether to allow that ornot.”

Google, Microsoft and most otherlargeadvertisinggroupshaveforseveralyears operated a scheme called Ad-Choices, which allows internet users toopt out of behavioural targeting on theweb. The industry plans to extend thistomobile inthecomingmonths.

Victor Malachard, chief executive ofByyd, a mobile advertising platform,says that, when done correctly, targetedadvertising is good for consumers as itdeliversadsthataremorerelevant.

One of Byyd’s biggest customers isWeve, a joint venture created in 2012 bythe UK’s biggest mobile operators —Vodafone, EE and O2 — to mine theircustomers’ data for use in targetedadvertising.

Weve holds a vast repository of dataabout more than 22m smartphoneusers, including demographic detailssuch as age and sex, as well as highly

accurate information about theirmovements.

“We’re able to look at consumers whohave been near specific points of inter-est, such as a supermarket or a sportsvenue, and retarget them accordinglybased on that information,” says MrMalachard.“That’squitepowerful.”

To protect customer data, Weveassigns each mobile subscriber ananonymised identifier that is visibleonly to the company’s own services.These identifiers are never revealed topublishers, advertisers, or technologyintermediaries.

Another innovative company seekingto take advantage of data withoutinfringing privacy is AdTruth. The com-pany, whose clients include King DigitalEntertainment, says it has developed atracking technology that includes “pri-vacybydesign”.

Rather than tracking a device’sunique identifier or using other tech-niques that provide 100 per cent accu-racy for tracking purposes, AdTruthcollects less sensitive information, suchas a device’s screen size, operating sys-temandtimezone.

Using these variables, the companygenerates its own “probabilistic” identi-fier for each device. The idea is that, onaverage, the identifiers are highly accu-rate for targeting purposes, but thatthey are not permanent and cannotguaranteeaone-to-onematch.

James Collier, regional managingdirector for Emea at AdTruth, says:“Many of our clients don’t want us to bemore than 85 per cent accurate, becausethey believe that the 15 per cent [errorrate] gives them enough coverage interms of legislation changes and intermsofhonouringconsumerprivacy.”

Privacy concernscolour success ofthe smartphoneAdvertising

Lawmakers are increasinglyturning their attention to thecollection of data on mobiles,reports Robert Cookson Direct hit: adverts can be targeted

Emerging markets are fuelling growthin the mobile phone market, but for appdevelopers this presents big challenges.Almost 80 per cent of the 1.8bn peopleexpected to acquire handsets in 2018,according to the International Data Cor-poration, live in areas where networkcoverage ispatchy,budgetsare tightandsmartphonesarerelativelyrare.

App developers need to take intoaccount the smaller screen size andreduced capability of low-cost phones inemerging markets, says India-basedNeha Dharia, a senior analyst at Ovum,atelecomsconsultancy.

To be popular in these areas, mobileapps also need to overcome the culturalbarriers of language, literacy and localcontent, Ms Dharia says. “They have tobe more intuitive and easy to operate,with fewer interactions required. Andtheyneedtominimisebatteryusage.”

Emerging markets are not just catch-ing up with established ones, says SerpilTimuray, chief executive, Africa, Mid-dle East and Asia-Pacific region forVodafone. “In some ways, they are leap-froggingthem.”

Take the example of the tablet-basedmobile app developed by Vodafone fortea farmers in Turkey, which digitisessoil audit procedures and has led to a significant reduction in costs. The appreplaces a day-long manual audit withreal-time data collection, which is fasterandmoreaccurate,MsTimuraysays.

Not surprisingly, given the hugeopportunity, mobile app designers arerising to the challenge. And becausemobile technology does not rely oninfrastructure such as fixed lines, com-puter hardware and good electricitysupplies, it can be introduced quicklyandcheaply.

In advanced economies, mobile pay-ment for goods and services is in itsinfancy, says Ms Timuray, but in eastAfrica, millions of people use theM-Pesa mobile payment service

launched in Kenya in March 2007 bySafaricom,aVodafoneaffiliate.

Meanwhile, some 14,000 small-scalecocoa farmers in Ivory Coast are using amobile phone app to access farmingadvice, details of training sessions andreal-time information on market prices.They can also record their usage of ferti-lisers, check their cash flow, and gain anaccurate measurement of their farm’ssizebywalkingtheperimeter.

The service is run by Olam Interna-tional, an agricultural business thatsupports smallholders in 14 emergingmarkets. The aim is to reach more than500,000 farmers by 2017, and to expandto include growers of coffee, cashewnutsandcotton.

Chris Brett, head of corporate respon-sibility and sustainability at Olam, says.“We want to make [these small farm-ers] more stable, because the supplychain is highly fragmented and ineffi-cient, with the risk that farmers willstopgrowingstaplecrops.”

Theappis free,easytouse, in the locallanguage and has symbols rather thanwordswherepossible.

“Restricting the options helps makes

it accessible, and reduces the opportu-nity for error,” Mr Brett says. “It’s mucheasier to teach someone to use a mobilephone app than to cope with the com-plexitiesofaPC.”

Coping with the developing world’sconstraints has led to a branch ofengineering known as “frugal innova-tion”, says Abhijit Kabra, global lead inmobile applications at AccentureMobility.

He adds: “Emerging markets arebreaking new ground in creating appsthat can capture video content whennetwork traffic is at its lightest and storeit toplaybacklate.”

This avoids buffering and losing con-nectivity and can also be used in devel-oped markets to improve customer sat-isfaction and make use of networks atquieter times.

Another problem with the large scaleof app rollouts in developing countries,and the diversity and fragmentation ofhandsets, is that it is hard to developsecure apps that remain up to date, saysMrKabra.

In response, app developers are usingcrowdsourcing — inviting computerenthusiasts to help test and enhancecomputer systems. These techniqueswill lead to the creation of more robustapplications in the developed world too,MrKabrasays.

Emerging markets are also using appsfrom developed markets. “WeChat, thesuccessful China-based competitor toWhatsApp [a messaging service thatdoes not use up data time on phone con-tracts], is becoming more than a plat-formforchatting,”saysMrKabra.

He adds: “It has moved into gaming,shopping and banking, allowing its500m users to send digital cash andmakepurchases.”

However, one of the toughest chal-lenges facing mobile app developers,particularly in emerging markets, ismaking money. “Emerging markets arevery price-sensitive,” says StephenKennedy, chief executive of Magpie,which identifies apps suitable for use inChina,MexicoandIndia.

To take off, services need to cost lessthan $10 a year, Mr Kennedy says. But atsuch low prices — which will spread tothe developed world — it will be hard forappproviders toreapbigprofits.

Low cost of emerging market appsoffers benefits to developed worldServices

There is a need for productsthat are intuitive and easyto use, writes Jane Bird

Agri app: Olam is targeting its mobileservices at Ivory Coast cocoa farmers

‘You should be giventransparency about whatdata are collected and why’

W hen King Digital Enter-tainment launchedits eagerly awaitedfollow-uptothepopularmobile game Candy

Crush Saga, it looked far beyond Apple’sAppStoretopromote it.

Videos heralding the arrival of theCandy Crush Soda Saga blitzed 100mFacebook newsfeeds in a single day. TVspots aired in 20 countries and digitalbillboards were flooded with fizzybubblesaroundtheglobe.

The multimillion-dollar launch illus-trates that mobile gaming is no longer apoor relation of video games. Newzoo, aresearch company, forecasts that themobile games industry, which it sayshas predicted global revenues of$30.3bn in 2015, is poised to overtakeconsolegamessales for thefirst time.

Underlining the transition, Newzoosaid in a report that Apple’s forecast$4bn in gaming revenues — madefrom just hosting and selling otherdevelopers’ games, for which it takes a30 per cent cut — is likely to be almostdoubleNintendo’ssales thisyear.

As mobile games have increased in

sophistication, growing numbers ofplayersspendmanyhours—anddollars— on addictive titles such as Clash ofClans, Minecraft and Game of War: FireAge.

“The first wave of mobile games wassimplistic — the gameplay was there butthe polish wasn’t,” says Julian Farrior,chief executive of Backflip Studios, themobile gaming company behind Drag-onVale and Seabeard, which is nowmajorityownedbytoymakerHasbro.

But, Mr Farrior adds: “Over time, thepolish has increased, the budget hasincreased and revenue expectationshave increased.”

In the App Store’s early days, barriersto entry were low. But, as it has becomeharder to be noticed in an overcrowdedmarket, promoting and distributing ahit game has become an expensive butimportantpartof themarketingmix.

“It’s a very competitive market,” saysRiccardo Zacconi, King Digital’s chiefexecutive. “The ‘top grossing’ charts arevery stable. It’s a handful of developersthere and the conditions for succeedingareveryhard.”

Despite this, King’s marketing drove

Soda Saga to the top of Apple andGoogle’s app download charts globallyfor November. In its earnings report,King said it set a new quarterly record of1.5bn average daily game plays in thethreemonthstoDecember.

But King has an advantage othergames makers do not. As well as theexternal advertising, many peopledownloading Soda Saga did so becausethey saw an ad in the original CandyCrush game, which has been down-loadedhundredsofmillionsof times.

Electronic Arts, a veteran consolegames maker, has franchises that arejust as well known as King’s, includingJohn Madden NFL football and FifaSoccer. Even so, EA is only just startingto findits feet inmobile.

Andrew Wilson, EA’s chief executive,says the company had a “breakout per-formance” in mobile over Christmas,generating a “record” $121m in sales, up25percentovertheprioryear.

Its rival, Activision Blizzard, whoseCall of Duty andWorld of Warcraft fran-chises have dominated console and PCgaming, has been even slower to mobile.

In late 2013, Bobby Kotick,

Activision’s chief executive, said therewas nothing that had driven any sizea-ble amount of operating profit in mobilegaming. But in its recent earnings call,Activision’s chiefs admitted mobile andtablet gaming had “moved up on ourpriority list” after finding success with aWarcraftspin-off,Hearthstone.

In the console world, developerscreate games and leave it to publishers,such as EA and Activision, to work withSony, Microsoft and Nintendo ondistribution. Mobile games are usuallyfree, with revenue generated from adsor in-appsales.

“When you’re thinking about thattransition, it isn’t wholly intuitive toconsole developers who are reliant onpublishers for distribution,” says MrFarrior. “In mobile, you own the distri-bution and the development of thepiece. That’s . . . outside the comfortzonefor traditionalpublishers.”

Another challenge for console devel-opers is that mobile games are createdand updated very differently. Consolegames are typically left unchanged, butmobile games, once on a device, can beupdatedalmostconstantly.

King, for example, adjusts thedifficulty of Soda Saga’s levels every fewweeks. The first “cohort” of players waslooking for something more difficultthan the original Candy Crush, Mr Zac-coni says, while newer players wantsomethingeasier.

Despite the different dynamics, MrFarrior says mobile studios such asBackflip are hiring console games devel-opers in much greater numbers. “We’vehad to hire truly talented experience,and the bulk of that experience was inshifting fromconsole tomobile.”

Backflip is planning to use Hasbro’sbrands and characters to help its gamesstand out. But even names that couldincludeMy Little Pony and Transformersare not enough to guarantee a hit in themobilegamingworld,MrFarriorsays.

“A brand is important, but a brandalonewon’tgetyouthere,”hesays.

To succeed, he says, you need an“absolutely killer game”, with highretention and conversion from freedownloads to paying customers. “Youneed to marry the good math with thegood brand and have a really talented,aggressiveuseracquisitionteam.”

Developers seethe future ofgames on muchsmaller screens

Entertainment Consoles are being supplantedbymobile devices, reportsTimBradshaw

Party poppers:actress MollySims at thelaunch of King’sCandy CrushSoda Saga onBroadway lastNovemberBryan Bedder/Getty

Activision’schiefs nowsay mobilegaminghas ‘movedup’ theirpriority list

Monday 2 March 2015 ★ FINANCIAL TIMES 3

When US telecoms groups spent$44.9bn snapping up airwaves in arecord-breaking auction of govern-ment-owned spectrum last month, ittookmanyinthe industrybysurprise.

Most analysts had predicted theauction would raise a fraction of theamount, with some pencilling inestimatesas lowas$15bn.

The total haul is more than double theamount the government raised last timeit auctioned airwaves in 2008, when thesmartphone revolution was still in itsinfancy. Since then, there has been asurge in the number of consumers usingtheir mobile phones to download videosand music, prompting fears that the USand some other developed countriescouldbefacingaspectrumcrunch.

Mobile data traffic has been growingat a blistering pace. By the end of lastyear, traffic stood at 2.5 exabytes amonth, according to Cisco, more thandouble the amount in 2013. By 2019,Cisco predicts that it will have grown 10-fold to 24.3 exabytes a month. An exa-byte isequal to1bngigabytes.

The primary reason for the predictedexplosion in mobile data traffic isthe shift in how people consumevideo. Generation Z — shorthandfor those born from the mid-1990sonwards — are abandoning theirparents’ television sets and desk-top computers in favour ofmobile phones. Content pro-ducersare followingthem.

Jonathan Chaplin, an ana-lyst at New Street Research,says this has prompted a“fundamental step-change” in how the likes ofVerizon and AT&T viewtheir ability to cope withthesurge inmobiledata.

This explains why theywere so willing to shell outbillions in the auction,even though they havehad to take on moredebt and sell assetsto fund the pur-chases.

If steel and oil were the commoditiesthat defined the 20th century, thenwireless spectrum is arguably the oneneeded by the internet industries thatwill dominate the next 100 years. And,as with oil, there is a finite amount. Yetanalystsandexpertsaresharplydividedonwhether itwillactuallyrunout.

According to the US Federal Commu-nication Commission’s models, demandfor spectrum will eclipse supply sometime in 2018. Mr Chaplin says Verizon,the largest wireless group by marketshare, is in the worst position. It

accounts for about 40 percent of industry revenues,but controls 17 per cent ofspectrumcapacity.

The situation is not asacute in developing mar-

kets, where smart-phone penetration isstill in its infancy, or inEurope, where agreater share of thepopulation lives inurban areas. Citiesand towns would be

in a better position tocopewithanyspectrum

crunch, because lots oftraffic can be offloaded on

toWiFinetworks.However, Marty Cooper, a

US engineer who is widely cred-ited with inventing the first real

mobile phone, is adamant thatthere is not going to be a spec-

trum crunch. Instead, he

says the telecoms industry will “find awayofusingspectrummoreefficiently”,just as the modern hybrid engines thatpowertheToyotaPriususe lesspetrol.

Nokia Networks recently suggestedthat existing spectrum could be made athousand times more efficient by 2020,by deploying new technology and usingnewfrequencybands.

So why are telecoms companieswilling to pay so much for spectrum?The industry insists it needs to grab asmuchaspossibletosatisfyusers’hungerfor mobile data. But Mr Cooper suggeststhat they could be “hoarding” it tostop competitors from entering themarket.

While the big US telecoms group areengaged in a race to buy more airwaves,some companies are taking an entirelydifferent approach: building mobilephone networks that use no wirelessspectrumatall.

Cablevision, the US cable operator,last month launched Freewheel, amobile phone service that allowscustomers to make voice calls anddownload videos and music by solelyusingthecompany’sWiFihotspots.

The service has huge limitations: theminute customers are outside the rangeof one of Cablevision’s hotspots, theywill be unable to use their phone. Theymust also use a specially modifiedMotorolaphonethat isdesignedtoworkonthesystem.

Yet the trade-off is partly reflected inthe price: $9.95 a month for Cablevisioncustomers, on top of their regularmonthly bill, or $29.95 for non-custom-ers. That is a fraction of the cost of themost basic $50 plans on offer — whichare also subject to strict caps on datausage.

Craig Moffett, an analyst at MoffettNathanson, says of Freewheel: “Thebest way to view [it] is as a proof of con-cept. The service itself is unlikely to befinancially material for either Cablevi-sion or the wireless industry. Theconcept,however, isabigdeal.”

If a larger cable group, such asComcast, were to follow suit with aservice that was predominantly pow-ered by WiFi hotspots, it would have“the potential to attract a meaningfulnumberofcustomers”,MrMoffett says.

“If priced aggressively, it could also beenormously deflationary for traditionalcellularproviders,”headds.

That is a sobering thought for thosecompanies that have just shelled outbillionsonspectrum.

Fears of a spectrum shortagespark networks’ bidding frenzyWireless communications

While US telcos race to buymore airwaves, others havetaken a different approach,writes David Crow

The Connected Business

A n all-pervasive mobilecomputing platform hasbeen the great hope of techinvestors for the better partof the decade: a successor

to the PC-and-server world, it wouldprovide the foundation for the nextgenerationofGooglesorebooks.

Now, as that promise starts to showsigns of being fulfilled, the money ispouring in. In the US, the amount ofventure capital investment in mobilemore than doubled last year, hitting$7.8bn, according to CB Insights, whichgathers start-up data. That represents16 per cent of all the money invested byventurecapitalistsduringtheyear.

Payment companies such as Square,delivery services such as Instacart, andmobile security providers includingLookout and social media apps such asYik Yak are all part of a wave of mobile-first start-ups that have tapped intoinvestor enthusiasm for businesses thatarepreparedfor thisparadigm.

“When the platform shifts, we get anew opportunity,” says Bill Gurley, apartner at venture capital firm Bench-markandabackerofUber.Thecar-hail-ingservicerecentlyraised$1.2bn,oneofthebiggest fundraisingroundsever foraprivate company, giving it a valuation of$40bn. That makes it a powerful state-ment of the sort of opportunity MrGurleyclaimsfor thesmartphoneera.

“The mobile platform puts a

processor just about everywhere,” saystheBenchmarkpartner,whowasspeak-ing at a Goldman Sachs conference lastmonth. “It’s what’s behind a companysuchasUber.”

If smartphones have put processorsinto more than 1bn hands, then the nextextension of the mobile platform —“wearables” such as smartwatches andglassescarryingsensorydevices—couldsoon make them inescapable, adding totherevolution’smomentum.

It has been long expected that mobilebusinesses will take off, but it has takensome eye-catching valuations of compa-nies to convince investors that big prof-itsare finallyupforgrabs.

The emergence of Uber as SiliconValley’s hottest start-up since Facebook,for instance, has caused an investmentstampede into many other services thathave modelled themselves on the ride-hailing company. Most style themselvesas “on-demand services” — usingmobile handsets to address a want andthen supplying it by means of offlinefulfilment.

Excluding Uber, companies that fitthis description raised $1.46bn in ven-ture capital in the 12 months to Septem-ber 2014, CB Insights says. The risingtide of so-called “Uber for X” companies(because many style themselves “theUber” of a particular industry) includesrival taxi app Lyft, as well as deliveryservicessuchasPostmates.

The conspicuous success of otherearly mobile leaders has also attractedinvestor interest to other promising cat-egories. Facebook’s $22bn acquisition ofWhatsApp last year, for instance, hasconfirmed chat apps as one of the hot-testareasofmobile investment.

Last year, partly encouraged by Face-book’s acquisition, venture capitalinvestors put $1.41bn into mobile mes-saging companies, CB Insights says:from Snapchat’s vanishing messages toSlack, a service for teams of workerswithaheavymobilecomponent.

The investment boom is spreadingwell beyond mobile-first companies.Many whose histories date from wellbefore the smartphone boom are alsoshifting their focus towards mobile and,in some cases, putting substantialinvestmentsbehindtheirplans.

For instance, when Change.org, an

online service for organising petitions,raised $25m late last year, much of itsmotivation was to extend its mobilereach. Already, half of all interactionswiththeserviceareonmobiledevices.

“There has been a historic false dividebetween web and world, which iscollapsing with mobile,” says BenRattray, Change.org’s chief executive.By adding a geolocation tag to its peti-tions, for instance,anyonewithamobiledevice would be able to see all of theChange.org campaigns taking placenear them, potentially bringing muchmore publicity and support for localevents.

“You can engage people where theyare in the world or in real time,” says MrRattray — things that could add to bothrelevance and immediacy for a widerangeof internetservices.

How many of the companies staking

out a place in the mobile world will pro-duce a return for their investors isanother matter. WhatsApp had barely scratched the surface in experimentingwith ways of producing revenue beforeit was acquired; Facebook has since putthe question off and shifted its focus tousergrowth.Fewcanaffordthat luxury.

Advertising, the main source of reve-nue for many desktop internet compa-nies, is growing fast on mobiles, albeitfrom a low base. By the first half of 2014,it had reached $5.3bn, or 23 per cent ofall US digital advertising, according totheInteractiveAdvertisingBureau.

Yet, with the most successful compa-nies inmobileattractingsky-highvalua-tions, it could takeyears for thebusinessfundamentals — the elements thatgenuinely reflect the values ofcompanies in the mobile industry — tocatchup.

Backers beton start-upsas hopes ofprofits riseVenture capital High valuations of companieshave attracted investors, writesRichardWaters

Mobile data traffiBillion gigabytes per month, by region

Mobile venture capital investments and deal volume trendQ1 2013-Q4 2014

Deals

Investments ($bn)

2.5

2014

4.2

2015

6.8

2016

10.7

2017

16.1

2018

24.3

2019

Latin America

Middle East and Africa

Central and eastern Europe

Western Europe

North America

Asia-Pacific

Q1 Q4 Q12013 2014 Q4

0.7 0.8 1.1 1 .1 0.9 2.6 1.2 3.1

106115

150 150

125

146 145155

FT graphic Sources: CB Insights; Cisco Photo: Cesare Ferrari/iStock

The value of mobile Investment trends and data predictions

‘There hasbeen ahistoricfalse dividebetweenweb andworld, whichis collapsingwith mobile’

Spectral efficiency MartyCooper, pictured on the phonebelow, formulated the law ofspectral efficiency.

“Cooper’s Law” states that theefficiency of spectrum has doubledevery two-and-a-half years sinceMarconi made the first transatlanticwireless transmission in 1901.Dismissing an imminent spectrumcrunch, Mr Cooper says: “Spectrumis 1tn times more efficient than itwas at the start of the century.

“We know enough to keep usgoing for another 50 years at least.”

Staying onlineCooper’s Law

4 ★ FINANCIAL TIMES Monday 2 March 2015

This trend is being played out inmergers and acquisitions in the sector,for example in the £12.5bn acquisitionofmobilegroupEEbyBTintheUK.

But, inevitably during one of the mosttumultuous periods of change for tele-coms since European deregulation ofthe sector two decades ago, there arerisks — not least that some overstretch,or others under-reach, in setting outbusinessstrategies.

Mr Vestberg predicts a segmentationof the industry, as some concentrate onnetwork provision, while others look toopen new markets. But, he says: “It’snew turf. There will be competitors inthe technology industry wanting thesamecustomers.”

Some still ask why telecoms groupsworry about maintaining the status quo.On the face of it, there is little cause forconcern. Mobile revenues are estimatedat close to $100bn a month, according toresearch by The Mobile World, anindustry database provider. This isgenerated by rising global mobileconnections,morethan7bnatpresent.

The telecoms market generatednearly $2tn in revenues in the past 12months, Mobile World said, with 61 percent from mobile services. These grewalmost4percent inthepastyear,even iffixedrevenuesslidalmost1percent.

Buttheoverallpositive industrynum-bers belie a more mixed picture in manydeveloped markets, in particular inEurope, where revenues have fallen andprofitsbarelycover investmentcosts.

More importantly, the bigger risksare ignoring what is happening else-where, in particular as the technology sector looks to compete directly withtelecoms groups in internet-based

Continued frompage1

voice, messaging and network services.Network operators still control certainparts of the customer relationship butthesearecomingunderattack.

One obvious area is customer billing,which has been crucial for telecomscompanies as the trusted provider ofcommunications and digital services.However, the introduction of servicessuch as iTunes, Google Play andAmazon have disrupted this link withthecustomer.

Meanwhile, control of the technologyfor directing communications in IP-based networks is being challenged byvarious technology-led services, whileeven the trusty Sim card — the piece ofplastic that gives a phone its identityand connection — is being challengedby Apple’s own electronic version,

launched in autumn 2014.Thenetworkoperator, inotherwords,

is losing control of the customer, andwith it the ability to make more moneythan by just providing a basic level of connectivity.

But Bain & Company, the manage-ment consultancy, sees a chance tomake telecoms services premium again.Astudybythegroupfoundthat thefightformarketsharehasdrivendownpricesfor network services such as voice, textand data as well as devices. This hastaught customers to make price themain criterion over factors such asnetworkquality,brandorservices.

Laurent-Pierre Baculard, partnerwith Bain, says: “As connectivity costshave fallen, customers have begun tothink of telcos as mere providers ofpipes and have shifted their perceptionsof value from the network to theirmobiledevicesandcontentproviders.”

Mr Baculard says that telecomsgroups need to invest in their networksto provide better connectivity and mon-itoring of sensors and other connectedobjectsandbecome“enablersofan inte-grated, premium digital lifestyle . . . notonly entertainment and communica-tion, but also smart and connectedhomes and cars, security, healthcareandotherdigital services”.

Ben Verwaayen, former chief execu-tive of BT and Alcatel-Lucent, similarlysees an important role for telecomscompanies—if theywanttotake it.

But Mr Verwaayen says that whiletelecoms groups are all about providingindividual services,preciselywhat thesewill be will be decided by customers andnot the networks that serve them. As forthe original use of the phone, he says:“Voice isnowjustanapplication.”

Telecoms companies seek to redefinerole as digital competition intensifies

The Connected Business

D igital downloads — onceseen as the salvation of amusic industry ravaged byonline piracy and falling CDsales — are in decline, and

record labelsareworried.Amid great promise, downloads

became the main way to listen to music,but a decade of growth came to a shud-dering halt in 2014 and sales are set tofall further in2015.

Enter streaming, the latest whiteknight with potential to return themusic industry to the good times. Arange of companies led by Spotify andincluding Apple and Google, are bettingmusic fans will migrate to new servicesthat give listeners all the music theywanttohear fora fixedmonthlyprice.

Access, not ownership, is the order ofthe day and Spotify is the operator lead-ing the charge. The Swedish companyadded2.5msubscribersat theendof lastyear and now has 15m paying custom-ers, with 60m people around the worldusing its services.

Its growth is attracting investor inter-est. It recently hired Goldman Sachs toraise about $500m, a new round offinancing that is expected to value Spot-ify at as much as $8bn, according to peo-ple familiarwiththematter.

Spotify’s investors include SeanParker, the founder of Napster, andTechnology Crossover Ventures, theSilicon Valley investment firm that ledits most recent fundraising at the end of2013, when it secured $250m. Recordlabels Universal Music Group and SonyMusicalsoownshares inSpotify.

It is easy to understand why investorsdo not want to miss the boat. Consumerbehaviour is shifting: global digitaldownloads of albums slipped 9 per centin2014andsalesof individual tracksfell12 per cent, according to Nielsen Musicdata. Around the world, demand forstreaming services is increasing, risingmorethan50percent,with164bnsongsstreamed in the US alone in 2014.

Despite the growth of streaming, noone in the music industry is yet poppingthe champagne. Even if it continues onits growth trajectory, streaming will notreplace revenue lost by declines indownloading for two or three years.Still, it is a model the record labels love,because it replaces one that depends onhits with one that delivers steady,recurringrevenue.

Downloads may be falling, but 2015still ranks as a pretty good year to be amusic label. Technology groups arelaunching competing music streamingservices and are on the lookout for

exclusive deals with labels and big acts— anything to give them an edge overtheircompetitors.

One record executive commented:“Think about it: Google, Apple, Spotifyand others are all converging on thisspace. And what do they need? Ourmusic.”

Apple is — unusually, given its sizeand pedigree in digital music — anunderdog in streaming: its iTunes storeis theworld’s largestmusicretailer.

The company took steps to changethis last year when it paid $3bn for BeatsElectronics, the audio group founded by

entrepreneur Jimmy Iovine and hip-hop star Dr Dre. The deal gave Apple theBeats brand, which has cachet amongyoung music fans, but will ditch thenamewhenit launches itsownsubscrip-tionstreamingproduct thisyear.

Due in the summer — the release datehas slipped back from the spring — theApple streaming service has the advan-tage of a vast installed base of devices.Apple will effectively pre-install the appon new devices, including it on anupgradeof its iOSoperatingsystem.

Mr Iovine, who Apple retained afterbuying Beats, is opposed to having a free

tier, which will distinguish the servicefrom Spotify: the Swedish group uses itsfree service to convert listeners to pay-ingsubscribers.

Apple will have to employ othermeans to attract customers. A lowerprice point has been mooted, with thecompany reportedly considering a $7.99monthly fee in the US, compared with$9.99 for Spotify. It also has the advan-tage of having hundreds of millions ofiTunes customers, existing music fansto whom it can promote and market thestreamingservice.

The absence of a free tier may alsowork in its favour. Spotify has in recentmonths found itself embroiled in a warof words with singer-songwriter TaylorSwift, who pulled her albums from theservicetoprotestagainst thefree level.

“WithBeatsMusicandRhapsody,youhave to pay for a premium package inorder to access my albums,” she said in aTime magazine interview, adding. “Ithink that people should feel that thereis a value to what musicians have cre-ated,andthat’s that.”

Spotify paid four-fifths of its reve-nues, equivalent to €605m, in royaltyand distribution costs to artists in 2014.As more people turn to streaming, thatfigure should rise. But — as Spotify’s dis-pute with Taylor Swift shows — stream-ing remains a nascent business: theremay be more bumps in the road for anindustry still desperate to return to thehalcyondaysofhigh-marginCDsales.

Industry hails streaming as ‘new white knight’Music The uptake ofservices will not replacelost revenues just yet,saysMatthewGarrahan

Idina MenzelLet it Go

Pharrell WilliamsHappy

John LegendAll Of Me

Katy Perry feat.Juicy JDark Horse

Meghan TrainorAll AboutThat Bass

Iggy Azaleafeat. Charli XCXFancy

John LegendAll Of Me

Katy Perry feat.Juicy JDark Horse

Top five on-demandstreams

Top fivedigital songsSales, 2014

Meghan TrainorAll AboutThat Bass

Iggy Azaleafeat. Charli XCXFancy

4.7m 4.4m 4.4m 4.0m265m 252m 236m 235m

Audio and video, 2014

FT graphic Source: Nielsen * Includes audio and video data from AOL, Beats, Cricket, Google Play, MediaNet, Rdio, Rhapsody, Slacker, Spotify, Xbox music, YouTube/Vevo

Downloads v streams Winners and losers

268mTotal on-demand

streamsTotal sales

6.5m

Number of on-demand music streams*Total audio and video

Number of digital music salesAnnual % change, 2014 Annual % change, 2014

2013106.1bn Audio

2014163.9bn

20131,259.3m

20141,102.5m

106.5m 117.6m60.5%

Track Album-12.5% -9.4%

Video49.3%

Track

Album

‘Google,Apple,Spotifyand othersare allconvergingon thisspace’

ContributorsDaniel ThomasTelecoms correspondent

Sarah MishkinTim BradshawSan Francisco correspondents

Robert CooksonDigital media correspondent

David CrowSenior US business correspondent

Richard WatersWest Coast editor

Matthew GarrahanGlobal media editor

Jane BirdJessica TwentymanFreelance technology writers

Maija PalmerSocial media journalist

Adam JezardCommissioning editor

Steven BirdDesigner

Andy MearsPicture editor

For advertising details, contact:James Aylott, +44 (0)20 7873 3392.

All FT reports are available on FT.com atft.com/reports

Premium rate:Taylor Swift

Monday 2 March 2015 ★ FINANCIAL TIMES 5

6 ★ FINANCIAL TIMES Monday 2 March 2015

The Connected Business

A pop -up shop at theBoxpark mall in London’sShoreditch is a fashionablestarting point for a smallbusiness hoping to start a

trend. Newcomer Wines aims to popu-larise Austrian wines by whetting theappetitesofyoungercustomers.

Daniela Pillhofer, the company’s co-founder, says mobile technologies havea big role to play in educating shopperson the pleasures of Austrian wine — andintakingpayments.

In-store tablet computers showvideos about winemakers, andpurchases made by credit or debit cardsare processed on a mobile phone ortablet via a card reader and app fromSwedish mobile payments specialistiZettle.

“About 80 per cent of our customerswanttopaythatway,”saysMsPillhofer.

Not every small business is able tohandle its customers’ payment prefer-ences so readily. A study in five Euro-pean countries by Visa Europe foundsmall businesses push about one in fourclientsawaybynotacceptingcards.

Companies such as iZettle, Paylevenand SumUp use mobile technologies todeliver low-cost competition to tradi-tional card payment services, whichoften have long contracts and monthlyfees thatdetersmallbusinesses.

It is not just in the area of paymentsthat small businesses may lose out. ABoston Consulting Group study of smalland medium-sized enterprises (SMEs)found the 25 per cent of SMEs that usemobile services most intensively haverevenues that grow up to twice as fast astheir peers and create jobs up to eighttimesfaster.

The report says SMEs behind thedigital curve “are at risk of being leftfurtherbehind”.

Mobile technologies underpin thefranchise strategy at Diamond Logistics,a courier company in Surrey, England.The scheme, launched in 2012, has seenthe company open 14 locations in thepast two years and it plans to increasetheseto40bytheendof2015.

The company uses mobile providerVodafone’s One Net platform for smallbusinesses that integrates landline andmobileconnectivity intoonesystem.

Using this, Diamond keeps its distrib-uted network of franchisees and driversworking as a single, customer-focusedteam,sayschiefexecutiveKateLester.

This means that, when drivers are on

the road, it is easy for office staff to alertthem, via a mobile app, to new collec-tions they need to make for same-dayand next-day delivery services. Afeature in the One Net platformautomatically diverts customer calls tothepersonbestplacedtohelpthem.

The field-based sales team at FirstMile, a London-based provider of

recycling services to SMEs, uses anAndroid-based mobile app whenmembers visit businesses in Londonand Birmingham to gauge their interestinsigningupfor its services.

The app, linked to a customer rela-tionship management system fromcloud-based services provider Sales-force.com, gives the team a map show-ing which businesses they need to visitinaparticulararea.

After each visit, they use the app toscore that prospect according to a“warmness rating”. A “hot” lead is fol-lowed up by the office-based sales team,“colder” leads are flagged up for auto-matedemailmarketingcampaigns.

BruceBratley,FirstMile’s chiefexecu-tive, says the company quadrupled itsfield sales in a matter of months usingthe app, which paid for itself within amonthof its launchinJanuary2014.

Patrick Rusby, an analyst at AnalysysMason, agrees that better use of mobiletechnologies can transform a smallcompany’sprospects.

“Mobile opens up new horizons forSMEs, giving them better access tobetter tools, which enable them to com-pete on a level playing field againstmuchlargerrivals,”hesays.

SMEs at risk of falling behind the digital curveTechnical advantageBusinesses that exploitmobile best grow fasterthan their rivals, saysJessica Twentyman

Streets ahead: Kate Lester, chiefexecutive of Diamond Logistics

Could an internet-connected thing — asmart fridge, a thermostat or a home-help robot — become a millionaire?This is not as ridiculous a question as itmay seem.

If we do indeed move toward a worldin which devices are connected to theinternet and performing mundanechores, it is likely that many of themwill be connected to some kind of bankaccount.

For maximum efficiency, the smartfridge that orders your milk shouldalso be able to also handle thepayments to the supermarket. Youmay not hook the fridge directly to acurrent account — worried perhaps asoftware glitch might cause the fridgeto accidentally put you in debt byordering £20,000 worth of dairyproducts in a single day. But you mightset up a pre-paid account with a setamount of milk money that the fridgecan access.

What happens if the fridge is able tobuy your milk for 1p a litre cheaperthan you have budgeted? Perhaps it isable to join with other networkedfridges to buy in bulk, lowering theprice. Or its ability to search hundredsof thousands of prices allows it to dosome bargain hunting. The milkaccount grows a surplus. But is thismoney yours?

As the owner of the fridge you wouldassume so. But is this always clear?What if you do not own the smartfridge, but rent it? Or if it has beensupplied to you, free of charge, byits manufacturers or by the dairy?Who owns the surplus then?Would it be like the deals somesolar panel companies offer, wherethey install the equipment forfree on the understandingthat they keep themoney from anyelectricity generated?At the very least, youwill need to read theownership contractcarefully.

And what happenswhen the artificialintelligencecapabilities ofappliances increasesmarkedly and thefridge is capable ofmaking more complexdecisions? What if, ratherthan keeping the milk fundsin the prepaid account, itconnects to an online stockmarket trading site, investsthe money and makes aprofit?

It still buys the milk, but

now there is an extra £20 in theprepaid account. Does that belong toyou? Will there be anything to stop anadvanced, AI-enabled fridge opening aonline bank account and depositing themoney there without your knowledge?Should banks have a “humans-only”policy to stop this happening?

And what would a rich machine buy?A group of Swiss artists haveexperimented with this idea, creatingthe Random Darknet Shopper, anautomated online shopping bot thatwas given an allowance of $100 a weekin bitcoin and instructed to make onerandom purchase a week from anonline marketplace. The items weredisplayed in an exhibition at the KunstHalle in St Gallen.

To the consternation of theperformance artists — and the Swisspolice — the purchases included 10ecstasy pills and a false Hungarianpassport. This prompted debate overwho was liable when a robot broke thelaw on its own initiative, a debate thepolice sought to clarify by seizing thecontraband goods.

The idea of the shopping robot addsanother dimension to the discussionabout what a robot-filled future will belike. Last month, an open letter, signedby scientists and entrepreneursincluding Stephen Hawking and ElonMusk, urged us to begin consideringsome of the ethical dilemmas andpotential dangers posed by artificialintelligence. Who is liable if a robot hasan accident, for example? How will aself-driving car choose what to do if theonly way to avoid a head-on collision isto veer on to a crowded pavement?

Scientists at places such as theFuture of Life Institute based in the US,the Centre for the Study of ExistentialRisk at Cambridge university and theMachine Intelligence Research

Institute in California (yes, thesereally exist) are also consideringwhat might happen if we areeventually able to create machines

far more intelligent than humans —superintelligences that may

break out of the bounds oftheir programming andbegin to disregardhuman controls.

In science fiction, thisscenario — called“singularity” or“transcendence” —usually leads to robotversus human war anda contest for worlddomination.

But what if, ratherthan a physical battle,it was an economic one,

with robots siphoningoff our money or destroyingthe global economy without-of-control algorithmictrading programmes?Perhaps it will not make fora great movie, but it seemsthe more likely outcome.

After all, the financialcrisis of the past decade hasshown us how easily it couldbe done, even by dumbhumans.

Milk-buyingrobotsmaybethe end of us allINSIDE TECH

MaijaPalmer

I bank, therefore I am?:a still from the sciencefiction film ‘I, Robot’