Forward
Welcome to the 2008 edition of the DTT Global TMT Industry Group’s Telecommunications Predictions.
As predicted in last year’s Telecommunications report, concerns about inadequate capacity in the networks that underpin the Internet grew, particularly as video streaming and downloading continued to increase in popularity. The net neutrality debate became less charged, as opposing sides started to take a more constructive stance. Broadband appliances, particularly games consoles and connected digital music players, helped to shift the center of gravity of the broadband market away from the PC, albeit slightly. As predicted, mobile television failed to gain significant traction, with some services ramping down or shutting down entirely due to weak demand. Many mobile operators accelerated their deployment of technologies designed to boost indoor coverage, and new data suggested that in-building usage was greater than ever. IPTV struggled to differentiate itself from regular television, and overall, demand for the medium remained niche. The mobile data industry continued to be dominated by exchanges of small packets of data, such as messaging and ringtones, rather than large multimedia files. Fixed operator triple-play launches were widespread, but discounting remained the main marketing tool – leaving the proposition’s power to deliver profits open to question. The connectivity chasm grew ever wider, as the wealthy enjoyed increasing connectivity options, while the poor were left with few, if any. And free offers continued to be used across the sector, although their impact on penetration growth, particularly in some of the world’s most developed markets, was limited.
The outlook for the telecommunications sector in 2008 is similarly varied. This year’s Predictions cover: the impact of a possible economic downturn on the telecommunications sector; the growing viability of a machine-to-machine market, catalyzed by the imminent arrival of the $10 mobile phone; a more positive approach to disruption in the telecommunications sector; how to make the convergence of GPS and mobile technology a commercial success; the growing importance of communications to new media companies; the rise of mobile network sharing as a means to get mobile indoors; the increasing importance of making communications accessible to all consumers; the rise of the emerging market global mobile titan; the uncertain relationship between bandwidth and revenues in the broadband market, and the outlook for GSM as it reaches 21 years of age.
I am often asked how the DTT TMT Global Industry Group’s Predictions differ from the many similarly titled reports produced by other organizations. I believe Predictions has a unique combination of objectives and methodology.
The Predictions series has been designed to provide a diverse selection of views and thoughts that challenge, inform and engage industry leaders and executives. It neither aims, nor claims to be a comprehensive forecast of every anticipated event. Its aim is to provide a point of view, but by the very nature of predictions, the outcome may differ from original expectations.
The inherent unpredictability of the global telecommunications sector can be mitigated by having a robust methodology that synthesizes multiple sources of information and a wide body of opinions that require thorough peer reviews. The 2008 series of Predictions has drawn on internal and external inputs from conversations with member firm clients, contributions from DTT member firms’ 6,000 partners and managers specializing in TMT, and discussions with industry analysts. As last year, Predictions for the telecommunications sector has been able to draw upon the insight gleaned from a series of 20 interviews with leading executives from around the world on the key industry theme of digitization. These interviews have been published in a book, Digital Dilemmas, available online (www.deloitte.com/tmt ).
I hope the result of our endeavours provides you with plenty of food for thought for the year ahead. On behalf of DTT’s Global TMT Industry Group, may I take this opportunity to wish you all the best for an enjoyable 2008.
Igal Brightman
Global Managing Partner
Technology, Media & Telecommunications
Executive Summary
What appeared to be at first a problem affecting the US sub-prime mortgage sector may actually lead to a wide-reaching economic slowdown. This may in turn cause a downturn for the telecommunications sector in 2008. Equipment manufacturers may be hit by customers deferring equipment purchases. However, service providers may be protected by the world’s dependence on telecommunications services and recent price cuts. An economic slowdown may even encourage some businesses to accelerate process changes that require communications. Nonetheless, a downturn may cause businesses and consumers to reduce spending wherever possible, including on telecommunications. Investment in new networks and manufacturing facilities may be constrained by the higher cost of borrowing. The industry should be prepared to confront, or even better, to exploit, this possible outcome. Mobile operators could use the prospect of a downturn to encourage consumers to consolidate all their voice spending on mobile, so forgoing the monthly fixed-line rental. Fixed operators should also consider offering lower monthly rates in return for longer contract terms, in order to stabilize medium-term revenues. Retailers, particularly those specializing in the mobile industry, may have to diversify into related services. For all concerned, but equipment vendors in particular, growth in emerging markets could offset potential declines in the developed world.
The price of mobile phones has fallen sharply and a growing number of models are now priced at under $50. In fact there are plans for the launch of a mobile phone with a wholesale price of $10 in 2009. Lower priced handsets are likely to increase overall mobile penetration rates, which are rapidly approaching saturation point. But as global mobile ownership approaches 50 percent, the growth rate for mobile is expected to slow. The market in developing countries may be constrained by the aspiration of some customers to own more expensive phones as a symbol of their increasing prosperity. However, another market, so far little exploited, could be a major consumer of a $10 mobile – the machine. Integrating mobile connectivity into machines could take the total addressable market for mobile subscriptions to tens of billions. For mobile to be deployed in machines on a large scale, the cost of deployment, as well as the cost of the module itself, should be minimized. Mobile manufacturers should work closely together to develop a single, globally recognized standard that includes specific guidance on size. Businesses will integrate mobile modules into their devices only if standards covering the specifications of the mobile modules themselves and their communications protocols exist.
Over the past few decades, the telecommunications sector has had a strong association with disruption. With the arrival of each disruption, the typical response has been to proclaim the imminent demise of the incumbent technology. Yet more often than not, the incumbent players themselves have tended to benefit most from disruption. VoIP had been expected to kill off PSTN and mobile voice. WiFi networks were supposed to destroy mobile data networks. Some commentators have suggested that WiMAX may bring down telecommunications titans’ data businesses. While the threat of disruption has frequently come and gone, many underlying technologies survive, often thriving within an incumbent’s portfolio. WiFi has become a significant element of mobile operators’ overall service portfolio. VoIP in the hands of fixed incumbents has been deployed as a more efficient means of transporting voice traffic from its point of origination to its destination. The telecommunications industry may realize in 2008 that while disruption is likely to remain, it does not imply the destruction of legacy.
Incorporating new functionality into an existing product does not always add value. Satellite positioning should not become just another technology integrated into a mobile phone simply because the price of the former has fallen to a few dollars. The mobile industry needs to identify the specific applications and services that could result from a combination of mobile handsets and location data, by considering several critical differences between the uses of satellite navigation in vehicles and how it may be used by pedestrians. During 2008, it may become apparent that mobile may fit better into GPS, than GPS into mobile phones. Manufacturers may also want to consider how positioning functionality could provide additional revenue streams on top of handset sales. Operators should try to understand how the technology could be used to enhance the value of other existing services, such as messaging, or serve as the platform for entirely new ones. But mobile could also be used to address one of the key weaknesses of GPS – its need for line of sight of satellites.
A characteristic common to many new media websites in 2008 is likely to be a portfolio of communications tools, from traditional email to experimental media, such as digital ‘pokes’. New media sites are also expected to foster one-to-many, or even one-to-everyone communication. The range and quality of communications tools offered on a new media site could become a significant differentiator in an increasingly competitive market. All of these trends may reassure the telecommunications industry that demand for communications is more vibrant than ever. Demand for new media may, however, also highlight the inability of the telecommunications sector to monetize more of this need. Communications companies should address which parts of the value chain they should aim for. As well as providing the underlying network infrastructure, where else could they profitably operate? They should also undertake research to identify the next big way of communicating. Companies should distinguish between communications services that customers may consider worth paying for, and features that are just nice to have. Offering branded communications tools used on new media sites could prove an important long-term strategy. Earning a reputation for providing the most robust email, or the least spam-afflicted IM, could be a means of engendering consumers’ loyalty.
In the last few years, mobile has steadily evolved from an outdoor network into an indoor network. During 2008, operators are likely to evaluate various ways to improve indoor coverage. Deploying GSM-based femto cells may initially be a popular option. However this approach may ultimately be considered too technically and strategically challenging. Operators may also consider single handset solutions. But this approach faces obstacles in the form of handset cost, the need for voice-quality WiFi throughout buildings, and the technical complexity of managing cellular to WiFi handoff. In 2008 the combination of these trends, and the lack of viable alternatives, may cause some operators to contemplate, and in some cases undertake, network sharing as the best way to reduce network-related overheads and boost indoor coverage. While sharing has attractive economic benefits, regulators and customers may worry about its impact on independence, innovation and quality. As with any major strategic decision, the quality of execution is likely to be fundamental to the success. Network sharing can reduce capital expenditure and operating overheads, but it could have many pitfalls. Operators entering into network sharing should table comprehensive agreements that have considered a wide range of eventualities. Operators should consider how best to create shared departments for network strategy and planning to minimize the potential for disagreement.
The telecommunications industry can appear too focused on serving the youth market. This can result in products and services that while looking good may be daunting to use for the cash rich, but visually challenged older generations. Creating products and services that do not take into account older age groups’ lack of familiarity with technology may also restrict the available market. The telecommunications sector should increase its focus on developing accessible products and services. This could address corporate social responsibility objectives and also please financial stakeholders. Several products and services, such as large-button phones and talking text messages, designed from the outset to be accessible to older generations and people with disabilities, have become mass market successes.
The will to grow via acquisitions is likely to remain strong in the mobile telecommunications sector. Developed world mobile operators are looking to purchase stakes in emerging markets to tap into growth and high EBITDA margins. Western operators may also be able to learn important lessons relating to cost optimization from operators in developing countries. However, acquisition targets may increasingly become acquirers in 2008. Following a trickle of acquisitions by emerging market operators in 2007, players in these regions may become increasingly active predators. Emerging market operators should focus most attention on other emerging markets, rather than make a play in the developed world. Both developed and developing world operators should take the opportunity to learn from one another. Any operator with a presence in emerging markets should benchmark taxation levels for handsets and services against other countries.
Speed also remains enticing for the telecommunications sector. In the wireline sector, the current speed to beat is 100 Mbit/s. In the wireless sector, the latest technology attains over 7 Mbit/s, itself faster than many wireline broadband speeds. The rapid adoption of fixed broadband appears to have demonstrated that significant demand already exists among at least 330 million households for applications and services that require more speed. However take-up for mobile broadband appears to have been far slower. The bulk of revenues in the mobile sector, even in the most advanced countries, comes from voice and data services supported by 2G networks. But in 2008, with the possibility of the credit crunch affecting investment decisions, there may also be a growing group of individuals who question the consumer need for faster speeds and the tens of billions of investment dollars this may entail. Telecommunications companies should be careful not to prioritize the quest for attaining the limits of what is technically possible, over the need for profitability.
On 7 September 2008, GSM will be 21 years old. On that particular day more than 700 GSM networks in more than 200 countries are expected to carry more than 16 billion minutes of calls and six billion text messages. GSM’s global subscriber base is forecast to grow by 1.2 million and over six million GSM handsets are expected to be manufactured. GSM is forecast to generate $3 billion or 1.36 percent of the world’s daily GDP. GSM’s success has been achieved despite facing a number of significant challenges. It has outcompeted other digital cellular technologies, and by the beginning of 2008, is expected to have 85 percent market share. As it comes of age, its outlook is expected to remain as challenging – and as rewarding – as ever. Churn remains a significant factor for many operators; adoption of data services could be faster; there may also be regulatory challenges ahead. In 2008, GSM mobile operators should enjoy their historical triumphs but also prepare for the many challenges ahead. They should review strategies for every aspect of their businesses.
From Credit Crunch To Communications Crisis?
What appeared to be at first a problem affecting the US sub-prime mortgage sector may actually be a slowdown affecting many of the world’s industrialized nations1.
A vital question for the telecommunications sector is likely to be the extent to which the credit crunch, a global contraction in the availability of credit, may provoke a crisis in the telecommunications sector in 20082.
An optimistic outlook for the telecommunications sector in 2008 would be that most companies should not suffer significantly, even in countries with large financial sectors that could bear the brunt of the sub-prime correction.
However, the impact may vary by type of company. Equipment manufacturers may be harder hit. It may be easier for a business or residential customer to defer an equipment purchase than to suspend voice or data services for a period.
As for service providers, they may be better able to weather the storm, at least in 2008. The world appears to be far more dependent on telecommunications than ever, and costs have generally fallen. Enterprise communications prices have declined steadily, in line with growing competition and the emergence of efficient software-based solutions3. Consumer mobile and broadband prices have also fallen significantly, through a combination of excess supply4, competition and regulation5. In some markets, consumer broadband is nominally free if other services are purchased, making it particularly hard for customers to cut out this portion of spending6. Given this, service revenue growth may hold steady, even if there were to be a downturn in 2008, and as a result, operators’ stocks may be seen by investors as secure.
An economic slowdown may even encourage some businesses to accelerate process changes that require communications. The need for efficiencies may encourage some companies to accelerate their use of offshoring; it may cause others to use home working as a means of reducing office costs; it could stimulate some companies to implement mobile data solutions as a means of improving productivity.
A more pessimistic outlook is that the gut reaction to a downturn may be for businesses and consumers to reduce spending wherever possible. Businesses may look at ways to cut telecommunications costs, both by negotiating hard on rates and applying stricter rules on usage among employees. Consumers may try to cap their spending by opting for smaller mobile bundles or downgrading broadband packages.
Investment in new networks and manufacturing facilities may become harder to justify, as higher interest rates raise the cost of borrowing. This in turn may have an impact on an operator’s ability to develop new services. Equipment manufacturers, software developers and other suppliers may suffer as a result.
Macroeconomic trends are hard to predict and even harder to influence. In the light of current trends, telecommunications companies, while hoping for the best, may need to prepare for the possibility of an arduous 2008.
The need for efficiencies may encourage some companies to accelerate their use of offshoring; it may cause others to use home working as a means of reducing office costs; it could stimulate some companies to implement mobile data solutions as a means of improving productivity.
Bottom Line
While a downturn in the telecommunications sector is far less certain than a global slowdown, the industry should be prepared to confront, or even better, exploit, this possible outcome.
Mobile operators could use the prospect of a downturn to encourage consumers to consolidate all their voice spending on mobile, so forgoing the monthly fixed-line rental. A growing number of consumers have already chosen to make all voice calls via their mobile phones7. Operators could try and maintain revenue flows by offering customers lower tariffs in exchange for longer contract terms. This offer may also encourage prepay customers to move onto a contract.
Non-core mobile services, from music downloads to mobile television, could be most affected if consumers cut their spending8. Operators may therefore want to concentrate product development and marketing on the services they regard most likely to generate the bulk of revenues and margins, which in many markets are currently voice and messaging9.
Mobile operators could also consider a renewed focus on the enterprise market. Operators could argue that mobile-based solutions, such as email and field force automation, could deliver vital efficiency gains to corporations.
Mobile operators may also need to consider starting or accelerating network sharing, for example, their radio access networks, as a way of reducing the cost of deploying and running networks, particularly if data usage remains low.
For fixed operators, demand for consumer broadband is likely to remain relatively steady. Non-core services may, however, suffer. Operators may therefore need to look again at their approach to bundling. Offering discounted combinations of fixed voice, broadband and IPTV appears to have become a common approach among fixed operators. While theoretically this offers good value to the customer, if the market were to slow, the value proposition could unravel. With fixed voice usage in sharp decline10 and IPTV embryonic11, operators may find consumers increasingly indifferent to bundles, particularly in markets where mobile prices are low and free-to-air digital television is widely available. Consequently, operators may find a ‘pick and mix’ approach more compelling and more profitable. By allowing consumers to choose which services they want to bundle, they may be able to improve perceived value, while offering greater choice and flexibility12 .
As with mobile, fixed operators should also consider offering lower monthly rates in return for longer contract terms, in order to stabilize medium-term revenues.
As for the enterprise market, fixed operators should highlight the range of operational efficiencies that could result from more, rather than fewer, communications. Operators could therefore recommend an acceleration of offshoring, video conferencing and home working, all of which could reduce costs.
Fixed operators may also need to re-examine their plans for next generation networks. Many operators’ long-term strategies assume fiber-based networks. While the credit crunch may raise the cost of finance, networks may have no choice but to upgrade, not least because of the expected operational efficiencies from next generation networks13. Operators may have to share the cost and risk with partners, or try to renegotiate terms with financiers and suppliers.
Retailers, particularly those specializing in the mobile industry, may have to diversify. Mobile operators are constantly reviewing channel costs such as commissions and subsidies. Should a country’s economy slow, operators in that market may focus efforts on their own branded stores at the expense of independent retailers. Should that happen, retailers may have to diversify into related products (such as PCs, peripherals and technical support) or services (such as fixed voice and broadband).
For all concerned, but equipment vendors in particular, growth in emerging markets could offset potential declines in the developed world. Emerging nations’ economies are forecast to continue growing steadily despite turmoil elsewhere14 15. Telecommunications operators in emerging markets may continue to yield much higher EBITDA margins than are normal in western economies16.
All telecommunications companies should scrutinize their cost base. Some may have accumulated excess weight, particularly during high-growth years. A slowdown may even be the impetus for some much-needed cost cutting and headcount reduction.
All companies should keep an eye out for mergers and acquisitions (M&A) opportunities. A downturn could create consolidation opportunities across all parts of the value chain. Some emerging-world telecommunications titans may even consider financial discomfort and faltering valuations in the industrialized world as the trigger to start seeking out bargains17.
How To Capitalize On The $10 Mobile Phone
The first mobile phones, based on analog technology, cost upwards of $5,000 apiece18 when they were first launched in the mid-1980s. By the time digital mobile networks launched the following decade, prices had dropped, albeit only to $2,000, leaving mobile too expensive for most. At that price point it was unfeasible even to consider using mobile as a means of providing connectivity to machines. It was often far cheaper to send a human being to a machine.
Since then, however, the price of mobile phones has fallen sharply and a growing number of mobile phone models are now priced at under $5019. One manufacturer aims to release phones targeted at developing markets for $25 or less20 during 2008, and there are plans for the launch of a mobile phone with a wholesale price of $10 in 200921.
The lower the price of a mobile handset goes, the greater the addressable market becomes. Over 80 percent of the world’s population live within coverage of a mobile network22, but half of these live on under $2 a day23. For this latter group, low-cost handsets could become an essential tool to increase earnings simply to the level of making a living.
Lower priced handsets are likely to increase overall mobile penetration rates. But as global mobile ownership approaches 50 percent, the growth rate for mobile is expected to slow. There may therefore be diminishing returns from lowering the price for mobile devices even more. Further, standard license fees, typically upwards of $5 per device, may impose a floor below which price cannot drop any further.
However, another market, so far little exploited, could be a major consumer of a $10 handset: the machine. Integrating mobile connectivity into machines could take the total addressable market for mobile subscriptions to tens of billions. A mobile module could be profitably integrated into a wide range of machines, from vending machines to bank ATMs.
The rewards could be substantial. There is a growing volume of machines and infrastructures that could be usefully connected. There are more than one billion PCs worldwide24; more than 600 million road vehicles, of which well over a sixth are commercial vehicles25; 18 million freight containers26; three million miles of oil pipeline27, and over one million industrial robots28. In Europe and the United States alone there are 1.1 billion generic machines, such as computers, photocopiers, burglar alarms and point-of-sale devices that could readily be connected, yet during 2007, just 2 percent were29. The existence of billions of mobile-enabled machines around the world could be a significant driver for the mobile data market.
With sufficient collaboration and focus, the mobile industry could make 2008 the year in which machines finally become a driver of growth, and mobile data starts attaining the volumes and delivering the value to which the industry has aspired for many years.
Bottom Line
The major opportunity for the $10 mobile phone may be the market for machines, rather than for people.
For mobile to be deployed in machines on a large scale, the cost of deployment, as well as the cost of the module itself, should be minimized. Mobile manufacturers should work closely together to develop a single, globally recognized standard that includes specific guidance on size. Businesses will integrate mobile modules into their devices only if standards covering the specifications of the mobile modules themselves and their communications protocols exist.
Vendors should also consider what features will be most keenly required. Simplicity and ease of integration are likely to be key to adoption, as industrial customers will most likely be looking for plug-and-play components. Though there may be room in the medium to long term for more advanced functions, initial success will require an unswerving focus on simplicity.
Manufacturers and operators should be aware of some of the main differences between demand for mobile from people, and that from machines. While consumers may replace their handsets more than once every year, some machines may host the same module for many years. As a result, both manufacturers and operators will have to examine how they can extract value from the provision of machine-to-machine solutions. Equipment sales and subscription revenues may remain low, and, as a result, services such as solutions and systems design, business process consulting, integration and hosting may have to deliver the majority of revenues. Operators and vendors may not currently have this skill base. Many may have to gain a full complement of such skills through acquisition or partnerships.
While machines may be the key market for the $10 phone, emerging economies may also represent a sizeable opportunity. Vendors should note that demand may be stronger in rural areas, where consumers are likely to welcome any device at an appropriately low price. In contrast, in urban areas, consumers may aspire to higher-end phones, partly as a means of demonstrating their increasing wealth30.
But serving rural communities in the developing world, particularly at a retail level, is likely to pose a considerable challenge for companies used to the sophisticated supply chain of the west. Vendors should start working out how to get their products to India’s 700 million rural population31, for example, while still keeping retail prices accessible.
The Disruption Of Disruption: Incumbents Convert Threats Into Opportunities
Disruption implies a break in the established order. The more entrenched that order, the more disruption may frighten the disrupted and encourage the disruptor.
Over the past few decades, the telecommunications sector has had a strong association with disruption. The industry, which generates more than 2 percent of global GDP32, has experienced a string of fundamental disruptions, such as the digitization of transmission, the emergence of cellular mobile and infrastructure-based competition. With the arrival of each disruption, the typical response has been to proclaim the imminent demise of the incumbent technology. Yet more often than not, the incumbent players themselves have tended to benefit most from disruption.
Digitization of transmission enabled a massive increase in capacity and a significant improvement in efficiency over analog systems. Many of the world’s largest mobile networks were created by fixed-line parent companies, which are expected to continue to enjoy, and in some cases even rely on, their growth during 2008. Infrastructure-based competition spurred growth in investment in network roll-outs, and even when some of these failed, it was often incumbents that were able to purchase assets, occasionally at fire-sale prices.
More recently, VoIP had been expected to kill off PSTN and mobile voice33. This has yet to happen, and according to some, it may never34. WiFi networks were supposed to destroy mobile data networks35. Again this has yet to happen. And looking ahead, some commentators have suggested that WiMAX may bring down telecommunications titans’ data businesses36, although this looks increasingly unlikely37.
While the threat of disruption has frequently come and gone, many underlying technologies survive38, often thriving within an incumbent’s portfolio. WiFi in the hands of major mobile operators has become a significant element of their overall service portfolio, particularly for enterprise customers and other users of heavy data. VoIP in the hands of fixed incumbents has been deployed as a more efficient means of transporting voice traffic from its point of origination to its destination, and incumbents are now among the most successful VoIP providers39. And WiMAX, which has recently been welcomed as part of the 3G standard40, may well be used by incumbents to offer wireless broadband services to hard-to-reach rural areas, as well as emerging economies.
As such, the telecommunications industry may realize that while disruption is likely to remain, destruction of legacy is not fundamental to it. Smaller companies may be able to innovate faster and better, creating propositions that can help to drive the industry forward. But such companies may lack the financial strength or the management experience to change an entire sector. Small companies may be essential for creating disruptive technologies. However, it will be the incumbents who will more than likely monetize them.
While the threat of disruption has frequently come and gone, many underlying technologies survive...
Bottom Line
The primary reasons for incumbents’ successful deployment of disruptors are experience, access to existing customers, marketing capabilities and capacity to support.
Telecommunications customers may be reluctant, for example, to take on services that lack the 99 percent reliability and round-the- clock support they have become accustomed to. Often, it is too expensive for any new entrant to replicate existing telecommunications industry service levels. Incumbents should exploit this advantage and seek also to exploit potential disruptors rather than develop strategies to defend against them.
For example, recently announced moves towards open development platforms in the mobile market are likely to be a step in the right direction, as they may offer a framework within which new solutions can be developed without needing to upset the status quo.
Other forms of alliance are likely to be important for incumbents and new entrants. Incumbents should trial new technologies and business models in the same way that home-grown products and services are. Both parties should develop skills in areas such as relationship management, project management and customer research.
The investment community should also consider modifying its approach. Clearly all investors dream of spotting giant-killing new technologies and business models early on. But if it becomes more difficult for new start-ups to thrive as independent competitors to the telecommunications giants, investors should consider modifying their exit strategies, perhaps focusing more attention on trade sales instead of initial public offerings.
The more innovation and advancement that takes place, the more the telecommunications industry as a whole is likely to grow. But consideration of any new technology or business model has to bear the customer in mind. The pace of change is ultimately dictated by the pace at which customers want to, and are able to, change. Whatever the degree of disruption implied, any new proposition must be practical, beneficial and timely.
Giving Mobile GPS Direction
number of functions that could be included in devices continues to expand.
The toy market provides an example of how technology can re-invent even the most basic product. A few years ago, one of the best-selling holiday season gifts was a spinning top. The i-Top incorporated a push-button interface, an integrated display and a counting mechanism. In 2004, more than one million units were sold in the United States and Canada41. The toy included four games, the most popular of which centered on the simple challenge of seeing which player could attain the highest number of spins. Adding a simple counter increased the value of the toy and was one of the reasons why it was able to command a $20 retail price tag42.
However, incorporating new functionality into an existing product does not always add value, even if that functionality has been a commercial triumph in another, seemingly similar context. Satellite navigation may prove a case in point, unless the mobile industry is able to identify the specific applications and services that could result from a combination of mobile handsets and location data. During 2008, it may become apparent that mobile could fit better into GPS, than GPS into mobile phones.
GPS technology is a well-established, mainstream success in the automotive market43. Unit sales in 2006 approached 20 million, and are forecast to exceed 50 million units by 201144. Motorists in some markets have become so dependent on satellite navigation that in some UK villages traffic levels have swollen because their navigation systems have guided them into hitherto quiet lanes45. GPS is also popular among hikers and skiers around the world, although this is a minor market relative to that for cars46 47.
Prices for GPS functionality have fallen to such an extent that a growing number of mobile phones now incorporate GPS navigation. In 2008, prices for GPS chipsets will likely continue to fall to just a few dollars48, although the cost of mapping data is likely to remain at least 10 dollars. Accordingly, the number of devices that incorporate the technology is expected to grow rapidly in 200849.
While the combination of GPS and mobile phones should ultimately be a success, in 2008 the industry may overlook several critical differences between the uses of satellite navigation in vehicles and how it may be used by pedestrians.
A critical requirement of satellite navigation is the line of sight between the satellites above and the device on the ground. Without it, no positioning information can be received.
In a car, this is relatively easy to attain. GPS systems are usually mounted on dashboards, or integrated into cars and linked to an external antenna. In contrast, mobile phones used by pedestrians are often kept in pockets or hip holsters. In either case, line of sight is far harder to attain. Furthermore, with pavements often in the shadow of tall buildings, pedestrians may struggle to get a signal even with the device uncovered.
Where GPS is positioned as a competitor to in-car navigation systems, there are legal issues to consider. For example, in a growing number of countries, it is illegal to use mobile phones while driving, and the law does not distinguish between using a mobile for making a call or charting a route. Furthermore, in-car GPS systems typically use the car’s own power supply, a large external antenna and a bright LCD display (usually shaded from the sun’s glare), whereas mobile phones generally do not.
Therefore, while a growing number of GPS-enabled mobile phones may be shipped and sold in 2008, aside from the initial novelty, they may not be used very often. This may mean additional costs for the manufacturers and operators, but little added value to consumers.
However, motorists able to avoid traffic jams thanks to their mobile- connected GPS systems may be more pleased with this application of convergence.
GPS technology is a well-established, mainstream success in the automotive market. Unit sales in 2006 approached 20 million, and are forecast to exceed 50 million units by 2011.
Bottom Line
Satellite positioning should not become just another technology integrated into a mobile phone simply because its price has fallen to a few dollars. The technology should be commercially relevant for all those affected by its emergence: handset vendors, operators, and service providers (from advertisers to information suppliers).
At present, mobile phone navigation may make sense for handset vendors. The addition of a GPS chip and antenna, as well as mapping software, could allow handset vendors to increase prices, or at least slow price declines. It may also help individual vendors gain market share in the short term. In addition, manufacturers may want to consider how positioning functionality could provide additional revenue streams on top of handset sales. Vendors should consider whether the invention of new forms of peripherals, such as wearable antennas, could make GPS in mobile more valuable.
While mobile GPS may be good news for vendors, operators may find it harder to monetize this technology. Operators should try to understand how the technology could be used to enhance the value of other existing services, such as messaging, or serve as the platform for entirely new ones, such as social networking or treasure hunts.
Mobile operators should also consider how cellular technology could enhance traditional satellite navigation systems. Mobile is already used as a means of updating digital mapping data, including traffic alerts. Cellular networks’ ability to track the speed of movement of vehicles, by measuring the rate at which their phones move between base stations, can also be used as input into navigation systems50.
But mobile could also be used to address one of the key weaknesses of GPS: its need for line of sight of satellites. It therefore struggles when working in dense urban areas and cannot function within buildings. Mobile networks, via a process called triangulation, can provide that missing information. Consequently, operators may be able to add considerable value to important services such as locating missing children, which are likely to yield high margins.
Operators could then experiment with using enhanced GPS as a supplementary part of other companies’ services. For example, satellite positioning could enhance roadside assistance services by automatically transmitting location and customer data in the event of a breakdown. Satellite positioning could also enhance emergency services by locating callers, even when they are inside large buildings, and fleet management by tracking vehicles.
Indeed, it could be that the real opportunity for mobile GPS is in the enterprise sector, where positioning data is more than just a luxury or a gimmick – it can make a material difference to the bottom line.
Exploiting New Media’s Growing Need For Communication
In 2008, it would not be surprising if some industry analysts predicted, again, the imminent demise of the communications sector as we know it. However, whatever the outcome for the sector, it is likely that in 2008 digital communications will become more varied, vibrant and vital to the way we live than ever before.
The amount of traditional digital communication should grow, continuing the trend of recent years in which voice, text messaging and email volumes have all steadily risen51 52 53.
People are also likely to use even more modes and methods of digital communication. New media companies, such as social networks, synthetic worlds and blogs are likely to offer the services that will initiate large volumes of traditional and newer forms of communication.
Indeed, a characteristic common to many new media websites in 2008 is likely to be a portfolio of communications tools, from traditional email to experimental media, such as digital ‘pokes’, used to express the simple question: "are you there?". In 2008, new media sites are also likely to stimulate considerable demand for non-verbal dialog by offering digital communication via a blend of pictures, videos, sketches and animations.
New media sites are also expected to foster one-to-many, or even, one-to-everyone communication. Blogs have given individuals the opportunity to be heard, or more often than not ignored, by over a billion online users. Through photograph-sharing sites, people can share their personal images online with selected individuals, or anyone who cares to look.
Virtual worlds, such as Second Life, are likely to use a variant of IM to enable users’ avatars to communicate with each other54.
Therefore, the facility for dialog using a range of digital platforms may become even more fundamental to the continued appeal of social networks. In 2008, the range and quality of communications tools offered on a new media site could become a significant differentiator in an increasingly competitive market55.
All of the above trends may reassure the telecommunications industry that demand for communications is more vibrant than ever. Demand for new media may, however, also highlight the inability of the telecommunications sector to monetize more of this need. Communications companies may consider that in 2008 they are still allowing new media companies too big a share of their revenues.
Bottom Line
The underlying demand for communications, enabled by new media websites, is encouraging for the telecommunications sector. However, telecommunications companies’ share of new media revenues is disappointing, particularly given how central digital communication is to the appeal of many new media websites.
The telecommunications sector should consider how it can earn a greater share of revenues from communications in new media sites, since telecommunications operators’ networks underpin the majority of digital communication.
The first question communications companies should address is which parts of the value chain they should aim for. As well as providing the underlying network infrastructure, where else could they profitably be? Becoming a new media company may be too far a stretch, so providing a growing range of communications tools, on a branded or white-label basis, may be a preferred direction.
If telecommunications companies do focus on providing a wider set of communications tools, they should undertake research to identify the next big way of communicating. Research and development teams could look to current physical behavior as a guide. There are many ways of adding to a face-to-face communication, from eyebrow expressions to folding arms or legs, all of which may have their digital equivalents.
Network information, such as presence, could be used as an input into the development of new communications tools, or the enhancement of existing ones.
Telecommunications companies should distinguish between communications services that customers may consider worth paying for, and features that are just nice to have. The sector should also remember that a feature in one context may be regarded as a service in another. For example, IM is a feature for many social networking websites, but could generate revenue on mobile phones. Services that are popular among consumers, such as variants on IM, may be regarded as a barrier to productivity in a business environment.
Offering branded communications tools used on new media sites could prove an important long-term strategy. Earning a reputation for providing the most robust email, or the least spam-afflicted IM, could be a means of engendering consumers’ loyalty. This approach could prove to be strategic if users change a social network or virtual world frequently. Furthermore, an individual’s preferred set of communications tools is likely to evolve with age. Multi-tasking communication is popular among the young, who are seemingly able to maintain various forms of conversations simultaneously. For older consumers, one exchange at a time may be enough. A strong brand, enveloping a diverse set of communications services, could mean loyalty to the communications provider over the years.
footnotes
1 Consumer spending to hit ‘three-year low’, The Times, 10 October 2007; Fed cool on longterm growth forecast, Financial Times, 20 November 2007.
2 For more background and explanation of the credit crunch, see: Lessons from the credit crunch, The Economist, 18 October 2007.
3 Software transformation of enterprise communications is shifting solution value into applications and higher-level services, Market Wire, September 2006.
4 Don’t expect video to exhaust fiber glut; Bandwidth prices stabilizing based on additional factors, consolidation, Network World Fusion, 19 February 2007.
5 For further discussion, see: EU backs cut in French mobile fees, Global Insight Daily News, 17 September 2007; Ofcom caps mobile termination rates until 2011, VNU, 14 September 2006; Mobistar nine-month update to show impact of reduced roaming fees, AFX, 22 October 2007; Telecom cuts mobile termination rates as part of government deal, Dow Jones International News, 3 September 2007.
6 For example see: Netia launches promotional free broadband offer, Global Insight Daily Analysis, 10 July 2007; Vodafone launches free broadband, Vodafone New Zealand, 13 August 2007; Free broadband from Pipex, The Observer, 20 May 2007; Maran now plans free broadband, Financial Express, 25 April 2007.
7 The acceleration of fixed-mobile substitution in western Europe: facts and figures, Analysis, 30 July 2007.
8 See: Mobile television in Europe suffers from financial concerns, Penton Insight, 17 September 2007; Mobile television: Screen test, Economist Intelligence Unit, 18 September 2007; TV on cell phone screens? No thanks, say Europeans, Reuters, 24 September 2007.
9 Mobile’s newest killer app: voice, CNN Money, 8 February 2007.
10 Fixed voice disappearing rapidly in EU says analyst, IT Week, 1 August 2007.
11 What do we do with IPTV? Telecommunications Online, 28 March 2007.
12 The road to quad-play service provision, Cable Labs News, March 2007.
13 Colt: next gen networks are essential, Business Mobile Asia, 26 February 2007; Telecoms prices can’t keep falling, The Australian, 4 May 2007.
14 Emerging markets weathering the storm, Financial Times, 20 November 2007.
15 G7 woes underline power shift to emerging nations, Reuters, 22 October 2007.
16 Global Wireless Matrix, Merrill Lynch, 9 January 2007.
17 Telkom eyeing telecommunications business overseas, Organization of Asia-Pacific News Agencies, 20 June 2007.
19 Ibid.
20 Motorola aims to boost sales, R&D presence in emerging markets, Dow Jones, 8 November 2007.
21 The race is on to make the $10 mobile phone, Electronics Weekly, 17 April 2007.
22 Mobile networks to cover 90 percent of the world’s population by 2010, GSM Association, 30 October 2006.
24 http://news.zdnet.co.uk/itmanagement/0,1000000308,2118203,00.htm
25 http://hypertextbook.com/facts/2001/MarinaStasenko.shtml
26 The Box: how the shipping container made the world smaller and the world economy bigger, Marc Levinson (Princeton University Press, 2006).
27 http://www.secprodonline.com/articles/41598/ .
28 http://www.deviceforge.com/news/NS2554298208.html
29 Jasper Wireless targets untapped M2M market, ZDNet, 9 October 2007.
30 Developing nations desire high-end phones, Ericsson, 13 April 2007 (based on a CMO study covering 15,000 consumers in 37 countries).
31 India’s vision for a digital billion, BBC News, 6 February 2007. 32 http://www.taipeitimes.com/News/worldbiz/archives/2006/12/04/2003339097 33 For examples see: Offers of free calls over the Internet fail to switch on phone users, The Times, 3 September 2007; On the line online, The Guardian, 26 March 2004.
34 Analysts: pure play VoIP companies have no future, ZDNet, 31 May 2007.
35 Will WiFi kill 3G? Computer Times, 9 April 2003.
36 The wide world of WiMax, CNN Money, 26 June 2007.
37 WiMAX suffers a setback, BusinessWeek, 9 November 2007.
38 Good technology never dies, Telecom Asia, 1 February 2006.
39 Market Update – BT emerges on top in UK VoIP race, Global Insight, 31 March 2007.
40 WiMAX now officially part of the 3G standard, Engadget, 19 October 2007.
41 Irwin back in the game with a new name, DSN Retailing Today, 14 March 2005.
42 For more information, see: http://irwintoys.com/toys/novelty_games_and_toys/i_top_pro.html
43 One GPS giant too many, Business Week, 21 June 2006.
44 Handset navigation poised to threaten personal navigation device market, In-Stat MDR, 25 June 2007.
45 Sat-nav blamed for village jams, BBC News, 7 March 2006.
46 Research indicates market booming for GPS devices, TMC Net, 10 April 2007.
47 Research Indicates Market Booming for GPS Devices, TMCnet, 10 April 2007: http://www.tmcnet.com/ce/articles/6155-research-indicates-market-booming-gpsdevices.htm
48 Big suppliers dominate the auto infotainment silicon market, EDN Asia, 1 August 2007.
49 Handset navigation poised to threaten personal navigation device market, In-Stat MDR, 25 June 2007.
50 Now there’s need to be spooked by phantom jams, Sunday Times, 18 November 2007.
51 Voice minutes to double by 2015, IT Week, 22 May 2006.
52 Viva SMS – Worldwide SMS revenues to reach $67 billion by 2012, says report, Telecommunications Online, 13 July 2007.
53 Is email the ultimate social environment? GigaOM, 20 September 2007.
54 Second Life’s voice capability was launched in August 2007, The Second Life voice viewer is live!, 2 August 2007: http://blog.secondlife.com/2007/08/02/the-second-life-voiceviewer-is-live/
55 The future of social networks – communication, GigaOM, 9 October 2006.
56 Your television is ringing, The Economist, 12 October 2006.
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