2018 Predictions - Strand Consult
Another exiting year has flown by. It is our annual tradition to make our predictions for the coming year. This is our 17th year of making predictions. We invite you to see our predictions from past years.Looking at investments in Europe versus United States, it is clear that the right framework conditions can stimulate investment and innovation. The question is how long European politicians continue to promise dreams of 5G while they become a reality in the US and parts of Asia.
What Happened In 2017 - The paradigm shift became more apparent to telecom companies and investors
As Strand Consult looks back on the past year in the mobile telecommunications world, we are proud of our research which has contributed to many academic and industry conferences around the world. We are honored to be invited to share our knowledge to an array of global stakeholders, including telecom regulators, boards of directors, financial analysts, journalists, industry professionals, professors, students, and the public at large. We visited many countries to contribute to the evolution of the industry and its regulatory modernization.
In 2017 we exposed how politicians and regulators make policy not on evidence, but ideology and idiosyncratic preference. We see counter trends: some countries want to open the door for markets to drive a dynamic future while others want to double-down on failed policies of the past. Some operators accept bad regulation as part of the new normal while others challenge it in court. Financial analysts incorporate regulatory burden as one of the parameters for assessment, and CEOs need to be ready for their questions about the impact of regulatory policies. As such, knowledge of public affairs and regulation is becoming increasingly vital for CEOs, and in 2017 many companies tapped Strand Consult for its expertise in business models, market conditions, and regulation.
The regulatory world was brutal in 2017
Around the world, and especially in the EU, regulation is effectively a re-nationalization of networks, but without financial compensation to the shareholders. Policymakers have made rules for mobile coverage, faster broadband, free roaming, data protection, and intellectual property, many rules which negatively impact shareholder value. Moreover, regulators justify their actions by saying they are protecting the Internet and preserving democracy, but the real question is whether it’s a cover for politicians to take control of communication and shut down their political enemies. Brexit, Trump, and Emmanuel Macron success frighten many underperforming politicians.
The threat to the free and open internet is not the telecom companies that build and operate networks, but the governments that want to control people and the information they see. Political elites are also threatened by the internet’s capabilities for empower people through platform as well as their ability to create a media outside of national broadcasters. As such internet platforms are also a target for government regulation.
This year many companies and their trade associations had difficulty challenging bad regulation. But some countries, such as the USA, were lucky. FCC canceled its Title II internet regulation and shifted the responsibility for the internet back to the consumer protection/competition authorities FTC. Strand Consult supports this decision. If anyone doubts that competition authorities are not effective to challenge telecom companies, they should look no further than Margrethe Vestager in the EU.
On our workshop Communications strategies for next generation public affairs and regulation, Strand Consult describes the new reality and how operators need to reinvent their communication with policymakers.
Strand Consult’s predictions proved right again in 2017
This year is Strand Consult’s 17th year in making predictions, and 2017 proved us right again. While many of our predictions are dark, we tell the truth. For example, we correctly predicted that 2017 would bring some of the worst news in Ericsson's 140-year history. Indeed, many financial analysts and investors have lost their appetite for the EU, a region whose government continues down the road of being left behind.
It is unfortunate that many of our predictions of lost investment are negative for industry and society. At the same time many of these outcomes could be avoided if operators were better communicators. On the positive side, our expectation that the US would return to an environment that supports investment proved true. The new leadership of the Federal Communications Commission (FCC) focuses on closing the digital divide and acknowledges that the Federal Trade Commission (FTC) is better at protecting consumers when it comes to free internet. There are also indications that some Latin America countries are modeling their future on US, not EU, telecom policy.
We also got it right on the service side in 2017 predicting that the use of voice-based products and services such as Amazon Echo Dot and Google Home would explode. The transformation from the “Blackberry” keyboard to “Voice to text” computer has happened in few years. Increasingly voice is used to search for content and to control devices, as it is to compose email and SMS.
In 2017 Android further cemented its market position, while Microsoft pulled out of the classic mobile phone market. After many serious attempts, including the acquisition of Nokia's mobile phone business, Microsoft recognized in 2017 that they did not have the muscle to create a serious alternative to the Google and Apples ecosystems. Meanwhile China retains its strength in device development, and this extends Android’s market position. China has made the smartphone increasingly affordable to larger number of people globally.
The promises made in 2000 about 3G took a long time to be realized, but 2017 was in full swing with robust hardware, user-friendly software, and resilient telecom networks. While the technological development is encouraging, the move by many governments to restrain the market’s evolution through network neutrality and other misguided regulation is not. Regulators in their myopic focus on speed fail to recognize that speed is growing faster than consumers can consume it. This raises question among operators about the demand for 5G, its business models and revenue projections.
2017 was a good year for makers of technology aimed at end-users, it was not a fun year for those who make technology for telecommunications companies, nor was it good for investors in telecommunications infrastructure. The regulatory animus which prioritizes content and tech for end users but not the underlying networks, is unhealthy from a societal point of view, particularly for the 5G gigabit society politicians like to dream about. It takes money to make money and without new networks the dreams won’t become a reality.
The fast version - What will happen around the world in the next 365 days
European politicians will spend a lot of time boasting about their technological ambitions; the message will be "Make Europe Great Again." But for all the talk, the dream will not become a reality for Europeans. The EU will continue to fall behind the US and East Asia, as these regions implement the 5G networks that EU politicians can only dream about.
The US will be an exciting region to watch, a reset after the 2015 Title II debacle. The combination of tax reform and regulatory right-sizing will boost American operators in 5G, IoT, and wireless broadband technologies. In 2018 there will be courtroom drama: a showdown between the Justice Department and AT&T over its attempt to acquire Time Warner; the Supreme Court’s decision on whether to hear seven petitions against the FCC’s Open Internet rules, and states suing the FCC for overturning them. Fall elections will serve as the first nationwide litmus test of the Trump administration.
Latin America, Attention will be paid to Latin America's limited ability to develop local services and limited level of investment. A culprit may well be that key networks are still state-owned, frustrating their entrepreneurial abilities. A possible pendulum swing is afoot, and privatization is long overdue in many countries.
Africa wants to get more investment in the networks that are the foundation of the modern society, and consolidation is needed among many players across a region with high penetration, high churn, and low ARPU. Political and regulatory pressure adversely affect the market.
Asia is probably the most exciting region in 2018 as China, South Korea and Japan will take another leap into the future. China is grooming Huawei to be a one-stop shop for telecommunications, enterprise solutions, smart cities, and energy production. By 2018, Huawei will be not only largest manufacturer for telecom equipment but solar panels as well. India, once a textbook success story for its mobile market liberalization, is a basket case. Increasing broadband regulation imperils investment, and performance in infrastructure deployment and internet adoption lags.
2018 – A year in which increasing regulation threatens new technology
Recall the paradigm shift created by Apple and Android; it revolutionized the form factors of the smartphone. Google has powered many innovations which have driven down the price of technology for consumers.
2018 will likely see new technology with high user value for the mass market. This development will likely increase the demand for connectivity, subscriptions, bandwidth, software and hardware based SIM cards. But the question remains on how to build the additional infrastructure (primarily 4G, 5G and Nb-LTE) to accommodate the increased traffic in way that satisfies shareholders. Strand Consult is not confident that most operators will experience increased revenue and earnings because of increased traffic and new technology.
The Internet of Things (IoT) market will likely grow significantly, as new services are deployed on top of old technologies, making the transition for consumers easier and cheaper. One example is devices for cars On Board Diagnostics (OBD) port which transforms old dumb cars into intelligent smart cars, a backward enablement for analog vehicles. Consumers will use their smartphone to make their car smarter and the driving experience better.
ODB solutions providers collaborate with mobile operators such as T-Mobile, Telia and others on combining technologies for new services. 2018 will prove that intelligent homes and cities can be realized incrementally without a complete overhaul of network and technology.
In 2018 many operators will declare the decommissioning of 2G/GSM and even 3G/UMTS networks and move toward 100% at 4G/LTE networks. The development will be driven by the positive experiences with 4G while the number of cheap phones that support different 4G frequency bands increases. The savings that an operator can achieve by operating a clean 4G network is so large that operators will try to expedite the processes. The case study is the American Verizon with its successful migration from CDMA to 4G/LTE, achieved faster than promised their shareholders.
In 2018 more Europeans will realize that politicians’ promise of 5G is hot air. The misguided net neutrality rules on the books and its heavy-handed privacy regulation coming online in May, the EU will likely be a dead zone for investment and innovation. The EU might be lucky to have some demo projects, but real services will be rolled out the US and parts of Asia.
Distribution channels will evolve in an interesting way
The world of connectivity is converging and diverging simultaneously. Existing value chains are breaking up while new ones are being forged. Telecom was once a vertically integrated industry in which the same firm sold network access, service, and device. This model has been disrupted at every level.
Diversification of the value chain has brought opportunity to market entrants. Consider how premium SMS services brought new ringtones, logos, Java games and TV voting or how MVNOs created new distribution channels. 2018 will bring more partnerships between operators, IoT providers, MVNOs, MVNEs and other players.
Strand Consult believes that the number of operators which can develop their own IoT services will be limited. Many operators will recognize that opportunity in offering solutions for global IoT connectivity.
Few competitors are teed up to challenge the dominance of Google and Apple in the app store market. While there is room for apps with unique offers, the clear majority of app-based services will be delivered through the two app stores that Apple and Google own and operate. In 2018 app store bottlenecks and related platform algorithms will get regulators’ attention.
Platforms will face big challenges in 2018
Google turns 20 years old in 2018. While Facebook, Amazon, Apple and other platform companies have been around for a while, they are bigger than most countries in users and revenue. Governments are struggling to figure out how to handle these players. Denmark has dispatched a Digital Ambassador to Silicon Valley with responsibility for these actors, as they are digital countries in their own right. Some believe there needs to be global government for these actors, a United Nations of Cyberspace as it were. There is no doubt that the EU wants them regulated.
It’s interesting to think about regulators’ assessment of the problem. They said that to spawn the next Google, we need net neutrality rules. Netherlands, Slovenia, or Chile have had these rules for almost a decade, and no Google has emerged from them. Indeed these countries have reduced the amount of internet innovation they made from before rules were adopted. If anything, net neutrality regulation has only strengthened the power of the existing platforms, giving them artificial subsidies in transmission and protection from competition.
It interesting that competition to platforms has emerged in those places with no net neutrality rules at all, namely China. Its plaforms such as Alibaba, the Amazon of China, and WeChat, its WhatsApp are getting smarter, better, and more integrated into the market by Chinese phones.
Many authorities will likely take up formal platform regulation in 2018, using net neutrality as a template. Already Democrats in the US have called for it. Platform neutrality regulation encompasses a grab bag of concepts such as transparency, hate speech, fake news, safe spaces, brand safety, content take down, the right to be forgotten, and market power. The most important is the goal of platform regulation is to stop users from consuming information that leads them to make the “wrong” choice when they vote, and in this regard, policymakers believe that they know better than voters themselves.
France’s telecom regulator ARCEP presented coherent “platform loyalty regulation” as part of its annual net neutrality report to BEREC and the European Commission. EU regulators want to reduce the market power of US firms, a goal not otherwise achievable by law or innovation by European firms. The goal is similar for the General Regulation for Data Protection (GDPR), a gambit to make the EU standard for data protection the global one, regardless of whether there is merit to the approach.
Finding a revenue stream from these platforms is the holy grail for policymakers. 2018 will see more on focus on taxation. Facebook says they will now move to a local sales structure, providing offices to support local advertisers and returning tax revenue for countries. While Facebook has customers in 195 countries but offices only in 30, the change is likely not significant. The company reported that the shift probably not will increase their overall tax burden.
There is no doubt that some will take pleasure in platforms getting their just desserts, but the truth is that increasing regulation is not good for consumers and citizens. Regulation of fake news is often a cover for censorship. And increasing the burden on platforms is not a selling point for reducing regulation on telecommunications. The government just grows more entrenched overall.
Business models – it’s all about money or is it?
The basic idea of running a business is to generate revenue that covers marginal cost and fixed cost. Entrepreneurs find opportunities and create business models to make products and services accessible to more people. Advertising, a business model in which a third party pays the consumer’s cost to access content in exchange for an opportunity to communicate, is an important historical model. Without advertising there would be a lot less content in every medium.
Just as advertising fertilized content for radio, TV, print, search engines, and other media, sponsored data can help the broadband market by reducing the cost to end users and increasing the means content providers can reach audiences. But policymakers have artificially repressed this development with net neutrality, the incongruous argument that restricting the freedom of partnerships and pricing somehow improves consumer welfare and innovation. With such restrictions removed in the US, 2018 will be an interesting year to see whether consumer-centric models emerge. EU regulators on the other hand, will double-down on their net neutrality rules, attacking offers that attempt to give consumers free and reduced-price access under yet another preposterous argument that restriction of expression leads to media diversity.
The advertising model is analogous to phone subsidies, which increased the number of people with mobile phones. Increasing penetration through subsidies not only helped bring down hardware costs for consumers, it had the ancillary benefit to create the market for mobile traffic and networks and later a market for apps.
2018 will see the rise of the Chief Privacy Officer. Indeed, the GDPR requirements are expected to drive 75,000 new jobs as firms of 250 or more must conduct audits and hire staff to comply the EU regulation. While some suggest these actors could help firms use privacy to their advantage, it is also possible that privacy professionals, performing to regulators’, not consumers’ preferences, could doom the new ideas that emerges. The GDPR offers no safe harbor to test new personal data-based innovation nor relief for a failed attempts to create privacy-enhancing technology.
It’s not market failure that brings regulation, but market success
Strand Consult had little focus on regulation in the past. In the early days of the mobile industry, policymakers largely kept their hands off the market to let it grow. Indeed, the mobile industry was considered the manifestation of market competition, and governments reaped billions of dollars and euros with expensive spectrum auctions. Alas how that dream has been dulled by regulation of every kind (roaming, wholesale, access, neutrality, transparency, privacy, security, etc.) as well as fixed line regulation that is applied to mobile. Nobel economist Hayek described it best: it’s not market failure that brings regulation, but market success. CEOs should ask themselves which regulations they faced a decade ago versus today. With the explosion of regulation, Strand Consult has evolved its business to address its clients’ new challenges. With reports, workshops and consult, Strand Consult helps its clients, including governments, bring an evidence-based approach to telecom regulation and policy.
Conclusion - 2018 will be a challenging year for creative people and innovative companies
The year 2018 will be interesting. There will be tons of new solutions that can add value to society, but there will continue to be a challenge that increasing regulation will limited the possibilities for business models. The price of technology has fallen so much, user interfaces are so user friendly that what should now be focused on is how to create a number of sound business models that can stimulate adoption.
We expect more information to emerge in the early part of the year. CES in Las Vegas, and Mobile World Congress are two events which will set the tone for 2018. Strand Consult expects another exciting year and looks forward to contributing with serious knowledge and analysis to help our customers to navigate in a complex world. We also look forward to educating policymakers with a more realistic view of the industry.
We hope these predictions give you inspiration for 2018. It is our 17th year in making predictions, and we try to inform, delight, and challenge our audience. We invite you two see for yourself whether we were right over the years.
John Strand, CEO