The Wisdom of Fundamental Curves (Revisited in 2012)

Leonid Brezhnev Kurt Lewin said there is nothing as practical as good theory. I had the honor of presenting a keynote to HSM the biggest business/management conference of Brazil, in Sao Paulo in the Autumn. I knew that my audience was less 'techie' than usual, and more of mainstream management. I wanted to offer them value out of my keynote and I went back to a favorite theme of mine that I occasionally use, the Fundamental Curves. The presentation was exceptionally well received and as word spread about it, I promised I would write about it. To give you, my blog readers and my Twitter followers a chance to read what I talked about in Brazil. What is all the hoopla about..

THE INEVITABLE SHIFT IN FUNDAMENTAL CURVES

Its funny, I noticed that it was in my second book that I discussed the Fundamental Curves. That book - m-Profits (the world's first business book on the mobile industry) introduced Fundamental Curves with this sentence: "In this chapter I will examine the inevitable shift in the near future of access devices in what I call the 'Fundamental Curves'." That book turns 10 years of age now in 2012 haha..

In the book and my presentations at the time, I used the fundamental curves to explain the relationship of fixed telecoms vs mobile; of the PC based internet vs mobile internet; of email vs SMS; of PDAs vs smartphones; and of stand-alone cameras vs cameraphones.

A fundamental curve has an insight based on the concept of 'inevitable'. The curve must conform to evidence that its pattern is inevitable. When you have two fundamental curves that intersect, that gives incredibly powerful insight. If you can find such fundamental curves before the intersection has happened, you know a transition will happen in that industry: inevitably. You will then have a powerful strategic insight that you probably can use to your business advantage.

And an immediate example: Facebook has passed 600 million users. Its growth has been breathtaking, and I have heard some analysts say its growth has been the fastest to that level of any new tech or service. But will Facebook reach 7 Billion users ie the full population of the planet. No. While its growth is astonishing, Facebook is constrained by the global penetration rate of the internet. There are only about 2 Billion internet users (including home and office users, shared users like family PCs, schools and internet cafes; and mobile internet users). So Facebook will hit a natural barrier which is the penetration of the internet. Maybe the internet will reach 100% of the planet but certainly not with PCs. And unless the internet penetration reaches human population levels, FB cannot get there. So Facebook reaching everybody is not inevitable.

But mobile phones will reach everybody (at least everybody who has learned to read and write, and everybody who still can remember how to read and write). The mobile phone penetration rates exceed the human population in more than 60 countries already. You see the difference? Mobile penetrations were an inevitable trend, Facebook has not yet been proven to be so (it may end up being one, but currently evidence does not support that view). 

HOW DID I GET HERE

I first was faced with a situation of Fundamental Curves when employed by Elisa Corporation / Helsinki Telephone and the Finnet Group including Radiolinja in Finland. This happened in 1996. I was literally the world's first person to observe certain facts about our industry, that seemed impossible. I had been tasked by my boss, Matti Tossavainen, to build the Elisa Group's first 'bundle' of telecoms services. I was meeting with my peers, the various product managers and product line managers of the Elisa Group, to examine the data of their services, to consider which two services would be bundled with my service, the international calls which were branded "999" based on our international calls dialling prefix. Some who have followed international ice hockey over the years, may remember the Finnish hockey team tends to have these weird 999 number logos on their jerseys - thats my old product and we had a lot of affiliation with Finnish ice hockey.

So for my service bundling project, I met with Mikko Heijari, the product manager for "950" GSM call services, ie our mobile voice calls product manager for the Group. Finland was at the time the run-away leader in mobile phone subscription penetration rates worldwide, and our brand, Radiolinja was the world's first digital cellular service running on GSM and we were far ahead of our rivals in GSM subscriptions. Mikko's product was not just in the world's most advanced mobile market, his product was the clear market leader. And Mikko was of course trying to convince me to use his product as one of the three to be bundled.

I remember it was early Spring and the quarterly data was not out yet, even internally. What Mikko did, was to take the latest available data, and then project that to the end of the month, to show how dramatic the current picture was. I was stunned. The numbers he showed me, suggested that the growth rate in mobile phone subscriptions was accelerating, not slowing down. And we in Finland had for several quarters dumbfounded all experts with unbelievably high mobile phone penetration rates.

Based on the early numbers I prepared a proposal to use mobile phone calls as one of our bundled services (with long-distance calls the other) and took the proposal to my boss. We examined the data and by this time the first internal numbers were coming out and Matti was sold. I had won my argument to make mobile phone calls part of our bundle. At that point, I unknowingly had started the project that would create the world's first fixed-mobile converged service.

But it also meant, that I became intensely aware and interested in the curious pattern of mobile phone penetration rates - as obviously my reputation within the company was now tied to whether this phenomenal growth would indeed happen with the mobile side. At the end of 1996 Finland's mobile phone penetration rate had passed 28% per capita. By the end of 1997, Finland's penetration rate growth had increased further and passed 42%. We would sit with Mikko when each newest quarter data would come out, and study the numbers and look for when will it start to slow down. And in the Autumn of 1997 I remember having the meeting in Mikko's office when we studied the latest numbers, when it hit me - this pattern will shoot past fixed landline penetration rates.

That was an unbreachable barrier. Esteemed telecoms gurus had explained why it was utterly impossible for mobile phone penetrations ever to match, far less exceed, the fixed landline penetration rate. I remember looking at the numbers, taking out my trusty HP LX200 PDA and doing my calculations and looking at Mikko and saying - what I could not believe my own ears with me saying this - that in two years mobile phone subscriptions would exceed landline penetration rates in Finland. This was with the most pessimistic scenario. In two years (the reality was one year). Mikko looked at me, my math, and then plugged the numbers onto his PC and he had to verify it for himself. The trend was 'inevitable'.

WHY MOBILE CANNOT EXCEED FIXED LANDLINES

Today nobody doubts the facts. But back in 1997 and before, it was 100% accepted mantra that it was physically impossible for mobile phone subscriptions to exceed landline penetration rates (in the Industrialized World; it was theoretically possible for Emerging World countries to 'leapfrog' the landline and go straight to mobile). Nobody doubted this, not even we - the people of Radiolinja and the world's first GSM operator, the challengers of Finland. Even we did not believe it could happen.


Here is why. The thinking was, that in the Industrialized World, with over 100 years of the telephone, the penetration rate of the telephone had reached saturation. Every household and every office was wired for the telephone. When you do the math, the penetration rate came at between 58% and 62% per capita across Western Europe, North America and Australia, plus the affluent countries of Asia.

Then there were elderly people who had no need to be 'mobile' ie didn't have a need for a car (anymore) and were for example living in an old folks' home. They still had a landline telephone but would quite understandably have 'zero' need for a 'mobile' telephone. Not to mention with mobile you had to buy the handset and the voice calls were more expensive, etc.

So even if every 'other' telephone like home phones and office phones were replaced with mobile, there was a significant portion of the telephone network with these elderly people who absolutely certainly would never ever in a million years, be buying mobile phones and attempting to learn to use that difficult new and expensive technology.

It made perfect sense. And I had heard big experts say this at big telecoms conferences, and I had read these theories in the major journals of the industry etc. I truly believed it to the core of my heart. And now I was staring at numbers which told me that the world was not flat. And like I say, 'numbers are my buddies' - I decided that my numbers are right, and all the biggest gurus and experts were wrong. The numbers do not lie.

So yes, I showed these to Mikko, who was equally stunned. And then we took them to Matti Tossavainen who was also astonished. Matti was so much the skeptic, he actually convinced me to 'reconsider' and to wait until the next quarterly data came out. But in my heart I already knew that my numbers, my buddies, had shown me the light.

TWO INEVITABLE CURVES

So the Fundamental Curves? One was clearly proven fact, that landline penetration rates will plateau and stop growing when all households have telephones. So that line will 'flatline' ie run about parallel to the horizontal. And then there is another penetration rate - that of mobile - which was still accelerating in 1997 and would crash through the landline penetration rate and continue to grow. There you are: two Inevitable Patterns that cross. I was the world's first person to see that mobile phone penetration rates not only could grow past fixed landlines, but that they indeed would.

I remember having several heated arguments about this with many experts in Finland and at international telecoms conferences in London and Brussels etc over the next few years. And the Finnish pattern proved itself in late 1998. Many experts believed the numbers were faked. Then Norway and Hong Kong followed in 1999. And Italy, Sweden, Austria and the UK in year 2000. By this time even the big experts had to accept that it was no fluke, this would be a global trend.

Now, as regular readers of this blog know, I am nothing if not curious. So of course it was not enough for me to spot this trend, I wanted to know why. Why did we break the impenetrable sound barrier in Finland or perhaps more aptly, passed the unbreachable speed of light haha.. Why?

And so I dug into all kinds of data with the help of Mikko and the other experts of the mobile side of the company. I found out that some perfectly normal 'non geeks' would actually carry two phones. The most common use was that one phone was a work phone, and the second phone was a private phone. Another common use was that the phones were on rival networks for many reasons including network coverage and pricing differences. I also found that bewilderingly, perfectly normal high school age kids in Finland were starting to have their own mobile phones. Teenagers! So where a family of four, with two teenagers, would typically have one home landline phone (and both parents would be reachable at work so the four people had three landline connections ie about 75% penetration rate in this simplified example) with both teenagers having their own mobile phones, and both parents having mobile phones, the household had one landline but additionally four mobile phones!

By 1998 we were starting to see the early evidence of households abandoning landlines and going purely mobile. So I had not just seen the numbers, the absolute evidence, but I was now starting to have insights into why the impossible had happened. Fast forward four years, and by 2002 I had started to obseve several similar instances of 'Fundamental Curves'. I had now learned to look for this phenomenon and gain the insights out of it. It made me seem often very 'smart' haha, in the ability to see into the future.

FUNDAMENTAL CURVES, REVISITED

That makes sense really only from a historical point of view, and we don't need to be convinced now ten years later, that there will be more users of the mobile internet than fixed internet, or that cameraphones will be used by more people than stand-alone cameras, etc. When I was preparing the HSM presentation, I dug into the Fundamental Curves and also looked back into my first data points (fixed vs mobile). 

Some technologies come and go, like the steam engine, the dirigable (zeppelin airships) and the telegraph. Others arrive and by all signs will never leave us, like the wheel, electricity and television. When I first used the Fundamental Curves thinking on mobile, I had accepted that the other Fundamental Curve, the fixed landline penetration rate, would remain stable - a perfectly horizontal curve. It didn't occur to me back then around 1997 to 1999, even as early evidence started to trickle in, that landlines might diminish (to the point of possibly disappearing completely some day, like the telegraph, the Zeppelin andwhat is now happening to fax).

With enough time having passed between the last time I had seriously calculated this pair of Fundamental Curves and today, the picture was strinkingly obvious. Landline penetration rates will decline. They have turned globally into decline already several years ago, and in Finland more than a decade ago. I have known this and reported on it in my books for many years, yet I never connected the dots, that this also alters the 'Fundamental Curves'. What we have now seen, is a kind of cannibalization effect, which appears after the cross-over point. And... inevitably.

Lets compare. The second evidence for me was the PDA vs Smartphone battle. Yes, the pattern holds, PDA sales turned into decline after Smartphones shot past. Then email vs SMS. SMS user base shot past email a decade ago. Last year we heard that email has plateaued, and some analysts believe email user base declined last year. Certainly every market reports that the youth are abandoning email comprehensively. So if it isn't happening yet, it will definitely happen as that generation gets jobs. Next, cameraphones vs cameras. Yes, the evidence is out that camera sales have peaked and are now in decline. Wow. The Fundamental Curves are teaching me again something new. Numbers are my buddies! Even this grumpy old man can learn something new...

REVERSE LETTER U

I have written before that mobile is the ultimate cannibal. The formula for mobile phones is:

A + B = A

where A is a mobile phone, B is anything else (camera, PDA funtion, music player, GPS, video recorder, internet browser, etc). Or to put it in words, its like this:

Mobile + Anything (soon becomes just) Mobile

Think cameraphones. Early on we added the camera to the phone. There were mobile phones and 'cameraphones'. Today every mobile has a camera. Same happened with music players. Midway in the past decade there was a class of mobile phones that were 'musicphones' but today every phone has a media player. And so forth. Mobile plus Anything will soon become just Mobile.

Now when we take any rival technology that intersects with mobile, its growth will cease, and soon thereafter, will start to decline. So the shape is like a very shallow letter U, but reversed. It grows, then plateaus, then turns into decline. All after it has intersected with mobile. 

I was immensely excited when I saw that the data fit this pattern almost perfectly. Where it was not perfect, there is very strong possibility that it is only a matter of time. So for the HSM presentation I took the following list of pairs of services and products, going through the Fundamental Curves: Fixed and mobile telephones; email and SMS; PC and smartphones; and lastly mobile and fixed internet. Then I argued that I can see the early signs that this same pattern also repeats with money! (cash vs mobile money).

First, understand the time frames. This does not happen in a couple of years. This takes literally a decade or more. But the beauty of 'inevitable' is that it is certain. That is the nature of Fundamental Curves. I cannot promise you that this happens with Facebook and Twitter, we don't have the evidence and I don't know if the pattern is applicable within internet services. But at least on all those examples I listed (plus we have also seen it already in musicphones vs stand-alone music players) it is clear.

There are at least four dramatic lessons you can take from any instance where you find a Fundamental Curves situation. First, that obviously mobile will not stop growing (yes, it will eventually stop, but not into the foreseeable future). Note that this means you have insights where almost all experts claim the opposite. Have you seen how Tomi Ahonen has been 100% correct on SMS forecasts every single year since my first such forecast in year 1999? And essentially all the other experts were wrong? Time and again, they promised us in 2001 that SMS was slowing and would be replaced. In 2004 we were to have witnessed the peak year for SMS and the fad would pass. That 2007 was going to be the pinnacle but that SMS would soon disappear. That SMS would start to die in 2010. And so forth and so forth. They didn't believe in Fundamental Curves and thought that SMS would soon vanish. If the conventional wisdom is wrong - and you know it is wrong - you can make a fortune with the contrarian - but true - insight. (on Twitter at this point you'd see Tomi doing the SMS Dance..)

Secondly, is the converse, that the usually dominant (in this case non-mobile) technology is going to be superceded. If mobile phone subscriptions will exceed landlines. Then it is only a matter of time when voice calls on mobile will exceed those on landlines, and so too will voice revenues on mobile. And if so, it means that mobile companies will grow to tower over their fixed landline cousins. And for the CEO of BT or AT&T to sell their mobile arm and keep the mobile arm will prove a disasterous decision in the long run (as we have seen).

Thirdly there is going to be a cross-over point. This is a dramatic point that will be widely reported and its passing will shift the insights in the industry. You have foresight into a major moment in the industry. When is the right time to go from simple services on mobile to smartphone apps for example. Or when to shift your customer service priorities from email to SMS etc. The competitive advantage 'window of opportunity' is open up to the cross-over point, after that you are only copying the industry and cannot really gain an advantage anymore.

Fourthly there is the end-state. This is the astonishing lesson I just learned a few months ago when preparing that keynote presentation. Yes, all these technologies, after facing mobile, will fall to their demise. It won't happen overnight, and technically it might not reach zero, but for a global mass market service or technology, the numbers will be so tiny as to being economically irrelevant. Its like horse-drawn carriage makers - they still exist but obviously compared to cars, the carriage industry is irrelevant in its size today.

NOT EVERYTHING MOBILE IS INEVITABLE

Note that not all things are inevitable, not even with mobile. We have good examples like video calls and LBS (Location Based Services). Other times the 'inevitablity' may be altered due to timing - such as the delays with 3G launches at the previous economic downturn or the slope of the 'mobile' curve may be at a slower rate (or faster rate) than we thought, such as happened with early MMS projections where we as an industry misundertood MMS to be more like SMS and email (which it isn't) and didn't see that as a mass media channel, MMS is a super-charged SMS. There was a fundamental curve for MMS, only it wasn't going to replace SMS (and email) as we originally thought. (for those who don't know, MMS is now the world's second most used data application/service behind only SMS and far bigger by number of users than email or Google search or Facebook etc).

And obviously there are some cases of a service or feature we have on our mobile phones that will almost definitely never replace its dominant sibling. Take light. We have 'torches' or 'flashlights' on many phone models. Others with larger screens have a 'light' function and if you don't have one, just take a picture of a blank piece of white paper in daylight - and you have a perfect bright light on your phone you can use if the electricity is suddenly cut off in your town, or if you lose something in a dark place etc.. So yes, we can definitely use our mobile phone as a light source. But it will not replace the light bulbs and light fixtures in our homes for example. So yes, mobile phones replaced our fixed landline phone at home (and our alarm clocks at bedside) but while we can use the mobile phone for our lights, we won't be doing so (ever).

And with some things the jury is still out like with smartphone apps. The pattern with the smartphone apps 'economy' is dangerously near that of a tech bubble (massive numbers of free downloads and woefully little actual commercial success either from direct revenues or advertising - this is almost exactly what led to the dot-com bubble bursting a decade ago). The Fundamental Curves phenomenon has to satisfy the evidence of inevitability on both curves involved.

And I am sure it is not restricted to mobile, its only that I study mobile. So I'm sure there are fundamental curves in other industries - air travel went from dirigibles (zeppelins) to airplanes. The airliner propulsion went from propeller-driven to jet driven enignes. In automobiles the early steam-powered vehicles were replaced by gasoline-powered combustion engine cars, but since then while diesel engines took over essentially all trucks and busses and heavy vehicles, diesel engines don't seem to be on any inevitable trend in passenger cars (but don't argue that point with me, I am not an expert on the car industry, I honestly don't know the trend lines). Probably electrical engines will take over with time, or hydrogen or whatever.

After my first encounter with the Fundamental Curves, the early cases were accidents, but because of my experience, I was very quick to notice where another situation of Fundamental Curves existed. And as mobile has been the fastest-growing giant industry ever in humankind's economic history, those cross-over points have come rather quickly. And after I had seen a few of those, I started on a quest to discover situations of the Fundamental Curves, and this has been behind some of my most famous forecasts more recently, where I have been the first to make a huge cross-over prediction such as that of when musicphones would be outselling MP3 players including the iPod. And more recently for example that SMS will pass voice call usage on mobile phones. If you use the Fundamental Curves method to study your opportunities in mobile or elsewhere, it can help you make the right strategic choices.

And if you do find new insights with Fundamental Curves (or by any other means), don't be afraid of the arguments. I've been through this many times. Remember what Thomas Carlysle said of invention: "Every new opinion, at its starting, is by definition a minority of one." So if you do discover something truly new, then you have to convince the rest of the world to believe what you know is true. That means you have to argue it with everyone. Over time you'll find others who buy in, and who will spread the story too. But years and years later you will still find those who refuse to face those facts and you have to go through that argument once again. It is quite exhilirating to know you are the first person on the planet to have recognized some new fact or phenomenon. But after that comes the responsiblity to spread the story - and that does mean you have to 'convince' all others - nobody else does know this and you start off as an absolute minority of one against the world. If your facts and logic is sound, you will then find people willing to listen and some willing to accept it.

STRATEGIC LONG TERM CHOICES

So take HP and Dell and Lenovo etc. PC makers. The Fundamental Curves says that one day the modern PC will cease to have a mass market business. It might happen as soon as at the end of this decade and definitely by the end of the next decade. Replaced by what? Smartphones of course. Apple sees this as does Fujitsu and Google (and probably Microsoft although their behavior doesn't really suggest that). So which company is being run by smart CEOs with a long-term vision and who are the morons who will go out of business? HP's decision to abandon the Palm based smartphones is a perfect example of making the wrong choice. You can be 100% sure that if Steve Jobs was forced to pick keeping either the Macintosh or the iPhone, he'd have kept the iPhone. But HP abandoned its smartphone and kept the PC. This is like AT&T selling its wireless arm (or BT selling O2). Idiotic decision. The CEO didn't understand the Fundamental Curves.

So that is what was on my mind when I gave my keynote in Sao Paulo. And the audience loved it... I will be showing more of the Fundamental Curves thinking at conferences and workshops this year. If you would like me to speak to your audience whether a public conference or one of your customer events, or an internal event for your staff, I'd love to be there. Just drop me a line at tomi (at) tomiahonen (dot) com and we'll set the wheels in motion.

PS thank you eduardo for correcting the original source of the opening quotation. I had seen it before attributed to the past Soviet Union Premier, but clearly Kurt Kewin said it first, and am happy to attribute the quotation correctly. 

Comments

[@rodrigottr]

Hey Tomi!

Next time in São Paulo give me an invite to watch the presentation hahah

I studied the fundamental curves with another name in college. It was the innovation adherence analsys. What makes an innovation more succesful then other.

Tomi. Do you see a fundamental curve on Android vs iOS or any other OS?

[eduardo]

Actually, it was Kurt Lewin, the gestalt psychologist, who said that there is nothing so practical as a good theory.

As far as PC's go, I think mobile phones don't really replace them for a lot of functions (do you produce this blog on a smartphone?). I expect PC sales will continue to rise slowly as more of the world becomes industrialized, reaching a plateau in two or three more decades. But it is certainly true they have become unexciting, low profit margin commodities

[cycnus]

Hi Tomi.

First,
Thanks... I love your article.

Second,
* I think the problem with MMS (compared to SMS) were the pricing. Here (in Indonesia), regular MMS cost 10x more than SMS. and there were cheap SMS bundling, but not cheap MMS bundling. So, the MMS were at disadvantage over SMS. I was wondering what keep the carrier for giving an MMS a boost....
* Same thing with Video call. If the price different were only 10%-20%, I think it would be popular among family member.

Third,
I was hopping you could give a projection on SMS vs. BBM (Black Berry Messanger) vs. What's app vs. YM (Yahoo Messanger) vs. IRC..... :)
Will yahoo lost the war to What's App?
Will IRC still as big as before the mobile took over the PC?

Once again...
Thanks for this great article.

[Juha Autero]

Mobile phones were not replacing landline phones, either. Of course mobile phone is better substitute to landline than smartphone is to PC because services they offer are so similar. That doesn't change the fact that smartphones are growing faster than PCs, which means that eventually there will be more smartphones than PCs. That will change markets so that it's preferable to write new software (and services) for smartphones. As people use more smartphones they will find less need for PCs and eventually get rid of them. For example someone that uses his or her PC mostly for email and web surfing starts using smartphone for SMS and web surfing and when it is time to upgrade the PC he or she notices that there is no need to do that because he or she is now using SMS instead of email and does most of web surfing on the phone anyway.

I started to write this comment on my Mac, but then I had to leave and finished it on my phone. Then I learned that this comment form doesn't work on it and now I'm sending it from my Mac again.

[ノースフェイス]

羅津、パイオニア、男性は3場所は通年不凍港であり、両方が北朝鮮政府の経済と貿易港によって承認されたままです。

[グッチ]

同県亘理町荒浜地区にある阿武隈川沿いの堤防。近くに住んでいた男性（６０）は２階建て自宅の１階が浸水したが、流失は免れたため「住み慣れた土地を離れたくない」と修復を決意。昨年９月、建設業者に予約金１００万円を支払い、年末までに仮設住宅から自宅に戻れるはずだった。

[Office 2010]

Based on the early numbers I prepared a proposal to use mobile phone calls as one of our bundled services (with long-distance calls the other) and took the proposal to my boss. We examined the data and by this time the first internal numbers were coming out and Matti was sold. I had won my argument to make mobile phone calls part of our bundle. At that point, I unknowingly had started the project that would create the world's first fixed-mobile converged service.

[cheap nike air max]

But after that comes the responsiblity to spread the story - and that does mean you have to 'convince' all others - nobody else does know this and you start off as an absolute minority of one against the world. If your facts and logic is sound, you will then find people willing to listen and some willing to accept it.