Strand Consult: Predictions for the Mobile Market in 2007
| hristopher Columbus knew all about the threats facing Telcos today |
| Navigating the mobile universe is a daunting challenge. But it’s not unlike the challenges faced by ancient explorers such as Marco Polo, Christopher Columbus and the Vikings. In each case, it was their ability to navigate effectively that was the key to reaching their respective destinations. If you could talk now to some of those explorers – who helped enrich our understanding of the world – and asked them to recount their experiences, I believe they’d express similar sentiments to those felt by many Telcos today. For instance, they’d talk about the anxiety of setting off into the unknown, the danger of navigating uncharted waters for weeks or months on end and, finally, their apprehension on seeing a new coastline and venturing ashore for the first time. The single biggest challenge facing these explorers was, however, probably the fear of the unknown. Christopher Columbus, for example, was in all likelihood less fearful of the journey to ‘India’ (South America) than by the thought of what he might find once he got there. The Telco industry isn’t too different. Nobody doubts the importance of good navigation, but many in the industry are daunted by the numerous ‘unknown threats’ that lurk along the way. We remember all too well what happened back in 2000, when operators bought 3G licences for billions of euros, a feeding frenzy that left many players sick and even dead. At Strand Consult, we make a living from selling strategic information and knowledge to help navigate the Telco market. But we realise that, just as for Marco Polo, Christopher Columbus and the Vikings, it’s not only about delivering the knowledge necessary to navigate effectively. It’s about helping the industry prepare for the unknown. In this tough marketplace, however, we believe it’s as vital to be able to evaluate the work we’ve completed as well as our work in progress. Our clients, after all, don’t pay us to come up with undocumented predictions. They purchase strategic information, knowledge and insight to help make their journeys smoother, less hazardous and, of course, cheaper. Every year for the past 7 years, Strand Consult has spent a little bit of time during the hectic month of December putting together our predictions for the coming year, and passing these musings on to our clients and friends. But we also revisit the previous year’s predictions, so that we can revaluate our own conclusions. To say that 2006 was an exciting year would be an understatement! And the fact that we – for the 7th year in a row – were pretty much dead-on with our predictions is something we’re immensely proud of. You can find our predictions over the last 7 years here: Predictions from the last 7 years The mobile market in 2007… Now, to the future. Each year we seem to say that the year just gone was exciting, just as we usually say that the upcoming year will be so too. Well, it’s the same again: 2007 will be an exciting year, and we anticipate many ‘big events’ with huge consequences for people working in the industry. We’re calling 2007 the “Year of Truth”, a time when more and more players are forced to confess the sins of the past and start calling things by their proper names. We believe 2007 will be the year in which operators start speaking out against the marketing hype and rosy predictions surrounding new technologies that promise a shiny-bright future. In other words, we’ll see the death of the naïve operator. It will no longer be enough simply to present these companies with graphs of the famous ‘increasing curve’ showing growing demand for this or that new technology or service! The gap between operators and technology providers has deepened in 2006, and we believe it will deepen further in 2007. We’ve been in close dialogue with quite a lot of operators on board and management level over the course of this year, and we have realised that the credibility of technology providers today is close to that of used-car salesmen. The technology providers themselves can be divided into two distinct groups. One deploys the ‘increasing curve’ graph to demonstrate, for instance, how ARPU will grow exponentially. The other group sits down and looks at the operator’s business case, and then offers suggestions on how to optimise this. In 2007, operators will place more effort on reducing costs as their profits come under pressure from continuing price falls. This applies especially to countries like Denmark, Norway, Germany, Spain, the UK, Ireland, France, Poland and Brazil. We believe, too, that infrastructure providers will come under growing financial pressure, resulting in further consolidation among them. We also suggest that Ericsson will benefit from the Alcatel/Lucent and Siemens/Nokia mergers, which will be beset by political and internal power wrangles, undermining these entities’ ability to act effectively in an extremely competitive market. The big question is what Motorola will do. We’re not among those that believe Motorola will merge with a Chinese player to fight the ‘big three’ in the infrastructure market. In fact, we believe the best way forward for the US vendor would be to spin off its infrastructure division into a separate company and then list it on the stock exchange – thus creating a lean, mean challenger to the big three.Next, we believe that 2007 will see continuing consolidation among MVNOs and MNOs. The fact is that in a number of countries there already are one-too-many operators, so the question is not whether consolidation will take place, but rather who will buy whom. We believe the market is ripe for consolidation in numerous countries, including Brazil, Italy, Austria, Switzerland, the Netherlands, UK, Sweden, Denmark, Ireland and the US. However, it is not easy to predict in which of these countries consolidation will actually take place. The truth is that the 3/Hutchinson group is in deep trouble in Denmark, Sweden, the UK and Austria. It looks to us like these units are on a mission impossible, and one has to ask how much 3’s shareholders will retain confidence in a company that never achieves the goals it sets and has had to change strategy at least THREE times already. The year 2007 will also be one in which the industry focuses and optimises. The customer will get more for less and this, combined with pressure from smaller and more effective operators, will force larger players such as Vodafone, T-Mobile, Orange and Telefonica to reduce their costs significantly. We anticipate, in response, large cost-cutting programs in 2007, resulting in a lot of people leaving the industry. The big buzzword will be “outsourcing”. A growing number of operators will outsource small or large parts of their businesses, while more and more infrastructure providers will do what Ericsson has already started doing: offering outsourcing services to operators. We also believe that 2007 will be the year in which a number of operators will start offering their customers triple- and quadruple-play solutions. We believe this development, involving large-scale investments, raises some crucial questions – for instance, whether such solutions will be based on the take-3-pay-for-1 concept, and if so, how this would affect operators’ operating margins.At Strand Consult, we believe that many operators’ margins will come under huge pressure in 2007, and the financial markets will begin discussing whether the industry is capable of maintaining them at plus-40%. We propose, therefore, that the Telco industry seeks inspiration from three other sectors: airlines, supermarkets and pharmaceuticals. Today’s tough pricing pressures, and the need for reigning in costs, looks similar to the recent experience of the airline industry. Meanwhile, business models in the mobile sector could start to resemble those of supermarket retailers, which provide the logistical meeting point for consumers and products and make a living off the resulting ‘traffic’. The pharmaceuticals industry could provide the inspiration for innovation. Companies such as Ericsson, Alcatel/Lucent and Siemens/Nokia, for instance, will have to look increasingly at purchasing smaller companies producing great new products that could then benefit from the larger players’ global distribution. Consumer behaviour in 2007… This coming year will be the year of the consumer. In many countries, broadband is already being offered almost for free when a user spends more than E50 a month on mobile services. The UK, France, Spain and Germany are leading this trend, but others aren’t far behind. Simply put, the customer is winning control in the marketplace, and triple- and quadruple-play is arguably the response of operators frustrated by this growing consumer power. Sometimes it seems that operators are finding it hard to accept that they are doing business in mature markets. We believe that in pursuing a multi-play strategy, operators should see their customers in terms of the following 4 archetypes: -Collectors – those who want to gather all their telephony needs in one place -Shoppers – those who are simply after the best deal -Conservatives – those who lazily tend to remain with their existing providers -Coincidentals – those who are driven by convenience when shopping for new products or services Many multi-play operators, we believe, will spend lots of money trying to win as many customers as possible, but are already finding that it’s very difficult to get users to take all their telephony services from one provider unless presented with an amazing deal – for instance, where two or three of the triple- or quadruple-play services are offered almost for free. As more players go from offering a single solution to offering triple- and quadruple-play, operators will also discover that customer behaviour changes significantly when the number of suppliers of services suddenly explodes. In particular, the customer begins demanding lower rates as well as good service. If you’re among those that think the best strategy is to offer either low prices and bad service, or high prices and good service, it’s time to re-evaluate your thinking. Don’t forget that the discount supermarkets today offer their customers low rates, a large variety of products and good service! The operator’s business… A number of the biggest players in the business will, in 2007, re-evaluate their role in the marketplace. That’s partly because the story they’ve been telling financial analyst since 2000 no longer impresses. No longer is the road to success represented by an advanced new mobile portal, massive subsidies on expensive terminals or press releases claming to be the first to offer some new solution. We know that the stock market is no longer as naïve as it used to be, and the fact that a player such as KPN – which in record time has become not only a runaway financial success but also analysts’ darling – should wake up the likes of Vodafone, T-Mobile and Telefonica. If their management teams don’t get it yet, they should make a quick call to their respective country managers in Germany and enquire how E-Plus is doing, and whether they’re feeling any pressure on their operations there. Next year, a lot of operators will also launch new strategies with a clear focus on improving profit. Cost-cutting, for instance, will occur through staff reductions and massive outsourcing to other players. The art will be to reduce costs at a rate that enables profit to remain stable as prices plummet. We believe that big outsourcing projects will take place in Germany, the UK, Denmark, Brazil, Spain, Italy and France. In 2007, we will also see a number of operators choosing to offer their customers flat-rate mobile services on their own networks, as has already happened in Austria, Germany, Belgium, Sweden and Denmark. Cross-border services are something else we hear a lot about. Strand Consult believes that a number of providers will combine solutions so that through their own or partners’ networks they can offer large companies cross-border SIM cards. This enables operators to market a one-shop telephony service to multinationals, even if the operator is not present in all the countries its corporate customer is based in. In the MVNO market, meanwhile, we’ll start to see a lot of new players. Some will be forced eventually to give up or consolidate, and we’ll see a number of players focussing on Value Added Services (VAS). The question is not whether, in 2007, we will come across an MVNO with the same type of service offering as Vodafone, but in what country it will be. By the way, we have several qualified guesses to offer on that one! We also believe it will be easier, going forward, to strike revenue-share deals with technology providers, which means that eventually the customer will have a hard time seeing any difference in the solution offered by a company such as Vodafone and one from an enhanced MVNO. Incidentally, if you are among those that believe 2007 will be the year in which MVNOs die in their masses, you should re-evaluate your thinking – it’s going to be a big year for MVNOs! The handset market – more, better and cheaper… The terminal market will, in 2007, become more fragmented – in spite of several players in 2006 succumbing to the pressure and dying. We believe 2007 will be the year that one clear winner in the terminal market will be declared – and it will be Nokia! Three players, Motorola, Samsung and SonyEricsson, meanwhile, will fight it out for the number-two spot, which will be measured not only in terms of volume or turnover but market respect.If there is any player that can make life sour for Nokia in 2007, it’s not the other terminal manufacturers but Qualcomm. In early 2007, Qualcomm is due to finalise a deal with Nokia over intellectual property rights to WCDMA technology. No one doubts it will be a long, noisy and difficult battle, and we believe that Qualcomm will be on the winning side. A number of new stars will also appear – or perhaps we should say that some old ones will re-appear, helped by aggressive branding and massive support from Microsoft. This will help them boost their position in the smart phone market. We’re of course talking about HTC of Taiwan, which will spend 2007, and especially the 3GSM World Congress, telling the world that they finally have their own brand to stamp on the many phones they sell each day. The big question here is how HTC and other smart phone manufacturers will affect the overall market, not least RIM’s position. On that front, we believe 2007 will be the year that RIM admits it is struggling in Europe, and refocuses on its primary markets, Asia and the US. Mobile services will continue to explode… The market for mobile services will also accelerate in 2007, showing remarkable growth. More and more operators will use ‘bonus’ models and differentiated revenue-sharing to stimulate the content market. We believe that in quite a lot of countries operators will see the premium VAS market making up 5-8% of the total market, and that premium services delivered over Wap-push and billed via Wap billing will explode. We believe Wap billing in a number of countries will account for up to 15-20% of all billing in the mobile-services market. We also expect the market to fragment as the number of services that are available explodes. At the same time, we’ll see service providers focussing on narrow segments to achieve success. In much the same way that MVNOs have targeted niche segments, we’ll see mobile services providers targeting specific groups of people, for example soccer fans, or Turkish people living outside Turkey. The list of possible segments to focus on is very long, so the task for the services providers is to find the right partners with whom to market their services. Such partners could be media groups or even rival MVNOs that target the same narrow segments. We think that the big winners in 2007, however, will be media groups. Players that focus exclusively on developing, marketing and selling mobile services will be strangled by escalating marketing and technology costs. We foresee a massive consolidation, where the driving forces will be larger or regional media groups with access to cheap marketing via their own media. Next year will also be one in which a number of large internet players try seriously to move into the mobile universe and create a market position much like they have done on the internet. We believe this will have two important consequences: a lot of press releases; and a lot of operators wanting to partner with them to exploit their “brand magic”. Experience tells us, however, that a good brand and partnering with operators isn’t enough. No operator worldwide has achieved financial success with their portal strategies, and there is little chance that they will do so any day soon. The future lies in effective revenue-sharing between operators and content providers. This was true when we said it as far back as the WAP Congress in Barcelona in 1999. History has proved that we were right, and few today question that premium SMS and revenue-sharing is the road to success. We believe that if the big internet players want to achieve success in the mobile universe, they need to change their strategies and focus. Some of them already realise this, but we doubt whether all will see the “mobile light” in 2007. The 8 most-hyped in 2007 It’s one thing to predict who’ll succeed and fail, but what are likely to be the most-hyped technologies and services in 2007? There are a number of eligible candidates whose apparent magical properties are likely to be excessively promoted next year. So, here goes with the mobile industry’s most-hyped in 2007: Operators’ own shops: A lot of operators believe it’s vital to have control over distribution by buying and managing their own shops. We do not believe operators can run such shops cost-effectively, nor do we believe that this is the answer to ‘disloyal’ independent retailers. Loyalty is something you win by virtue of your actions. In that sense, loyalty is like love – it cannot be bought. UMA: There’s already a lot of talk around UMA, and how it will turn the mobile industry upside down. The fact is, UMA means higher SACs, higher support costs and lower ARPU – not to mention the lack of decent UMA terminals. The question to ask oneself is this: why should operators invest in infrastructure to be able to offer their customers a discount? Mobile TV: Mobile TV via DMB or DVB-H is something on everybody’s lips right now. But sadly, nobody’s developed the correct business model. Nor is it clear how to create the right sort of content for mobile phones or how to charge for it. Another thing most people forget is that DMB and DVB-H is flow television, not TV on demand, and we thus have little faith in it. We believe the future will be in small video clips that the customers can stream or download to their handsets. Mobile IM: A lot of operators see IM as the next big source of revenue, much like SMS. But this is very naive. IM is a peer-to-peer solution delivered on a flat-rate data package, and operators are kidding themselves if they think they can make money on anything other than the traffic that Yahoo and MSN generate on their network. Advertising and free mobile services: A lot of people believe adverts can finance everything from phones to services and traffic. But honestly, when most customers’ ARPU is between E20 and E40, you’d need to unleash a hell of a lot of ads just to finance one small part of the mobile market. Anyone believing that advertising revenue is the way forward for the industry should look at the value of the mobile market compared to the advertising market – all the world’s ads would have a hard time financing the mobile industry. Internet companies in the mobile market: A lot of internet firms dream of success in the mobile market. In their naivety, they believe that the way to succeed is through partnerships with mobile operators. These people should sit down and understand how the mobile market functions right now, and how it will do so in the future. It’s worth asking whether the same internet companies believe that the way to success on the internet was through ISPs. That’s not the type of partnership that created success for the likes of Google, MSN, Ebay, Amazon and Yahoo. Mobile VoIP: This is a hot topic that’s become widely talked about. However, most people forget that both the receiver and caller pay for data traffic. They also forget about the growing number of flat-rate mobile products on offer. Why does a customer need VoIP on their mobile if they can get flat-rate voice already? 3G: Believe it or not, you still find a lot of people hyping the difference between 2G and 3G services. But we ask ourselves, what is the difference, and can 3G services finance a 3G business case over the next 3-5 years? We don’t believe so. 3G is still mainly about voice, which accounts for 90-95% of most people’s mobile bill. Isn’t it time to bury the 3G rhetoric? To put it frankly, 2007 will be the year when more and more people in the mobile industry shout “No more bullshit!” Most of us are tired of the used-car-dealers’ sales talk, seeking to persuade the world that their new technologies and services will massively boost APRU and lead us all straight into the land of milk and honey. At Strand Consult we have proven regularly that we know which way the industry is heading. And like Christopher Columbus, Marco Polo and the Vikings did in their time, we are striving each day to move the borders of our understanding and expand our vision of the industry. We’re confident about our own judgements. But don’t judge us merely on what we’re saying today about the future. Just look at what we said about the present in the past. You can find our predictions from the last 7 years here: Predictions from the last 7 years |
2006 Predictions 2005 Predictions 2004 Predictions 2003 Predictions 2002 UK predictions Strand Reports |
