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OCTOBER 2009

h i g h t e c h p r a c t i c e

What shape will the wireless

The era of the nomadic Web is upon us. But questions still remain as
to how things will play out in a wireless world.

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

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

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

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

1
Third-generation high-speed downlink packet access (3G-HSPA) is a communications protocol that allows for higher data-
transfer speeds and capacity. Long-term evolution (LTE), also known as 4G, is a technology designed to increase the speed and
capacity of mobile-phone networks.
2
UK PC & Mobile Internet Usage Report, December 2008, comScore; McKinsey 2009 North American wireless panel survey.
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1. Will the mobile Web become a substitute for wired access? Clearly, this is question
number one for cable Internet companies and service providers with no mobile offerings.
The old phone companies faced this very issue 20 years ago at the dawn of the cell phone
age. It took longer than they had expected for wired use to fall substantially, and even
now it is mostly younger customers who are willing go the wireless-only route. The more
dramatic change—where a real shift to wireless has taken place—has been in the amount
of voice minutes consumed. Accessing the Web on mobile devices, however, may not follow
this pattern. Most Web users seem to be holding on to their broadband hookups. (It’s not
clear whether Austria’s experience is a harbinger. But for now, at least, Austrians are an
exception.) In terms of raw data consumption, 90 percent of people trolling the mobile
Web use fewer than two gigabytes a month. They use up to ten times as much data tethered
to their PCs to download music, exchange photos on Facebook, or watch YouTube videos.
As a result, the number of hours spent on the wired Web is three to seven times greater
than on the mobile Web. These habits will take time to change, so it’s difficult to see mobile
completely replacing wired usage—for now.

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

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

But things can change quickly. Take, for example, the abrupt shift toward wireless
browsing and searching, as well as the rapid growth of social networks and video sharing
on the mobile Web, due mostly to the enhanced capabilities of new smart phones, such
as Apple’s iPhone. Solving some temperamental technical issues could intensify the shift
even more. Safeguarding wireless transactions with better security software, for instance,

3 
DOCSIS (data over cable service interface specification) allows for the addition of high-speed data transfer over an existing
cable TV system.
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could help move a sizeable chunk of Internet shopping and banking to wireless. The next
evolution of wireless advertising also hangs in the balance. Some early predictions held
that it would have reached the $10 billion mark by now, supporting a new brood of digital-
content providers. The actual figure is closer to $200 million, which, nonetheless, suggests
either a major growth in advertising yet to come or simply over-optimism on a large scale
by many analysts. Breakthrough designs of wireless devices, though, could at some point
make mobile screens a more inviting environment for direct marketing and wireless
commerce. Companies are currently developing certain technologies that will enable
customers to point their mobile devices at any item in a store and, by sending an image of
the item directly through the web interface, check competitors’ prices at other locations.

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

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

4 
The total market value is currently unknown, and estimates thereof vary significantly. What is known is that typical paid
applications range from $2 to $3 per download, and only the best apps (the top 5 percent) are purchased. The real uncertainty
lies in how those paid applications stand against the total number of consumer downloads: if these applications follow a
typical power curve—as what happened with other third-party application platforms such as i-mode for the wireless Web or
Facebook for the wired Web—they may account for as much as 30 to 40 percent of total downloads. Given the current rate
and number of downloads, this means that the App Store generates a revenue market of close to $800 million, with $250 million
accruing to Apple.
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Related articles tail (perhaps supported by advertising) for those who are unwilling to pay for downloads.
If the browsing experience improves, more control of what the Web delivers could shift
“Google’s view on the future
from app stores to mobile operating systems such as Google’s Android and others.
of business: An interview
with CEO Eric Schmidt”
5. Which mobile Web are we talking about? While much of the current debate focuses
“McKinsey conversations on whether wireless will supplant wired, there are alternative pathways to the mobile
with global leaders: Web. Already, a quarter of the Web connections by mobile handsets pass through Wi-Fi
John Chambers of Cisco” networks either at home or in free and paid public spaces (including Wi-Fi access through
the use of PCs would amplify this figure). The iPhone and other smart-phone devices have
“The next step in open embedded Wi-Fi receivers that provide users with connection speeds that are sometimes
innovation”
better than current 3G if users are near a Wi-Fi transmitter and 3G towers are congested.
Then there’s the added, and substantial, benefit of bypassing fees for data plans—
“Hal Varian on how the Web
challenges managers”
particularly those that charge more for heavier use.

“Eight business technology 6. What will the pricing model be? On the access side, pricing for wired data quickly
trends to watch” evolved from a brief period of pay-per-minute charges to the current flat-fee rate. (Today,
a portion of broadband-data pricing is tiered by speed or volume of data consumed.)
Mobile operators are taking a longer time to offer flat plans for data. One reason for that
resistance: they would like to keep revenue-per-user relatively high by using a pricing
strategy based on microsegmentation—effectively charging more for heavy users. This
approach is understandable, since for network operators, the economics of the open-
data spigot can be punishing. When the voice side of the business shifted to flat fees for
wireless, for example, network traffic merely doubled. But the full panoply of rich media
that users want on their smart phones—videos, social networking, and location-based
search, to name a few—increases data usage tenfold when wireless pricing goes prix
fixe. That increase multiplied over millions of users would use up a significant chunk of
wireless network capacity, slicing into margins for 3G networks and requiring major new
investments.

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

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

Jacques Bughin is a director in McKinsey’s Brussels office. Copyright © 2009 McKinsey & Company. All rights reserved.