Strand Consult: "Moment of truth" for handset players

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. 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.

Premium SMS will spread to the mobile broadband market and IP billing will become a natural part of first the mobile broadband and later traditional broadband markets. The first operators will launch these types of services during the first half of 2009 and these will subsequently spread across large parts of the world in 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.

Consumers will discontinue services and change behavior

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 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-line to mobile. 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 choosing 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 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.

Operators will focus on decreasing opex and minimizing 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. 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 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 organization 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.

The mobile broadband focus will be on winning market share and retaining market shares in voice traffic. All operators know that the mobile broadband market will be enormous and will use all means at their disposal to acquire as large a share as possible.

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 in mobile broadband 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 organization. The focus will be on who can produce a voice minute, SMS and a megabyte at the cheapest price. The winners will be the most efficient operators.

Vendors: Winners and losers

During 2009 a great deal of focus will be on technologies. The media will be flooded with stories about DSL, FTTH, femto cells, Wimax, CDMA, LTE, HSUPA, GSM/CDMA-450Mhz, UWB and DVB-H.

We have little doubt that most FTTH providers are having difficulty getting their business cases to work. The big question is whether providers can attract enough customers to achieve a ROI on the enormous investments that FTTH requires.

We believe the mobile 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 femtocells will give. Basically femtocells will increase operators' SAC and opex, but not decrease their capex as many thought would be the case.

Handsets: Moment of Truth occurs when customer chooses

We believe fewer new products will be launched, but those that are launched will represent a wider spectrum. The 'Apple' effect will result in many new and exciting products. But Apple itself will probably experience a greater resistance than expected and unless they launch new products their role might quickly be marginalized - 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 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 experiencing tough times will face worse times and those doing well will do even better in 2009. The largest challenge for the handset-makers 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 handset demand. Customers will want smart products at reasonable prices or alternatively designer products with a high status symbol value. Competition between 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 share. The big question is how large this market will be compared to the smartphone market and whether operators will move focus away from the EUR450 smartphones and over to the EUR350 ultra portable PCs with built-in 3G/HSDPA.

We believe there will be quite a debate regarding NFC for mobile payments, though we do not think this market will be very large in 2009. The question is whether 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 big new thing: Premium mobile broadband

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; 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 for premium SMS. We believe this market will launch in 2009 and literally explode in 2010 and that it will create many new exciting services.

We will also see a number of convergence 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 centralized model, the financially centralized model, the media centralized model and the user centralized model. We have no doubt that it will be the operator-centralized model that will come out the winner in the short and medium term.

There is no doubt that the largest surprises on the mobile market during 2009 will most certainly come from the mobile services market.

http://www.strandreports.com/sw3516.asp

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