Research Notes

Predictions for 2013: What to expect in the mobile telecom industry

With the turn of each year, Strand Consult reviews the year past and makes an assessment about the year to come.

For the last 18 years Strand Consult has provided strategic information to the mobile telecommunications industry, and for the last 12 years, we have made predictions. This annual review attracts a wide audience, both inside and outside the telecom industry. We believe that our predictions have become so popular, not just because of their accuracy, but because we are not afraid to speak our minds.

Also, we post all of our predictions for the last 12 years, something that we have yet to find others do. We let our readers to decide for themselves whether we were right. We believe we were spot on in what would happen in 2012, but you can judge for yourself by reading the predictions from 2011:

Here are our predictions for 2013.

Increased competition and falling prices: consumers are the winners (again)
When you want to see the future of the mobile market, take a look at Scandinavia. This is the region with the most competition, the lowest prices, the highest phone concentration, much of the leading experimentation in business models, and some of the fastest broadband speeds. Denmark, in particular, brought the world the concept of mobile network virtual operator (MVNO) and continues to innovate this business model.

The competition that began in Scandinavia has spread to Europe and will grow to other parts of the world. Next year we will see prices fall, and operators in highly penetrated markets will price to win customers, whether or not it is profitable. We characterize this competition as lemmings in a brutal race to commit suicide. Specifically we will see operators compete with data packages and for international traffic. For consumers in many markets, this means they get more data in the same package. In other markets, they will experience getting a free data add-on when they buy a voice, SMS, or MMS package of a certain size. In Denmark one month of mobile voice and data equals the price of a large pizza and a 2-liter bottle of cola.

LTE, no longer a premium product, becomes a commodity.
LTE will be “free” In response to competition, operators have rolled out LTE. They had hoped to get a premium price for the upgrade of customers from 3G to LTE, but that is a wet dream. As it turns out, operators can upgrade their old network to the new network that supports GSM/UMTS/ LTE without having to increase their CAPEX. Therefore the cost of rolling out LTE is often marginal.Not only will network operators reduce their premium prices, virtual operators will increase the amount of data they offer for a given price. Oister, one of 3’s discount brands, offers 80 GB of mobile broadband for just €39/month. As prices in the mobile broadband market are squeezed, we will see the trend spread to other broadband markets.

Operators will try to limit the loss by earning revenue with value added services (VAS), but don’t expect VAS to replace lost revenue from expected higher LTE premiums. There are no-brainer music add-ons such Spotify and Wimp, and there are opportunities for operators to think outside the box for other exciting possibilities. The greatest value of VAS will become marketing for operators.

Smartphone subsidies will disappear in many countries.
Goodbye to free phones. Heavy competition and price cuts will force operators to reduce or eliminate subsidies for mobile phones. We have already seen the trend in a number of countries, and the installment model has already shown success. This will be a blow to the smartphone market, and things are likely to get difficult for hot products such as the Samsung Galaxy 3S, the Apple iPhone 5, and the Nokia Lumia 920. Customers may be less enthused to buy when they realize what the phone actually costs. We believe that handset manufacturers will face increasing challenges in 2013 and with some country variation, will rethink their value chain which relies largely on operators for selling phones.

A rude awakening for telecom investors: the world is not developing as they had dreamed
If you are an investor in telecommunications, it is hard to see the good news. Investors who have enjoyed supernatural returns will likely see share prices come back to earth. We are reminded of the 3G auctions between 2001-3 when operators overpaid for licenses, and the IT bubble burst. There are only two ways that operators can compensate for low prices: consolidation or massive cost cutting (as we saw 10 years ago). We see two forms of consolidation. Light consolidation is when two or more operators build an infrastructure together. Heavy or classic consolidation is when two or more operators are merged into one. If investors are optimistic, we would advise them reconsider their faith. We see no new technology or offering that creates new revenue for mobile operators. 2013 will be a tough year with difficult decisions in the boardroom.

Governments’ broadband targets for 2015 and 2020 will finally have substance.
Around the world, there is much politicking on broadband, especially fiber to the home (FTTH). Politicians speak about fiber as if it were the second coming of the messiah, speeds of 100 Mbps for half of all households. Naturally it plays better for politicians to paint golden dreams rather than focus on the reality of their sub-optimal policies and the hard facts about the bandwidth that people use today. Almost 60% of data traffic in the US goes just for real-time entertainment, more than 35% for Europe. Do consumers not have enough films, video and music online? Will more bandwidth make them happier? The question is whether consumers are willing to pay for a fiber upgrade when many are getting Netflix with cable or DSL just fine today.

2013 will either be the year when the FTTH lobbyists win a great victory and get governments to commit real money or government and industry finally agree to a win-win broadband deal. We are curious to see which government will be brave enough to take money away from sacred programs in health and education to fund fiber and broadband instead. It’s a cheap trick to make a promise today that future administrations will have the burden to realize. Furthermore it dangerous technology determinism to suggest a number like 100 Mbps because it sounds good, but not to do the arithmetic on what the higher bandwidth will be used for, how the infrastructure will be provisioned, and what consumers are willing to pay. Consider the logic: Netflix boasts quality experience with fiber at 2.5 Mbps. Even with Moore’s Law, how realistic is it that the demand for broadband speeds to be 50 times what is available today in less than 5 year?

Look at it another way. Where is the business value in innovating a higher bandwidth service? Around the world, we see content and application providers optimizing down their services so that they can be consumed at lower speeds. Consider the world of content delivery networks (CDNs), which transmit 80% of the world’s content. The cash flow for that industry is the same as it was 10 years ago, but more CDNs distribute more content. Technology innovation, rather than bandwidth increase, has driven the efficiency.The key question is whether a broadband deal will reflect the realistic levels desired by consumers, rather than government officials. We find it unlikely that cash-strapped governments will put up the money, and it is hard to justify giving subsidies to the telecom industry which makes profits and already invests in infrastructure. So, we expect that business and government will negotiate. A more pressing and important issue is bringing broadband to rural populations and the poor. Strand Consult believes that this can be delivered through an improved carrot & stick model, and we plan to publish a major report on this subject in 2013.

Will the FCC have the courage to bring MNVO competition to the USA?
The fact that the American telecommunications market looks like an oligopoly is not a secret. Denmark, a country of 5.5 million people, has the same number of network operators as the USA. It is becoming increasingly difficult to swallow that small European nations have more competition, better speeds, better service, and better prices than Americans.However, simply having more network operators in the US will not increase competition. Many entrants have tried and failed to succeed in the American market (Sprint, MetroPCS, Clear etc). Much of this is related to poor management and bad decisions (stubbornly hanging onto dead Wimax and CDMA technologies), not to mention the scale and capital needed to build a national network. We wrote about T-Mobile a few years ago, and we can still see that they did not learn from their experience in Germany in the last 8 years.

It is time for the Federal Communications Commission (FCC) to pull the MVNO card and allow virtual operators to create more competition in the American market. The sooner that T-Mobile understands that their path to success is through an aggressive MVNO strategy, the better. We believe that MVNOs can play a major role in the US in 2013, and if T-Mobile removes subsidies and goes for a SIM-only strategy, their shareholders will only be happier in the coming years.

Facebook will wake up and smell the mobile telecom coffee.
Facebook, under increasing pressure from its shareholders and with its growing base of mobile users (now more than half of all users), will make moves to monetize revenue from mobile beyond advertising. Keep in mind that most of Facebook’s ad revenue comes from North America, but its user base is growing in Africa, Asian and Latin American, where Facebook’s mobile ads for Amerians are not relevant. We expect the world’s largest communication platform to look more seriously at monetizing opportunities in mobile products and services, both in acquisition of mobile technology firms and with business models including VoIP, MNVO etc. Read more about our report on Facebook and the mobile industry:

Smartphone makers will experience a downturn in spite of analysts’ efforts to puff up the numbers for handset sales.
The smartphone market is synonymous with hype, and there are no shortage of cheerleaders including IDC and Gartner who have fallen under the spell of handset manufacturers. When a research company purports to sell objective information, but reclassifies the designation of the Series 40 to a smartphone to lift the reporting of Nokia’s sales, we find something rotten in the research industry. The market for mobile terminals has moved from feature phones to smartphones. Apple iOS and Android dominate, and Microsoft and RIM are the two dark horses. 2013 might be the year when touch screen phones have serious competition from other form factors. In any case, Steve Elop will disappear from Nokia before year end, and it will be a hard year for smartphone makers.

The value added service (VAS) market will look very dull in 2013.
We find it hard to see how mobile operators should have a central position in the VAS market. Apart from operator billing, they struggle to offer a range of APIs, and it appears that smaller, more dynamic technology companies can do this better. Lessons from the last 15 years of the premium SMS market show that mobile operators have limited ability to develop, market and sell the services demanded by customers. Expect continued discussion about near field communications (NFC) and mobile payment in 2013, but their growth will be mixed as these solutions aren’t readily accepted in all markets. See our research note on this topic: We are eager to see whether alternative app stores can give the incumbents a run for their money. There is room for both operators and content providers to offer customers access to portals where content is not prescribed by the device.

Patent lawsuits will become more than entertainment for the press.
Reading about the patent lawsuits in 2012 was like reading the sports pages: knock outs, strike outs, touch downs, slam dunks and so on. We hope that journalists can improve their coverage in 2013 so that there is less namedropping and more investigation and analysis. We believe that readers are tired of articles that now has X sued Y and vice versa. In 2013 there will be more focus on the basis for these lawsuits and more explanation: what is a patent, what are the types of patents and where they apply, what is the difference between an ordinary patent and an essential patent and so on. There is a need for mainstream audiences to understand the global patent regime, how companies leverage their patent portfolio, intellectual property in the supply chain, its impact on the trade in hardware, and how actors use the legal system and the courts vis-à-vis patents. The discussion will become more nuanced, and serious media will take an interest in covering patents, an exciting but complex proposition.

Over the top (OTT) players and cable companies will battle fiercely.
2012 was the year when OTT exploded on the telecom scene. While operators have absorbed shocks from VoIP to their long distance revenues, new internet players such as Netflix now challenge their bandwidth, taking first place as the traffic hog in many countries. Netflix has had an impressive year with a global rollout and revenues to match, but don’t expect cable industry to sit idly. The advent of Netflix and HBO in many countries has been met with pushback from cable companies, which are leveraging their assets (incumbency, existing customer base, and established relationship with content providers) with new go-to-market strategies for their own OTT services to compete with the American players.

OTT has some spillover effects. Media companies are seeing new life for their content, but OTT may be bad news for BitTorrent. As quality content becomes available for a competitive price, people stop pirating. BitTorrent has 22% of all of European traffic, but in North America, just 10%. BitTorrent’s traffic is likely to fall as Netflix and cable companies step it up in Europe in 2013.It won’t be smooth sailing everywhere for Netflix. The company has already ruffled the feathers of operators. Norway’s Telenor exposed that Netflix threatened to blackmail the operator if it did not give Netflix free hosting and traffic, highlighting some unsavory tactics of the upstart firm. Consumers seem indifferent to these issues; they just want content with good quality for a good price. As such, we expect the presence of OTT to make Quality of Service more palatable with regard to network neutrality.

Quality of Service (QoS) will be accepted in the net neutrality debate.
2013 will see continued rancor about net neutrality, a highly charged emotional debate. The EU will announce its eagerly-awaited policy ruling on the topic. While the FCC and BEREC (Body of European Regulators for Electronic Communications) have found limited evidence of telecom companies violating network neutrality principles (in spite of vociferous charges from the opposition), these regulatory bodies plan to keep their “precautionary” stance and impose rules. It is important to note that consumers and some network neutrality advocates have become more comfortable with QoS regimes. This is a boon for operators because flexible pricing creates incentive to build infrastructure. Additionally a flexible pricing regime is more fair for consumers because with today’s “best efforts” internet, low volume users are probably paying too much for their internet connection while high volume users are paying too little. There could be economic justification for operators to charge content providers delivery fees as means to support infrastructure investment, but this is a difficult political argument. As such, content providers and operators are looking at content delivery strategies together. Strand Consult has kicked off an academic research project in this area and intends to contribute valuable empirical evidence to the debate.

Network equipment manufacturers will finally see light at the end of the tunnel.
In 2013 a number of operators will report that they have increased their CAPEX, but this will not necessarily bring smiles to the infrastructure equipment providers. We will need to go further into 2013 before we know whether it is a good year for the equipment providers, and there may be some consolidation among equipment makers along the way. What can make 2013 a good year for equipment manufacturers is whether they use public affairs and communication effectively in their strategy. Most politicians don’t understand the barriers and capabilities of infrastructure technologies, so network equipment manufacturers and operators should work together to educate regulators and politicians. By focusing on the lack of transparency in the rental market for land for mobile masts, operators and equipment makers can improve their chances that vital infrastructure equipment is deployed. This is a win-win: operators get lower rent, and therefore lower capex, and manufacturers sell their equipement.

Conditions to build and operate mobile infrastructure will improve.
2012 saw consumers’ complaints about mobile coverage reach a fever pitch. It is ironic that this comes at a time when mobile operators are investing more in infrastructure than ever before and the cost to erect infrastructure has never been so high. At present the process to erect a single mobile mast/antenna can take between 12 – 14 months and cost €100.000 – €250.000. Operators are consistently blamed for problems in coverage, but rarely are other important factors such as the smartphone or the local policy for mobile masts considered.

In 2013 Strand Consult will continue to focus on the important issue of building and operating mobile masts and antennas. To date, we have meticulously documented the challenges that mobile operators face with regard to erecting infrastructure in municipalities around the world. These challenges include increasing and illogical rental pricing; routine delays for permissions, putting projects on hold for months, if not years; and local officials who come up with groundless excuses to block mast deployment (“My coverage is fine, so no one in my community should have a problem.”). We have also documented municipalities creating cartels to set rental prices artificially high as well as strong-arm tactics by public officials. Then there are the set of national, regional, and local regulations. In a country such as Brazil, each of its 5500 municipalities have their own rules, and there are 250 individual statues about mobile masts. On top of that, the proliferation of smartphones with poor configurations to the network and sub-optimal software developments (handset makers sell the phones first, and rely on consumers to fix the bugs later through software updates) creates black holes in the networks. It is little wonder that operators are burning money needlessly on mobile infrastructure, and public servants are unwittingly harming their own citizens.

Strand Consult has started an important dialogue about these problems. The process began in Denmark and is spreading to other countries. As a result of our detailed research and reports, stakeholders including operators, equipment manufacturers, municipalities, regulators, politicians and community members have come together to work cooperatively to improve mobile coverage. The realization is that good mobile coverage is a responsibility shared by all, not just the operators. On its own accord, the Danish telecom regulator made an in depth study of the major smartphones in all the regions of the country. It found that poor coverage was not related to the mobile network, but rather the poor quality receiver on the handset device. 2013 will be the year that more countries will have a more informed discussion about mobile coverage, especially the role of the municipality and the smartphone. Read more about this project:

Small cells will get attention, but the concept is not ready to be a commercial success.
There will be focus on small cells in the new year. While the technology is good enough, regulation and the lack of a business model will inhibit the growth of small cells. Small cells are only economical in highly populated areas. To serve larger regions, an antenna, mast or tower must be used. In addition, even when the economics are right for small cells, these projects fail for lack of agreement of how, where, and by whom to deploy the technology. Small cells are certainly novel technology, but expect only talk, not implementation, of small cells in 2013.

We wish you a happy new year in 2013 and look forward to hearing from you.
We expect 2013 to be an exciting, if not challenging year. There will be plenty to research and discuss, and you can rely on Strand Consult to continue to publish important and interesting information about these topics. We welcome your feedback and criticism, and we hope that you will look at our predictions from the past:

In particular we would like to challenge journalists to improve their reporting. We observed in 2012 that too few journalists asked difficult questions. We found articles that were not news at all, but stories based on hearsay, corporate press releases, and Facebook posts. It is a worrisome trend for journalism to be driven by rumors and be informed by little to no original research or investigation. We realize the financial pressures on the news industry and journalists in particular, so Strand Consult makes itself and its research available to the press. Journalists and all are welcome to contact us with your needs and questions.

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