Strand Consult: Predictions for the Telecoms Market in 2009
| 2009 will be the Moment of Truth for many players in the telecoms sector |
| When writing our predictions for 2009, there is no way of avoiding relating my predictions to the new reality that has emerged due to the international financial crisis. At Strand Consult we make a living out of viewing events objectively, but on the other hand we are also so realistic that we know that the international recession that large parts of the world is currently experiencing will also influence an industry that primarily does business by delivering a basic service like good old-fashioned telephony – we are in a commodity industry. Today Strand Consult delivers strategic information to over 140 mobile operators and all the largest technology suppliers around the world. During 2008 we have conducted over 40 workshops at CxO level for different operators around the world – workshops that have been exciting and given us the possibility to communicate at the level where decisions are made. In the course of 2008 we have handled tasks in 30 countries across most of the world’s continents. For a company like Strand Consult, the moment of truth is not when our customers purchase reports or workshops, but when companies use that knowledge and our recommendations to achieve measurable results. If we look back at 2008 and the many articles we have been quoted from, the lecturers we have held at numerous conferences, the newsletters we have sent out, the reports we have published and sold and the many workshops we have conducted, we can only be proud of our efforts and we know that the companies that have used our knowledge can all most probably measure of the value of our efforts – our success can be measured by the success of our customers. Again this year we would like to continue our 8 year old tradition of spending a little bit of time during the hectic month of December to compile our predictions for the coming year, and passing these thoughts on to our clients and friends. But we will also revisit the last year’s predictions, so that we can re-evaluate our own conclusions To say that 2008 was an exciting year would be an understatement! And the fact that we – for the 9th 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 at the bottom of the page. The Moment of Truth is the reality that will always be the first and last thing that those trying to be successful will meet 2008 has been an exciting year in many areas and once again events have developed almost exactly as we predicted in last year’s predictions, 2008 . This has been a year where a number of Internet companies across the world have tried to hype their technology and was also the year where the press has focused more on writing about what the big boys are talking about, rather than what customers are actually choosing to purchase and use. Basically you could say that 2008 was the year where there was more focus on the few million Apple phones that have been sold and the phones Google did not sell – rather than the billion phones that customers actually purchased and the 3 billion phones that are being used daily by customers. During 2008 we have heard a great deal about the many new American players that have had a vision of achieving a central role in the mobile world – with many of them coming from the Internet and IT world. But if we examine the actual success they have achieved, it is mostly limited to the press coverage they have received. It is a fact that the cash flow they have generated is almost invisible in an industry that in most countries has a 4-7% share of the national GDP. If you measure how successful 2008 has been based on the cash flow generated by the various market players, there is no doubt that the large have become larger and the smaller players have had difficult times – and are facing even more difficult times. 2008 was the year that proved that you either need high volumes or to be a focused niche player. The list of companies that have experienced problems during 2008 is long and many have already warned that 2009 will be a tough year. It is no secret that we here at Strand Consult have been critical about the iPhone, on the other hand our analyses during 2008 have shown that there is not one operator that has increase their turnover, revenue or improved their market share due to the iPhone. In our latest iPhone analysis LINK we document that a number of operators have issued profit warnings based on the iPhone. We have documented that the closer partnership you have with Apple, the worst business case the iPhone becomes from an operator’s point of view. We are somewhat shocked by the enormous focus there has been on the functionality of a telephone that has such a tiny share of the market and we feel it is sad that there is not more focus on the functionality of the billions of telephones that customers have actually purchased and are using every day. Regarding winners and losers 2008 was the year where mobile broadband took off. In many countries 60% of the broadband connections now being sold are mobile broadband connections and we can see that in countries like Austria, Finland and Sweden mobile broadband is cannibalising the DSL market. There is no doubt that mobile broadband has become very successful and that we are seeing an increasing number of operators moving their focus away from 450 Euro expensive smart phones and over to 350 Euro portable PCs/notebooks with built-in 3G/HSDPA. We have started seeing the MVNO market grow in countries like Spain, UK and Italy and the question is not whether there is a worldwide market for MVNOs, but rather how big it will be and how operators will do business on a market where part of the competition is created by virtual operators that are either Web based or come from the retail world – and often from the fast moving consumer goods market. Supermarkets are and will be natural players on this market. 2008 was the year where SIM only products were very successful in many countries. Simply put one could say that consumers chose value for money and traffic pricing in many countries was more important than a new and smart mobile phone. Turning our attention to mobile phones, 2008 was the year where Motorola really experienced their Moment of Truth as they were simply unable to create replacement for the classic Razr. Motorola’s problems have not been caused by the financial crisis but by the mismanagement that Motorola’s old management was responsible for. This was also the year where HTC really emerged into the spotlight. A lot of us have known HTC for many years, but 2008 was the year where this impressive company kept on launching amazing products. It is simply impressive to see how HTC has developed and if you are a Motorola shareholder you should try to avoid comparing these two companies ability to develop, market and sell mobile phones. Again in 2008, EU’s competitive Commissioner Viviane Redding chose to use the telecom industry to improve EU’s image. Her fight for lower roaming prices is legendary – on the other hand it clearly shows that a great deal of what is going on at the EU is happening without any understanding of how the telecom industry functions and is developing. You can read here LINK a brief note that describes how we view the way the EU is handling this matter. If you take a closer look at a region like Africa, it is fun to note that 2008 was the year where operators like Zain and MTN abolished roaming costs across large parts of Africa. In reality you could say that in Africa ordinary competition is creating the market development that the EU is trying to force by unfair regulation. All in all, 2008 was an exciting year – maybe not so exciting for everyone that had dreamt of being successful in the mobile world – but due to that 2008 was the year where mobile broadband really took off and where many operators had no choice but to focus on how to reduce CAPEX and OPEX. Simply put one could say that the most successful operators today are those that have followed the guidelines we have published in reports over the past 5 – 7 years. How will the mobile market developed during 2009 – Who will survive and who will enter into some type of consolidation? There will be some main trends that will dominate the 2009 mobile market. This will be the year where almost all the world’s mobile operators will primarily focus on mobile broadband. This market will grow, but competition will be so tough that it will result in very low prices on most markets. These low prices will result in operators over time having five choices on how to continue to do business, LINK. Reducing SAC, reducing customers’ consumption, launching a number of premium products, bundling services with a mobile broadband product and launching premium billing on mobile broadband. We believe that the services market we already know from the mobile market with premium SMS will spread to the mobile broadband market and that IP billing will become a natural part the mobile broadband market and later on the traditional broadband market. The first operators will launch these types of services during the first half year of 2009 and these services will subsequently spread across large parts of the world during 2010. The current financial reality will result in demand decreasing and a great deal of the sales created in 2009 will primarily derive from the innovation that the industry must deliver. This will come from new and smart handsets and new and innovative services which will create a large part of the revenue on top of the basic products and services that customers purchase. Those that do not understand the importance of innovation will experience a decreasing demand for their products and services during 2009. This will be the year where there is an extra large focus on cash flow. Some will have a positive cash flow they can take advantage of and some will have a negative cash flow and will one way or the other need to enter into some form of consolidation. 2009 will be the year where innovation is King and cash is King Kong. Consumer behaviour in 2009 – Customer’s will discontinue some services and change behaviour If you look at how customers will behave during 2009 you will see that their main focus will be on value for money. Companies that can give customers value for money will be successful – those that focus on premium products that do not differentiate from their competitors will experience a tough year. When customers experience a financial recession as currently being described by the media, they become much more price sensitive and this happens quickly. One of the areas where operators will quickly experience this will be the acceleration of customers migrating from fixed lines to mobile and an increasing number of customers will discontinue their fixed line phone subscription and instead use their mobile phone. We believe that this market development will be especially visible in countries like Spain and Germany. In countries where mobile broadband penetration is over 10-15%, DSL providers will experience an increasing number of customers that choose a mobile broadband connection rather than a DSL connection. We believe this market will be concentrated around the singles and youth segment – segments that perceive mobile solutions as a natural technology in their daily lives. The handset market will be hit hard by market developments. We believe that the market will be divided between cheap basic handsets and new innovative products with smart designs. Today almost all sales are replacement sales, resulting in customers either choosing a cheap product with the functionality they require, or alternatively choosing a smart designer product with a high status symbol value. The market in-between these two types of products will be limited. For many years it has been the operators that have been the handset manufacturers’ best friends. In 2009 the customers will take over the handset market. The limited subsidies will result in customers paying a larger share of the handset price in the future – the company that can deliver value for money will be the company that sells the customers their next mobile handset. The operator business – Focus on decreasing OPEX and minimising CAPEX If you sell infrastructure, 2009 will be a tough year. We are certain that operators will focus on limiting their CAPEX and will focus on getting value for money. This will result in operators increasingly limiting their investments to the absolute minimum – competition will be tough. Operators will primarily purchase extra capacity and expansion of their mobile broadband networks, investments in improving coverage will be limited to a minimum. We believe that the MVNO market will continue to grow; we will see this market spread to South America, the Middle East and perhaps Asia. Successful MVNOs will move from being a European phenomena to becoming a global phenomena and new types of MVNOs will emerge. We believe we will see a number of data-based MVNOs across the world and some of these will emerge from the IT industry. Some of these MVNOs will focus on becoming mobile ISPs, while others will focus on delivering data services, including machine to machine solutions. Many operators have through the years been very focused on CAPEX, while their focus on limiting OPEX has been limited to what their organisation believed they could handle in a natural fashion. We believe that handset subsidies and dealer commissions will come under great pressure in 2009 and only those dealers that can create added value for the operators will have a chance of making good money. Regarding the mobile broadband market, the main focus will be on winning mobile broadband market shares and retaining market shares on mobile voice traffic. All operators know that the mobile broadband market will be enormous and will use all means at their disposal to acquire a large a share as possible of this market. The problem is that when all operators have the same prerequisites for doing business on this market, the primary competitive parameter will quickly become the price of mobile broadband. We will experience this development on almost all mobile broadband markets. The largest challenge on the mobile broadband market will be that the largest voice operators will face difficult times. Quite simply one could say that the larger market share you have on voice traffic, the more difficult it will be to gain large market shares on mobile broadband without losing your voice market shares. Outsourcing will also grow in 2009, primarily driven by the desire for right-sizing. An increasing number of operators will use project outsourcing to achieve a leaner organisation. Focus will be on who can produce a voice minute minute, SMS and a megabyte at the cheapest price. The winners will be the operators that run the most cost efficient organisation. The network technology business – Winners and losers During 2009 there will be a great deal of focus on a number of technologies. The media will be flooded with stories about DSL, Fibre to the home, Femto cells, WIMAX, CDMA, LTE, HSUPA, GSM/CDMA-450Mhz, UWB and DVB-H. On the whole a lot of this communication will be driven by the technology providers that make a living from selling these technologies – they will all claim that they are selling the winning technology, but many of them will fail – and only a few will be successful. Regarding Fibre to the home we have little doubt that most fibre providers are having difficulty getting their business cases to work. There is no doubt that there is a market for fibre and a need for fibre to the home, the big question is however whether the providers can attract enough customers to achieve a ROI on the enormous investments that FTH require? We believe that the roadmap is GSM, UMTS and then LTE and we believe that the evolution that started with the introduction of 3G and UMTS will quickly develop. The market for portable PCs with built-in mobile broadband will result in what started as an evolution will develop into a revolution, with customers adopting these products in a large scale. There is no doubt that CDMA is a dead technology and that an increasing number of CDMA operators will choose the GSM/UMTS path as their roadmap – a strategy which will prove successful. We believe that Femto cells will run into the same problems that UMA experienced. There will most probably be a number of operators that will test this technology, but regarding the business case they will find that SAC and customer care costs will exceed the advantages that operators believed Femto cells will give. Basically Femto cells will increase the operators SAC and OPEX, but not decrease their CAPEX as many thought would be the case. The Handset business – The Moment of Truth occurs the second the customer makes his choice… Just like in 2008, 2009 will also see many new products launched. We believe the actual numbers will be a little less, but on the other hand those that are launched will represent a wider spectrum. There is no doubt we will experience the “Apple” effect and this will result in many new and exciting products. On the other hand a market player like Apple will probably experience a greater resistance than they had expected and unless they launch new products their role might quickly be marginalised – once again innovation is needed to drive new sales. A market player like Nokia will maintain their position and launch a number of new exciting products, designs and form factors and have an extreme focus on services, all resulting in them getting a great deal of attention during 2009. We believe that most of Nokia’s handsets will feature GPS and that they will do everything they can to create an alternative to Google Maps – an 8 billion US dollars investment in Navteq can only be justified by being successful with their GPS handset offerings. If you take a look at the other handset manufacturers you could generalise by saying that those companies that are currently experiencing tough times will face worse times and those that are currently doing well will do even better in 2009. The largest challenge for the handset manufacturers will be adapting to the new reality where an increasing part of the market will be driven by the consumers and the number of operators moving large numbers of handsets with the help of subsidies will be limited. It will be innovation and customer experiences that will drive the demand for mobile handsets. Customers will want smart products at reasonable prices or alternatively designer products with a high status symbol value. Competition between the handset manufacturers will be limited when compared to the competition that the handset market will experience from the ultra portable PCs with built-in 3G/HSDPA – that will take market shares. The big question is how large this market will be compared to the smartphone market and whether operators will move focus away from the 450 Euro smartphones and over to the 350 Euro ultra portable PCs with built-in 3G/HSDPA. We believe there will be quite a debate regarding NFC for mobile payments. On the other hand we do not think this market will be very large in 2009, so the question is whether the mobile operators will have a role when customers start using NFC cards for payments. We believe many operators will have an unrealistic attitude towards this market. The mobile services market – A new and large service market will emerge and the operators have a unique opportunity… There will be a great deal of focus on mobile services in 2009. A number of the services that are currently free will start costing money when other players bundle their products with different types of services. We have already seen how Nokia has bundled their handsets with music and services and TDC in Denmark has given all their customers access to unlimited and free music downloads. This trend will spread to other countries, markets and market areas. The question is what significance this will have on companies that make a living of producing, marketing and selling mobile services. The biggest new thing in 2009 will be premium mobile broadband services. We believe many mobile broadband operators will launch IP billing and an open garden strategy similar to the existing successful strategy being used for premium SMS in the mobile area. We believe this market will launch in 2009 and literally explode in 2010 and that it will create many new exciting services. We will not only see new mobile services but also a number of convergence services. This will be services that can be used on a mobile handset and shared with others over the Internet. In this universe Nokia will try to ensure a market position through OVI and will face a fierce battle from Google, Facebook, MySpace, MSN and the other market players that want a share of the mobile universe. The market for mobile services will be driven by the business models that operators offer content providers that can create traffic on the operator’s networks and billing systems. The market for selling services will be divided into four financial models: The operator centralised model, the financially centralised model, the media centralise model and the user centralised model. We have no doubt that it will be the operator centralised model that will come out the winner in the short and medium term. The market developments we will experience will be exciting and there is no doubt that the largest surprises on the mobile market during 2009 will most certainly come from the mobile services market. Conclusion 2009 will also be an exciting year and the press will be busy describing the Moment of Truth – reporting financial results and reporting about those that give up. We know that customers will focus on prices / services and flexibility when choosing the products and services that they feel give them value for money. We are looking forward to the Mobile World Congress in Barcelona where we will probably see the first guidelines for which direction things are moving in and thereby an indication of whether our 2009 predictions will come true. Perhaps you do not agree with our predictions, but on the other hand our predictions are not created based on the hype generated by the media or because we want to market and sell some new technology. We make a living out of helping our customers navigating a turbulent mobile world and it is our company goal to ensure that our customer’s shareholders are successful. We are confident about our own judgements and predictions. 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. below. Finally all that is left for us is to wish you a very Merry Christmas and a Happy New Year. Yours sincerely John Strand & Strand Consult |
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