Major Industry Trends
Growing Popularity of Mobile Threatens Fixed-Line Sector
The telecoms industry can be divided into two principal sectors: fixed-line services, and mobile services. The mobile sector has proved the main engine of growth over the past decade, and has proved a boon to many consumers in emerging economies who previously did not have access to fixed-line services. However, it is not just in the developing world that the growth of mobile services threatens the position of traditional fixed-line operators. In June 2008, The Times quoted broadband experts as predicting that the mobile-phone network could replace copper wire as the principal method by which people connect to the internet in the UK, in as little as two years.
The newspaper said that “increased sales of laptops (which can be connected to the internet via the owner’s mobile-phone connection), the widespread rollout of high-speed mobile networks, and the falling price of connecting to such networks have all contributed to the uptake of mobile broadband.” Similar trends can be seen in other advanced economies.
Recession Hits Sales of Handsets
After years of rapid growth, sales of mobile handsets have been dealt a blow by the global economic slowdown. In March 2009, the Reuters news agency reported that “the overall cell phone market is expected to contract by about 10% this year. . . as consumers rein in spending, and handset sellers try to clear out unsold phones.” If sales were to fall in 2009, it would be only the second time this has happened in the industry’s 15-year history. (In 2001, sales of mobile phones fell by 3%).
The mobile makers have responded swiftly to falling demand. Thus, the world’s top cell phone maker, Nokia of Finland, announced in January 2009 that it would cut annual costs at its key handset unit alone by more than €700 million, to counter plunging demand. In March, it added that it had stopped using subcontractors to manufacture its mobile-phone engines, which include the phone, and the software that enables its basic operations. In 2008, Nokia outsourced about 17%, by volume, of the manufacturing of its mobile-phone engines.
Reuters quoted Adam Pick, an analyst at iSuppli (which provides information on the electronics-industry value chain), as saying that “this announcement clearly illustrates just how severe the situation in the mobile-handset market really is.” In March 2009, another major player, Sony Ericsson, released a profit warning for the first quarter of the year. The company predicted that it would sell 37% fewer handsets in the first quarter of 2009 than it did in the same period in 2008.
Telecoms Sector in Good Overall Shape to Survive Recession
A report by PricewaterhouseCoopers (PwC), published in March 2009, found that, overall, the telecoms industry was well placed to survive the global economic slowdown. PwC said that the industry had much lower levels of debt than other sectors, despite a spate of mergers and acquisitions over the past few years. Gary Taylor, a director at PwC, was quoted as saying that “although, in terms of deal activity, the industry is seeing a return to the recent dark days, on the whole telecoms should stand up against the crippling headwind of the recession.”
He added: “The dotcom crash put the industry through its paces and, as a result, we should see far less distressed debt and insolvencies than other sectors, such as banking and retailing. Telecoms companies have emerged tougher, thanks to tighter balance sheets.”
PwC added that the position of the overall global industry is being aided by the fact that consumers are not cutting back on usage of mobile phones—behavior that is protecting revenue streams. Indeed, the telecoms sector traditionally does well during a recession, and this may explain why telecoms stocks have generally performed well during the current economic downturn. PwC says that, in 2008, stock prices for mobile providers fell on average by just 8.3%, while those for fixed-line providers declined by 11.1%. By contrast, the MSCI World Index fell by more than 38% in 2008. However, the impact of the global financial crisis and the economic downturn on the telecoms industry has varied around the globe, and between the fixed-line and mobile sectors.
Europe Soars. . .
In Europe, for example, the telecoms industry has proved remarkably resilient. According to a European Commission (EC) report published in March 2009, the European Union’s (EU) telecoms sector, which is worth about 3% of the EU’s GDP, grew by 1.3% in 2008, with revenue estimated at above €300 billion, outperforming the rest of the economy, which grew by 1%.
The EC said that Europeans are now paying far less for broadband internet access and for mobile telephone calls than in previous years, and this has contributed to an increase in usage. Lower subscriber costs have also helped to dampen inflation, the commission said. Furthermore, the EC said that the prices of most basic services, such as phone calls and internet surfing, were still falling, and that consumers were already paying around 35% less than five years ago. The average market share of the leading operators also declined by around 3% in 2008, which, the EC said, indicated that the market was becoming more competitive.
The EC said that most broadband internet users in Europe were now paying less for speeds of above 2 megabits per second (Mbps), the minimum rate that is now generally required for video streaming. The EC said that the average monthly price for a connection rated at 1–2 Mbps fell to €31 in 2008, from €38.20 in 2007. For access speeds of 2–4 Mbps, the average monthly cost declined to €37 in 2008, from €52 a year earlier.
Mobile usage increased across the continent, with the number of subscribers increasing to 119% of the population in 2008, compared with 112% in 2007. Mobile-phone penetration is highest in Italy, where 153% of the population have a mobile phone, compared with penetration rates of 87% in the US and 84% in Japan. About 23% of European residents, representing 114 million fixed telephone lines, have broadband internet subscriptions. By contrast, around 25% of Americans have broadband internet subscriptions.
. . .While Asia Slumps
The mobile sector in Asia has been hit hard by the economic slowdown. Research released by the analysts, Informa Telecoms & Media, shows that mobile net additions in the Asia-Pacific region declined by 22.6% between the third and fourth quarters of 2008, from 87.69 million to just 67.91 million, yet the final quarter of the year is traditionally one of the strongest seasons for sales. Nicole McCormick, senior analyst at Informa, was quoted as saying that “economic woes, subscriber base clean-ups in China, Bangladesh, and Pakistan, as well as less competition in Indonesia contributed to the uncharacteristic fall in net additions” during the quarter.
Market Analysis
China Dwarfs Other Mobile-Phone Markets
In February 2009, the total number of mobile-phone users in China reached 565 million, making the country the world’s biggest cell-phone market, according to government figures. Mobile-phone use has exploded in China in recent years, on the back of falling handset prices and user charges. The two main players in the market are China Mobile, which has 450 million subscribers, and China Unicom, which has 130 million subscribers. China Telecom, the country’s biggest fixed-line carrier, is also targeting the mobile-phone sector. It plans to spend CNY47 billion (US$6.88 billion) to expand its mobile-phone network in 2009, with the aim of attracting 100 million mobile subscribers by 2011. The country’s three major mobile carriers are rolling out third-generation (3G) services nationwide in 2009 after obtaining licenses from the government in January. 3G networks enable faster data transmission, and easier use of services such as internet surfing and video.
In March 2009, China Mobile reported a 30% jump in net profit to CNY112.79 billion (US$16.50 billion) in 2008, up from CNY87.06 billion in 2007, but it also warned that 2009 would be a tough year for China’s telecoms industry. The company’s chairman and CEO, Wang Jianzhou, said: “The influence of [the] financial crisis that swept across the globe in 2008 will likely widen and deepen, and its impact on China’s economy will continue. The telecommunications industry will be affected.”
Wang said that the firm would be looking to boost its wireless broadband services in the coming year, and that it would also consider expansion into foreign markets. Earlier in 2009, Wang said that factory closures as a result of reduced demand for Chinese-made goods had hit the mobile market, as users had moved back to rural areas and reduced the number of calls they made.
US Market
The US may not be the largest telecoms market in the world, as measured by the number of mobile-phone users, but it remains one of the most sophisticated in terms of technological development, and market trends in the US are often later repeated in other areas of the world. The penetration of mobile-phone ownership is already high, with more than four out of five Americans owning a mobile. Thus, AT&T, Verizon Wireless, Sprint, and T-Mobile, the four main national carriers in the mobile market, are focusing on squeezing more revenue out of cell-phone users through exclusive contracts with handset makers, or other partnerships. They are also investing heavily in new network technologies, such as LTE and WiMax, which enable high-speed downloads on cell phones, and, thus, can generate further revenues by enabling users to download movies, etc. Smaller, independent phone companies will inevitably lose market share because they do not have the resources to build their own advanced technologies, leading to further consolidation in the industry.
Mobile Industry Pins Hopes on Smartphones
While sales of mobile phones are expected to fall in 2009, smartphones are expected to buck this trend, and register both volume and value growth. Smartphones are mobile phones with advanced features, such as e-mail and internet facilities, and a full keyboard. They tend to feature powerful processors and large memories. Some analysts believe that smartphones will eventually surpass laptops in popularity, and that they could account for 20% of the overall mobile-phone market within a few years.
According to the technology research firm, Gartner, smartphone sales for the whole of 2008 reached 139.3 million units, a rise of 13.9% on the previous year. The main players in the smartphone sector are Nokia, Apple (with its iPhone), Research in Motion (with its BlackBerry), HTC of Taiwan, and Samsung.
Popularity of Dongle Threatens Fixed-Line Firms
The growing popularity of the dongle—a pocket-sized USB device that provides internet access wherever there is mobile-phone coverage—was underlined in March 2009, when the leading mobile operator, 3, owned by the Hong Kong conglomerate Hutchison Whampoa, announced that it had sold 1 million of the devices. The Times (March 25, 2009) quoted analysts as saying that strong sales of the gadget by 3 and its rivals proved that dongles posed a significant threat to traditional landline phone companies, and to the providers of wifi hotspots.
The newspaper added that all the main UK mobile operators—Vodafone, O2, T-Mobile, and Orange, as well as 3—now offer dongles, and that 13% of the 495 million people in the EU access mobile broadband using dongles and data cards. Over the 12 months to March 2009, the cost of dongles fell from about US$100 to less than US$50, and, in some cases, networks offer them for no cost. Users need only plug the device into a USB socket on their laptop to use it, rather than being forced to configure it. The Times quoted Ben Wood, of CCS Insight, a telecoms research group, as saying, “As these mobile packages and speeds get good enough, people will be starting to say ‘hang on a minute, why do I need a landline again?’”
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