Challenges in getting users to significantly increase spending--in support of major spectrum and network infrastructure investments, as they demand much more network capacity with exponential growth in mobile data---are uncannily reminiscent of what happened a decade ago on fixed networks. Many market participants and observers misjudged the economics and how destructive competition could be in this previous bandwidth frenzy. Several technology vendors and network operators including Nortel Networks, WorldCom and Global Crossing failed catastrophically as a result. Some forecasters predicted shortcomings and today's forecasts can help ensure mistakes are not repeated in pursuit of the mobile broadband bonanza. This month I discuss some forecasting travails and reveal results from WiseHarbor's recent mobile forecasting that combines outlook for devices, network infrastructure and operator services to 2025.
Facts of life in forecasting
Forecasting requirements-in mobile and other industries-differ significantly from user to user. For example, granular, category-by-category forecasts for devices are necessary for manufacturers' tactical inventory scheduling each quarter and for next year's new product planning. Conversely, strategic planning horizons extend a decade or more. Business planning assumptions are required throughout planning periods. Most mobile industry forecasters are unwilling to publish forecasts longer than five years. With mobile broadband, investments in research and development, patents, spectrum, network infrastructure and device platforms (i.e., basebands and operating systems) are very long term bets, as are mergers and acquisitions. For example, when bidding for patent portfolios or spectrum in auctions, would-be purchasers must consider the entire life of the patent or license respectively, as well as geographic scope, among other issues.
Forecasts are subject to many uncertainties at the best of times and in many cases turn out to be inaccurate. For example, what did a typical industry analyst forecaster have to say about the outlook for alternative computing devices just 18 months ago? Until Apple's iPad was announced in January 2010, tablets were hardly even recognized as a category following various failed products over the previous decade. Instead, smartbooks were expected to be the hottest device category after phones, and yet sales in that category remain anaemic.
Forecasting can be perilous for the forecaster. Whereas wireless industry forecasters were repeatedly criticised (principally by major equipment vendors) for underestimating the growth of cellular, for example, plenty of them overshot by orders of magnitude on cordless with DECT and CT-2. Overestimation is potentially embarrassing, but by the time such inaccuracies are apparent most folk have moved on with erroneous forecasts forgotten. Downbeat assessments tend to draw more immediate censure.
On the other hand, getting it right can also be forgotten. For example, I produced a very upbeat multi-year, multi-nation forecast for ADSL in a bespoke project for Alcatel in the late 1990s. The company has capitalised on this as market leader for many years, but nobody ever came back to me with recognition for that correct call.
Forecasters need to be diligent, independent of vested interests in any particular outcome and wary of hyping the next thing the supply-side wants to sell. Competition in immature markets is more powerful and disruptive than many observers realise. From my experience working with mobile operators and technology vendors in high-growth markets, there is a persistent tendency to underestimate volume growth with subscribers or handset sales while overestimating ARPUs and ASPs. At present, however, these metrics are buoyed by the rise in smartphones and data usage.
A bittersweet experience
Some forecasts are not welcome, even when they ultimately come true. In the second quarter of 2000, I produced a forecast with average prices for bulk wholesale transatlantic fiber optic circuits, using a 155 Mbps circuit benchmark, falling 99.5 per cent with increasing more than one hundred-fold capacity from 1999 to 2009. My unpopular message on pricing was delivered before the tech sector collapse that only started to become apparent at the end of 2000. Most other analysts forecasting fibre-optic markets at the time also predicted exponential growth. This was straightforward, however, given that several years of major capacity construction increases had already been announced by operators.
According to a paper presented by TeleGeography and the David Ross Group at the May 2010 SubOptic conference in Yokohama, the price for such a circuit fell by 98 per cent from 1999 to 2003 when the last new cable system was introduced. It went on to state that "[e]ven though price erosion has persisted since 2003, the good news for operators, is the pace of erosion has slowed, with the decrease in prices often reflecting reductions in upgrade [to higher capacity on the same fibre] costs." On the basis of the more prevalent 10 Gbps circuit benchmark used nowadays, the authors calculate a 60 per cent decline between 2003 and 2009. All told, that is a price reduction of 99.2 per cent--astoundingly close to my forecast above and well within the margin of uncertainty on market tracking measurements. It is very gratifying to have my accuracy independently verified by other experts after all this time, even though my plummeting price projections made me persona non grata in certain quarters a decade ago.
I was unusual among industry analysts in forecasting the crucial economic variable of price, as well as quantity. And, nobody else predicated such a precipitous fall of more than 40 per cent per annum over a whole decade. The opening sentence in the abstract of the aforementioned paper says it all. "A significant number of trans-Atlantic cable systems in operation had their cost basis restructured via bankruptcy earlier this decade. As a result, pricing can be based on the incremental cost of provisioning capacity, rather than on recovering the cost of the initial investment." Bankruptcies and financial restructurings occurred because the pricing assumptions of the business planners were unduly optimistic, given the reducing technological costs, increasing competition and over-supply in operator services.
The moral of the story ought to be obvious: long-term business planning assumptions on pricing matter as much as do volume forecasts, unless you are waiting for the chance to become the second owner of assets in a distress sale. Infrastructure assets will remain and second owners can operate at marginal cost with disregard for the full sunk costs. I call this the Channel Tunnel effect: many people lost a lot of money in digging it, with several financial restructurings, but nobody ever suggested filling in the hole!
What about mobile broadband?
According to a recent Lex column analysis in the Financial Times, "investors do not believe [European telecoms companies] can keep paying cash out at the current rate. Telecoms operators face both long-term decline in fixed-line revenues and the need to invest in mobile networks as Internet traffic explodes. Some face grim macroeconomic climates. Others have to deal with price-cutting competitors. Investors think free cash flow can only fall."
What is the outlook for usage and revenues across the entire mobile ecosystem including carrier services, network infrastructure and devices? Will smartphone adoption and mobile broadband usage be sustained without a repeat of the financial failures in the tech sector collapse in the early 2000s? Hopefully, it will not end in tears this time.
I reaffirm forecast findings WiseHarbor published one year ago that LTE will be as successful as the leading cellular technologies that preceded it with LTE-TDD precipitating the demise of WiMAX, which will peak by 2015. Mobile broadband will do for Internet connections--averaging several gigabytes of usage per month by 2020--what 2G has achieved over the last 15 years in providing voice and text communication to more than half the world's population, with 5 billion connections, including those with multiple subscriptions.
Cellular will maintain its stellar growth because it is the cheapest, most convenient and pervasive means of connecting people. Increasing demand for mobile broadband and new types of devices will make up for saturating demand and price erosion in mature phone markets with voice and SMS. Two-sided operator charging, of content providers as well as end users, will become the norm. European operators are already pushing for revised Internet peering terms.
Mobile device sales will grow from 1.6 billion units in 2010 to 3.9 billion in 2025, including phones, new personal devices such as tablets and a wide variety of machines, such as cars and utility meters, which are currently mostly unconnected. Handset revenues will flatten approaching 2015 following current buoyancy in average selling prices and the smartphone surge. Device manufacturers will grow revenues from other types of devices thereafter. Total global mobile connections in service will rise to 21.5 billion (2.7 per head of population) by 2025.
While data traffic grows more than 1,000-fold, operator revenue yield per megabyte will decline dramatically from $100 with SMS, $1 in voice and $0.10 with mobile data in 2010 to $0.001 with data predominating in 2025 (global averages including postpaid and prepaid plans).
LTE is set to become the leading technology by around the end of the decade with WCDMA-based HSPA Evolved technologies remaining very strong in the marketplace. Constraints such as spectrum and device availability prevent a more rapid switch. GSM and CDMA will continue significantly beyond 2020. Mobile operator equipment expenditures will increase at an annual average of 3.3 per cent net of inflation, with most growth in developing regions.
Boom not bust
Transforming networks with new radio technologies, fibre backhaul, all-IP transport and other innovations in traffic management and charging is essential to drive down costs and maintain profitability with high growth. Nobody's forecast is gospel truth: if cost reductions are insufficient then forecasted price reductions and volume increases cannot be achieved economically. Forecast figures can help set targets and bounds on what technologies must deliver with increased performance, lowered costs and what market participants such as operators can justify charging for services while paying for spectrum, infrastructure and device subsidies. They can also help technology vendors decide how much to invest in R&D.
European mobile operators misjudged 3G by paying too much in the millennial spectrum auctions. We can only hope competitors will respect the economics, do their sums and behave rationally this time in upcoming spectrum auctions and network builds with HSPA and LTE. Government agencies also have responsibilities not to manage competition in ways that are detrimental to the market long term by unduly impeding consolidation or constraining spectrum availability.
Keith Mallinson is a leading industry expert, analyst and consultant. Solving business problems in wireless and mobile communications, he founded consulting firm WiseHarbor in 2007. WiseHarbor is publishing an annual update to its Extended Mobile Broadband Forecast in May 2011. The new forecast will include network equipment, devices and carrier services to 2025. Further details are available at: http://www.wiseharbor.com/forecast.html