Research Notes

2017 Predictions and review of 2016

Another exiting year has flown by. Thank you for your readership.  We would like to take this opportunity to wish you a Happy New Year. As is our annual tradition, we offer our predictions for the coming year. This is our 16th year of making predictions. We invite you to see our predictions from past years.

The year in which politicians and regulators halted development
When Strand Consult looks back on the past year and our contribution to the mobile and telecommunications world,  we are proud of our research which has contributed to a number of academic and industry conferences around the world.  We are honored to be invited to share our knowledge to an array of global stakeholders, whether telecom regulators, boards of directors, financial analysts, journalists, industry professionals, and the public at large.

When it comes to telecommunications policy debate, there is a manipulated reality about the industry. Strand Consult’s role is to present the facts and create transparency. In 2016, we killed many myths, and we plan to kill more in 2017.

Strand Consult has many distinguished team members, and we are pleased that Roslyn Layton, Vice President of Strand Consult and PhD Fellow at Aalborg University, was selected as part of U.S. President Elect Transition Team with a focus on the Federal Communications Commission (FCC).  Following every Presidential election, the transition team is entrusted with the smooth transfer of power and information from one administration to the next.  While Strand Consult is not privy to the transition team’s activities, we are pleased that our people can play a positive and constructive role in the new administration and bring an evidenced-based approach to American telecom policy. 

Strand Consult operates globally but its Danish headquarters affords it an opportunity to use Denmark as a  laboratory. There is no doubt that Denmark is considered a top nation for its access, use, and skills of digital technologies. This is the result of nearly two decades of a political consensus to pursue a market-based, technology-neutral approach to telecom policy. 

Through its 10 Steps to reduce cost for mobile masts and improve mast regulation project, Strand Consult has worked collaboratively with the Danish telecom authority and national politicians to help create a framework to fast track the deployment of telecommunications infrastructure. This project has been successful to reduce cost and increase deployment in a number of areas. Strand Consult’s uses its practical experience in Denmark to provide a real world test case on how to create a constructive dialogue with a community of stakeholders that ensures maximum speed and minimum cost to deploy the infrastructure on which the digital society depends.

In the process to understand the challenges on the ground, Strand Consult has learned of the growing problem of municipalities using public money for broadband projects, subsidies which are not authorized under Danish and EU law. As result, Strand Consult has been on the battlefront to expose ths illegal activity.  There is no doubt that Strand Consult has been harsh in its critique of municipal leaders. For example the Danish municipality Ringkøbing Skjern is being investigated by Danish and EU authorities, and the municipal director has stepped down after Strand Consult’s revelations indicate that his municipality has violated state aid rules.

As CEO of Strand Consult, I recognize that these revelations have been politically damaging to a number of officials, but there are strict state aid rules for a good reason.  Limited public funds are prioritized for the poor, sick, youth, and the aged, and these funds should not be abused by companies looking for handouts for their preferred technologies.  It is alarming that EU officials are calling for public WiFi in 2000 towns using taxpayer money, while at the same time denying the consolidation that could allow private providers to make these investments. As we have long described, there is enough capital in the telecom industry to make the necessary investments; the challenge is to get the policy right such that operators have a stable framework for the long term and can manage their operations to earn a return on their investment.

As CEO, I would also like to apologize to BEREC and Norwegian regulator Frode Sørensen. I have been been very critical of their lack of transparency  in proceedings and lack of empirical evidence to justify the guidelines issued on net neutrality.  Nevertheless, I believe our critique is correct. As we describe in our report, Understanding Net Neutrality and Stakeholders’ Arguments,  BEREC’s official stakeholders are not reflective of the European citizens to whom BEREC is accountable by law. Instead BEREC has prioritized the interests of a few “civil society” advocacy  groups which are funded by American internet companies over the needs of ordinary European citizens.   It’s a bad sign when telecom regulators start to become social regulators.  We hope that new Austrian chair for BEREC will bring a return to empirical methods and evidenced-based policymaking in 2017.

Again in 2016 our predictions proved true.
Strand Consult is known for not sugarcoating the truth and we have for many years described the need for  consolidation, particularly in EU countries.  EU competition authorities are charged with approving mergers, but they have little understanding of what creates competition in the telecommunications market and the impact of technological developments on competition in the telecommunications sector. They confirmed this to us in email in 2016.

Sadly the European Commission has few leaders who understand technology or telecommunication, and they all fail miserably on coordination.  While Ansip and Oettinger have the official responsibility for telecom policy, the de facto decision maker is Margrethe Vestager, who by either confirming or denying a merger, changes the speed and direction of EU telecom investment for years to come. 2016 only gave us more evidence that EU telecom regulation is a big mess.

Look no further than the ticking time bomb of roaming regulation set to begin in 2017. The EU is desperate to buy popularity among the growing number of dissatisfied Europeans voters. We regret that Jens Rohde of the European Parliament has not wanted to create transparency and provide access to the analysis that underlies the Parliament’s view on the “roam like home” process in the EU. In any case, the roam like home gambit will fail for a number or reasons we describe.

Telecom regulation in the US in recent years has also suffered.  Rulemaking there is also highly politicized and lacks process and transparency. FCC Chairman Tom Wheeler proposed an unprecedented 45 rulemakings that resulted in divisive 3-2 votes along party lines. 

Let me say that I really like Tom Wheeler as a person, and have had the pleasure to have known him for 17 years.  At the same point, I am not alone in my view that his chairmanship is a disappointment. With his acumen and experience, he was well-equipped to craft the lasting win-win solutions for both sides of the aisle when he took office 3 years ago. But sadly, he caved to President Obama and his donors, issuing many misguided and controversial rulemakings including  inlcluding Title II reclassification, set top boxes, asymmetric privacy regulation, and business data services.

The good news for the US in 2017 is that people now have a chance to weigh in on telecom policy. The election which confirmed Republicans in every seat of government is a rejection of the last 8 years and sends a clear message that people don’t want government to regulate the internet. Congressional reform for telecom regulation is long overdue and has not looked so good since 1996.

Put simply, 2016 was probably the apex of the pendulum swing to the left when it comes to telecom regulation. Regulators around the world, including Canada, took a number of bad decisions that will affect the telecommunications industry’s ability and willingness to invest in infrastructure negatively and may eventually have major societal implications. In 2017 the pendulum will inevitably swing to the right. The question is whether new leaders will have the fortitude to keep to the center where the best and lasting decisions are made.

Since 2002, Strand Consult has published predictions. Each year we provide a link to predictions to all the previous years.  We believe that one shouldn’t judge the fortune teller on what he says about the future, but whether he was right in his predictions in the past. Strand Consult’s predictions having consistently proven true, and 2016 was no exception.

2017 – It will be a year of many changes.
We have made these predictions for more than 16 years, and 2017 is probably the most difficult year to predict. When we make these predictions, we look at many factors (technological, regulatory, political, economic etc), and we look at how they will affect each other in the future.

2017 looks like a year that could evolve into a year like 2015, which we consider “annus horribilis.” We fear that it will be worse, and we already know that 2017, for some actors, will be a year they would like to avoid, particularly the infrastructure industry. It is probably hard to see light at the end of the tunnel especially, if your name is Ericsson.

In 2016 Ericsson said goodbye to Hans Vestberg. Despite a number of acquisitions over the years, he failed to deliver growth for the company. He will likely be remembered as Mr. Flatline based on Ericsson’s share price for the 6 years he was CEO.

The Board said goodbye to Vestberg without having a serious successor in line. The new CEO, Börje Ekholm, looks like placeholder until Ericsson can be consolidated into something else. Ericsson’s crisis is greater, deeper, and more extensive than that experienced by Nokia and Alcatel-Lucent. It’s possible that 2017 will bring the worst news in Ericsson’s 140-year history.

The telecommunications industry is investment heavy, and an evidenced-based, predictable framework is important.  This needs to be contrasted with the notion of “bright line” rules, the current fashion of pro-regulatory advocates.  Clear rules are important, but they need to be sound rules. That is, they need to be based upon empirical findings of market failure, or at least a political and intellectual consensus of the need for rules.

Today’s telecom regulation is not even driven by regulators; it’s is conceptualized by advocates and politicians and then foisted upon regulators with the brute force of millions of computer generated emails. Just like email spam, the quality of automated comments is limited.

The current regulatory chaos in many countries will likely affect the industry’s ability and willingness to invest in the infrastructure that is the foundation of modern society. This is bad news for companies such as Ericsson which require a stable regulatory environment and a framework in which operators can earn an operating profit which allows them to buy capital equipment and invest in infrastructure.

Chaos prevails in the EU.  In spite of the seeming consensus in BEREC, its regulators are all over the map.  This will affect the level of investment negatively. Financial analysts and some of the biggest investors have likely lost their appetite for the EU. The political and regulatory risk to invest in the EU is simply too high. We will not be surprised to see banks denounce EU telecom policies.

In the US, there is a lot of speculation and sensationalism in the media about the Trump administration.  I don’t believe the best and worst prognostications. The truth is somewhere in between. I hope that the Republicans have learned from Obama’s telecom policy errors and return to the bi-partisan political agreement that earlier had stimulated the market.

In any case, 2017 marks a fork in the road for the US and EU. The US indicates that it wants to return to a framework that make it attractive to invest in infrastructure.  The EU looks like it will continue down the road of being left behind. It appears that a number of Latin America countries are recognizing that the regulation road in Europe leads to a place of no growth and no investment. 

When it comes to telecom, the world is moving in four different directions. East Asia and the United States will be the most investment friendly; Latin America has some some bright spots; Africa has not so many bright spots; and the EU is the region that investors should avoid.

Brussels’ attempt at feel good, look good politics has not worked. This populist appeal has become a panic and has spread from telecom regulation into media. The latest EU proposal is aimed to punish social media firms that fail to monitor and delete so-called “fake news.” But the truth is that traditional media have been peddling bad journalism for years, with little to no censure. This knee-jerk reaction to social media shows just how deep the panic is in Brussels.

Increasing telecom policy does not spring from independent, evidence based assessment. It does not even come from regulators at all. Instead it comes from politicians and advocates who think they have an idea about how the industry should work. In any case, this requires a new skill set for leaders of telecom companies, as they can no longer expect the predictable framework and relationships of the past.

To hype or not to hype? That is the question for the tech industry
There is panic among technology companies. Samsung’s “hot” Galaxy Note 7 experienced a huge downturn that cost their shareholders dearly. Similarly, Apple, even with an iPhone facelift after 10 years, still finds it difficult to attract customers as it did in the past. The decline in Apple’s market share, under pressure from many sides, will likely continue, if not accelerate, in 2017.

Many tech suppliers will hype 5G up as the new revolution.  The message that more G is better–2G, 3G, 4G, 5G—is just an orgy of hype. Let’s be honest: 5G will find it difficult to create economic growth, despite the claims of mobile operators and politicians. 5G, while not a total loss, will probably be a financial disappointment for most.

In 2017 people will likely recognize that most 5G services can run on 4G networks. It’s not necessary to deploy a specialized 5G network if 5G services can be run on a 4G network.  The change from 4G to 5G will not be as dramatic as the jump from 3G to 4G, or 1G to 2G or 2G to 3G.

In 2017 there will be focus on services, and we hope to be pleasantly surprised by the opportunities that arise from the meeting of hardware, connectivity, and artificial intelligence in the cloud.  We expect to see an emergence of voice-based products and services such as Amazon Echo Dot and Google Home. These devices offer some cool services and technologies with usability and a price point that will allow nearly everybody to participate. 

While we expect continued hype about the Internet of Things (IoT) in 2017, it is also difficult to see the big financial value for telecommunications companies that build and operate infrastructure. We believe that in 2017 there will be a showdown between those who deliver connectivityt via unlicensed spectrum (mainly WiFi,SigFox and Lora,) and those which use licensed spectrum technologies, primarily LTE-M, EMTC and NB-IoT. Mobile operators have some unique features with LTE-based technologies,  but they should not be greedy. The way forward is to create partner models that help other players to get success. Premium SMS was a good example.

China’s dominance on the device side will likely continue in 2017, and this will help cement Android’s market position. 2017 will likely be another tough year for device makers.  Samsung, Apple, HTC, Sony, and LG will have it hard.

Security deserves more attention in 2017.  Let’s face it. Almost every country is failing on security; the question is just who is honest to admit it.  Politicians and regulators are fooling themselves that regulation is the answer. To be sure, regulation has a role, but addressing security effectively requires a number of inputs.  It requires a dedicated and sustained effort to educate end users and teach them that they must be careful on their data and devices; a robust research and development in security technologies; the appropriate response and deterrence strategies to threats (including coordination with the military); and the collaboration of the many institutions governing the system.
Unfortunately politicians just flog one part of the equation, typically fining or regulating companies for security breaches. This fail to address the source of threats and the base of users. In order to work, security policy needs to offer the constructive framework and incentives for education, prevention, and innovation.

In this way, telecom operators have a central role in security policy.  They need to protect their customers, both from security threats and meddling government, and they should take a greater effort to educate their customers about security.

What will happen–Around the world in 365 days
Strand Consult works in many countries and on many continents, and we believe that the geographical differences are significantly larger in 2017 than we have seen previously. In practice, the market will move in four directions. Europe will emerge as the region with the most regulation and most unfavorable environment for economic growth. We expect it to account for an ever diminishing share of the world’s telecom investment.  We find this truly lamentable, as at the beginning of the millennium, Europe was in a different place. There was investment, growth, innovation, and above all, optimism. Europe even produced its own mobile phones.  We blame the downturn on a lack of political leadership, courage, and willingness to make necessary change.

EU politicians believe that they can regulate themselves out of the financial crisis. This policy hasn’t worked for 8 years, and EU’s appeal to the moral superiority of regulation is like the orchestra that continues to play music on the sinking Titanic. There is no justification in a government that continues to sanction economic decline in the name of morality.
In the US, industry understand how to execute. On the one hand, there is Silicon Valley, a magnet for innovative people and money, and on the other hand, the major US telecom operators which understand what it takes to succeed.  Unlike the Obama administration, which openly sought to reward Silicon Valley at the expense of other industries, we expect that the new administration wants Silicon Valley to win but also a number of other industries. The calls for a renewed focus on infrastructure, including private investment, are likely to be positive for American telecom operators in 2017.

We expect to see more bright spots in Latin America.  Mexico is an interesting country, as is Colombia which has joined the OECD and is making great progress in achieving ICT goals.  Chile will likely move towards policies that promote economic growth after some years of stagnation.  Latin American countries needs to make the path that’s right for them. When it comes to telecom, they should pay attention to the policies of the US in the period of 1996-2006. In any case, they need to build policies based on evidence of what works to build viable digital economies, not “look good, feel good” platitudes.

For example in a number or Latin American countries, just 1 percent of digital services are produced locally. Ninety nine percent of the traffic and revenue goes to countries outside of the region. This is an important fact for regulators to consider when thinking about the policies that will stimulate tax revenue, digital development, investment, and innovation in their respective countries. 

A number of countries in East Asia have a pragmatic approach to telecom.  They are not driven by the same populism that we see in Europe and the US.  Not only do a number of East Asian countries have a sensible investment leve,l but the industry has a lot of focus on how to stimulate the services market, in particular national and regional services.

Africa has essentially three telecom regions, but all have suffered from too many mobile operators for too long. Consolidation is desperately needed to get a healthy market.  Let’s hope that the continent can import some pragmatism to allow the necessary consolidation.

Conclusion – 2017 will not be a great year for telecom investors.
2016 was not a good year for the telecom industry, and in spite of the bright spots, 2017 will likely continue being dull. There is hope that things will change in America, but we believe that it is going to take longer than most would like.

We can see a number of political and regulatory systems around the world adding more regulation to competitive markets, affecting companies’ ability and willingness to make long term investments. For many of the regulations imposed, there is little to no academic or empirical evidence that the proposed rules achieve their outcome. On top of that policymakers adopt rules without a means to measure their effect, so there is no accountability to connect the regulations with their promised outcome.  We see that a number of regulations imposed under the guise of being good for consumers but are in reality “trojan horses” give governments more control over networks. This is not a positive direction.

Sensing a backlash to the election of Donald Trump who defied convention and communicated directly to tens of millions of voters by social media, we expect that regulators and politicians (and some enterprising “social justice” advocates) will want greater control of the media.  They will likely advocate censoring social media in a effort to keep it “free”. 

We hope to operators around the world will learn from the Danish and Canadian operators who are fighting the government to protect the privacy of their customers. This week the EU Court of Justice ruled in the in Tele2-Watson case, saying that national authorities have gone too far.  Strand Consult believes that operators should do a better job to promote the transparency reports they compile in response to increasing government meddling and surveillance. Operators should beef up their efforts to expose this growing political and regulatory problem.

The year 2017 will be interesting. There will be new solutions that can add value to society, but there will continue to be a challenge for industry to find viable business models. Ultimately it is about getting customers to buy and use these solutions. If no money comes into the system, firms will not take risks to make investments.

We expect more information to emerge in the early part of the year.  CES in Las Vegas, the inaguration, and Mobile World Congress are three events which will sent the tone for 2017. Strand Consult expects another exciting year and looks forward to contributing with serious knowledge and analysis to help our customers to navigate in a complex world. We also look forward to educating policymakers with a more realistic view of the industry. 

We hope these predictions give you inspiration for 2017. It is our 16th year in making predictions, and we try to inform, delight, and challenge our audience. We invite you two see for yourself whether we were right over the years.

John Strand, CEO

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