Mobile Industry Winners and Losers, 2010Bengt Nordstrom
We enter 2010. Older, certainly. Wiser? Well, maybe. Much has happened this past year to change the face of the mobile industry. Mobile broadband has cemented itself as the route to global connectivity. Online Service Providers (OSPs) such as Skype, Facebook, and Apple's iTunes store (AAPL) have emerged as the key challengers to mobile operators in applications and services. Now we are giving birth to yet another new generation mobile technology, christened LTE for "Long Term Evolution." What labor pains will we suffer this time around? Continuing consolidation of the infrastructure vendor community points to the disappearance of further well-known industry brands in the coming years. By contrast, today's mobile carriers look likely to survive, although some will find tougher going than others. The industry watchers at Northstream have made predictions on what the year ahead holds for the mobile world. Let's consider them. For broadband, the short version is that LTE (the fourth-generation mobile network successor to 3G) is good and HSPA (a high-speed data upgrade to 3G) is great. LTE will indeed be commercially launched in 2010 and it will be surprisingly good, considering that it is new technology. As with all new mobile technologies, confidence about the future will rise once systems are stable, coverage is built out, and a choice of devices is widely available. Our biggest concern for LTE is the shortage of spectrum in lower-frequency bands. Kindle: A vertically inspired winnerThe real blockbuster in 2010 will be HSPA, or High-Speed Packet Access. We know for sure that it adds top-line growth for mobile operators, though we wonder about margins, particularly in the light of the "iPhone impact," by which carriers transport much more data at typically flat rates. The competition in the HSPA chipset-and-device market is fierce, so look for crashing prices. HSPA connections will exhibit hockey-stick growth, globally reaching 400 million in the next 12 months. The epicenter will be Unicom (CHU) in China, already the biggest HSPA network in the world. Any and all device players need to be there. Devices are another growth story for 2010. The success of connected devices is exemplified by the rapid growth of the Amazon (AMZN) Kindle e-reader in the U.S. The Kindle was developed by a vertical player for its own market, in this case content retailing. This increases the likelihood of success since the retailer is closer to customers and understands their needs better than traditional operators or handset makers do. We are seeing the enormous impact of ubiquitous mobile broadband networks on a global scale. In the not-too-distant future, anything that can be connected will be connected. Networks are ready and operators have started to understand that this market requires a new business model. By the end of the next decade, mobile broadband will be far greater—not in revenues but in number of connections—than the traditional handset market. With this rapid growth in mobile broadband and smartphones, OSPs are reaching a significant number of mobile users. In 2009 we have seen OSP services becoming more and more popular; the 80 million mobile users of Facebook represent a good example of the trend. The U.S. is leading the way. North Americans are getting their revenge for being left behind in mobile infrastructure. When the smartphone game suddenly becomes a matter of Internet technology, software, and working with a developer community, the North American vendors leverage their intellectual property lead. This is why we see Nokia (NOK) and Sony Ericsson losing their grip on their market to Google (GOOG), Apple, and Research In Motion (RIMM). Operators and European handset vendors will need to address this fundamental market shift and adapt to the game's new rules. North American device and software vendors will dominate the global smartphone segment from 2010 onward. Operators can upgrade inexpensivelyThe mobile infrastructure market has had a very competitive decade, something we have witnessed firsthand as sourcing advisor to operators around the world. The new guard at Nokia Siemens Networks (NSN) has changed strategy and is now bidding as aggressively as Huawei and Ericsson (ERIC). The market has thus gone from very competitive to ultracompetitive. The winners, in the short term at least, are operators. GSM and W-CDMA networks can be upgraded to brand new, high-capacity, multistandard networks, including LTE, at prices that previously amounted to mere down payments for comparable deals. How long can this go on? Not more than a year, in our opinion. The number of global infrastructure players will be reduced to three during 2010. Ericsson and Huawei are strong candidates for two of the seats, while the third slot will be filled by either Alcatel-Lucent (ALU), NSN, China's ZTE, or a combination. Two of them have already gone through painful mergers this decade. Better luck next time? What of the global operator community? Currently, the sector is healthy, at least for the top two players in each market. We could argue that this is not remarkable, given the oligopoly created by spectrum-licensing regimes and other high barriers to entry. The challenge for operators is how to achieve growth. Take away their emerging market assets, and it becomes evident that revenue and margin pressures have been increasing throughout this decade. In the same time frame, there have been numerous product and application launches from operators trying to build revenue streams from services other than voice and messaging. The result, in most cases, is negligible revenue. The average operator reaches 30% of the mobile users in any single market. Differentiation hasn't worked, so unless they seek scale through cooperation, they are competing on an unequal footing with the online service providers, who have a global market. In 2010, OSPs will start competing for operators' core revenue segments—voice and messaging—and the OSPs will win, emerging as the leading service and application providers for mobile users. We'll expand on these predictions over the year ahead. Meanwhile, mark our words. A year from now, we'll revisit to see how right or wrong we were.
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