Research Notes

Predictions for 2014: What to expect in the mobile telecom industry

2013 was a great year for Strand Consult and its team of experts. We have never published so many new reports or have been involved in so many interesting projects around the world as we have this year. Globalization is exciting, and it forces reluctant national regulators to think in new ways. One of our key accomplishments was to help operators optimize their business case to build and run mobile infrastructure. As a result of our work, Denmark is one of the few countries in the world where operators experience vastly improved conditions to deploy mobile infrastructure. This is part of a multi-stakeholder process with regulators, municipalities, and operators to improve mobile coverage. Read more here and here.

Strand Consult was pleased to help stop the mobile roaming proposal “roam like home” presented by the EU Commission. Our research and analysis showed that the proposal created perverse opportunities for arbitrage. To do something for consumers, the EU Commission should address the fundamental challenges in the telecom industry, namely barriers to consolidation and tax harmonization, which will ultimately make the industry more efficient and consumer prices more fair and transparent. Read more.

Strand Consult also published a major report on network neutrality which promises to be an essential tool for operators to address the resurgence of the debate that will come in 2014. Read more

Since 2002, Strand Consult has published predictions and provides links to its predictions from past years. We believe that you should judge a fortune teller not on what he say about the future, but instead on what he says about the present and the past. Our assessments have consistently proven true, and 2013 was no exception. Read more.

Predictions for 2014
Here are Strand Consult’s predictions for 2014. Feel free to share them to create debate. The exchange of ideas is an important element for the evolution of our world.

The GSMA will reinvent itself
The GSMA is the global trade association for the mobile industry, and it has a vital role to play in communicating to governments and the public. As mobile takes on a greater impact in consumers’ lives, the GSMA must be more aggressive on political and regulatory fronts. A key issue where it must step up is mobile broadband.

Mobile operators invest over $100 billion annually in capital expenditure in mobile networks. The EU used to account for a third of the world’s telecom capex investment, but that number has fallen below 20%. Meanwhile the U.S. has held its capex constant at almost a quarter of the world’s total, even though the global pie is getting bigger. In effect Americans, who comprise just 4% of the world’s population, enjoy one-fourth of the world’s telecom investment. The European approach with a focus on end user prices and so-called consumer-led industrial policy has had a devastating effect across the European continent which suffers from underinvestment. This proves which regulatory policies work and which don’t.

The political system must recognize that private companies can’t be forced to make investments if they earn increasingly less revenue, and authorities shouldn’t congratulate themselves on creating competition because they can count the number of players, but not the level of technology.

This is not a call for government subsidies. The telecom industry has the cash flow to support capital expenditure. The situation in Europe can be resolved very simply if regulators and competition authorities allow consolidation. As the internet is increasingly mobile and many choose mobile broadband as their primary internet connection, the GSMA can play a more central role if they want to.

Continued challenge for operators’ profitability
Heavy competition, falling termination rates, declining roaming revenues, and higher taxes in some countries means that the mobile industry continues to be challenged financially. Regulatory unpredictability is another challenge for mobile operators. The European Commission’s mobile roaming gambit in the summer of 2013 created so much uncertainty that it further deterred telecom investment in Europe. Read more about the EU Commission’s “roam like home” stunt.

Creative approaches to consolidation
There is a need for consolidation in the mobile industry, and it will come. 2014 will see not just the classic type of consolidation through merger & acquisition, but network sharing and experimentation with the carrier’s carrier model. Learn more about the carrier’s carrier model

Mexico will be an interesting country to watch for the carrier’s carrier implementation. Expect there to be fewer operators at the end of 2014. If you believe that there are better times down the road, you will likely be disappointed. The smart operators will be the ones that can sell themselves in time.

More focus on mobile coverage
In the coming year there will be increased attention on what creates good mobile coverage and how to maximize it. Some 70% of the poor coverage experience that consumers have is not related to the network at all, but by the mobile phones themselves. A number of regulators now understand this and are starting to take steps to educate consumers, such as placing disclosures on phones.

This comes from a broader realization that achieving good mobile coverage is not the responsibility of the operator alone, but a variety of stakeholders. In It is not just about building large and state of the art networks, but how political, regulatory, and municipal representatives can cooperate to remove the barriers to good mobile coverage. These includes charging abnormal and exorbitant rates for site rental for mobile masts, unnecessary delays for mast approval, and barriers to operators to share and co-locate facilities. Just as Strand Consult has facilitated the process in Denmark, political and regulatory actors will start to play a constructive, proactive role to create improve mobile coverage in 2014.

2014 will be a regulatory annus horribilis for the telecom industry
The entire regulatory environment will be in focus in 2014. On the plus side, Tom Wheeler, the new Chair of the Federal Communications Commission in the US, will likely lead the implementation of a series of reforms to modernize telecom regulation. This is woefully overdue in a world where IT, Telecom and Media have already converged. The FCC’s action will send a clear signal to regulators around the world that telecommunications regulation needs to be addressed in a global, not national, context. The public need not fear if regulators relinquish those areas that are no longer relevant. There is a vast, well-practiced body of competition law to address problems that might emerge in the telecommunications industry.

The U.S. is lucky to have strong leadership, but this is not the case in Europe. The EU will continue to be bogged down with the moribund economy and how to address the future. Telecommunication companies and investors will find it hard to see where the EU is heading. The EU talks about the need for consolidation, but telecom and competition authorities cannot agree on how to go forward. As the elections for the elections for the European Parliament approach, incumbents and candidates will say a lot that sounds good in the consumers’ ear, but don’t plan on substance that would create regulatory stability. Unfortunately, it is probably one of the many bad news that investors will get in 2014.

Roam like home was one of the EU Commission’s gambits to appeal to consumers. Thanks to Strand Consult and other parties that crunched the numbers, “roam like home” was dead on arrival. Read more

Issues such as privacy, data protection and net neutrality will merge in a nasty way. Discussions will be misused to carry out range of unrelated regulatory initiatives in countries such as Brazil, France, and Germany. Depending on the outcome of the court decision in the US, the net neutrality debate will explode. Organizations such as Sweden’s Pirate Party will hijack discussions as part of the election to get attention. The telecom industry, often ill-prepared for the debate, will likely suffer. Take a look at Holland to see how a net neutrality law can be made in just 2 months. Read more.

Broadband will remain on the agenda. Expect the usual emotional appeals that government can do better than industry. But don’t forget the facts: private industry invests more $300 billion every year, and the reality that people are taking advantage of broadband more than ever. The way to get broadband investments is simple. To be sure, there are countries and regions where broadband could be better. The challenge is not for the industry to the make the investments, but to create the conditions so that the industry can make them.

We find it ironic that so much attention is put to policing the telecom industry when the rest of the players of the internet value chain run wild. If delivering voice, text and data are the domain of operators, then Facebook, Google, Skype, WhatsApp and a myriad others are operators in their own right. It begs the question of what and from whom are regulators protecting the public. It’s not operators that are the problem. As the NSA scandal has revealed, governments are larger and more pernicious than imagined. Who regulates the regulators, or more to the point, who watches the watchers?

Infrastructure providers will have difficulty to see who their friends are
We would like 2014 to be a good year for equipment providers Ericsson, NSN , ALU, Huawei and ZTE, but it won’t happen. It will be another tough year for the infrastructure providers, and the political and regulatory uncertainty in the EU and other regions means that operators will postpone their CAPEX again.

On the other hand, as infrastructure providers get squeezed, they will likely take a more vocal role in the infrastructure debate. While they many have many dialogues with regulators, they can likely benefit by making their discussions public. Infrastructure providers can achieve a lot good will with their customers by being one of the more visible stakeholders the movement to improve mobile coverage.

2014 represents the last window of opportunity for equipment manufacturers. If they want to market their services, they have to be able to make a real difference for their customers. The next wave of revenue for operators has not been found, so equipment providers need to demonstrate how they can help operators cut costs. The disconnect is evident when looking at small cells. There are many challenges associated with creating networks of small cells. This report gives an idea.

Mobile phone manufacturers need to realize that the subsidies will be reduced significantly
For the last 20 years mobile phone manufacturers enjoyed subsidies form operators. It was through subsidies that mobile operators boosted penetration and helped to grow the mobile market. The model has come to the end of its useful life. Markets are saturated with phones. Profits for operators are squeezed because of competition; operators spend some 15% of sales on infrastructure and nearly twice that on buying and retaining customers. Competition will continue to drive prices down, so operators need to reduce subsidies to manage this further financial pressure. This has already happened in Denmark.

Reducing subsidies will have a big ripple effect on the marketplace. Without subsidies to drive customer acquisition, the mobile market will be driven more by attracting and retaining customers. The U.S. will experience one of the greatest upheavals as device sales move away from operators’ stores and to regulator retailers. There will be a larger selection of phones which can be used across operators. Unlocked phones will be big in the U.S. in 2014.

Connected devices will garner even more attention than phones. 4G/LTE will be the continued buzzword even though most people can’t tell the difference between 3G and 4G. The lazy journalist can find old stories about what you thought 3G should be and then reprint them as 4G stories. With so many years in the mobile industry, we recognize things from the past and experience a kind of mobile déjà vu.

Fortunately 2014 will be the year when there is more focus on quality of phones, especially the antennas and the role they have in relation to coverage experience. Strand Consult described it in this research note. The phone manufacturers that have not mastered the quality of their phones can run into a media firestorm. It will be interesting to see how Apple customers react when they learn that much of the bad coverage they experience is due to their phone. The phone has a more complex relationship to coverage than most realize. The cuts on subsidies and the increased scrutiny from consumers will be a double whammy for phone manufacturers.

Broadband – the hottest topic
Broadband will continue to be a big deal in 2014 as it was in 2013. In many countries, there will be people who will argue that broadband, especially fiber to the home (FTTH), is the panacea to all the world’s problems. The same people will argue that the government should get involved in broadband investment and deployment, especially when consumers aren’t doing enough on their own to demand the technology. The debate will be derailed by technologically religious people with limited insight, and this makes it difficult for the telecom industry and other serious actors to have a forthright debate.

2014 will be the year when rogue politicians outbid each other in how high they can promise taxpayer money for broadband, and lobbyists will beg for subsidies. They will pay little heed to the facts or the reality of the telecommunications market and the state of competition. In 2013 Strand Consult published a report to address the myths in the broadband debate. With hope, consumers will learn of the catastrophic national fiber projects in Australia and New Zealand and that government sponsorship of broadband is not the way to go.

While the debate plays out, consumers will continue to buy 4G/LTE, many as their primary broadband connection (already 7% of all Danes), and as seen in Japan, cancel their fiber subscription in lieu of mobile only broadband. More people will buy and use 4G/LTE than the biggest optimists would dream of. The challenge for operators is that consumers don’t pay a premium for that 4G/LTE, so there is little upside to ARPU. As such, the need for consolidation will grow more obvious though the year.

Rest assured that Strand Consult will remain active on this important issue in 2014 and issue a series of reports and research notes.

Mobile services become even more mobile
Mobile drives the development of the internet, and players such as Facebook, Google, WhatsApp and Yahoo! have increasingly mobile first strategies. The way we use mobile is changing the internet fundamentally. In 2014 there will be a focus on the composition of internet traffic and which devices are in play. It will increasingly recognized that high speed broadband connectivity is enabled through mobile devices, not computers or laptops. Consider what an innovator thinks about today. Does he develop for the mobile device of the 15 inch screen?

The classic consumer internet services consumed on a computer are old school. New services are conceived entirely from the perspective of a mobile phone. In 2014 there will be a year with a lot of focus on OTT services and how they challenge the telecom industry. Operators will also realize that most did not succeed with their own OTT services, and they will accept that the market will be dominated by Internet-based companies, the largely American.

2014 will find continued discussion of mobile internet services, their business models, and the reality that advertising as a business model works only for a few big players, not the whole ecosystem.

Consumers get value for money. Keep your eyes on USA, Mexico, and Africa
In a large part of the countries around the world, consumers get value for money with mobile services. A month of mobile services costs as much as a family size pizza and a large Coke. Mobile is a mecca for competition between operators, devices, and services. The U.S. will likely see even more competition in the form of MVNOs. In Mexico operators and regulators will look at the carrier’s carrier model to solve some old challenges.

Africa’s is the world’s final frontier for the internet. The internet penetration rate is so low that it has nowhere to go but up. When it comes to broadband, it’s a fait accompli that broadband will be mobile. Looking at how Africa has innovated with mobile provides a valuable lesson for many in the developed world who think that FTTH is the only worthwhile religion. There is no doubt a need for consolidation, and it is likely to occur through classic M&A and network sharing.

Strand Consult hopes that these predictions for 2014 give you some inspiration. It is our 13th year in making these predictions, and they consistently prove our audience’s most favorite content. Please be sure to see our predictions from the last 12 years and evaluate for yourselves whether we were right or not.

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