2005 – a look back…
2005 is almost over and once again we here at Strand Consult would like to give an overview of 2005 and our predictions of what we believe the coming year will have in store for the mobile industry. There are many people that put forward predictions about what will be happening in the coming year, but we are probably the only people in this business that also take a look at our previous predictions and how close they came.
Fortune telling can be fun, but you should not judge the fortune-teller on what he believes will happen tomorrow, but rather what he predicted yesterday would happen today. We make a living of selling information about the future and our customers judge us every day when they purchase our reports and workshops. We believe it is important that customers also judge their consultants on what they have said in the past.
If we take a look back at the year 2005, it basically developed as we had predicted at the end of 2004. The biggest buzzword was MVNOs and the whole industry focused on these "new" players, either looking at how they could become one or how they could contribute with products, services and solutions to them.
The number of No frill/discount MVNOs exploded and in countries like Germany, Holland and Norway a number of new players launched their copies of Telmore and CBB, the two MVNOs that originally entered the market in Denmark back in the year 2000. Strand Consult has since described this market in great detail and the MVNO market has since spread from Scandinavia to the rest of Europe.
2005 was also the year were we saw a large consolidation, players like O2, Telfort, Telering, Saunalahti, Meteor, Amena, Smartcom etc. were all purchased by companies that either wanted to expand their national - or international - footprint, many with the strategy that big is beautiful.
The market for mobile services is continuing its growth and what were just a few years ago small Premium SMS companies have now developed to large market players that are dominating regionally or internationally.
If you look at the traffic generated from mobile services, the growth has been outside the operators’ portals, the main growth has come from those content providers that have focused on marketing services across networks. One could say that the operators’ portal strategy has failed in generating traffic and thereby revenue that can cover the costs of operating the portals.
In many countries we have seen a drastic fall in prices following the introduction of the new discount concepts that are spreading across Europe, a price reduction that has scared many operators. On the other hand the experience from a number of countries has now shown that this price reductions results in a fantastic growth in MOU especially on the consumer market - lower prices is not the same as lower revenue and can in fact have a positive effect on an operator’s business case.
The mobile market in 2006…
Looking ahead at 2006, if we were to use a headline to describe what we believe will happen over the coming year, the best headline would be "More and better products for the same or less money".
Strand Consult believes that many players will have to admit that the mobile market is going through a paradigm shift and is changing direction. The classic mobile dealer will be facing a new reality, a reality where he will have to add value in the sales phase and admit that the revenue he receives today from selling a contract will be replaced by revenue related to what value his customers generate. One of the few dealers that became aware of this a few years ago and have already restructured to this new way of doing business is Carphone Warehouse, that quarter after quarter is showing how to run this type of business. Their results speak for themselves and we have great respect for Charles Dunstone and his team.
We believe that the mobile stores will strengthen their position in a number of countries, but on the other hand we believe the radio and TV stores will be weakened with their limited selection and lack of focus. They will have a difficult time proving how they can make a difference and offer operators anything else than switching customers - this will affect their sales revenue and the focus the operators will have on them.
We also believe that the many players that today dream of earning fortunes on selling solutions and services to operators and MVNOs will have to redefine their target groups and the business conditions that they are operating under today.
One example of this is the many players that would like to sell Service Delivery Platforms to mobile operators. Sooner or later they will have to admit that the operators are increasingly purchasing these types of solutions on revenue sharing basis and the fact that the operators are becoming an increasingly small a part of the mobile services market and that they will have to find their customers in the future amongst the gateway companies and media companies that are focusing on mobile services.
We believe that the mobile industry's value chain will change, it will become longer and contain more - and more specialised - players and the growth in the number of players and links in the chain will make it more complex doing business on the mobile market.
The year 2006 will be the year of the operators, vendor's will find it more difficult - especially those that believe that all they have to do is to deliver hardware or software at the operators front door and then send a huge bill. Vendors who want to do business with operators will have to understand that they need to go through a restructuring process and will increasingly have to document that their solutions produce results. Many market players are having difficulty documenting that there is a relationship between the price of their services and the revenue it generates.
Consumer behaviour in 2006…
In 2006, the market for discount telephony will explode. Just the number of No-frill concepts that have already launched and those that are on the way, will mean that their share of the market will explode over the coming years. To put it simply, if you do not believe in discount airlines, then you do not need to believe in these No-frill concepts like Telmore, CBB, Simyo, Yess, easyMobile etc.
We also believe it is time to start dividing customers up into three groups. Customers for the discount/SIM Only concepts, customers for the smart, new handsets and customers that hang on to their old mobile phone and the subscription or prepaid solution they are used to. These are the main groups that will be the basis of working with segmentation in the future.
Over the coming year, more and more customers will move from having one handset to having two or more handsets - our figures show that 10 to 15% of European mobile customers now have at least two handsets and this number will explode over the coming years with both increasing handset sales and increasing acquisition costs as a result.
In the consumer segment these large price drops will mean that the operators MOU will grow significantly and will help compensate for some of the loss in revenue and especially countries like Sweden, Finland, Germany, Holland and Denmark will experience this growth.
Corporate customers MOU will not increase at the same rate, business customers use their mobile phones as they always have done - so lower prices will not affect the number of minutes they generate, on the other hand lower prices might help move some fixed line traffic over to the mobile networks.
The year 2006 will be remembered as a consumer year, where the customers gained the largest advantage from the price reductions, the technological development and the new business models that will strengthen the market for mobile services.
The Operators business…
If we look at 2006 from an operator angle, the market will move in two directions. Some operators will focus on the traditional way of doing business with their own shops, subsidising handsets and focusing on developing, marketing and selling mobile services. In contrast to this strategy, there will be the others that will be moving in "new" directions and focusing on bringing down costs and their risk profile, while at the same time using those savings on subsidising and distributing reduced prices per minute. The goal will be to become more agile and thereby more easily be able to navigate a turbulence mobile market.
We believe that the local market structure and group strategy will decide which road an individual operator will take and we believe that there is a bigger possibility for operators to differentiate themselves in this area than through the services they offer their customers.
When we look at how operators will be doing business over the coming years, we believe they will have five focus areas: customer retention, outsourcing, consolidation, new business models and discount/No-frill concepts.
As operators experience how increased acquisition costs combined with falling prices per minute affect their business case, they will start focusing more and more on customer retention - it will become vital to be able to hold on to their customers - especially their good customers.
In connection with decreasing their costs and with some of operators focusing on their core business, we will experience an increased focus on outsourcing. Operators like 3 have done it in Italy and England, Telering and One have done it in Austria and Base have done it in Belgium - this is just the beginning of what many operators will be doing over the coming years. We will experience that the infrastructure providers will move from being system providers to being service providers. The possibility of sharing infrastructure with a service provider can also help bring down production prices and push up profitability.
The consolidation we have seen in 2005 will continue and spread across countries, regions and operators. Even though there are not many operators left in Europe that are on their own, there is still the possibility for existing operator groups to redefine which markets they want to focus on. A good example of this is Vodafone's sale of their Swedish operation to Telenor.
We also believe a number of operators will redefine their role in the mobile value chain and that outsourcing is one way of doing it - so that some tasks can be solved by others by giving them a share in the revenue stream the service generates. Premium SMS has already shown the way for many operators, so why should that model not spread to other areas?
We also believe a number of operators will develop new business models to strengthen their business. New business models will focus on rewarding people that want to develop and market 3G services to customers - it will be lucrative to be able to generate traffic that operators need for their networks.
We also believe that most operators will launch their own discount/No-frill brand to compete against the MVNOs. This is a natural move once they realise that there is a customer segment that are demanding these services, so why not launched it themselves - instead of letting those customers move over to some random MVNOs? The big buzzword will be Discount/No-frill MVNOs.
We believe that in a market with an increasing number of MVNOs, the operators will start moving into the market for MVNEs and start offering customers technological platforms that enable them to easily launch a service provider/MVNO company.
As the number of Service Providers and MVNOs increase, we will see an increasing focus on sub-brands. Some operators will use the same strategy as KTF in South Korea, TDC in Denmark and E-Plus in Germany already have, moving from a single brand strategy to a multi-brand strategy. The challenge is to keep the balance between the marketing costs and the business case one creates.
We believe that Vodafone will focus on high-end customers in mature markets and use their large cash flow to expand on emerging markets. We believe that TIM most likely will leave South America, or alternatively enter into a larger global consolidation. A player like American Moviles might use their large footprint in South America to enter into an even closer partnership with Vodafone. Telenor will continue to expand in countries like Pakistan and Bangladesh and maybe even more countries in Asia. We also believe that TeliaSonera will have to redefine their role - it is difficult to see where they will show growth in the future and how their shareholders can look at them as anything else but a bond. One of the operators that will be a role model for those operators moving in the opposite direction from Vodafone is Tele2. We think people will perceive Tele2 in the same way they see Telmore and other No-frills/Discount concepts - a market player with low costs and a handsome cash flow.
2006 will be a MVNO / Service Provider year….
2006 will without a doubt be a year where the service provider/MVNO market will explode. What happened in 2005 is only the beginning of the paradigm shift that the mobile sector is experiencing. We believe that No-frills/Discount is King and the number of Telmore/CBB copies will explode all over the world.
We also believe that most Internet providers will move into the mobile market and use their existing customer base to offer solutions where they can offer their customers a combination of IP telephony and mobile telephony - not as a UMA solution, but as an offering where you have the same voicemail on your fixed line and mobile phone.
We will also experience a number of MVNOs basing their business on Value Added Services. We believe that most of these companies will have a hard time reaching critical mass next year - they will most probably only have the same level of success as Nokia's N-Gage.
In countries like Germany, Denmark, Norway and Holland we will see a consolidation, where service providers/MVNOs merge. On some markets some of these consolidations can result in some of these players having a go at being a MVNE and expanding their brand to a sub-brand strategy, where each brand is targeted towards certain customer segments.
We have little doubt that it will be the operators that control that market and we believe a number of operators will be very active as MVNEs - they see the service providers/MVNOs as a new distribution channel with lower distribution costs.
The handset market, more, better and cheaper…
The market for mobile telephones will be very exciting in 2006 - to put it simply, it will be the year where we got more, better and cheaper handsets. It is becoming more and more like the PC market and the development we have seen on that market over the past 15 years.
We will see more functionality on the handsets, some will become very popular - while others will flop - we believe that manufacturers will compete on who can send out the most press releases with the headline "The world's first mobile telephone with…" it will not be the customers driving this market, but rather the technology companies trying to stimulate demand using smart handsets with new functions.
We believe the handset market will split into three segments - those customers that purchase and use the newest technology, those that focus on having a sensible handset and those that just see their handset as a tool for speaking in and sending SMSs.
We believe the market for customers with two or more handsets will explode and many handset manufacturers will make good money on customers’ demands for new and smart handsets with exciting functionality.
The Smart Phone market will be in the segment where the customers have multiple handsets. It will be the customers that purchase a combination of smart phones/small designer phone or PDA handset/less handy phone - the demand in this segment will be high and the replacement frequency will be big.
We believe the growth in the Third World will make the average handset price drop, the growth on the smart phone market is not large enough to compensate for the price reductions we will experience on handsets in emerging markets and on the market for classic handsets.
We believe there will be fewer players but more brands and handset models. ODMs will experience a demand for their products and services. 2006 will most probably also be the year where we will see other handset brands than just the traditional brands. Why not a Manchester United mobile phone or a Ferrari or Hugo Boss - there are many possibilities.
We believe Microsoft will come out of 2006 much better than many expect - the corporate market and the possibility of having push e-mail by combining Exchange 2003 will drive their success and a MS based handset. Microsoft will most probably overtake RIM as the leading mobile e-mail provider.
One subject that will be on everybody's lips it is the battery - all these new functions need power and the physical limitations of today's battery technology means that it will be difficult to deliver enough power for a whole day's work on an advanced handset.
Mobile Services will explode in 2006…
The market for mobile services will continue to show impressive growth rates in 2006. The breadth of the services will impress many and now it is not just ring tones and logos, but also a great many other services that the customers will be choosing and purchasing.
Mobile e-mail will be the corporate application number 1, but we also believe many private customers will use their mobile handsets to send and receive e-mails to family and friends. We believe that many companies will spend 2006 giving their employees access to mobile e-mail and at the end of the year, many will be asking themselves whether they really needed a Blackberry handset from RIM to check mail - and RIM might be asking themselves what went wrong. Alternatively they might be spending the year entering into alliances with a number of handset manufacturers.
Many will be talking about Off & On portal sales of services. We believe that discussion is too undifferentiated and we would rather talk about the operators portal strategy moving from a single portal to a shopping mall. We believe that today's common strategy where many operators are focusing on having one portal using the motto "one size fits all" will be replaced by operators launching portals targeted at different segments and that they then will unite these portals together in one large shopping mall.
The market for services sold through content providers will also grow significantly. We will see that the consolidation that started in this area with Aspiro, as a major player will spread across the rest of the world and central Europe.
Even though we will experience a consolidation, we will also see a great number of new players entering the market - players that will contribute with the innovation that the mobile services market really needs if it is to grow in the future.
We believe many customers will be disappointed with music downloads via the mobile operators networks directly to mobile handsets - we have little doubt that side loading from a PC to the mobile phone will be much more popular than direct downloads, even though many operators will use cheap music downloads to try to profile and market themselves.
Mobile TV (DMB, DVB-H) will be a popular conversation piece, but as they say in Korea, it is difficult to see how the business model would work for the operators - how will the mobile operator earn money on the pay TV and satellite TV market? Content is expensive and the acquisition costs and churned are high. The question is whether 2006 will be the year where people start asking players within the mobile TV area what went wrong - we know that mobile TV leaves more questions than answers and the experiences from Korea so far are most certainly not positive, quite the contrary!
Likewise regarding mobile convergence – what about the merging of the IP telephone and the mobile telephone - yes that is a technical possibility, but where are the business models, which handsets can one offer customers etc. There are many questions one could be tempted to ask, for example whether this is not just a dream from the technology companies to be able to keep the old fixed line net alive? The advantage of low IP prices is receding as prices of mobile telephony drop and flat rate is introduced in a number of mobile networks.
We believe that streaming content will be big in 2006. The combination of WAP push and a link to a page with exciting content of up to 2 to 3 minutes will become very popular. Content can be many different things, some serious like watching a news event, to entertaining content like movie trailers or mobile marketing - there are many possibilities and few limits.
But the industry and especially the players in the media world will have to take a closer look at the term mobile journalism. Content needs to be designed, produced and edited so it fits onto the handsets available on the market. You cannot watch a whole movie on a mobile telephone - that would be like watching a movie through a keyhole. Nobody wants to waste their time doing that – maybe except for a few teenage boys…
If you look at who will be creating the headlines in 2006, it will probably be Europe that gets the most - but a market like China will receive a lot of attention in the New Year. The growth it will experience, the customers’ ability to use the phone for other things than speech and the fact that it in many ways is a healthy mobile market will put a lot of focus on that part of the world.
We believe that South America and especially a country like Brazil will be exciting. Vivo/Telefonica need to find a solution for their CDMA challenges, the way ahead for them is not WCDMA - their ARPU is too low and their SAC to high to make a sensible business case from that. We believe that either Telefonica will have to pull out of Brazil or alternatively purchase players like Brazil Telecom and Oi and move into the GSM world in that way. The challenges are enormous and GSM is winning market shares daily at the expense of CDMA.
We believe that Eastern Europe will become an exciting region, the large operator groups want into this market and we believe that the events can easily develop in the same way as we have already seen in the Czech Republic where Telefonica, T-Mobil and Vodafone are fighting over the customers. The question is on what level these operators and the regulative authorities of this region will focus on the Service Providers/MVNO market.
One thing is certain, 2006 will be just as exciting as 2005 - we believe it will be even more exciting. Isn’t it great working in this industry? At Strand Consult we love it!