Foreword
Welcome to the 2009 edition of Predictions for the telecommunications sector.
This is the eighth year in which the Deloitte Touche Tohmatsu Global TMT Industry Group has published its predictions for the year ahead. The volatility of the global economy in 2008 and the anticipated challenges ahead in 2009 have made this set of predictions particularly challenging, but also particularly important, to compose.
Some have questioned whether predictions are feasible amid such turbulence. Colleagues have asked how accurate they can be, given the uncertain outlook and many of the unprecedented conditions being experienced today.
Anticipating the course of the next 12 months is likely to be hard. But, in my view, that makes having a considered perspective more crucial than ever. Predictions, by their nature, are not facts. But properly developed predictions should encompass a diverse array of views and inputs, which can kindle debate, inform possible directions and even identify necessary actions. Every year, the methodology for Predictions is revisited, to assess how the approach could be made more robust. This year, our standard methodology has been bolstered through a program of in-depth interviews with 50 CXOs at some of the world's largest TMT companies. I am most grateful to all the respondents who offered up their insights and experience, at a time when their attention was particularly in demand. 2009 is likely to challenge all of us. The telecommunications sector is unlikely to remain unscathed by the global economy. But we should not forget that the reliance on the telecommunications sector to keep the businesses and the people of the world connected remains as critical as ever.
In short, while global growth may be cyclical, the need for telecommunications, is and will remain, fundamental.
I wish you all the best for 2009.
Igal Brightman
Global Managing Partner
Technology, Media & Telecommunications Industry
Group
Smart Phones: How To Stay Clever In A Downturn
Growth in demand for smart phones – devices boasting powerful processors, abundant memories, large screens and open operating systems1 – has outpaced the rest of the mobile phone market for several years.
During 2008, smart phone sales increased by almost 35 percent, while the market as a whole grew 10 percent2. By year-end, smart phones had taken 13 percent of the total handset market3.
But a continued economic downturn during 2009 may buffet the fortunes of smart phones. While sales growth for all mobile phones may decline to around 4 percent, smart phone growth could fall by more than 15 percentage points, to under 20 percent4. Smart phones' market share may increase by no more than 2 percentage points.
While double digit growth is likely to be the envy of many other sectors in 2009, smart phones had been regarded as a means of materially raising the usage and profitability of mobile telephony. The smart phone also represented, at last, a way for the mobile industry to make its users embrace data, as well as voice; it enabled average selling prices of devices to rise.
Mobile operators, the main channel to market for smart phones, are likely to contribute to the decline in smart phone growth. Responding to the economic downturn, operators are expected to make strenuous efforts – which in a few cases may be over-reactions – to reduce costs. Handset subsidies, which cost the industry tens of billions of dollars each year, are likely to come under intense scrutiny. Already credited with reducing operator profitability, smart phones, which may cost twice as much as regular feature phones, may be a prime target5.
Operators may try to reduce subsidies by replacing smart phones with feature phones on many consumer tariffs6. Some may even offer consumers a discount on their monthly bills in lieu of a new handset. Consumers keen to control their spending may find such offers increasingly appealing.
The contracts for some existing smart phone users may also slow demand in 2009. The high price of smart phones, relative to average selling prices (ASPs), mean that many contracts for higher end phones are based on 18-month periods or longer. Smart phone users that took out subscriptions in 2008 may not be able to replace their handsets until 2010.
Operators may take a similar approach in the enterprise market. Subsidized smart phones may be offered only to companies prepared to pay for additional services such as mobile email. Companies seeking to reduce their monthly mobile voice expenditure may be offered only feature phones.
In response to slackening demand, handset manufacturers may shift new product development from feature-rich devices to simpler phones. Such devices may also offer greater reliability, and thus suffer fewer expensive returns, as they would be based on more stable functionality7.
The subsidy model or the smart phone is unlikely to end in 2009. But it may be the year in which operators start to make smarter use of smart phone subsidies to preserve margins.
Bottom line
While 2009 is likely to be a tougher year for smart phones than in recent years8, the mobile industry should keep its faith in the smart phone.
The most important challenge for mobile phone manufacturers is to show how their smart phone products can provide a superior return on investment compared with their competitors, even if they have a higher list price, and require a higher subsidy. Manufacturers may need to argue the case for their products not just with operators, but also their shareholders.
Manufacturers should therefore focus on developing smart phones with features that consumers want to use and are willing to pay for. Manufacturers should work closely with operators to create easy-to-use services based on specific functionality that users value.
Handset manufacturers should also consider increasing their marketing to consumers that may increasingly be losing confidence. Consumers in many markets are likely to cut spending but may want occasional treats. Advertisers need to convince them that smart phones are indispensable rather than indulgent.
Smart phone manufacturers could sell their devices as price-competitive replacements for laptops. For some workers a smart phone may address all their communications, connectivity and applications requirements.
Mobile component manufacturers should look at ways of reducing their costs; it is likely that handset manufacturers will want to pass on some of the downward pricing pressure.
Mobile operators should reduce smart phone subsidies with care: this is not a guaranteed route to improved margins. Operators in countries where subsidies are prohibited do not always enjoy higher margins.
In markets where subsidies exist and are reduced, consumers may expect monthly charges to fall. Operators should ensure that cost reductions from lower subsidies exceed any accompanying drop in service revenue.
They should bear in mind that smart phones generate over 25 percent of mobile data traffic9. Operators need data traffic growth to offset declining margins for voice and SMS services10. They should work with handset makers to ensure that feature phones do not compromise data usage.
Data Ascends From The Basement To The Boardroom
Customer information has been part of telecommunications operators' asset bases for decades, with the largest operators accumulating terabytes of data11. But so far, collection of customer, network and operational data has outweighed insight12.
In 2009 however, several factors are expected to raise the profile of information, catalyzing its ascension to the boardroom.
First, the economic outlook is likely to put pressure on operators' margins, as clients become more willing to haggle for better deals, as a means to trim their outgoings. Better customer information may help operators retain their clients and attract those of their competitors, by gaining a better understanding of where clients feel the value lies.
The diversification of other sectors into telecommunications is likely to continue. Some of these new competitors may already have a comprehensive understanding of their customer bases, which could be used to compete against operators. For telecommunications operators to be able to face up to their competition, they may need an equivalent understanding of their customer bases: otherwise their role may be reduced to that of wholesaler, a change that would likely imply much lower revenues per subscriber.
A key result of the economic downturn has been the sharp contraction in credit available to consumers, particularly in markets where debt-to-income ratios have risen to over 100 percent13. A sharp fall in credit is likely to change the behavior, spending patterns and needs of some customers in a fundamental manner. In 2008, the decline in disposable income encouraged the adoption of SIM-only contracts in some markets14. Having a deep, current view of the customer is likely to be essential to operators providing services, products, bundles and pricing that are appropriate for their clients.
Accurate information may be essential to enable an operator to transform from being regarded as best for the latest technology, to best for value. Information is also likely to be vital in supporting diversification into other areas, such as IPTV and managed services.
Better customer information may also help operators respond more quickly to rapidly emerging phenomena such as social networking and online video sharing. It could also enable operators to capitalize on such developments, rather than be sidestepped by them.
New technologies may also help bring customer information to the fore. Software-as-a-service (SaaS) may facilitate low-cost, scalable analytical tools. Applications that monitor unconnected device usage, such as MP3 consumption on mobile phones, may provide richer detail.
Bottom line
Operators should recognize that information assets may become as important to value creation as physical assets. They should consider how to structure their activities to utilize their full spectrum of information. Customer information management should be integrated, not appended, or worse, archived.
Information should be represented at the highest level. Having a Chief Information Officer (CIO)15 on the senior management team and implementing a Data Governance framework may become essential. Insights gained from customer information are likely to be relevant to the whole board, and customer information should inform the widest range of executive decisions.
Operators should appoint CIOs with care. The CIO should be able to collect and analyze customer data and make it relevant to strategy, innovation and operations. Leadership and communications skills may often be as important as IT experience16. Operators may need to hire interim expertise and solutions to analyze data, if they lack the required skills among the current workforce17. Operators should contract customer information systems specialists to accelerate execution.
Operations should be optimized to deliver value at the lowest possible cost. Understanding the data points in operational key performance indicators should enable operators to manage their processes, both customer facing and back-office, in the most efficient manner.
Gathering customer information should be assiduous but not undermine consumer privacy. The value of information should be balanced against the possible consequences, should it be lost, stolen or abused. Operators should manage this tension without increasing risk. Data security should be a priority, particularly if third parties are involved in systems development and data analysis.
Technology companies should consider the telecommunications industry's complexity when designing customer information solutions. Although network technology is often homogeneous, billing, customer relationship management (CRM) and information systems are frequently proprietary. Technology companies should also consider the evolving service portfolios of operators. Customer information solutions must be flexible enough to accommodate data relating not only to calls and connectivity, but also media consumption, downloads and financial transactions.
Regulators should monitor operators' activities closely. Open dialog with operators may be essential, along with clear guidelines about acceptable and unacceptable practices. Similarly operators should monitor the evolving regulatory environment regarding retention of customer information, from calling records to browsing logs18.
Digital Communication Loses Its Message
In 2009, employees are likely to communicate digitally with each other in more ways, and in greater volumes, than ever before. But a greater quantity and variety of communications, digital or otherwise, may not mean a better kind of communication. Indeed, digital communications applications, most notably email, may obscure as much as they inform during 200919.
When email was first launched, it offered a fast, immediate, and relatively low-cost alternative compared with mail, faxes and internal memoranda. The success of instant messaging was founded on its greater immediacy and lesser formality, relative to email. The growth of services like text messaging, has been driven by similar benefits.
However, the value of email has eroded as inbound volumes have continued to increase, boosted by spam20, and as employees continue to send and copy too many messages, to too many people, too often21. During 2009, on average office workers are expected to check their inboxes more than 50 times22 and send more than 160 messages daily23, in all dedicating up to two hours each day to email24.
The value of digital communications in working hours may be further depleted by social networks, which offer myriad ways of sending and receiving messages between thousands of individuals at a time. The impact of social networks has been measured at billions of dollars in lost productivity25 26.
For some, 2009 will be the year in which their volume of emails sent, received and saved, finally falls. In some respects this will be a response to internal mandate: it has been estimated that every employee creates 20 megabytes, every day27. Heavier users may find their inboxes forcibly emptied by IT departments, to control costs.
In a few cases, users may resort to 'email bankruptcy', that is deleting everything in their inboxes and starting over.
Bottom line
For businesses, digital communication is a productivity tool. In many businesses, the efficiency of digital communications has been increasingly blunted by overuse. Companies need to make digital communication between workers, as well with customers and suppliers, useful again. Excessive use of digital communication, especially email, is an entirely human problem. Organizations need to help users regain discipline in their use of communications tools. Users should be encouraged to focus on the quality, not quantity, of digital communications. Enterprises could even offer employees the option of switching off28. Workers should not feel the need to be connected and responding at all times. Companies could consider discouraging email for one day a week29.
Empowering employees to stem the flow of messages, albeit temporarily, could have a considerable impact on productivity by allowing each worker to focus on the task at hand. In some cases, rationing the quantity of messages sent per day could train workers to be more selective in their use of digital messaging.
Companies should also consider the direct financial benefit of less digital communication. Simply persuading employees not to make indiscriminate use of the 'reply-all' function could save time and money. In a typical 1,000 person organization, it could cut the daily email count by several thousand, saving 285 person-hours per day and potentially recapture $1,800 per year per employee in wasted labor costs30.
It is in the interests of telecommunications and technology companies to advise organizations on how to preserve the power of digital communications. A phone call to a single individual may be the most efficient and effective response to a group email. A short text message could replace a lengthy phone call.
Social networking companies should consider their potential impact on the workplace. A growing trend to ban access to their networks from office computers demonstrates the threat seen by employers31. However, many companies are keen to take advantage of some of the perceived benefits of online networking to promote co-operation and teamwork32. Social networks may find that the best approach is to offer 'white-label' solutions to corporations33.
The Joys Of Disintermediation: Why Operators Should Embrace The Application Store
Mobile operators have long been concerned by disintermediation: the intrusion by third parties into the originally closed relationship between operators and their customers.
Operators have frowned upon, and in some cases countered, what they perceive as interference from third parties. Companies that have directly targeted operators' customers have been sternly warned away34. Content providers have been encouraged to offer content only via operators' portals35.
They may therefore become vexed by one likely development in 2009: the proliferation of mobile applications sourced from third parties36.
In 2009, mobile phone users are expected to download over 10 billion applications to their mobile phones. The majority of applications are likely to be sourced from sites managed by mobile device manufacturers, consumer electronics firms and software houses37.
Although a few operators may launch their own application stores38, the majority are likely to see no alternative to allowing their customers to access third parties' stores39.
Operators are not likely to earn any direct revenue from application downloads. Any subscription or license income is likely to be shared between the application store and the application's authors.
Customers on flat-rate mobile data subscriptions are expected to generate additional revenues from application usage only if resultant traffic volumes are so high that usage caps are breached and additional charges are levied. But these cases are likely to be exceptional.
However, as consumer awareness of mobile applications increases, the number of voice subscribers that add data subscriptions may well rise, boosting revenues40.
Not all customers will want to commit to a data subscription. But this may be even better news, if previously voice-only customers start to purchase data on an ad-hoc basis and download occasional applications. Ad-hoc usage is typically billed by the megabyte and may be more profitable for operators than 'all-you-can-eat' monthly tariffs.
Thus the growth of application stores in 2009 could have a positive impact on operators, even though they displace operators' direct billing relationships with users. If must-have applications emerge that encourage the majority of mobile customers to start using data, operators can only benefit. So far, aside from text messaging, only a minority of mobile users use their phones for data41.
The malign nature of disintermediation is likely to remain a common theme at most telecommunications industry conferences in 2009. But even as attendees deplore their seemingly inexorable destiny as 'dumb pipes', the margins and cash-generating potential of mobile operators are likely to remain the envy of many outside the sector.
Bottom line
Operators' concerns about third-party application stores may prove unfounded. Indeed their proliferation might well be a positive for operators.
Applications could also be used to drive operator loyalty and reduce retention costs. Operators could manage the transfer of applications from one handset to another. They could also offer device back up, which could become an additional revenue stream. Consumers could be offered applications as a reward for loyalty, sometimes in lieu of a handset upgrade. The upgrade cycle may lengthen, and costs fall, if consumers are regularly offered new functions on their phones.
Operators could generate revenues, in addition to data charges, from services offered to third-party stores. For example, charging application purchases to subscribers' phone bills could streamline the payment process. Credit card payment may be offputting to some potential customers, and processing charges for retailers can be high. Operators may also be able to earn revenues from developers and consumers by adding presence and location sensitivity to services.
Some operators may be in a good position to launch their own application stores. It may be more profitable to leave third parties to shoulder the costs. Evaluations of the merits of opening an application store should consider all the costs involved, ranging from application testing to hosting and from settlement to support. Operators should also estimate potential revenues in light of the fact that millions of the applications downloaded so far have been free.
Application store operators should carefully manage the portfolio of software on offer. Frivolous applications of little value are plentiful and these could degrade the overall perception of the store. Additionally, store operators should rigorously check applications for malware and viruses. Developers should note the mobile phone market's heterogeneity. There are significant differences between the most basic phones in the market and the most advanced. Developers should determine whether they want to build complex applications that may run only on smart phones or focus on mass market applications.
Consumers should be aware of possible risks from third-party downloads, which could include viruses. Even clean files may diminish the mobile phone's performance. Applications that constantly run background processes can cause other applications to run slowly and drain the batteries.
Integration Unleashes Mobile Phone Convergence, Finally
The objective of convergence is to combine two or more previously discrete technologies, with the end result ideally being improved features, benefits and value for the customer.
In the mobile market, this objective has not always been attained. The quality of photos taken on many camera phones has often been a far cry from that offered by dedicated devices. Mobile phone MP3 players have often suffered from compromised user interfaces and poor quality sound compared with their standalone peers. Demand for mobile phones converged with games-playing capability has remained niche.
Further, the cost of converged devices has often been at a premium to that of two separate products with equivalent functionality.
As a result, consumers seeking top-of-the-range performance had little alternative but to carry multiple devices.
But 2009 is likely to see a new range of mobile phones, which overcome the convergence compromise42.
Falling component prices43 and advances in miniaturization are likely to play a part. The economic downturn may also play a role in driving demand, as consumers seek a single device to deliver multiple applications. But the biggest driver is likely to be better integration with the extensive functionality available with today's mobile phones.
Camera phones boasting high-quality lenses and 12 mega-pixel sensors are expected to offer image quality that rivals the best point-and-shoot cameras44. A few may include features common only to expensive dedicated cameras, including near-zero shutter lag, smile recognition and 360-degree panoramic capabilities45.
But the most successful phones are likely to use the power of mobile connectivity to enhance the stills camera: using GPS to allow geo-tagging of images; high-speed broadband to post photos online, and email clients for sending photos to friends46.
The same will likely be true of music phones. A growing range of devices may have multi-gigabyte memory, dedicated music buttons and high-quality pre-amplifiers that rival standalone players47. And music and mobility will be more carefully fused. Music phones may incorporate mobile broadband to enable rapid downloading over-the-air; FM transmitters to play music in cars or on hi-fis, and WiFi connections to exchange music with PCs48.
Over and above their increasingly attractive technical specifications, demand for these products is likely to be driven by a combination of reduced consumer spending and the availability of subsidies from mobile operators. Though standalone cameras and music players are likely to remain inexpensive, they may struggle to compete with converged mobile devices offered nominally at no cost.
Consequently, sales of mobile camera phones during 2009 may exceed those of dedicated digital cameras, for the first time ever49. And by year-end, camera phones will likely outnumber all the conventional digital and analog cameras ever sold. Sales of music phones may be as much as three times higher than those of dedicated players50, and whereas MP3 functionality was rarely used in older phones, in 2009 models, usage may exceed 60 percent51.
The mobile phone may soon come to be regarded as the most successful converged product of all time.
Bottom line
Mobile handset manufacturers are getting better at convergence, but still need to proceed with care. They should not assume that the mere addition of more features guarantees success.
Rather, they should focus on deeper integration with the objective of enhancing products' practical benefits so as to justify any price premium.
Manufacturers should work closely with mobile operators to ensure that converged functionality can be monetized. Operators are likely to be reluctant to subsidize features that offer no route to revenues.
Standalone device manufacturers should focus on enhancing the capabilities of their devices. Physical size, storage capacity and battery performance may be areas in which superiority over converged devices can be established.
Operators should study consumers' use of converged products in detail. Tools now exist that can monitor usage of all mobile phone functions, not just those that require a network connection. These could offer far greater detail on consumer behavior, and may help identify revenue opportunities relating to converged functionality.
Footnotes
1. An open operating system is one that allows the user to download and install applications developed by third parties.
2. Apple's iPhone the best-selling phone in US, beats Motorola's Razr, Silicon Alley Insider, 10 November 2008.
3. Smart phone 13% of total market says Canalys, Wireless and Mobile News, 7 November 2008.
4. Are global smart phone sales poised to take off? Seeking Alpha, 9 September 2008.
5. 2nd update: AT&T 3Q Net Up; EPS hurt by iPhone subsidies, Nasdaq, 22 October 2008.
6. Orange is keen to follow O2's handset subsidy cuts, Mobile Monday, 7 July 2008.
7. Smart phones confuse a fifth of new users, Smartphone.biz, 15 September 2008.
8. Barclays whacks Christmas iPhone sales estimate, Silicon Alley Insider, 7 November 2008.
9. Smart phones gobbling up ever more market share, Venture Beat, 10 September 2008.
10. Mobile telephone providers gearing up for battle, Credit Suisse, 8 September 2008.
11. The diverse and exploding digital universe, IDC, March 2008.
12. For discussion on the role of the CIO, see: Realizing value from a CIO: navigating the silicon ceiling, Deloitte MCS and Cranfield University, November 2008.
13. US household debt: a frightening picture, Seeking Alpha, 26 August 2008.
14. iPhone and SIM only deals give O2 best ever quarter, The Daily Telegraph, 14 November 2008.
15. The CIO's role is to exploit the value of information, through its capture and analysis, and through formulating strategies that reflect a company's information assets.
16. What makes a good CIO? ZDNet, 27 October 2008.
17. Interim CIOs are on the rise, CIO.com, 17 July 2008.
18. Garda chief asks mobile phone chief to retain Web browsing data, Irish Times, 6 November 2008; Examples of data retention rules in different countries, ICT regulation toolkit, ITU: http://www.ictregulationtoolkit.org/en/PracticeNote.2117.html
19. For discussion on information overload, see for example: Personal computing: interruption overload, Government Technology, 20 November 2008; The Grill, MIT's Jo Anne Yates on information overload, ComputerWorld, 16 November 2008.
20. Spam volume rose to 150 billion messages a day in Q2 2008, Spam Fighter, 2 September 2008.
21. From information overload to communication overload, The Register, 10 May 2007.
22. Tech firms act to counter 'information overload', The Times, 16 July 2008.
23. Taming the growth of email: An ROI analysis, The Radicati Group/Hewlett Packard. See: https://h30046.www3.hp.com/campaigns/2005/promo-evolution/1-1LRYR/images/Preview_Radicati.pdf
24. Office email 'wastes time', The Daily Telegraph, 11 March 2008.
25. InternetSafety reveals where workers waste time on the Web, Atlanta Business Chronicle, 8 July 2008.
26. Online social networking costs £6.5 billion in lost productivity and open security risk, The British Journal of Healthcare Computing & Information Management, 13 February 2008.
27. Taming the growth of email: An ROI analysis, The Radicati Group/Hewlett Packard. See: https://h30046.www3.hp.com/campaigns/2005/promo-evolution/1-1LRYR/images/Preview_Radicati.pdf
28. Tech firms act to counter 'information overload', The Times, 16 June 2008.
29. http://abcnews.go.com/WNT/story?id=2939232&page=1; http://www.usatoday.com/tech/techinvestor/corporatenews/2007-10-04-no-email_N.htm; http://www.npr.org/templates/story/story.php?storyId=91724075; http://news.bbc.co.uk/1/hi/technology/7049275.stm
30. Email overload costs organizations over $5,000 per user per year, Fort Docs, March 2007.
31. Time-wasting staff given a slap in the Facebook, The Times, 28 July 2007.
32. Companies warm up to social networks, Christian Science Monitor, 8 September 2008.
33. Why most online communities fail, Wall Street Journal, 16 July 2008 (based on a study by Deloitte).
34. Mobile phone operators shun Google's search to find partners for its software, The Times, 6 November 2008.
35. UK mobile operators need to abandon 'walled garden' approach, Telecommunications, 30 July 2008.
36. App stores shift power balance in mobile market, CNET News, 21 October 2008.
37. App stores shift power balance in mobile market, CNET News, 21 October 2008; Apple App Store hits one billion downloads by MacWorld Expo 2009? The Industry Standard, 10 July 2008.
38. 3 opens Getjar-powered 'App Store', Mobile Entertainment, 30 September 2008.
39. App stores shift power balance in mobile market, CNET News, 21 October 2008.
40. Ibid.
41. SMS dominates UK mobile data usage, vnunet, 29 July 2008.
42. Snap! Camera phones keep getting better, The Guardian, 6 November 2008.
43. CMOS image sensor market heads downhill, EE Times, 30 August 2007. Flash memory prices to plummet, analysts say, Info World, 21 February 2008.
44. Snap! Camera phones keep getting better, The Guardian, 6 November 2008.
45. Ibid.
46. Ibid.
47. Can mobile phones replace MP3 players? Ezinearticles, 29 January 2008.
48. For example, see: http://www.gsmarena.com/nokia_n79-2497.php
49. Snap! Camera phones keep getting better, The Guardian, 6 November 2008.
50. Report: Music phone shipments top MP3 players, Fierce Mobile, 25 March 2008.
51. Music biz hopes device upgrades boost mobile sector, Ringtonia, 12 May 2008.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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