Strand Consult: A tough year ahead

When we examine the condition of the world at the end of 2009, we can see that many companies have been hit hard by their financial crisis. The global economy has more or less developed negatively and many companies and industries have seen negative growth. However when you examine operators, very few have been affected by the financial crisis. In reality many operators are taking advantage of the crisis to implement cutbacks that improve their financial results.
The recession has been a good excuse to implement adjustments that ought to have been implemented years ago.

We believe that an increasing number of MNO's will also focus on reducing their costs in 2010. Their focus will be on a totally new level of "lean". Next year we will see operators opting out of business areas, outsourcing smaller or larger parts of their businesses and also trying to adapt their business to a lower cost level - their strategy will be to postpone CAPEX and reduce OPEX.

When we examined the growth in many countries of voice traffic and especially mobile broadband, there is no doubt that many operators have underinvested in their networks and will most probably continue to do so through 2010. In fact we will see a number of operators during 2010 that simply have network capacity problems and especially within the mobile broadband area will experience difficulty in delivering the services that they are marketing and selling to their customers.

One of the largest challenges that many operators are facing is the uncertainty that is a result of the politicians’ lack of understanding of the industry. In almost all countries, operators face the challenge of not knowing how the political system will handle the allocation of various new frequencies, how they will handle refarming and how they will handle the digital dividend.

Simply put, operators around the world face a period where a number of frequencies will be allocated (800/900/1800/1900/2100/2600 MHz) and where they will start redesigning their networks to use a combination of different frequencies and technologies (GSM/UMTSLTE) and this will be happening on some markets where politicians do not have a long-term strategy for the telecom sector that operators can use to plan their investments. We believe that 2010 will be the year when many operators rebel against the political system and demand a long term strategy that can help them plan their investments.

The industry's largest problem is the lack of industrial understanding within the political system. This is both a national and regional problem. In Europe it is the EU that handles the overall regulations, but if politicians within the EU vote for political regulations that are not thoroughly thought through, these problems will spread to individual countries as soon as they start implementing EU regulations. The year 2010 will be a year with many examples of new EU telco regulations that are flawed or incomplete and these flaws will become very visible as the regulations are implemented nationally.

The experiences with roaming regulations shows what happens when you make a regional problem into a EU problem by homogenizing prices across countries in Europe, without regard to local conditions. We believe that we will see an increasing number of operators during 2010 that will announce that the lower roaming costs have not had any particular influence on their voice traffic and that their SMS roaming traffic in certain countries has grown significantly.

2010 will be a year where we will see a great deal of talk about network sharing, which has now become socially acceptable in the mobile industry. We can see a number of markets which will over the coming years experience a market consolidation that can go in two directions. The first is the traditional consolidation, with one operator taking over another operator and merging them together, as we have already seen in a number of countries (Holland, Austria, Switzerland, Denmark etc.) The other type of consolidation is an infrastructure consolidation, where operators build wholly or partially shared networks. This could happen in a number of ways:

  • A number of operators build a shared network, the network is a factory that produces traffic and operators purchase traffic from the factory. In Sweden, Telenor and Tele2 have chosen this model for their company:
  • Two or more operators build a shared network for a certain geographical area, but individually build their own network in other areas. In Sweden, Telia and Tele2 have launched and Telenor and 3 have launched
  • Operators share a smaller or larger share of their frequencies, network backbone etc. In practice they can share a smaller or larger share of all the resources needed to build a network right up to the point where the operators have a shared factory.
  • Or one can continue business as usual using multiple parallel networks, which will result in a traditional market consolidation, as already seen in a number of countries.

The reason why operators want to share networks is to limit their investments and ensure the possibility of flexible operating costs. At the end of the day the goal is to produce the cheapest and most cost efficient traffic, thereby ensuring that the operator will survive on the future telco market.

With the price developments in the mobile area and the costs of running a mobile operator business, there will not be enough cash flow in the mobile market to support the current number of parallel networks in the future. You don't need to be a rocket scientist to work that one out. 2010 will be the year where this process accelerates and where many will have a great deal of focus on this area.

The MVNO market will also continue to develop and we believe the UK will be the MVNO market that attracts the most attention during 2010. The consolidation between Orange and T-Mobile in the UK will result in Vodafone, O2 and 3 focusing on the MVNO market to retain and gain market shares. The UK market will be tough in 2010. We believe that the most successful MVNOs around the world will be the ethnic MVNOs, large retailers and online-based discount market players focusing on SIM only products.

The MVNE market will see an increasing number of operators launching in the MVNE market, either with their own department or together with an already established MVNE. As the number of MVNEs with close relationships to operators increase, they will start being purchased by the operators they are working with and be integrated with the MNO. We will see an increasing number of MVNEs during 2010, but will also see a certain level of consolidation on that market.

The products that operators will be focusing on during 2010 will be prepaid products, mobile broadband and flat rate voice and SMS traffic. We believe that 2010 will be the year where operators start contemplating how to reinvent and optimize the traditional prepaid products, that to be honest have not changed much during the past 10-12 years. In reality what the industry really needs is the next generation prepaid.

Regulation will remain a nightmare

2010 will be a year where we will see a number of mobile frequencies put to use. In many countries they are allocating the digital dividend 800MHZ, re-farming the 900/1800 frequencies and at the same time allocating the 2600 MHz frequencies. Within 12-24 months, we will see so many new frequencies becoming available, that together with the technological developments, will result in many operators choosing to wipe the slate clean and start building completely or partially new mobile networks. This means that for the first time in mobile history, operators will have the possibility to choose between using a combination of GSM/UMTS/LTE and different frequencies 800/900/1800/1900/2100/2600 MHz to deliver the bandwidth and services in demand by customers.

Simply put one can view these frequencies as one set of building bricks and the technologies as another set of building bricks. By building a network you can combine the different types of building bricks in various ways and thereby achieve multiple ways of solving the same challenges, to suit your particular market.

In addition to this, many operators are battling local authorities to acquire permissions to erect the necessary mobile masts needed to expand their networks. By combining multiple operators’ mobile masts, infrastructure networks, frequencies etc, network collaboration across operators can add a third set of building bricks for the future mobile networks. In other words, operators have a toolbox full of frequencies, technologies and the possibility of sharing resources that can reduce the costs of building and operating mobile networks.

We believe that 2010 will be the year where many operators will make demands on the political system to solve a number of industrial-political issues, thereby allowing operators to create long-term strategies. The solutions they should be focusing on are simple:

  • Clarify and explain to operators the terms for network sharing agreements.
  • Ensure that agreements are neutral both regarding technology (GSM/UMTS/LTE) and frequency (800/900/1800/1900/2100/2600 MHz).
  • Publish a roadmap that shows when different frequencies will be available and the terms under which they will be offered.
  • Allow the market to drive mobile development.

If politicians get it right, they can have a very positive influence on how society and the industry develops. With a close co-operation between operators, the regulative authorities and the political system, many countries can quickly achieve a fast expansion of their mobile broadband networks and thereby benefit society.

Trade war in the equipment sector

A lot is happening in the technological area. A technology like LTE has surprised positively and an increasing number of operators will announce that they will be focusing on LTE during the coming years. On the other hand, 2010 will not be the year where LTE takes off commercially, despite the fact that a number of operators will launch LTE commercially in 2010. It does look like LTE will roll out more quickly than the experts believe, but more slowly than announced by the press.

Regarding the infrastructure market, there is little doubt that there is an increasing need for the many operators that lack network capacity to start investing and we believe this need will grow in 2010 - despite the fact that a number of operators are redesigning their networks. Both mobile broadband and voice capacity will be a large problem in 2010 and large countries like Germany, England, France, Brazil and the USA will experience network challenges that will become very visible to end users.

2010 will be a year where operators start planning new networks from scratch. New grids and the combination of frequencies and technologies will make 2010 a year of planning. On the other hand the question is whether the infrastructure providers will see any growth in sales that corresponds to the needs of the market? We think it will be difficult.

We believe that we will see infrastructure providers demand political clarification regarding politicians’ views on the future, thereby allowing their customers, the MNOs to plan their investments based on future wind directions. The regulative challenges that operators are facing are a greater problem for companies that sell infrastructure, than for companies that sell traffic.

Pressure on the infrastructure providers will also increase during 2010 and we believe that we will continue to see consolidation among infrastructure providers. This consolidation is driven by a number of factors including pressure from Chinese providers that are influencing the rest of the world's infrastructure providers. 2010 will be the year where we really see the Chinese enter the market - aggressive prices and especially cheap financing will put other providers under so much pressure, that they will have difficulty responding.

2010 will probably be the year where NSN, Ericsson and Alcatel will ask the EU and WTO to examine the Chinese phenomena. We believe that the "old" infrastructure providers will view the financing packages that the Chinese are offering their customers as state support of a local industry fighting on the global market. The rhetoric we have seen in the airline industry, shipping industry and other business areas with large national interests will spread to the telco world and perhaps we will see something reminiscent of a small trade war.

2010 will most probably not be much fun for infrastructure providers. This will be a tough year, where the ability to attract and retain customers will be a significant parameter on a market with unparalleled tough competition.

The smartphone market is growing - but not due to demand from customers, but due to a shift in technology

Looking at the handset market we believe that it will continue to attract a great deal of attention in 2010. In 2010 we will continue to see that a great deal of the knowledge being published about this market is driven by the beliefs of the press, rather than actual sales figures. Most of what you read about the handset market is very focused on the hype surrounding smartphones and a lot of the information derives from the USA. When you read many of the articles published by the media around the world, it appears as if the USA - that has 7% of the global mobile market - is a good representation of the global mobile market - but it is most certainly not.

Likewise it appears as if a great deal of the media believe that the operators do business by selling handsets at under cost price, rather than by selling traffic. But there is an enormous difference between the financial reality that operators are a part of and what the press is publishing. In this area 2010 will most probably not be significantly different. On the other hand we believe many operators will focus on reducing their SAC during 2010. We will therefore see good offers for the good stable customers, medium offers for so-so customers and no offers for poor customers.

In 2010 we will see a large growth in the smartphone area, but not a growth driven by customer demand for smartphones, but by the fact that an increasing number of market players will replace traditional operating systems with smartphone operating systems. We will see an increasing number of Series 40 replacements from Nokia, and Samsung will have a great deal of focus on Bada during 2010. We believe that many other hardware manufacturers will take advantage of the decreasing hardware prices to launch technology shifts similar to those we are seeing from Nokia and Samsung.

And again in 2010 we will see decreasing prices. We believe that there is a large probability that a market player like Nokia will see increasing market shares on a number of markets. We will see the largest price reductions during 2010 in the Smartphone area, where an increasing number of medium-end handsets will be categorized as smartphones.

We think that Apple will announce new mobile products. Their iPhone is now two years old and has reached an age where it will take more than just a facelift to retain the current sales levels for Apple. Apple needs new products for the medium-end market and need to offer something with a slightly different form factor than the touchscreen phone they have been successful with so far. If Apple does not launch new products during 2010, they will experience a massive decrease in mobile phone sales.

2010 will be the year where the Android will receive a great deal of attention.  There is no doubt that HTC have launched some very cool Android products, but the Android market has developed as we predicted: We have seen new market players like Acer and Dell etc, but these market players’ share of the total market is still very limited and will probably continue to be limited next year. In 2010 we will still see the traditional market players driving the volume market.

In 2010 there will continue to be a great deal of focus on mobile phone UIs. We believe that Nokia's new UI for the Series 60 will be a positive surprise and we believe that Nokia will launch mobile phones that combine traditional design with touch screens. The question is not whether ordinary mobile phones will have touchscreens, but how large a share of them will have touchscreens in 2010? How Microsoft will fare in 2010 is difficult to predict. On the other hand 2009 must be considered an annus horribilis for them, one of the few years they would have preferred to skip in Redmond. But then again Microsoft can only move forward in 2010 when they launch their new version of Windows Mobile.

Looking at NFC we think it will start slowly in 2010, but during Q3 and Q4 we will see an increasing number of handsets with built-in NFC. We believe that 2010 will be the year where we see many NFC pilots around the world and we believe that 2011 and 2012 will see an increasing number of mobile phones with built-in NFC.

2010 will be an exciting year for handsets. The keywords will be an increasing number of improved smartphones, increased functionality and increased user-friendliness - and all for less money. On the other hand many operators will limit their subsidies to medium and light customers, which can have a negative influence on the handset market.

The broadband market will be bloody

In the broadband area the biggest winner will be mobile. An increasing number of customers in an increasing number of countries will discontinue their DSL connections and instead use wireless mobile solutions.

An increasing share of the broadband market for connections of up to 5 Mb will move from fixed line to wireless connections. If you want to do business on the broadband market, there will be three customer segments - those that want inexpensive connections, those that want mobile connections and those that require high bandwidth. In 2010, companies that offer wireless connections will come out on top and companies that today offer DSL will try to bundle fixed line and mobile broadband into packages at very aggressive prices.

In countries where operators have underinvested in their networks, sales of mobile broadband will grow at a slower pace and can thereby help extend the lifetime of the DSL market, thereby benefiting the DSL market players. We believe that some countries will see a good deal of negative press about mobile broadband products that do not meet the expectations and promises customers are given.

The DSL providers will try to fight against the mobile broadband providers by using their high bandwidth speeds, flat rate voice, IPTV and mobile broadband bundling. We believe it will be IPTV and flat rate voice that extends the lifetime of the DSL market. Those providers that focus on FTTH will experience massive competition from the mobile broadband providers - but not competition based on the quality of their products, but on the price of mobile broadband connections. This will be a war over mobile broadband customers and will cause massive pressure on prices for the rest of the broadband market.

Doing business on the broadband market in 2010 will most probably be great fun professionally, but this will also be a market where some players will have to admit that they cannot make a profit from the products they are creating, marketing and selling. We will also see consolidation in this area in many countries.

Moment of truth for VAS firms

When we look at the mobile services area we will also see a great deal of focus on app stores in 2010. We believe the information coming from this market in 2010 will be more varied than we have seen during 2009 and we will reach a point where we will be talking about a reality check for that industry. We believe that the reality check will be driven by the disappointing sales that many application providers are experiencing across many countries. In 2010 it will continue to be difficult to develop, market and profit by selling applications via the many app stores that will emerge in the coming year.

The challenge in 2010 will not be the number of services, but rather the quality of services and how to educate the many users on where to find the services that have the greatest value for individual end users. In other words the challenge in 2010 will be finding the few among the many that have the ability and willingness to find and purchase various mobile services for the many mobile phones on the market.

We believe that operators will have a great deal of focus during 2010 on OneAPI and will test the possibilities of showing how they can create a healthy business on future services that take advantage of some of the APIs that operators will open in their networks. Quite simply it will become easier to use the built-in intelligence in mobile networks to develop smart and intelligent services and thereafter use the operators’ IP billing to invoice individual services.

During 2010 we will see a war between the banks and mobile operators regarding how the NFC market should develop. On the one hand the banks are not interested in allowing operators into the payments value chain and on the other hand the operators will try to create a good business model for mobile payments. The largest challenge will be how operators can add value to this market and we do not believe they will find a solution to this problem during 2010.

The market for social media via the mobile phone will also grow significantly during 2010. An increasing number of end users will have access to Facebook, Twitter and Orkut via their mobile phone and that market will grow significantly in 2010. The largest growth will come from those customer segments that have access to the social media that are pre-installed on their phone at the time of purchase - downloading and configuring software on mobile phones will continue to be a large problem at the end of 2010.

Customers will retain power and receive more for less money

2010 will see an increasing distance between what the press write about what they believe is hot and what is not, compared to the customer behavior and what customers are purchasing. When you compare the reality that the press describes with the reality customers live in, there will be a great many things that most of the press will overlook during 2010.

Many will forget the importance that prices have on customers and the influence that this single parameter has on customers’ choice of products. For many customers, the desire for mobility and inexpensive prices will be more important than having the advanced solutions that the press will be focusing a great deal on.

Next year we will see the customers’ unwillingness/ability to see the difference between the different types of products that operators are offering result in pricing becoming more important than it has been historically. On most markets we will see aggressive pricing and that the wide distribution will attract customers. On the other hand we will also see it becoming increasingly difficult for operators to gain larger market shares and that the competition stimulated by customers’ behavior, will also stimulate the consolidation on the telco markets around the world.

Where we will see a positive development is in the use of phones for other services than just voice and SMS. In this area we believe 2010 will be an exciting year, where we also will see more advanced consumption patterns among customers with medium-end phones. We believe we will see many customers behave in a manner that will surprise many experts during the next year and we believe that many customers will realize that they do not need an expensive 400 Euro Smartphone to be an advanced mobile consumer.

Simply put, 2010 will be yet another year where customers retain their power and receive a great deal of value for their money. Some will claim that competition over customers will be so tough that customers will be receiving more than they are paying for.

Good journalism faces tough times

In 2010, the press will continue to have a large role in how the telco industry perceives itself. A great deal of the communication in the press will derive from the USA and be written by American media, who most often do not have their finger on the pulse regarding the telco world outside the USA. The total USA market is still only 7% of the global mobile market.

Many media in other countries choose to blindly quote what they see in English language media, resulting in the American media dominating during 2010 - a domination that is not justified by their work. We can only recommend the media outside the USA enter into a dialogue with their local operators and learn more about how local customers are behaving. In our opinion there is an enormous difference between the mobile market in the USA and what Strand Consult is seeing in countries like Brazil, India, Kenya, China and large parts of Europe.

We believe that a great deal of the press coverage that will attract global attention will be created in large international media, whereafter a great many smaller media will uncritically quote the international media. Even after that, a number of blogs will continue to extend the lifetime and effect of these stories. 2010 will probably see a number of serious trade magazines experienced massive competition from people that do not use the same manpower or research efforts to write the level of serious stories that we have been used to.

Here at Strand Consult we fear that 2010 will be the year where quality journalism will experience difficult times and where many of the industry's stories will have an angle that will make it difficult for people around the world to relate to what they are reading about to the reality they are a daily part of. On the other hand we believe 2010 will be yet another year where Strand Consult will take advantage of our research resources and industry contacts, to continually help change just a little the false reality that you will risk meeting in some media.

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