The way in which the world communicates has changed more in the last decade than in all previous history. In 1999, more than a century after its invention, less than one in six people in the world had access to a telephone of any kind. This year, seven in ten people have a mobile phone.
According to IBM's 2009 global consumer survey, after their homes most consumers list the mobile phone and broadband as the next two essentials they are most unlikely to give up. In emerging markets the mobile has even become the single most transformative tool for development - delivering public information and advisory services to rural communities as well as mobile payments and money transfer services in countries where banking services are often under-developed.
Emerging markets demonstrated their ability to make profits from low ARPU users. In 2008, average EBITDA levels for the mobile telecom industry in South Asia ranged from 45-65%, with ARPU levels below $5. This was driven, in part, by significant increases in minutes of use and innovative cost-management models. For example between Q3 2008 and Q4 2009, Bharti roughly doubled the total volume of traffic on its network, from over 65 billion to 130 billion minutes per quarter.
However, emerging market expansion has begun to falter, just as communications revenue is stalling in advanced countries. Although increases in mobile internet usage offer a glimmer of hope - along with operational challenges - the telecom industry faces some serious questions. Where will future growth come from? How will the industry evolve? Where does the data indicate the industry is heading?
Looking out to 2015
Traditional approaches to predicting the future based on prefabricated world visions of economic and geopolitical trends are unsuitable for such a fast-changing industry as telecommunications, the evolution of which has taken many unprecedented turns over the past decade.
Giving the ongoing uncertainties, IBM undertook scenario envisioning, that enables the industry to assess alternative contrasting futures distinctly different from the present. The findings built on an extensive fact base, including interviews with 60 senior executives from nearly 40 telcos, over 7,700 consumers surveyed in nine countries, including India and China, and extensive research by the IBM Institute for Business Value.
The study identifies important industry trends that are highly predictable, combined with critical variables of which the outcomes are far from certain. Mapping the extremes of the possible outcomes reveals four contrasting scenarios depicting what the industry could look like five years from now.
- Survival Consolidation will occur as a result of reduced consumer spending leading to revenue stagnation or decline. Investor' loss of confidence in the sector produces a cash crisis and elicits consolidation.
- Market Shakeout will happen when, under a prolonged economic downturn or a weak and inconsistent recovery, telcos are forced to disaggregate their assets into separate businesses. The market is further fragmented by government, municipalities and alternative providers such as utilities.
- Clash of Giants results from carrier cooperation and alliances (such as GSMA's Rich Communications Suite initiative) that pave the way for global consolidation in response to increased competitive threats from over-the-top providers and device manufacturers.
- Generative Bazaar transpires when infrastructure providers integrate horizontally to form a limited number of network cooperatives that provide affordable and unrestricted open connectivity to any person, service provider, device or object, unleashing a wave of generative innovation.
Today there is skyrocketing demand for services, traffic growth is going through the roof, customer numbers and volumes are at an all-time high. Significant structural, corporate and competitive change brings further opportunity. The complicating factor is that telco revenues and profits do not reflect this boom.
Survivor Consolidation, and to a lesser extent, Market Shakeout, are clearly less attractive scenarios for telcos to benefit from this opportunity. Both scenarios exhibit continued low value realization from the industry and at present are the predominate outcome trend. To return to growth and improved value realization, the telecom industry needs to act collectively to create the conditions necessary for the more dynamic and profitable scenarios of Clash of Giants or Generative Bazaar.
They can begin to accomplish this through greater global industry cooperation on common capabilities and platforms to improve competitiveness with global OTT providers. The role of service providers can be enhanced in adjacent vertical markets, enabling new business models in health, smart grids, banking and more. Further growth can be achieved through pervasive, open connectivity for any person, object and a multitude of connected devices. Telcos must play a stronger role in stimulating third-party innovation on open connectivity, and platforms and must create value-added platforms and services that enhance the OTT propositions, yet enable the telcos to capture a greater share of the OTT, VAS and adjacent industry value chains.
It is important to note that these scenarios are potential outcomes for markets at national and regional levels triggered by a distinct combination of factors across several dimensions: economic/financial, technological/investment, regulatory/competition and market-place/customer-related.
Survival Consolidation is certainly not an attractive scenario. Due to prolonged economic downturn, communications in emerging countries will remain voice-centric. The number of minutes of use on the mobile is increasing, but revenue growth will stall. Operators fail to grow beyond the $5 ARPU voice market, the bottom of pyramid (BoP) proves unviable to cater to given the economic situation. As a consequence, emerging operators growth stalls by 2015 and triggers consolidation in large (e.g. India) and fragmented (e.g. Africa) markets alike.
Because of the lack of financial capabilities, internet and data usage is limited to large cities with sufficient data networks. But deployment of basic mobile data services, such as mobile money and information advisory services, has good potential. We already see some successful mobile money schemes, among others Gcash and Smart Money in the Philippines, Wizzit in South Africa, Celpay in Zambia and, above all, M-Pesa in Kenya, which has now seven million users in a country of 38 million people. Examples of information advisory services are mKrishi in India, CellBazaar in Bangladesh and Nong Xin Tong in China, providing agriculture information, advice and trade support.
In the Market Shakeout scenario, where the market is stagnant or even declining, the vertical integration model is disaggregated and the industry is further fragmented by initiatives from other parties that extend ultra-fast broadband to particular areas. Operators are looking for growth through premium connectivity services sold to application and content providers and device manufacturers.
Voice revenue is stalling and emerging market operators will focus primarily on growing data usage of their current voice subscribers rather than growing their voice offerings to BoP. Their limited investment capabilities for the required data infrastructure fuels network outsourcing models for most operators. Operators such as Bharti are already outsourcing their networks to equipment suppliers as Ericsson and NSN.
MVNOs will emerge to offer low-cost data services to cater to specific local market needs such as mobile money and health care. Also parties such as Nokia will search for opportunities here. Nokia already announced plans to target emerging markets with its Nokia Money service. Where services are not profitable, organizations as NGOs might come in to subsidize particular offerings to reach certain communities.
Clash of the Giants
In this scenario, where the addressable market is expanding, mega carriers are looking for growth through selected verticals, such as e-health and smart grids, for which they provide packaged end-to-end solutions. Global industry collaboration on common capabilities and platforms must improve competiveness with global OTT providers, which 76% of telecom executives identified as the greatest threat to their business over the next five to ten years.
For instance, the world's largest mobile operators, including AT&T, Vodafone, Orange, Bharti, China Mobile and Orascom, team together on a wholesale platform for mobile applications in response to the success of the app stores driven by the likes of Apple.
Emerging market operators focus on maximizing their asset utilization by growing voice revenues through expanding their customer base to the remaining population at the BoP, together with data services packaged in such a way that they meet the needs and tastes of lower-income consumers. Extending communications to many more people is possible as ultra low-costs handset penetration increases.
The battle for cost efficiency favors the emergence of powerful large-scale operators in emerging markets. Bharti has already taken a step in this direction with the recent takeover of Zain's African operations, transforming the company into a truly global telecom company with operations across 18 countries and a customer base of around 180 million subscribers. Orascom is an example of an emerging market operator actively participating in the consolidation process in advanced markets.
Generative Bazaar depends on widespread deployment of ultra-fast broadband with open access, which serves to accelerate the explosion of new services and applications.
Expanded access to mobile services in emerging markets fuels economic development, which in turn creates more wealth for the BoP and drives further uptake of data services in a virtuous circle. Data services uptake is also facilitated by an open innovation approach that enables application and device developments that cater to emerging market specificities.
3G networks are already expanding in China, and the number of FTTx subscribers in China is expected to top 50 million in 2012. China's 3G and FTTx rollouts by state-owned carriers are part of the government's economic stimulus plan.
Some governments are stimulating or funding open access networks to spur economic growth. Singapore, though not an an emerging market, is a country where such deliberate state intervention can be found. The government is rolling out the open access Next Generation National Broadband Network (Next Gen NBN) that will offer pervasive, ultra-high connectivity by 2015, supporting a range of next-gen services, such as high-definition video conferencing, telemedicine and immersive learning applications.
There is compelling evidence that the telecom industry is facing one of its biggest inflexion points. So the threat posed by the OTT providers should be analyzed to develop cooperative value creation for all players. The value chains of adjacent industries, driven by smarter planet initiatives, are now more open for the telco to capture a greater share of these industry value chains and deliver improved outcomes. The alternative is to see the trend continue toward lower value realization.
The complete scenario study can be found at www.ibm.com/telecom.
Nick Gurney is the global communications leader for IBM Global Business Services; Rob van den Dam is the global telecommunications industry leader within IBM's Institute for Business Value