Research Notes

Strand Consult: Predictions for the Telecoms Market in 2011

Strand Consult has an annual tradition at the end of December, where we take a look at what has been happening during past 12 months and then predict what we believe will happen during the next year.
There are many experts in the telecom industry that have tried their hand at predicting the future, but unlike many others, Strand Consult has no problem at all in being held responsible for what we said in the past would happen in the future. In fact, that is precisely what we have been doing every year for the past 10 years.
To our knowledge, there is no one else in this industry that publishes their predictions for the coming year and at the same time gives their readers the opportunity to read our past predictions – predictions that now go 10 years back in time
On the other hand, giving people access to 10 years of predictions requires a combination of confidence, highly skilled employees and spending the necessary time and energy working on the predictions  – even if some of the predictions are about sensitive subjects that others try to avoid.
Many industrial fortune tellers’ predictions are all part of the new year’s entertainment lineup and an easy way of attracting attention from the industrial market players that contribute a substantial share of their turnover.
Our core business is helping mobile operators understand how the future market is developing. We have no interest in making money on hyping technology to thereby attempt to create a market for companies that want to do business with telcos around the world.
Through the years, Strand Consult has experienced customers and companies that have basically tried to bribe us into publishing positive articles and reports about specific technologies. However we are fortunate enough to be in a situation where we can afford to say thanks – but no thanks – to that type of customer. The day we lose our objectivity is the day we lose the whole foundation of our business.
Looking back at 2010, we could start by examining the predictions we published at the end of 2009. You are very welcome to read our 2010 predictions by clicking here:  

When you have finished reading them, you will once again agree that the predictions we published over 12 months ago, give a close description of telecom industry in 2010.
To summarise it all up, we can celebrate our anniversary of publishing predictions that have been almost spot-on for 10 years in a row and end the year of 2010 with the satisfaction of knowing that the customers that read our predictions in 2009 found it a little easier understanding and navigating the mobile universe during 2010.

Once again we have chosen to focus on 7 areas that we believe will attract a great deal of attention in 2011 and where we describe what we believe will happen during the coming year.
From super size to right sizing – how to build and operate mobile networks in the future.
Telco prices are dropping around the world, operators are facing financial pressure and demands from shareholders of maintaining margins are all resulting in the constant need for cost optimisation. Companies are therefore constantly optimising by cutting costs and trying to squeeze even more out of their previous and current investments.
Focus has traditionally been on each individual operator building their own network and where the operator with the largest customer base often had the largest and best mobile network with the largest turnover.

However with continually decreasing prices and increasing competition and after a long period where operators have cut costs in all areas, it is becoming increasingly difficult to find new areas where operators can save money – unless they start slaughtering some of the industry’s holy cows.
Quite simply it is safe to say that outsourcing central parts of an operator’s company and sharing networks and infrastructure are all areas that operators just a few years ago considered core business and extremely important areas for differentiating themselves on the market.
Today we are seeing an increasing number of operators choosing to share part of or their entire network, solely to achieve a more cost efficient business. The number of operators that will follow suit in 2011 will explode. The alternative to this strategy is either to leave the market, or purchase a competitor to achieve the size that is necessary to run a profitable business.
Based on what Tele2 and Telenor have done in Sweden and especially what Orange and T-Mobile have done with Everything Everywhere in the UK, we believe an increasing number of operators will realise during 2011 that “right size” is more important – and a much faster route to achieving a more profitable business – than building, owning and operating their own network.
The year 2011 will be the year where the industry increasingly describes and views mobile networks as factories and where focus will be on how to use one or more MNOs – possibly combined with a number of MVNOs – to create a more cost efficient factory.
The traditional strategy of building, owning and operating a network will recede during 2011 and be taken over by the new strategy of cost-effective production through partnerships that can create greater shareholder value, than the traditional strategy that has so far dominated the industry.
It will be exciting to see how Vodafone and O2 in the UK will react to Everything Everywhere. We will also be closely monitoring the consolidation of the markets in India and parts of Africa.
Regulation of the telecom industry – a greater political understanding and improved dialogue.
During our work around the world we often hear that many operators believe that the local political understanding of their business area is very limited. Many telcos experience that the political understanding of their business is limited and primarily focused on the consumers – rather than on the telcos.
The politics of the EU and various other countries governments is making it difficult for telcos to define long term strategies. Historically there has been a chasm between the politicians and the telecom industry. Many politicians simply have difficulty understanding that the telecom industry is a commercial industry that has shareholders that need servicing and that is doing business on a market with extremely tough competition and constantly decreasing prices.
We believe that 2011 will be the year where politicians – helped by the international financial crisis – will realise that society can benefit from a constructive dialogue with the telecom industry based on the motto: “What can you do for society – and what can society do for you?”
The increasing financial pressure that operators are experiencing from increasing competition, combined with political pressure that mobile operators must ensure broadband in rural areas, is resulting in politicians and the industry having no alternative but to initiate a more constructive dialogue about how to best combine the interests of society with the commercial goals of making money.
We believe we will hear a great deal about state subsidies for broadband during 2011, especially with focus on rural areas and the needs of these areas. Some countries will spend taxpayers’ money on broadband subsidies, while others will choose to spend their taxpayers’ money in areas like health, education and elder care.

Strand Consult actually published a research note about this subject last year and we are pleased to observe that there are politicians out there that agree with our point of view of not giving state subsidies to the telecom industry. However there are still some politicians that believe that the taxpayers’ money fits snugly into the pockets of large and often very profitable telcos.

You can read our research note by clicking here:  
All in all, 2011 will be the year where some countries see their politicians start a significantly improved dialogue with the industry, while other countries continue their not particularly constructive “EU-like” strategy.
It will be interesting to see whether politicians are able to combine the EU’s desire of a having European telecom market in the longer term, with the fact that there are enormous differences in the individual telecom markets within individual EU countries.
Infrastructure providers will increasingly develop similarly to medical companies.
2011 will be the year of LTE. We will see LTE roll out at a pace that will make you dizzy. On the other hand there are still a number of issues that need to be clarified regarding LTE. For example who decides whether LTE is 3G or 4G; the technicians and regulative authorities, or private companies’ marketing departments that are being a little too clever?
You can read more about this in a research note we published about this subject:  
During 2010 we saw a great deal of infrastructure consolidation in the industry and this consolidation will continue in 2011. The purpose of this consolidation is to create large-scale operations that can help compensate for the increasing pressure on prices that an increasing number of operators are imposing on their infrastructure providers.
2011 will be the year of consolidation. The question is not whether consolidation will continue in 2011, but rather who purchases who and who marrys who? One big question is what role the Chinese manufacturers will play during 2011 and whether they will enter the consolidation game, or continue to stay out of it as they have done so far? If the Chinese start playing an active consolidation role in 2011, it will almost certainly result in a good deal of political debate – and most probably result in Huawei and ZTE must expand by organic growth in 2011 and 2012.
Regarding technological development, we believe that 2011 will be a year where many smaller technology companies are purchased by larger telcos and IT market players that want to acquire or expand their footprint in the mobile universe.
In many ways 2011 will be the year where you really start seeing the telecom industry becoming increasing similar to the medical industry. We will see an increasing number of large companies outsourcing innovation to smaller market players – that they will then purchase at a later stage.
In our opinion, the large market players like Ericsson, NSN, Alcatel Lucent etc do not have the ability to create innovation from within their companies. They are increasingly focusing on the evolution of their existing business products and in purchasing new, innovative and exciting solutions from third parties.
2011 will be the year where venture companies that have invested wisely can make money by selling small innovative companies that have proof of concept to large global market players, that then have the size and distribution power to globalise that technology.
2011 will be an exciting year – especially for those working in M&A. It will be interesting to see who will be purchasing what, why will they purchase them, from whom will they purchase them and at what price?

We have no doubt that many people will make good money on selling companies within the mobile world, but it will also be interesting to how many investments backfire during 2011.
Moving from a smartphone driven market, to a service driven market.
Smartphone sales will continue to increase during 2011. Smartphones sales increased by 37 million devices in 2009 and 105 million devices in 2010 and we have no doubt that 2011 will set a new record for smartphones sales. However we will also see a significant sale of feature phones in 2011 and it will still be traffic from feature phones that is the foundation of the global mobile industry.
We will see sales growth being driven by a combination of OS replacements, where phone manufacturers increasingly move from manufacturing feature phones to manufacturing smartphones, and with an increasing number of phone manufacturers manufacturing, marketing and selling a wider portfolio of smartphones at increasingly lower prices. The combination of these different factors will result in the growth of this market in 2011.
This is all described in another research note we recently published:

Competition will increase on the smartphone market during 2011 and we believe many manufacturers will see their smartphone margins significantly decrease. We will see smartphones moving from being high margin products, to being medium/low margin products – and for a few manufacturers even a negative margin product.
An interesting question is how the price developments on the smartphone market will influence the large smartphone manufacturers like Nokia, Samsung, RIM, Apple, HTC and SonyEricsson? Will 2011 be the year where one or more of these manufacturers will surprise us negatively? We think so.
We believe that 2011 will be the year where a great deal of focus will move away from smartphone OSs and the so-called “war” that many media believe is ongoing in this area, and instead over to the service layer and types of services that the individual mobile devices can offer and how individual devices handle these services.
We’re not saying that the discussions surrounding various mobile OSs will disappear, but rather that the press will realise during 2011 that the service layer on individual mobile phone models has a much larger influence on which services customers use, than the actual OS of the mobile phone.
This increasing focus on the service layer will result in a number of smartphone companies purchasing technology companies within the value chain area that sells services, to thereby try to make their mobile phones more attractive to end users.
2011 will be the year where we see many start focusing on NFC. Many handset manufacturers will launch NFC capable mobile phones and operators will focus on gaining a central role within this area. On the downside we are still missing a proper structure on the NFC value chain and to find out exactly what role the mobile operators should have and how cash flow should be divided between the many market players that would like a piece of the “mobile payment cake”.
We have a sneaky feeling that the operators may have overestimated their role regarding using NFC for payments. It will be exciting to see who will finance operators becoming part of the value chain.

We look forward to seeing whether Nokia can regain the respect that they enjoyed from the press in the old days and once again receive the attention they deserve considering the number of devices they will be selling worldwide in 2011. It will also be interesting to see whether Nokia will be regarded as a serious smartphone provider in 2011.
The broadband market – always online and at a low price
For many years the industry has been talking about customers in the future being always on. But this is no longer a future scenario and in 2011 the discussion about the possibility of being always on will move to discussing the price of being always on.
Focus will move from the possibility of having broadband access, to a discussion about the various types of broadband access products for different types of devices and different customer segments and how much it will cost to use the different broadband products.
Competition in 2011 will increase thanks to LTE. In countries where LTE takes off, we will see an increasing migration away from DSL products. The only strategy DSL providers can use to hold on to their DSL 10 customers is by selling IPTV over DSL and offering their DSL customers free or extremely inexpensive access to mobile broadband as part of their DSL package.
The competition that derives from fixed line operators, cable TV providers and mobile operators moving from selling single or dual play products, to selling triple and quadruple play solutions, will result in broadband competition simply exploding. In 2011 it will be the end-users that are the big winners.
The prices of slow broadband connections will be extremely low and despite the fact that operators will attempt to market and sell LTE as a premium product, the extremely tough competition will result in mobile broadband connections being very inexpensive in many countries in 2011. Trying to sell LTE as a premium service to customers will have a short lifespan.
We believe that broadband prices on many markets will decrease so drastically that operators will offer a number of products on top of their mobile broadband subscriptions. These products will include the possibility of purchasing Quality of Service, Peer to Peer traffic, streaming services and VoIP services via the mobile broadband connection. All these services will cost extra on top of a very cheap mobile broadband connection.
Lower mobile broadband prices in combination with tough competition will result in operators needing to remove functionality in their products, to be able to resell them back to customers as individual premium products. The big question is whether customers will be willing to pay for these services, or whether competition will eliminate the possibility of charging a premium price for these types of services. This issue is described in a research note that we published:  
It will be exciting to see how companies that rent space on the national copper networks and then sell DSL over copper will manage in 2011. Will the decreasing broadband prices and competition from mobile broadband erode and finally exterminate their business?
The value added service markedet – The Old boys vs. The under 18s
Much too much has been said and written during 2010 about apps – especially apps for iPhones. If you take a look at the global mobile services market and what the world’s 4.6 billion mobile customers are actually using on their mobile phones, there is a huge discrepancy between the real world that many members of the Mobile Entertainment Forum are doing business in and what the press is writing.
There simply seems to be an infinite number of journalists that truly believe that you can only use VAS on a smartphone. Many of these journalists do not realise that the three companies Fox Mobile, ZED and Buongiorno alone have over 4000 employees that daily market and sell many different mobile services for many other types of mobile phones.
We believe that the market can go in two different directions during 2011:
1.  Continue its current direction, where the press disregards what services customers are actually choosing, purchasing and using on the billions of mobile phones around the world
2. A new direction, where the press and industry realised that the VAS market is significantly more fragmented than the press has been describing recently and where focus moves over to what the end-users are actually doing with their mobile phones.
We will most probably see the second scenario. It is very likely that the Mobile Entertainment Forum together with some of their older market players like Fox Mobile, Bourngiono, ZED etc. will start getting attention from the press and get the opportunity to describe the types of mobile services they are selling to millions of customers every day.
It does give a little food for thought that Japan – which is considered to be one of the most advanced mobile markets in the world – only has 2.5 million mobile customers that own a smartphone, out of a total of over 120 million mobile customers!
We will see a great deal of focus on Android during 2011. We will also see an increasing number of people realising that the Android market is also becoming increasingly fragmented and that getting advanced Android applications to run on different types of Android mobile devices is becoming an increasingly difficult task that requires a great deal of work.
During next year we will see an increasing focus on the fact that Google is more interested in widespread distribution of Android, rather than ensuring that Android is a clearly defined smartphone platform. Google will be more focused on “cloud” services, rather than services that reside and run on the actual device. Despite Android sales significantly increasing during 2011, some of the Android magic will disappear as the public get a better understanding of Android.
The world will also have a more varied opinion about app stores and portals. We are certain that people will realise during 2011 that there are other marketplaces for mobile services than just those that the handset and OS manufacturers and operators have launched, or will launch in the future.

By the end of 2011, both the industry and anyone who spends just a little time and energy examining this market, will have a very different opinion about mobile services, how they are marketed and especially how they are purchased.
The biggest challenge for companies selling services on this market will be the fact that their premium services will drown in the number of free services that are available. At the end of the day it will come down to delivering quality, the ability to deliver services for many platforms and having access to marketing/exposure that will decide who is successful on the mobile services market.
It will be interesting to see how quickly HTML5 will take off in the mobile world during 2011 and also whether Nokia can get application developers to use QT as a platform? We think that Nokia will need to spend 2011 documenting that QT will give them a strong position on the mobile apps market.
All in all 2011 will be a very exciting and challenging year for companies developing, marketing and selling VAS to billions of mobile customers around the world.
Customers do not yet have the power – but operators will give customers the power in 2011
For many years we have seen customers take control and via their actions get what they want – and all by “voting” with their wallet every time they purchase a mobile phone, a SIM card, or a postpaid contract.
Increasing competition on the mobile market and other telecom markets, is resulting in prices decreasing more quickly than customer needs and the selection of services growing faster than customers can comprehend.

Decreasing prices and competition between operators over launching increasingly better products that include an increasing number of packaged services, is resulting in customers very easily and quickly being able to switch to newer, faster and cheaper products.
With the current pace of product development, 2011 will be the year where the operators’ best revenue will derive from customers that hang on to old products and subscriptions that cost significantly more, than if they chose to use the same data consumption, but switch to a new type of subscription from their own or another operator.
There is only one area where customers in some countries will see a decrease in service, and that is in those countries where operators still spend fortunes on subsidising mobile phones. In these countries many customers will find themselves spending more on a new mobile phone in 2011, and at the same time see an increasing number of operators replacing subsidies with various payment models, where the customer can purchase their mobile phone and pay for it in instalments over 12, 18 or 24 months.
All in all 2011 will be a turbulent year with the telecom industry increasingly being commoditised. Companies that understand this trend and have the ability to adapt their business to this new reality will manage significantly better in the long run. On the other hand before we get that far, there will be some very holy cows that need slaughtering in this exciting industry.
We hope that the above information and predictions will give you some food for thought about the industry that you are a part of. The purpose of this newsletter and our many other research notes is not to point fingers at people, but to give the industry access to objective information and research, that makes it easier for companies to navigate this complex business world.
If you would like to read more about what we predicted in the past would happen in the future, you are welcome to read the predictions we have published for the past nine years by clicking on the links below. We are confident that our predictions this year will once again hit close to the mark.

2010 Predictions

2009 Predictions

2008 Predictions

2007 Predictions

2006 Predictions

2005 Predictions

2004 Predictions

2003 Predictions

2002 UK predictions

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