Jason Sumner, Lead Telecoms Analyst at the Economist Intelligence Unit, led a webinar on Wednesday, January 22nd from London regarding the outlook for the telecoms industry in 2014. He looked at an industry-wide survey to gauge the sentiment of industry leaders, after which he discussed three key issues that will be facing the telecoms industry worldwide in the coming year: 4G network rollout (particularly in China), M&A activity, and the net neutrality issue in the US. Finally, he talked about Telco operator strategies during the coming year, where they will be positioning and where EIU thinks they should be positioning in order to take advantage of the global trends in the industry mentioned above.
1. INDUSTRY SURVEY
Out of the six different industries analyzed by the Economist Intelligence Unit, the telecoms industry was the one that was the most positive in terms of outlook for 2014. Most respondents think that the conditions for the industry in 2014 will be the same or better than those in 2013.
If you look at the balance of sentiment, which is defined as the percentage of those who believe that the economy will do better in 2014 than in 2013 minus the percentage of those who believe that the economy will do worse in 2013 (and ignoring the percentage who believe it will remain the same), you get the following figures for the various industries:
| Industry | Balance of Sentiment * |
| Telecoms | 45% |
| Financial Services | 42% |
| Overall | 38% |
| Consumer Goods | 35% |
| Automotive | 31% |
| Energy | 23% |
| Healthcare | 17% |
As you can see from the chart above, the telecoms industry had the highest balance of sentiment of all six industries. The figure above is the average for all global respondents. Part of the reason for the upturn in the telecoms industry is because of the upturn in the global economy as a whole.
Here are some sector-specific questions that were asked of the various respondents to the survey.
| Survey questions | Agree | Neither agree nor disagree | Disagree |
| Developing/emerging markets provide better opportunities for growth in the telecoms sector than developed markets in 2014 | 78.3% | 13.3% | 8.3% |
| Data services revenue will make up for lost voice and SMS revenue in 2014 | 75.0% | 11.7% | 13.3% |
| Telecoms companies will sell more “big data”-related products and services in 2014 | 71.7% | 18.3% | 10.0% |
| Telecoms operators will begin to monetize their investments in 4G networks in 2014 | 65.0% | 21.7% | 13.35 |
| The “digital divide” between those who have access to broadband and those who do not will increase in 2014 | 56.7% | 15.0% | 28.3% |
| Regulatory agencies will change rules to allow telecoms operators to monetize more of their customers’ data in 2014 | 33.3% | 36.7% | 30.0% |
Most notably of the responses to these questions is the fact that about two-thirds of respondents believe that telecoms will be able to monetize their investments in 4G networks, and in a related question, three-quarters of respondents believe that revenue from data services will make up for lost voice and SMS revenue in 2014. EIU tends to agree with the respondents on the issue of monetizing investments for the 4G networks. However, although data service revenue is looking very positive, with companies such as AT&T and Vodafone looking at double-digit growth rates, it is still debatable whether they are going to start making up for lost bread-and-butter revenue of voice and text as early as this year.
Looking at some of the other results, not surprisingly emerging markets are seen overwhelmingly as having the best opportunities, but an interesting caveat to this is that some of the bigger operators are not always looking to expand in emerging markets, potentially because some of those emerging markets are relatively closed to telecoms, such as China, or perhaps relatively uncertain, such as India.
Looking at “big data”, it is definitely believed that it’s going to be exploited this year by telecoms, with about 71% thinking that telecoms will sell more “big data” products and services. EIU thinks that this is not necessarily an opportunity on the consumer side for operators, but more on the B&B side with anonymized data providing valuable market insights for other businesses such as location-based advertising.
On regulation, respondents are split, so we are looking at a third who agree that regulatory agencies will change rules to allow telecoms operators to monetize more of their customers’ data in 2014I, a third who disagree, and a third who neither agree nor disagree. Jason Sumner thinks this reflects the various regulatory environments around the world. There are no clear global trends; there are more regional trends. So, for example, in the US, as far as operators are concerned, regulations are headed in the right direction. We will discuss the issue of net neutrality later on in the webinar (see paragraph 4 below). Europe is a perennial question mark over which way they are going to go. The EU seems to believe in the need to loosen regulations and allow for consolidation, but national regulators are less sure.
2. 4G—GREAT EXPECTATIONS
The first of the three issues we wanted to look into a little more detail is that of 4G and 4G revenue. Just as a reminder of the survey question regarding 4G, two-thirds of the respondents believed that telecoms operators will begin to monetize their investments in 4G networks in 2014, and three-quarters thought that data services revenue will make up for lost voice and SMS revenue in 2014.
In terms of the global situation, let’s look at how the 4G network has grown. As of January 15th, there were 263 LTE networks commercially launched in a total of 97 countries, a growth of 112 networks from the 151 networks launched by the end of 2012. This number is estimated to grow from 263 to 350 networks in service by the end of 2014, which does include MVNOs (mobile virtual network operators). This represents about a 33% rise in the number of networks, so the networks keep proliferating
In terms of countries to watch, the EIU is looking quite closely at China. It is currently in a race to rollout 4G networks and offer 4G services. Of the three major suppliers in China, China Mobile is definitely in the lead in terms of infrastructure; it’s allocated $3.2B for what will be the largest LTE network in the world when and if it is completed. The Chinese government late last year favored China Mobile’s TV standard and gave them that headstart. Its competitors, China Unicom and Telecom must wait for the FDD (frequency duplexing division) standard and are resting on their laurels.
So, for example, China Unicom, which is the2nd biggest operator, did get a TV license, but is not planning to build a whole new network based on that. It’s actually pursuing a hybrid strategy, by not building its new network but rather upgrading 3G speeds in selected cities, and by doing that it’s able to advertise close to 4G speeds crucially with 3G prices for subscriptions and the devices. So far, given some of the issues that China Mobile has had with its rollout, they seem to be holding on to their high-end customers. China Telecom is actually not taking much action and appears to be waiting for its FDD licenses before it moves forward on things.
The situation as it stands in January 2014 is that licenses have been issued, 4G has been launched, but in terms of China Mobile, take-up has been somewhat tepid as compared to expectations. It also recently launched the iPhone, and that too has been rather subdued compared to other iPhone launches, part of that reason perhaps being because of the price point, but also because iPhones have been in China for quite a while now. So we think that in the long term, China Mobile is going to be poised to take advantage of the switch to 4G with its big network, but in the short term, the market may favor that hybrid approach by China Unicom. This all has huge implications for what is or what will soon be the largest M-commerce market in the whole world.
Just staying on the topic of 4G networks, looking more broadly in terms of pricing and whether returns are being made, 4G pricing is tending to favor operators at the moment; there seems to be less “all you can eat” packages in 4G than there were in 3G. As previously mentioned, operators like AT&T and Vodafone have seen double-digit rises in data revenue and South Korea has seen some encouraging signs in ARPUs (average revenue per user).
Looking at some data from the GSMA this time, they’ve looked at the situation, and where 4G has been deployed in developed countries, ARPUs are rising from between 10 and 40%, so there are some positive signs early on. I would emphasis this is at the early stages of take-up, so in the US for example 19% of connections are on LTE, whereas only 2% are on LTE in Europe. So in the early stages, we are seeing signs of price wars in some developed countries. There is some price competition going on in the US, where all four operators now have the iPhone. France is pretty much in a full-fledged price war for 4G. Here in the UK, EE is arguing based on some early success that it can differentiate based purely on the network, but we’re going to see 4G competition heat up here to test that.
Looking long term, its hard to see why 4G won’t eventually be commoditized like 3G networks, and the big question is whether you can actually differentiate on network quality; certainly operators are trying, and it’s an open question. Some of the strategies surrounding this we’ll look at in more detail a little bit later. They are definitely trying to differentiate through partnership, through their own branding, and then through technology as well. There’s a lot of research going on trying to speed up networks using existing infrastructure which would obviously safe money on capital expenditure.
3. MERGER DRIVERS STRONG FOR 2014
Let’s turn to the second issue, which is mergers and acquisitions in 2014.
Taking a step back, let’s look at the mergers and acquisitions that took place in 2013. Based on data from Mergermarket, in terms of total TMT M&A activity, it went up from $320B in 2012 to about $510B in 2013, a 54% increase over the previous year, and also the highest annual value since 2006. There were so-called 14 megadeals that were above $5B each, and that has been the highest number of those so-called megadeals since 2007.
The Vodafone-Verizon deal was, of course, a huge part of this, when Vodafone sold its 45% stake in Verizon for $124B; that made up a quarter of the total TMT M&A activity for 2013, and represented 5% of all global M&A. Without that one deal, TMT M&A values would still would been up 16% from 2012.
In terms of looking at the M&A activity in the sector of Technology, Media, and Telecoms or TMT, it was particularly strong in the Telecoms subsector. Looking strictly at Telecoms, it was actually up over 100% on the previous year, of course, based largely on the Verizon deal. It would have actually only have been about 3.8% on the previous year looking if that particular deal was stripped out.
There are reasons to believe that this momentum will carry over in 2014 because of some of the drivers we’re seeing.
- Eliminating competition–There’s a need in some developed markets in terms of competition and price pressure to consolidate and to be able to raise prices.
- Building scale–But there’s also a need to expand internationally, which relates to boosting top-line revenues, to building scale for leverage in some of the content partnerships these companies are engaging in, and adding spectrum.
- Cost synergies–There is as well as the ever-present need to achieve cost synergies.
- Favorable economy/market—This last factor is perhaps the most important, with a rebounding global economy, increased deal activity, and the appearance that equity markets are more friendly, we think this is going to carry deals forward into 2014.
There is just one caveat to that: on the counter side of that, regulators are still wary. Especially in Europe there is a test case that is coming up, but it’s still unclear that regulators in this part of the world are going to be open to consolidation on a national level.
There are several potential deals in the cards for 2014. Sprint and T-Mobile are in talks at the moment, but I want to look a little bit more closely for a moment at the potential deal between AT&T and Vodafone. AT&T is the largest operator by revenue in the US, and it is in increasing competition with other operators in a maturing smartphone market. It’s at the top of the tree, but there are worrying signs in terms of revenue. Vodafone has an enterprise value of about $228B, so if AT&T were to actually buy Vodafone, it would give AT&T the scale to drive up their stock price and earnings per share, which has been relatively flat as of late. As far as AT&T is concerned, it would give it access to lucrative markets which we believe are relatively saturated such as the UK and Germany; they don’t seem to be interested in developing markets. The reason why they are interested in Europe is because of that figure I mentioned earlier, that only 2% have LTE connections. So Europe has yet to adopt 4G on the scale of the US, and AT&T definitely sees this as an opportunity. The main reason why 4G has lagged is arguably because of underinvestment, and also arguably because the national regulators are keen to keep competition high and consumer prices low. It’s a bit unclear at this point how AT&T is going to reverse that trend, especially if you add on the complications around some of the privacy issues under consideration, and some of the international politics going on, where some of the national regulators in Germany and elsewhere are likely to question, if only to use it as a political bat to hit AT&T over the head, their involvement in surveillance operations by the NSA.
4. NET NEUTRALITY TESTED IN THE US
The last issue we will discuss before go into detail regarding strategy is the whole issue of net neutrality in the US and where it might be headed for 2014. First a little bit of background.
The FCC established the current net neutrality rules in 2010 to prevent AT&T, Comcast, and all of the operators from giving preferential treatment to their own web traffic or hampering competitors. Verizon challenged that policy in Federal Court late last year, and the situation now is that the decision has come down by a lower Federal Court in early January ruling in favor of Verizon saying that FCC may not impose those rules on ISPs (internet service providers).
So the result is that advocates of net neutrality are fearing that we are seeing a watering down of the whole concept of the open Internet, which would ultimately lead to less consumer choice. Now Verizon on its part says that it allows them to “innovate,” which reading between the lines means offering tiered pricing for speed, for quality of service, and even going so far as pricing content on the back end for the content provider.
In reality, we think that this is just one skirmish in the wider war over net neutrality in the US. 2014 is going to see quite a few big decisions from the key players: the operators, the regulator, and even the content providers. For the operators, I think the question is what to do in light of this small victory. To us, they seem unlikely to move very quickly to take any radical action like charging the content providers in any major way. This is for fear of perhaps upsetting the regulator, who is in the midst of deciding which way they are going to go forward, as the case hasn’t yet been heard by the Supreme Court, and also for fear of upsetting the consumers at this point.
Tactically in the short term it does give impetus to proposals similar to AT&T and its sponsored data package proposal which was just announced prior to the court decision. If you’re not aware of that, it allows third parties to subsidize tariff-free content for AT&T consumers. Now this proposal was actually made before the ruling, and to us it could indicate some relatively conservative action that operators might take with the fixed Internet because the sponsored data applies to the wireless Internet which technically net neutrality didn’t cover. To us the operators are looking to a consumer-focused strategy to take advantage of this if they do go forward by making something free rather than losing that PR battle in terms of shutting things down, especially the biggest and most popular content providers. It would not be good from a public relations standpoint, or even a business standpoint.
So we have yet to see the content providers speak out on this in a big way; I’m sure they are really against it, but are waiting to see how it plays out. Now the ball is in FCC’s court. They have a decision to make about whether they are going to rewrite the rules. There is some hope on the part of net neutrality advocates that the actual concept is still OK but the way they went about it wrong. One of the judges who made the ruling did say the fears are justified, and acknowledged that powerful incentives do exist for telecom companies to offer preferential access. So that does give some hope to net neutrality advocates that there is a way to rewrite the rules to bring this concept back. They could appeal it to the Supreme Court, and if they do end up rewriting the new rules, they need to consider erasing that distinction that they had before between the fixed and the mobile internet, and also coordinating it with the rewrite that is currently going on in Congress of the Telecoms Act.
5. STRATEGY: CONNECTIVITY ORCONTENT OR BOTH?
Looking beyond 2014, and some of the strategies that operators might employ, I’ve divided this into three issues.
The first issue is the core business of connectivity. We’ve heard a lot about OTT (over-the-top: delivery of video and audio over the internet) taking over and ARPUs declining, and the “dumb pipe.” In reality, if you look at it, the business of connectivity is not such a bad business to be in, just because it is set to explode. If you look at developed markets, where our SIMs, although perhaps not LTE, are getting saturated, there is huge potential for M2M (machine-to-machine: technologies that allow both wireless and wired systems to communicate with other devices of the same type) and all sorts of devices becoming connected and having SIM cards. And then if we look in developing markets, there is huge potential still for mobile phones to be connected. And then following that, the M2M trend will keep continuing or even happening simultaneously in developing markets.
This is a good segue into the second issue, which is mobile content and applications. Another opportunity is the fact that software is actually going mobile. In the short term, this is causing a lot of fear and panic: no one can quite tell who the winners and losers will be. But holding the connectivity trump card is quite an advantage in the new mobile environment. In order to really accelerate those revenues, though, it will be about partnering up. We’re already seeing some exclusive deals of the operators with especially popular content such as music. We’re seeing AT&T partner up with Beats (music streaming service) in the US; Vodafone has done a similar deal with a music streaming service in the UK. This goes a long way to avoiding the commoditizing of the network. It’s really about competing in consortiums, even in the B2B (business-to-business) space. We see some operators partnering up with healthcare software providers; they have found that they are able to really share ideas and create something new with those partners by mixing up software and the idea of making software mobile. The software companies don’t necessarily have the expertise to think about the potential for connectivity and what it can bring to their service.
So we’re going to see small bets across the ecosystem start to pay off. Right now the operators are in the midst of making loads of little bets; we’re kind of a stage where there’s uncertainty around what customers are ultimately going to accept. But we are starting to see the outlines of where M2M is going to be headed.
The third and final issue is, we hear a lot about data analytics potential. Our survey respondents are quite bullish on the idea that telecoms are going to be able to exploit this opportunity. Clearly there’s potential, it’s unclear exactly where and how the opportunities will emerge. There’s a lot of data being generated, you have to think that a lot of it is going to be worthless, so you can’t just think that every piece of data is going to be interesting. I think we are just at the early stages of figuring that out.
Having said that, I think there are a lot of positive trends, at least positive for those holding the data, in the fact that consumers seem to have accepted that bargain of data in exchange for free services. On the positive side for telecoms, the industry is actually very good at using internal data to understand its customers and usage patterns. But it does need to get better at utilizing it and monetizing it externally.
Some of those promising areas are in the B2B space, where we are looking at location-based advertising, with some interesting things being done around logistics, city planning, transport solutions for big events, etc.
QUESTIONS AND ANSWERS
1. What is outlook for GOOGLE?
Google is creating fiber networks in several US cities. Will it become direct competitor to AT&T? You can never say never, but they are unlikely to go full-scale into the fiber business, but in a limited way, it serves purposes. It is a great experimenter, they can experiment on superfast networks in this way. It does put pressure on the operators like AT&T and Verizon to roll out faster networks. AT&T has argued that the demand is not there for superfast connections. But with pressure from Google, it is reconsidering.
2. What about rural areas and emerging markets?
It is growing opportunity. Overall main opportunities is in urban areas, but it is spreading to ever smaller cities as they are connected by broadband. It depends on a few factors, such as connectivity, device prices, and user knowledge. These last two factors are getting less important. Some companies are looking at satellite market in rural areas.
All of those things apply in Africa. One thing that makes Africa unique is that they are a 2G continent. There is great potential there, but for the operators it is about taking things slowly in terms of technology. Making applications for feature phones (2G), and educating public about mobile phones is promising. In these places where there is a gap, there is massive mobile penetration albeit 2G. There is a push towards 3G smart phones, but there is a great push towards services. There is a huge opportunity to provide services over mobile devices. The impetus is coming from governments mostly, but operators need to show the way in growing how it can be tied to development goals in Africa.
3. Could you say more about net neutrality? Will telecoms starts charging YouTube and Facebook for bandwidth?
Things are in limbo in the short term, it does give operators are a tactical advantage because regulations are beginning to go their way. The conservative court Supreme Court may go the way the previous appellate court already went. The operators won’t go full bore at this point.
4. Can Telcos beat Facebook and Google?
No, they can’t, and they don’t need to. For a huge Telco, it is not going into an advertising model, but keeping with subscription model. They can’t overthrow Google, but the market for information is huge and growing, and there is no reason why they can’t enter that market in intelligence ways, starting with B2B data. It gets around current regulations, AT&T is hoping that there will be relaxation of regulations regarding use of consumer data in new Telecoms Act. Their data is good vs. Google regarding location.
5. How successful will EU be to unifying telecoms market?
It’s anyone’s guess. There are chances to achieve portions of ambitious plan to unify the market. But some aspects: roaming fees, for example. It is about providing something to operators in return to giving up fees for consumers. Consolidating the market or having underlying infrastructure is a more difficult task. National regulators need to be convinced; there will be testing of individual markets to see what direction telecoms regulators are going in this area.
6. How big is M2M opportunity for operators or is this just hype?
There is hype about it, but operators are already making money in this area , and it is growing fast although from a low base. It is about B2B services rather than consumer side. Crucially there are government incentives to go green and the consumer wants to save money, so smart meters and connected cars will face increased demand.
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