Contents

1. Making sense of the rapid change in mobile innovation (includes PwC's Mobile Technologies Index) 2. Device connectivity speed: One half of an equation 3. Infrastructure speed: Watch capital investment in 4G for the next inflection

www.pwc.com/technology

The PwC Mobile Innovations Forecast Making sense of the rapid change in mobile innovation
By Raman Chitkara, Global Technology Industry Leader With a quick boot, instant response to touch and speedy downloads from the cloudbased App Store, the application processor was one of the iPhones many competitive advantages when it debuted in 2007. One factor contributing to the powerful processing capability was Apples decision to use NAND flash memory instead of NOR. At the time Apple made that decision, NOR was the standard flash technology used in mobile phones and NAND was an emerging technologyfaster and denser than NOR, but more expensive. For those performance reasons, Apple chose NAND, taking a calculated risk that the priceperformance would improve, due in part to the demand that Apple itself would create with a successful launch of the iPhone. Within two years, NAND became the standard, not only for system boot up but also for storage. Looking back, one overlooked but key enabling technology for the iPhone was moving from NOR flash to NAND flash, says Steven Mather, Senior Principal Analyst at IHS, a global information and analytics provider. You needed a powerful operating system and processor, but you couldnt do that until you had the memory, and you couldnt do the memory until you had the NAND flash. NOR wasnt capable of supporting a higher level apps processor like the one in the iPhone. NAND was just one catalyst for the iPhone, which became one of the most successful hightech product launches of all time. The team at Apple recognised changes in technology, usage and materials, says Dan Hays, PwC US Wireless Advisory Leader. Designing a phone that was that thin with that battery life wasnt as much about beating the others to market. It was about recognising fundamental changes in materials, technology and things that you could do with industrial design and user interface.
Dan Hays PwC US Wireless AdvisoryLeader

The point is this: Apples decisions about NAND and other components illustrate how understanding the evolutionary curve of technological innovation, even of commodities like flash memory, can lead to a disruptive product that transforms an entire ecosystem. Where will the disruptions in mobile innovation arise over the next five years? How will they change consumer and employee behaviour? What business opportunities will result? What can companies do to take advantage of these disruptions? How do they fit into broader market trends now driving the technologysector?

Introducing the PwC Mobile InnovationsForecast Answering these kinds of questions requires not just a keen understanding of the evolutionary curve of the enabling technologies, but a broader framework for analysing mobile innovation quantitatively and qualitatively. So with the goal of providing business leaders early warnings about coming disruptions and actionable intelligence about new opportunities, PwC introduces its Mobile Innovations Forecast (MIF), a four-part framework for analysing and understanding mobile innovation. The four parts are: Enabling technologies; New technological capabilities; New use cases and New business models. The four parts will be explored in periodic articles on this Web site in the months ahead. We expect that examining, analysing and forecasting mobile innovation along these lines will shed light on the interdependencies that are otherwise cloaked by the unorganised daily stream of innovation announcements from the mobileecosystem. The first categoryenabling technologiesis the focus of PwCs Mobile Technologies Index, a new quantitative method developed to analyse the rate of improvement in key technologies that are fundamental to mobile innovation, and to help forecast new use cases and business models. (see sidebar, Creating the Mobile Technologies Index, page 8) These enabling technologies have led to the rapid improvement of mobile device capabilities, dramatically changing our personal and work lives, and the way several billion people interact with eachother.

New capabilities
The Mobile Innovations Forecast includes technologies that are not currently significant enablers of innovation, but could become important within our fiveyear period. In our four-part framework we categorise these as new capabilities and they will be the focus of a future report. [See Coming soon at www.pwc. com/mobileinnovations] As important as the enabling technologies in our Index are, some of themore interesting use cases and disruptive mobile innovation are likely to be driven by the emerging technologies and new capabilities of existing technologies, which we include in this group, says Daniel Eckert, a PwC Director for MobileComputing.
Daniel Eckert PwC Director for Mobile Computing

Over the next five years, the smartphone will continue to acquire capabilities that will make it more and more like a full-fledged personal computer, but in the same period mobile innovation will continue to extend beyond smartphones and tablets. Mobile innovation in health care, automotive, home entertainment, manufacturing and other diverse sectors is likely to be just as robust. We will track things like the number of technologies, how fast are they moving and how that enables innovations. If you get so much more processing speed and you get so many more features then it allows you to do something different, says Rodger Howell, PwC Principal for Mobile Computing. We will monitor progress along this vector, and we will also note when other vectors are showing up, new threads, new business models, new use casesheres a concept that somebodys trying in a market not provenyet.
Rodger Howell PwC Principal for MobileComputing

New capabilities include technologies that could change how users interact with the devices and how the devices interact with the environment. Based primarily on qualitative research to date, we can suggest several examples we might include: near-field communications (NFC), high-definition audio (HDA), 3D computing, future generations of voice recognition, artificial intelligence, advanced video compression, gesture sensing and olfactory sensing (artificial nose). Based on our historical understanding of technology adoption, new capabilities for the purpose of our forecast framework are those that have not yet met the threshold of 20 percent penetration of mobile devices but are likely to do so within our five-year timeframe. One such example is NFC, which allows for secure, simplified transactions, data exchange and wireless connections between two devices near each other known as proximity detection. NFCs
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This article, the first of many, introduces the PwC Mobile Technologies Index; then explains where the Index fits in the fourpart framework of the Mobile Innovations Forecast, and concludes with a look at how mobile computing contributes to the market and industry forces that are driving the broader technology sector. PwC identifies mobile computing as one of four market forces that are individually and collectively redefining customer demand, expectations and business opportunity. The others are cloud computing, social technology and the emergence of intelligent devices (the digitisation of inanimate objects). Together, these mega-trends are leading us toward an era of ubiquitous computing, which relies especially on wirelessnetworks.

The PwC Mobile Innovations Forecast

Making sense of the rapid change in mobile innovation

The Index: 41% CAGR through 2015 Our examination of mobile innovation begins with the key enabling components, introduced here and then analysed in more depth, component by component, in separate articles in the weeks ahead. For this purpose, we have created the PwC Mobile Technologies Index, a broad composite of seven enabling components that underlie the power of the mobile device to sense, analyse, store and connect information. Since the first brick-like mobile phones began to appear in the chauffeured limousines of business executives and movie stars in the 1970s, disruptive breakthroughs in mobile have resulted due, in part, to the continuous progress of these components at predictable price points. Thus, our forecast begins with them. In this first release of the Mobile Technologies Index, PwC forecasts a combined compound annual growth rate (CAGR) of the Index between 2011 and 2015 of 41 percent. [see Figure1, PwC Mobile Technologies Index] As Figure 1 shows, this is less than the 55% CAGR of the Index between 2006 and 2011, but still represents large enough improvements in the underlying components to anticipate many new mobile value propositions.

Here is the forecast through 2015 for each of the seven enabling technologies in theIndex: Infrastructure speed: In average Megabits per second (Mbps), will improve 54 percent CAGR. Device connectivity speed: In Megabits per second per dollar (Mbps/$), will improve 37 percentCAGR. Processor speed: In GigaHertz per dollar (GHz/$), will improve 53 percentCAGR. Memory: In Gigabits per dollar (Gb/$), will improve 48 percent CAGR. Storage: In GigaBytes per dollar (GB/$), will improve 35 percentCAGR. Image sensor: In Megapixels per dollar (MP/$), will improve 20 percentCAGR. Display: In performance per dollar per square inch (P/$/in2), will improve 16 percent CAGR. (Performance is a weighted aggregation of resolution, brightness, power efficiency and otherfactors.)

device penetration reached an estimated 7 percent by the end of 2011, but we expect it to hit the 20 percent threshold within a couple of years. NFC has the potential to drive use cases and business models around device-based electronic payment systems as an alternative to credit cards (already happening in parts of rural China), to being a proxy for tangible keys, money, tickets, travel cards and identitydocuments. Based on our future research, there could be several micro-electro mechanical systems (MEMS) that we would include as new capabilities. At present, the most widely adopted MEMS device is the accelerometer, which rotates the smartphone screen from vertical to horizontal. Its device penetration rate increases from an estimated 45 percent by the end of 2011 to an estimated 69 percent by 2015. Compasses, gyroscopes and pressure sensors are three other MEMS devices we are tracking with data. Compasses reached an estimated 20 percent by the end of 2011, and will hit an estimated 44 percent in 2015, but the other two do not reach 20 percent by then. New versions of Wi-Fi and Bluetooth currently under development could re-energise these technologies and make them new capabilities once again. A new version of Wi-Fi will offer ultra-high bandwidth for line-of-sight or in-room applications. A new version of Bluetooth is anticipated for ultra-low power applications. When these new versions appear, we would likely cover them as new capabilities. We also include power and batteries under new capabilities. A smartphone that only needed recharging once a week would be a game changer. Batteries have improved only gradually for the past decade and are expected to continue their relatively slow advance. New capabilities that would accelerate improvements in mobile device batteries would create new opportunities, so our forecast will be sensitive to major disruptions emerging from innovation in power management and battery life.

Figure 1: PwC Mobile Technologies Index

400 Mobile capabilities relative to 2011

41% CAGR (20112015)

300

200 55% CAGR (20072011) 100

0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: IHS iSuppli Mobile and Wireless Communications Service

The PwC Mobile Innovations Forecast

Making sense of the rapid change in mobile innovation

New use cases

The technologies that comprise the Mobile Innovations Forecast and new capabilities are important, but some of the most interesting questions about mobile innovation centre on evolving usecases. Tracking rates of change in various technologies will help us make modest predictions about use cases already under development. For example, within the five years of our forecast period we anticipate the smartphone will add new and improved features that will give it the power and capabilities of todays desktop and laptop computers. Im carrying in my pocket right now a smartphone that has, on the size of my fingernail, 32 GB of storage. My laptop probably has eight times that, says Dan Hays, PwC US Wireless Advisory Leader. But its not farfetched to ask why shouldnt all that storage just be on the phone that I carry around with me all the time. Its secured and why shouldnt I just dock it into a bigger screen when I want a tablet or dock it into a shell when I want a laptop or dock it into my TV at home when I want to watch movies. The extent to which the smartphone actually disrupts personal computers remains to be seen. But consider this: the Apple App Store now offers more than 650,000 apps,1 and the number of Android apps has topped 450,000.2, 3 This continuing proliferation of apps suggests any number of future mobile use cases that will extend the power and scope of mobile devices.
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You might notice that the Index does not include battery or power management. This is not an oversight, but an informed decision. Our research indicates that battery performance improvements have been limited in nature and are not currently forecasted to be anything close to what we have seen for the components we chose to include in the Index, such as processor speed or storage. We will keep a close watch on battery technology; if there is significant change in the offing we anticipate that it will be covered in future articles describing new technological capabilities. (see sidebar, New capabilities) The Index from an historical perspective The price-performance improvements of these enabling technologies are largely responsible for the current trend in which smartphones are gaining market share over feature phones. But all mobile devices become cheaper, faster, more

capable sooner, not later, and are able to deliver more, better and more diverse services and digital content of all kinds. The seven components together, on average, will improve 41 percent a year, each year, for the next few years. So the kind of dramatic change from phones we had in 2006 to the iPhone in 2007 is going to continue, IHSs Mather says. By calibrating each component at 100, with 2006 as the base year, the spider diagram illustrates how the seven components are progressing relative to each other. [see Figure 2] In the weeks ahead, we will examine these technologies in a series of articles, including one that looks at the operating system (OS), which is not included in the Index, but is a key enabler of mobile innovation. [See Coming soon at www.pwc.com/mobileinnovations] The first of these articles, looking at device connectivity speed, is available here.

Figure 2: PwC Mobile Technologies IndexRelative progress of components

Processor speed Memory 20062015 20062011

Infrastructure speed

Storage

600

500

400

300

200

100

100

200

300

400

500

600

Device connectivity speed

Imaging sensor Display

Note: Infrastructure speed, Device connectivity speed, Storage, Memory and Processor speed are core technologies. Each accounts for 16% of the Index. Imaging sensor and Display each account for 10% of the Index. See Creating the Mobile Technologies Index on page 8 for more information. Source: IHS iSuppli Databases

1 http://www.bgr.com/2012/06/11/apple-kicks-off-wwdc-2012/ 2 http://androidcommunity.com/android-growth-continues450000-apps-850000-activations-daily-20120227/ 3 http://www.engadget.com/2012/02/27/google-450-000android-apps-now-available-to-300-million-device/

The PwC Mobile Innovations Forecast

Making sense of the rapid change in mobile innovation

The four-part framework of the Mobile Innovations Forecast As noted, the Mobile Technologies Index is just the starting point for our ongoing forecasting efforts in mobile innovation. Wireless devices and their supporting services will continue to run applications faster, store more data, create better pictures, and display information in brighter and more compelling images, driven by the seven components of the Mobile Technologies Index. The seven components, individually or collectively, are not likely to cause the next great disruption in the next five years without some creative thinking about how to use them. Specifically, new capabilities, creative use cases and imaginative business modelsor some combinationare more likely to produce a game-changing mobile innovation, says Kayvan Shahabi, PwC US Technology Advisory Leader. We will more closely examine these three areas in future reports on this Web site.
Kayvan Shahabi PwC US Technology Advisory Leader

Theres a segment of just new ideas that are going to come in. We dont know what they are, but people are working on concepts that may or may not take off, PwCs Howell says. A domain of technology with this amount of innovation poses a challenge for applying a useful framework on its evolution: which attributes should be included? Add the complexities of personal, enterprise, national, service provider and global perspectives, and the problem becomes nearly unsolvable. The framework must be flexible enough to account for continuous introduction of the new. And it must separate innovations into meaningful categories while retaining an explicit expectation of emergent interdependencies. The historical context must also be considered. There was a time when most functions now standard in smartphones were too expensive or unusable due to the immaturity of the underlying technologies. Such functions included integrated imaging, general purpose operating systems, downloading applications, location awareness, motion sensing and others. How long after the technical capability existed did it take for these to become mainstream features, and what happened that allowed them and the use models they support to becomestandard? From this perspective, more interesting questions about the future of mobile devices can be considered. What features and functions are coming, but are not commercially possible today due to current technology limitations, cost, wireless network speeds, business model imperfections or other barriers? What constraints prevent their appearance? When will these constraints dissipate enough to allow the capability to flourish? Can we predict when mobile devices will incorporate potentially disruptive capabilities they dont have today, based on future engineering advances?

The smartphone is already causing disruption in several categories of electronicsalarm clocks, digital cameras, gaming devices, audio players and GPS devices, to name a few. Smartphone penetration in other use areas will also become predictable. But if we only deal with obvious use cases entirely predictable from technology trends, then we will be limited to simply forecasting improvement in those uses over time. Our future research will lead us to discover and examine ideas still in the pure concept stage. Some of these seeds, planted over the next five years, are likely to come to fruition. Such use cases will be found in numerous areas: health sensors and medical applications from on-person monitoring to alert systems; the electronic wallet; the automobile as an evolving mobile computing platform; wearable computing; highly evolved personal assistants. We can anticipate new classes of business use cases aswell. When we take a closer look at use cases in a future report, we will answer two keyquestions: W  hat use cases are still on the shelf because of unsolved problems technical or otherwiseand which of those problems have a chance of being solved in the next five years, thus unlocking the use case. W  hat use cases not even on the shelf yet could move quickly ahead if some technology or business model problem is solved. The answers will come from the use cases we identify through our in-depth interviews and qualitative analysis.

People are focused on the things they know or are easy to understand, but those might be the wrong things, PwCs Hays cautions. There are two pieces to this story. Theres how things are evolving and tactically moving up the curve and then theres the big gotchas. To anticipate the gotchas and track their progress from idea to commercial reality, we constructed the broader framework of the Mobile Innovations Forecast. The Mobile Technologies Index tracks innovation that, in aggregate, is analogous to a rising tide that lifts heavier boats still resting on a muddy bottom. Predictably, future component performance levels at acceptable price points will support even heavier applications that are not feasible today. But other types of innovation are harder to predict and the consumer, and even some established vendors, can find it hard to anticipate them.

The PwC Mobile Innovations Forecast

Making sense of the rapid change in mobile innovation

In this ongoing series of articles, PwC will periodically offer answers to those types of questions through the framework of the four categories of the Mobile InnovationsForecast:

New business models

When, where and how will the next disruptions to mobile business models happen? Perhaps a social networking site becomes a virtual network operator? Or a healthcare provider resells wireless devices and services as part of a chronic disease management solution. Maybe a carrier launches vertical service and application packages to industry segments. Were already seeing announcements by carriers and credit card companies that portend major business model shifts. How will the cloud figure in mobile business models? Does the newly emerging wholesale wide area network pipe business make sense? Will more electronics retailers offer branded devices and service? How far below the $100 price point might the full-featured smartphone drop? These are among the topics we will examine when we do additional research into business models in future reports. We anticipate considerable innovation over the next five years. You could argue that today theres very little differentiation in the mobile communications industry, says Dan Hays, PwC US Wireless Advisory Leader. The phones are all starting to look alike. The services are all becoming fairly ubiquitous. It all feels very similar. Thats when theres the potential for business model disruption. Operators, OEMs, retailers, automobile companies, healthcare providers and insurers, web-based entrepreneurs, the entertainment industry and any number of segments we havent considered yet, will seek new ways to monetise mobile innovation. New business models have the potential to disrupt as much as technologies do.
Continued on next page

The seven enabling technologies of the Mobile Technologies Index, plus the OS, as explained above, are the subject of this current report and a series of articles to appear in the coming weeks. The new capabilities of various emerging and existing technologies. [see sidebar, New capabilities, and the subject of a series of articles scheduled for later this year] New use cases that arise from performance improvements or entirely new mobile technologies including the extension of the mobile ecosystem into the cloud. [see sidebar, New use cases, and the subject of future articles] New business models built on all of the above, and that might increasingly rely on industry dynamics outside of the mobile industry itself. [see sidebar, New business models, and also the subject of future articles] We do not intend to develop an encyclopedic description of all existing or potential capabilities, emerging technologies, use cases and business models. In many cases we expect there will be an explicit hierarchy in the newa new capability, relying on further improvements in enabling components, creates the potential for new use cases that, in turn, create new business models. The broader business impact As noted, this introductory article and the individual component articles in the weeks ahead are just the beginning of a much longer project to track mobile innovation across a broad front. One hope is that, over time, the community of readers will offer their own ideas and insights into this process, and begin to understand how mobile innovation itself is only one key element in a broader evolving technologyecosystem.

The Mobile Innovations Forecast exists within PwCs framework for understanding various dynamics driving the broader technology sector today, a framework that suggests ways technology companies might navigate disruptions that are rich in opportunity. In this context, there has been little research that parses the mobile ecosystem as we are parsing it, and then analyses the ecosystem parts to forecast innovations likely to reach commercialadoption. It is a truism that technology innovation never stops, and technology companies can never rest on prior success. In this regard, the disruptive forces in mobile computing are familiaras friend and foe. But there is something different this time. PwC sees major market and industry forces co-mingling in ways that paint a forward-looking picture that is starkly, even radically, unlike the past. Incremental change this is not. As noted earlier, mobile innovation is one of four market forces that, individually and collectively, are redefining customer demand, expectations and business opportunity for technology companies; the others are cloud computing, social technology and the emergence of intelligent devices. Individually, each is turning the rules of the broader technology sector upside down. [see Figure 3] For examples, consider the following: Enterprise computing device strategies focused solely on desktop PCs and laptops ignore at their peril the 24x7 reality of fully engaged knowledge workers and customers on mobile devices. The lack of agility in typical legacy data centres destroys enterprise value relative to cloud options. Email and Web portal strategies are siloed and tone-deaf if they arent embracing many-to-many socialtechnologies. Networked, digital intelligence will be emanating from billions of smart, networked things operating without direct human oversight and offering data for purposes limited only by theimagination.

The PwC Mobile Innovations Forecast

Making sense of the rapid change in mobile innovation

Figure 3: The interplay of market and industry forces and how they are driving technology companies to consider new business models and more agile operations
Market Forces Mobile Computing Industry Forces Maturation/ Convergence

For example, when Apple launched the iPhone in 2007 it injected a new dynamic to the OEM and wireless carrier relationship, changing the standard business model. For the first time a carrier allowed an OEM to dictate design and functionality of the handset because it believed the innovations would jumpstart the adoption of its 3G service. Concerned about being disrupted by others, wireless operators in particular are looking to evolve business models. The operators are wrestling with how they can add value to avoid becoming just a dumb pipe, says Jagdish Rebello, Director of Consumer and Communications Research at IHS. In this, operators are competing against other operators, but they are also competing with content providers, OEMs, app developers and other nodes. The technologies in the Mobile Technologies Index and in new capabilities will suggest new use cases, which in turn can inspire new business models. And the whole cycle is likely to turn around on itself when new business models create demand for or accelerate the development of new technologies. Business models are not part of the Index, which is why our future analysis of them will rely on interviews with leading industry visionaries and other research to identify and analyse where new business models are possible, are being tried or thought about and where current business models are most likely to bedisrupted.

Cloud Computing

Ubiquitous computing

Global Focus

New business models

Intelligent Devices

Consumerisation of IT

Patent Wars

Pressure to be more agile

Social Technologies

Digital Transformation

Source: PwC

Mobile is one of several disruptive changes affecting technology, communications and media industries. The others being cloud computing, social media and the network of intelligent devices through the Internet, says Vicki Huff, Technology Industry Partner based in Silicon Valley. The individual impact of each could threaten established vendors and create new customer value propositionssomething mobile is already demonstrating in spades. But their combined impact is likely to be greater as mobile devices engage with smart objects without user intervention, incorporate personal data stored in the cloud and socialise commerce. We expect the same level of disruption we have seen in the mobile ecosystem to play out in all corners of the technology industry, in some cases bringing former competitors together and in others turning friends into rivals. PwC views these four trends as delivering on the long-time promise of ubiquitous computing, a phenomenon predicted two decades ago by Xerox PARC. Today, Wikipedia captures it well: Ubiquitous computing (ubicomp) is a post-desktop model of human-computer interaction in which information processing has been thoroughly integrated into everyday objects and activities. When our customers and employees live and work in this ubiquity they have disruptive expectations that their work lives will be as

thoroughly integrated as their private liveshence the consumerisation of IT that every enterprise is grappling withtoday.
Vicki Huff PwC Technology Industry Partner

As if these market forces werent enough, the tech industry itself is experiencing major internal disruptions: maturity and convergence, globalisation, patents as an arms race and digital transformation of business ecosystems. Market forces are driving some of these disruptive developments. Cloud totally redefines compute infrastructure. Everyone is in everyone elses marketshardware companies go into retail and services, while retailers introduce their own hardware and software companies become retailers and hardware vendors. And mobile computing is establishing heated competition for the future of the end-user devices, a battle that reverberates throughout the value chain, from chips to applications. Inevitably the migration of major powers towards overlapping customers is resulting in IP battles, even as globalisation is bringing new players onto the landscapelargely made possible by digitally transformed product development teams,
Continued on page 9

The PwC Mobile Innovations Forecast

Making sense of the rapid change in mobile innovation

Creating the Mobile TechnologiesIndex

The Mobile Technologies Index is a method PwC developed to analyse the rate of improvement in key enabling technologies that are fundamental to mobile innovation, and to help forecast new use cases and business models. In the spring of 2011, PwC began to research whether there was a way to forecast mobile capabilities. In addition to seeking credible data about the technological drivers of mobile capabilities, we sought a shared vision that mobile capabilities could be forecast. After an extensive review and discussion with various market research firms, PwC partnered with IHS. IHS, an Englewood, Colorado-based global information and analytics provider, has a comprehensive database of each sector of the high technology industry value chain, from analogue and digital circuit designers through the chip foundries, as well as the original equipment manufacturers and the telecom networkoperators. More than 130 subsectors of the high tech industry are included in its databases of prices, production capacities, capital spending, component features, average selling prices and numerous other metrics. More than 140 analysts have compiled these historical data points going back 10 years, and have prepared forecasts extending through 2015. The IHS iSuppli products and services include information from teardowns of various phones and tablets over the years, along with a continuing series of surveys, vendor roadmaps, market share analyses and other sources. PwC mobile computing and high tech industry practice leaders and IHS analysts reviewed the databases and identified several metrics that drove mobile capabilities in the past, and would be expected to drive the devices and services in the future. We eventually chose seven components for the Mobile Technologies Index: device connectivity speed, infrastructure speed, processor speed, memory, storage, display and image sensor. [See story, Making sense of the rapid change in mobile innovation] Through a series of back testing and other calculations, we determined that the relative performance of these Mobile Technologies Index components has consistently followed a pattern of at least 30 percent compounded annual growth. The components, and therefore the Indexs performance, appear likely to continue in the same upward path for the next five years. In addition to the analysis of the data, PwC practice leaders interviewed leading mobile industry visionaries to review the data and provide their perspectives on the future capabilities of smartphones, tablets, wearable computers and other portable devices. We concluded that five technologies will continue to serve as the basic building blocks of mobile innovation: device connectivity speed, infrastructure speed, processor speed, memory and storage. Over the five-year forecast period, each of the five will continue to progress along a Moores Law type price-performance curve, which makes them a natural starting point for a numerical and predictive index. Based on our analysis, we added two other technologies to the Index: display and image sensor. Both are progressing along a Moores Law-style priceperformance curve, which we expect will continue for the five-year forecast period. Currently both are nearly as important to mobile innovation as the five coretechnologies. The display, with its multi-touch capability, has been one of the most disruptive qualities of smartphones. Over the next five years we anticipate that touch sensitivities will improve, and the physical display will become thinner, tougher and less expensive per square inch. Resolution and power efficiency are also expected to improve. As for the image sensor, not only will the smartphone continue to disrupt the digital camera market, this technology will be integral to next generation social networking, which is expected to consume video the way todays social networking consumes stillphotos.
8
The PwC Mobile Innovations Forecast

We decided to weight these two at less than the value of the five core technologies. Each core building block technology accounts for 16 percent of the Mobile Technologies Index, and image sensor and display account for 10 percenteach. We examined several other technologies, some with meaningful metrics and some without. Among the more important ones were Wi-Fi, Bluetooth and operating systems (OS). Wi-Fi and Bluetooth have already achieved wide adoption. By the end of 2011, Bluetooth was found in an estimated 81 percent of handsets and its estimated CAGR is only 3 percent in Mbps/$ through 2015. Sixty percent of handsets will have Wi-Fi capability by 2015, including virtually 100 percent of smartphones. Its CAGR is 18 percent Mbps/$ through 2015. Given these factors, we decided to exclude them from the Index. We would like to have included the OS in the Index, but we have observed that the OS does not trend along a predictable evolutionary curve similar to the other components. Rather, it tends to lurch forward in disruptive ways with qualitative enhancements to the user experience. User experience can be measured through usability testing, but such studies of mobile devices are not widely conducted and tend to test for basic functions, making them a bit simplistic. The OS can also be benchmarked for standard criteria, but we are unaware of anyone issuing benchmark or usability data covering the past five years or forecasting the next five years for mobile operating systems. Despite these barriers to including an OS metric of some sort in the Index, the OS is central to innovation, and so we will include a qualitative analysis of it in this first series of reports, which are focused on the enabling technologies.

Making sense of the rapid change in mobile innovation

supply chains distribution channels and customer experiencemanagement. Given this landscape, PwCs Tom Archer, US Technology Industry Leader, says that all eyes should be on dynamic business model evolution. Vendors are looking at business models in a much more fluid wayacross a spectrumanchored by products at one end and experiences at the other. Increasingly, vendors are positioning themselves somewhere in the middle: product with services; product with experience; services/experience with product; and service. This is easier said than done, of course, which means successful business model evolution requires a real investment in enterprise agility. Customers are already voting with their dollarswith mobile computing leading the way.

Tom Archer US Technology Industry Leader

By examining mobile innovations in the framework outlined above, PwC hopes to create common understandings from which will emerge the launch points for disruptive innovations. In the weeks and months ahead, we will offer forecasts of the innovations positioned for near-term commercial success and around which others can build their own value propositions. We have not reached the end of dramatic changes through mobile innovation. We are only at the beginning.

Lets talk If you have any questions about the Mobile Innovations Forecast or would like to discuss anyofthese topics further, please reach out to us. Raman Chitkara Global Technology Industry Leader raman.chitkara@us.pwc.com Tom Archer US Technology Industry Leader thomas.archer@us.pwc.com Vicki Huff Technology Industry Partner victoria.huff@us.pwc.com Kayvan Shahabi US Technology Advisory Leader kayvan.shahabi@us.pwc.com Pierre-Alain Sur Global Communications Industry Leader pierre-alain.sur@us.pwc.com Daniel Eckert Mobile Computing Director daniel.eckert@us.pwc.com Dan Hays US Wireless Advisory Leader dan.hays@us.pwc.com Rodger Howell Mobile Computing Principal rodger.howell@us.pwc.com

About PwC PwC firms help organisations and individuals create the value theyre looking for. Were a network of firms in 158 countries with close to 169,000 people who are committed to delivering quality in assurance, tax and advisory services. Tell us what matters to you and find out more by visiting us at http://www.pwc.com/.

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www.pwc.com/technology

Mobile Technologies Index Device connectivity speed: One half of an equation

By Pierre-Alain Sur, Global Communications Industry Leader

From the users perspective, the mobile experience starts with the speed at which the device receives data and applications. That speed is, of course, the combined result of the speed capability of the modem technology inside the device, which is fixed, and the speed capability of the infrastructure, which can vary. Thus, wireless speed is a complicated component to measure. So complicated, in fact, that we break it into two components, each with its own metric, in the PwC Mobile TechnologiesIndex: Device connectivity speed in Megabits per second per dollar (Mbps/$) Infrastructure speed in average Megabits per second (Mbps) In this article we offer our forecast for device connectivity speed, explain the metric and how we calculate it, and explore some implications for mobile innovation. In the next article we post [see, Coming soon at www.pwc. com/mobileinnovations], we will offer our forecast for infrastructure speed, and identify a pattern we see that involves both wireless speed components and that signals a future innovation inflection point.

PwC forecasts a compound annual growth rate (CAGR) of 37 percent for average aggregated device connectivity speed as measured in Mbps/$ through 2015. [see Figure 1] Put another way, average aggregated device connectivity speed will be four times greater in 2015 than in 2011.
Figure 1: Device speed capability CAGR, 20112015
1.5 Mbps/$ 37% CAGR (20112015) Moving from 3G to 4G 1.0 75% CAGR (20172011) Moving from 2G to 3G .5

0 07 08 09 10 11 12 13 14 15

Source: IHS iSuppli Mobile and Wireless Communications Service

Mobile Technologies Index

Device Connectivity Speed: One half of an equation

The device connectivity speed metric is actually an aggregation of metrics for all wireless generations in use, plus the improvements we anticipate for each generation during their period in use. Device connectivity speed is defined as the theoretical maximum speed at which a mobile device can operate using a particular air interface technology, also known as a generation of radio transmission. The theoretical speed of each air interface is fixed, but the average speed realised within each generation of technology can improve through the optimisation of handsets, base stations and air interface protocols. In addition to these variables, average aggregated speed in each generation will improve as OEMs shift production mix to faster protocols that exist within the generation. Shifts within generations will deliver the following improvements in Mbps/$ from 2011 to 2015: 2G speeds will improve at 3 percent CAGR asthe mix moves from GSM to Edge. 3G speeds will improve at 6 percent CAGR as mix moves from EVDO and WCDMA toHSPA+. 4G speeds will improve at 8 percent CAGR as the mix moves from early WiMAX to matureLTE. These incremental gains may appear to be modest, but there is another dynamic at work: the mobile device production mix shifts as the industry moves from 2G to 3G to 4G. So we take

the average speeds and weight them based on mobile handset production for each generation, and wind up with the Mbps/$ of total devices produced each year improving at a 55 percent CAGR, 2011 through 2015. However, this 55 percent CAGR omits the cost of the main components in a handset that enable communication over the multiple air interfaces that end devices must support. After factoring in these costs, the actual Mbps/$ in the next four years will increase by 37 percentwhich is the device connectivity speed CAGR we use in our Index. This is just half the rate of improvement we saw in the period 2007-2011, when the CAGR was a staggering 75 percent. The slower increase in Mbps/$ is primarily due to the baseband chipset costs being significantly greater for the move from 3G to 4G than they were in earliertransitions. Nonetheless, we anticipate that 37 percent CAGR is enough improvement to enable continuing mobile innovation at a rapid pace. A review of recent history explains why we are confident in saying this. When the original 2G iPhone was launched in 2007, Apple proved that consumers would accept iTunes on handsets and the Apps Store concept. However, 2G connectivity was slow enough to risk failure for the original iPhone if the faster 3G version had not been launched one year later. By the time the 3G iPhone was introduced, the mobile handset supply chain was already producing more than 200 million 3G phones per year. Apple didnt have to create the 3G technology, it just had to put it to use. By the time Apple needed a faster connection to support its vision, the electronics industry was already devoting 20 percent of production to 3G handsets. Consumers were buying the faster handsets before many applications existed that needed the speed, and in many cases before infrastructure speed had fully transitioned. In contrast to classic pent-up demand, consumers were priming the pump for demand by pre-purchasing capabilities ahead of actual use cases, with the expectation that when 3G applications and 3G networks were available, their handsets were ready.

37%

Annual increase in mobile device connectivity speed

Mobile Technologies Index

Device Connectivity Speed: One half of an equation

We anticipate this trend will continue, and we use this as an example of the following rule of thumb for timing the launch of a disruptive mobile venture: When new capabilities reach a penetration level of 20 percent, game-changing services can be launched, and market disruption can ensue. At the 20 percent level, the market has begun transitioning from a relatively few early adopters to a mass market, and the entire ecosystem, including new entrepreneurs, are developing and positioning for game-changing solutions. In 2007 and 2008, 20 to 25 percent of device production was dedicated to 3G [see Figure 2]; this period coincided with the initial surge of 3G applications development. From the standpoint of infrastructure capital expenditure, 3G coverage had reached at least 53 percent of what carriers were spending on 2G during that time. (We will say more about this in the upcoming infrastructurearticle.)

All the 3G-related factorsdevice production, applications development and infrastructure investmentset the stage for the success of Apples iPhone, Googles Android, apps stores and other key mobile device phenomena that have contributed to the mobile ecosystem as we know it in 2012. 4G will offer even faster speed and less latency, which makes the speed more useful. Together, improved device connectivity speed and improved infrastructure speed will deliver another wave of innovation and disruption (to be further explored in the next article). The move from 3G to 4G will enable new business models for carriers, and new use models for the mobile device, including more and better streaming video, mobile video conferencing, voice-over-Internet services and other applications involving the movement of large amounts of information, including the growing mass of data collected by the mobile device itself and transferred wirelessly to the cloud for analysis, and back again for action by the user.

Figure 2: 4G poised to drive the industry in 2015

Device Production 2G 3G 4G

2007 80% 20% 0%

2008 75% 25% 0%

2009 71% 29% 0%

2010 66% 33% 0%

2011 58% 41% 1%

2012 51% 45% 4%

2013 44% 47% 9%

2014 37% 49% 14%

2015 31% 45% 23%

CAGR (201115) -14% 3% 121%

Source: IHS iSuppli Mobile and Wireless Communications Service

Mobile Technologies Index

Device Connectivity Speed: One half of an equation

Lets talk If you have any questions about the Mobile Innovations Forecast or would like to discuss any of these topics further, please reach out to us. Raman Chitkara Global Technology Industry Leader raman.chitkara@us.pwc.com Pierre-Alain Sur Global Communications Industry Leader pierre-alain.sur@us.pwc.com

About PwC PwC firms help organisations and individuals create the value theyre looking for. Were a network of firms in 158 countries with close to 169,000 people who are committed to delivering quality in assurance, tax and advisory services. Tell us what matters to you and find out more by visiting us at http://www.pwc.com/.

2012 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see http://www.pwc.com/structure for further details. BS-12-0541-B.0612.DvL

www.pwc.com

Mobile Technologies Index Infrastructure speed: Watch capital investment in 4G for the next inflection % % %
of capital expenditures

53

of device penetration

20

10

of subscribers on 3G

By Pierre-Alain Sur, Global Communications Industry Leader

PwC predicts that infrastructure speed will be the fastest improving component of the seven enabling technologies in the PwC Mobile Technology Index through 2015.

First, our forecast, and how we derived it.

The technology innovations that establish the speed at which data can travel to and of of of from a mobile device happen in two places: capital expenditures device penetration subscribers By 2015, we also expect three factors associated the infrastructure speed capability outside penetration penetration with the transition to 4G technologyshare the device, and the connectivity speed of infrastructure investment, share of devices from the modem capability inside the and share of subscribersto reach levels that device. [SeeDevice connectivity article at g could trigger a robust period of 4G innovation. www.pwc.com/mobileinnovations.]sThe ur n o ti We base this expectation on the pattern we Indexincludes both factors as separate, ova inn saw in the same three factors in the 2G-to-3G equallyweightedcomponents. G 3 transition. As this pattern repeats with 4G For myriad reasons, the actual speed for the it creates the potential for a surge of 4G user cannot be precisely predicted. At any innovation starting no later than 2015 [see 2005 2006 2007 2008 point in time, the wireless infrastructure is a Figure 1]. We expect this 4G innovation to include new business models based on capacity mix of technology generations. Carriers, for improvements, and new use cases based on better video streaming and other technologies. We explore all this later in the article.
e

49

23%

10%

4G

o nn

t va

2012

2013

2014

on

su

Figure 1: The shift from 3G to 4G will launch another innovation explosion

rg e

2015

Mobile Technologies Index

Infrastructure speed: Watch capital investment in 4G for the next inflection

good business reasons, dont normally make available to end users the maximum speed the underlying technology is capable of supporting. For the user, the mobile experience is only as fast as the slowest point on the network at thatmoment. But it is not the purpose of the PwC Mobile Innovations Forecast, of which the Index is just one part, to predict with precision the real speed, or even the average, that a user might experience in the future. The purpose is to understand and forecast mobile innovation. That is, to use infrastructure speed as we calculate it and all the other metrics in the Index to suggest direction and magnitude, both individually and collectively, and, in turn, to use these as vectors to help us identify patterns that suggest new inflection points for mobileinnovation. For infrastructure speed, PwC forecasts a global CAGR through 2015 of 54 percent [see Figure 2], as measured in average Megabits per second (Mbps). This makes it the fastest improving component, just ahead of processor speed53 percent CAGR in GigaHertz per dollar. The forecast CAGR for infrastructure speed is less than the rate of improvement from 2007 to 2011 when it was a staggering 77 percent. The CAGR is slowing down mainly because 2007 era

speeds started off so slow; speeds in 2011 and beyond are in a different part of the S curve. Estimating improvements in average infrastructure speed over time is a complex formulation, involving several judgment calls. First, it is important to recognise that the metric we use is really a measure of infrastructure speed capability, meaning the maximum speed at which a single device could communicate with the wireless infrastructure under optimal conditionsa bit like automotive fuel efficiency ratings. In practice, the speed at which bits are streamed to individual devices by wireless infrastructure is determined by several variables. Among these are the limits placed on the network by the operators themselves for technical, service quality or business reasons. Other variables include geography, the generation of technology used by the cell tower, the number of other devices sharing the total capacity of the tower, the type of data the devices are accessing (text or video, for example) and the signals generation, strength and exposure tointerference. The goal of tracking the relative changes in speed from one year to the next makes this task a bit easier, with the caveat that average infrastructure speed refers to speed where wireless services are offered to begin with.

Figure 2: Infrastructure speed, compound average growth rate (CAGR)

600 500 2011 Index base 400 300 200 100 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 20072011 CAGR = 77% Infrastructure Mbps 20112015 CAGR = 54%

Mobile Technologies Index

Infrastructure speed: Watch capital investment in 4G for the next inflection

With all of these factors in mind, we sought to create logic that resulted in an average network infrastructure speed capability across generations of technology and over time. Here is how we calculated the metric: a) We sum the cumulative capital spend in any given year on each generation of wireless infrastructure [see Figure 3], b) factor in end of life for infrastructure by discounting past investment by subtracting past years investments in 33 percent

increments beginning three years after theirdeployment, c) and then create the weighted average network speed where the weights are the percentage of discounted, cumulative spend and the speeds are global industry values for specified generations (3G, 4G, etc.) [seeFigure 4]. To reiterate the earlier caveat, the speed data in Figure 4 are the anticipated optimal capabilities, not the actual speeds any user would experience.

Figure 3: Capex infrastructure market share chart

100 90 80 70 60 50 40 30 20 10 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 $27.5 $26.8 $33.8 $36.2 $38.4 $39.5 $41.5 $39.3 $39.1 $41.7 $44.9 $46.3 $48.1 $49.8
Source: IHS iSuppli Mobile and Wireless Communications Service Total carriers' annual spending (bn)

4G 3G 2G

Figure 4: Infrastructure speed capability1 in megabits per second global average, 2006-2015 Figure 4: Infrastructure speed capability in megabits per second global average, 2006-2015
120 120% 100% 80% 60 60% 40% 30 20% 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 0% % change Mbps

Not normally seen in practice theoretically highest speed infrastructure can offer.

90

Source: IHS iSuppli Mobile and Wireless Communications Service

Speed

Percentage change

1. The maximum speed at which a single device could communicate with the wireless infrastructure assuming the service provider is not limiting these speeds for technical, service quality or business reasons.

Mobile Technologies Index

Infrastructure speed: Watch capital investment in 4G for the next inflection

We now turn to a pattern that suggests the timing of a new market opportunity for mobile innovation. We considered both the infrastructure and the device. Understanding how these impacted 3G helped us to pinpoint a comparable 4G innovation opportunity. In the device connectivity speed article we offered this rule of thumb for mobile innovation: when new capabilities reach a device penetration level of 20 percent, game-changing services can be launched and market disruption can ensue. The 3G modem technology reached device penetration of 20 percent in 2007 [see Figure 6].

Figure 5: Subscriber market share

100 90 80 70 60 50 40 30 20 10 0 2002 1.1 2003 1.3 2004 1.8 2005 2.2 2006 2.8 2007 3.3 2008 4.0 2009 4.6 2010 5.3 2011 5.8 2012 6.2 2013 6.5 2014 6.9 2015 Total 7.3 subscribers: (bn) 4G 3G/3.5G 2G/2.5G 1G

Source: IHS iSuppli Mobile and Wireless Communications Service

That same year2007network operators investment in 3G infrastructure crossed the threshold of 50 percent of total capex (53 percent to be exact). Subscriber rates are a lagging indicator of innovation and not included in our Index, but in looking for patterns it is useful to note that 3G subscriptions reached 10 percent of the total in 2008 [see Figure 5]. Device penetration by 3G of 20 percent and the 50 percent threshold in 3G infrastructure capex spending, both reached in 2007, coincided with a surge in 3G application development in 2007 and 2008. Given this pattern, when might vendors expect a similar burst of 4G-based innovation comparable to the 3G surge? We expect it to start by 2015, if not sooner. Here is our reasoning.

Figure 6: Predicting the innovation surge

2G to 3G began when penetration reached:

of capital expenditures
2007

53%

of device penetration
2007

20% 23%
2015

10%
2008

of subscribers on 3G

3G to 4G begins when penetration reaches:

of capital expenditures penetration

2013
4
Mobile Technologies Index

49%

of device penetration

10%
of subscribers penetration
2015

Infrastructure speed: Watch capital investment in 4G for the next inflection rg

3G

in

ati n ov

on

su

For 3G, capex spending hit 50 percent and device penetration hit 20 percent in the same year2007. Our forecast predicts 4G capex spending reaches close to 50 percent in 2013 (49 percent to be exact), but 4G device penetration lags, not reaching 23 percent until 2015. The 4G subscription rate reaches 10 percent in 2015, comparable to 3G in 2008. Based on the 3G pattern, we expect a surge of 4G-based innovation that would start no later than 2015. If infrastructure capex or device penetration were to accelerate faster than forecast, the 4G-based innovation surge could start as early as 2014. Whether it starts in 2015 or 2014, this surge of 4G-based innovation could trigger another shift in the wireless value chains major players, although such a shift would depend on some vendors recognising the same potential tipping point that we see, and seizing the opportunity ahead of others by creating innovations that 4G networks bring to life.

efforts by field service representatives and bring back house calls by the family physicianin virtual form. Some of these applications and use cases are possible even with 3G technology, but 4G will certainly accelerate their adoption by making them more widely available and by improving the user experience through somewhat faster downloads and lower latency. But whatever the new use cases are, we also expect the period of 4G innovation beginning in 2015 to differ somewhat from the 3G transition. To some extent, 4G may not impact mobile innovation the way 3G did, observes Dan Hays, PwC US Wireless Advisory Leader. We may be more likely to see second order effects from 4G rather than new things enabled by the technology itself. The use case and application innovation we saw with 3G may be less likely to recur than is business model innovation. I believe 4G will enable operators to deliver a more consistent experience, more ubiquitously, at a lower cost and allow them to make money and stay in business.

What kind of innovation can we expect? We anticipate that 4G innovation could spawn Dan Hays new use cases, involving more and better US Wireless Advisory Leader streaming video, including more satisfactory viewing of commercial film and TV content from the cloud and multiplayer mobile gaming with minimal latency. Other use cases are likely We expect operators to take advantage of 4G to come in mobile video conferencing and voice-over-Internet services that rival or exceed capacity and speed to achieve service level expectations but not necessarily go beyond the quality of traditional wire-line offerings; them. The burst of 4G innovation will also offer new device form factors better attuned to of applications of costs of operatorsof the opportunity to reduce the augmented reality; and other capital expenditures device penetration subscribers on 3G in network operations through improvements involving the movement of large amounts workforce productivity and other innovation. ofinformation.

53%

20% 23%

10% 10%
subscribers penetration
inn

We also expect new vertical industry use cases. For example, when paired with improved image sensing, innovative new sensors and artificial intelligence, 4G could support new use cases of such as remote medical diagnosis and repair
capital expenditures penetration

49%

device penetration

It might be that the network operators and their business models could benefit most directly from the 4G inflection point we identify. And yet, there is also another way to think about the of based on what happened of with3G. 4G transition,

Figure 7: The 3G innovation zone occurred in 2007 and 2008

3G

ova

n tio

su

rg

2005

2006

2007

Mobile Technologies Index

Infrastructure speed: Watch capital investment in 4G for the next inflection

e
2008

The initial transition to 3G started several years before the highly disruptive introduction of devices such as the iPhone, Android phones and tablets that took advantage of the newer technology. There were early great expectations, of coursenew 3G-only carriers started in various places in the world with little initial business success because the user experience was not that different from 2G. This was before devices had the component power of a true mobile computer (the very components we track in the Index), and before the existence of application ecosystems that offered compelling new usecases.

Instead, the early 3G value proposition mostly appeared to be lower operating costs for carriers rather than disruptive new capabilities for users. The predictions today that 4G will once again reduce operating costs for carriers has good reasoning behind it, especially because the software in 4G infrastructure is automating more and more management functions. But predicting that 4G will mainly reduce carrier operating costs would appear to deny the kind of impact from 4G that 3G eventually had in creating the setting for highly disruptive innovations. Our future research on 4G will explore this matter in greater detail.

Lets talk If you have any questions about the Mobile Innovations Forecast or would like to discuss any of these topics further, please reach out to us. Pierre-Alain Sur Global Communications Industry leader pierre-alain.sur@us.pwc.com Dan Hays US Wireless Advisory Leader dan.hays@us.pwc.com

About PwC PwC firms help organisations and individuals create the value theyre looking for. Were a network of firms in 158 countries with close to 169,000 people who are committed to delivering quality in assurance, tax and advisory services. Tell us what matters to you and find out more by visiting us at http://www.pwc.com/.

This content is for general information purposes only and should not be used as a substitute for consultation with professional advisors. 2012 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see http://www.pwc.com/structure for further details. BS-12-0541-C.0712.DvL