2009 Preview: Re-thinking priorities
It's the time of year again for the Telco 2.0 analyst team to come up with our highlights of 2008, and thoughts on where 2009 will take us. (For our predictions this time last year, click here). What makes the crystal ball particularly fuzzy right now is the general macroeconomic situation. Are we staring a recession in the face, a depression, or an outright panic? At one extreme we'll see a little trimming of investment spending. At the other, it largely depends on how black a sense of humour you have.
2009 looks like being a year when the Strategy department should be renamed the Opportunism department. Expect wild currency fluctuations to play havoc with financial reporting, sudden implosions of previously stable operators and suppliers, and unexpected incursions from Internet players into telco services.
In this article we cover 12 topics: basic voice & messaging, media, fixed broadband, mobile broadband, regulation, emerging/growth markets, devices and CPE, M&A, OTT players, OSS/BSS, NEPs, Technology:
Basic voice & messaging services
Bundling continued throughout 2008, but there remained little sign of mass adoption of true "converged" services. Innovation in the core service also remains glacial. This isn't likely to continue, as the users have "gone social", and the imperative in 2009, particularly for mobile operators and suppliers, will be to work out how to incorporate this into their basic product offerings.
Meanwhile, "over the top" plays -- especially VoIP (e.g. Skype and Truphone) -- haven't proved the competitive threat once thought. They will struggle in 2009 against the power of the bundle. Eventually, they will find ways of creating new business models that rely less on arbitrage or termination fees, but not in 2009.
Enterprise Unified Comms will continue to blossom. Expect to see hybrid models blending operator services and corporate-owned infrastructure, rather than "pure" hosted services. There are real and tangible gains here which will survive a downturn in discretionary spending.
Meanwhile, more and more enterprises have their own VoIP switch and often VoIP interconnect, cutting out the traditional telco services altogether.
The shine has been coming off the online advertising business over the past year, with growth dipping. (Offline advertising has been in freefall for ages.) Consumers continue to reward premium content, but are sticking with the brands and channels they already know. The value is in aggregation, and telcos simply don't have the skills to do this well.
Big questions will start to emerge in 2009 for traditional media companies about the effect of going online in cannabilising traditional distribution routes to market. A large amount of pressure will be placed on the larger aggregators, especially YouTube, to increase payments to content owners. The lack of growth in advertising will lead to concentration of content sites and even bigger gaps to emerge between the hobbyist & professional sites.
Given the mad rush of telcos into building vertically integrated IPTV offers, we may see an equally frenzied rush for the exits. Instead, fixed telcos will figure out the "Telco 2.0" logistics metaphor. Help support multiple third parties in delivering media services, and offer them the transactional support and business processes they need to make that successful.
The divergence of performance in deploying fibre between different countries and regions continues. Many examples of note seems to involve government intervention at some level (even if it is only swiping regulated monopoly rents on copper and magically laundering the cash into a new fibre monopoly). As capital markets stay in the doldrums, it's going to be either end users or municipalities (with stable tax revenues and long-term outlooks) who are going to drive capital investment in access networks.
The ISP business continues to look like a fools' paradise. Expect to see smaller ISPs continue to suffer and be bought up by the telco giants at bargain prices. Niche plays, especially in the SME sectors will struggle to differentiate and will consolidate.
One word summarises the big broadband story of last year: "dongles". Cleverer operators using discount broadband deals to reward and lock in their best customers. 2009 will see various pay-as-you-go mobile broadband models take-off. These will drive penetration into the mass market, but whether the generated revenue is enough to support mass-adoption of embedded mobile broadband is doubtful.
However, looking forwards, there are already signs of strain on many networks from this explosion of mobile broadband usage. Initially it is backhaul from cell towers that is being stressed, and that is being followed by new chunks of spectrum being added on. A product with no differentiation and rabid price competition equals no profit. Expect to see operator consolidation creating a lot of work for competition and anti-trust lawyers.
This will vary a lot by local market, based on issues such as: how many operators, how much/which spectrum, prepay vs contract, role of subsidy etc. Generally countries with Hutchison 3G subsidiaries are the most aggressive (plus others like Portugal & South Africa). We are going to see a lot of focus on 'offload' in 2009 - using WiFi, femtos, GSM refarming, anything -- to get that traffic onto cheaper fixed lines at the first opportunity.
We'll see some cracks in the seemingly-unstoppable LTE bandwagon, with HSPA+ being the beneficiary. Also, the outlook for standalone WiFi hotspots is bleak, unless integrated into 3G mobile broadband plans.
Looking forward, the Obama administration is making some very interesting hiring decisions in putting together its advisory team. These are bound to have a ripple effect into the staffing (and potentially even structure and mission) of the FCC.
Meanwhile, every regulator will be looking to fill up the taxman's empty coffers via spectrum auctions. What worked in the past won't work any more, with few willing to pay large up-front fees and risk new network expansion. New licensing regimes will be considered that shift us more towards a revenue-share type of model between government and private enterprise. This will take years to get to work, with multiple rounds of consultations & research papers & general hand-wringing about the delays in finding a more suitable way of renting out the airwaves.
The surprise coming from emerging ('growth') markets is that this is where many of the most cutting-edge "Telco 2.0" business models are being established. We expect more of the same, with increased focus on innovative personal communications services, and B2C transaction services such as advertising and payments.
Handsets & Consumer Premises Equipment
2008 has been filled with a lot of "me too products", copying both the iPhone and Blackberry. However, a couple of niche products that do things differently have been very popular this past year, such as operator 3 with both the Skypephone and INQ Facebook phone (both quietly powered by Qualcomm). All of these examples are demonstrating an ever closer coupling of the device with a co-designed set of online services. Furthermore, none of these services come from any telco marketing department researching the needs of end users and conceiving of the products -- the innovation is coming from external platform providers.
The iPhone in particular demonstrates that there is real consumer demand for a true mobile Internet experience. The qualifier is that the end-to-end user experience has to be simple and actually work. Operators thought that there was a "fast follower" position with iTunes, and were wrong, and will be wrong again with application downloads.
Consumers will continue to be more impressed by a pink featurephone than a pricey smartphone in 2009. The addition of a decent browser to Nokia's Series 40 gives you another reason to continue to lose and break cheaper phones. The slow counter-trend towards unlocked generic phones will continue to gather pace.
Also worth noting that there's a counter-trend towards unlocked generic phones (albeit slowly).
Home CPE will be a real battleground in 2009 with big innovations in modems, PVRs, linking the internet to TV, home wireless etc. Expect to see even larger CPE subsidies from both satellite, fixed & mobile operators to attempt to gain control of the home. In the more sobering times of 2009, we'd like to see operators think a lot more creatively about how to create and capture more value from the Playstations, XBoxes and Wiis out there -- make the most of what's out there already.
The M&A spree of years past has ended. The global telco consolidation has largely run its course. However, as we have discussed in our series of articles on the credit crunch, there are plenty of quality telco assets that may be available at distressed (and sometimes distressing) prices, particularly in the debt-heavy cable sector.
Fring is our top pick. It will continue to gather pace as the combination of usability, wide platform coverage, and fit for purpose makes it attractive to a wide range of people wanting to keep in touch cheaply whilst mobile.
Twitter won't gather mass market usage, but new communications patterns mixing push and pull content will be extensively copied and embedded into a wide range of other tools and services.
As the bottleneck between ambition and reality, investment in "next generation" back office systems will continue in 2009. There is a rush towards converged order-to-cash systems that can support the kinds of pricing and offers that are now needed.
As the economic storm strengthens, the forecast for network equipment providers gets bleaker. Nortel is unwell, Alcatel-Lucent is still consulting the manual to work out whether you pull the control stick forwards or backwards to end the tail spin. NSN and Ericsson seem to have the right mixture of products and services, but capital spending is likely to remain depressed. The eventual winners will be those who ask themselves the right question. It's no longer "who has the biggest/fastest/most feature rich box?", or even "who has the cheapest box?", but "who can operate this thing for me at the lowest cost". Telcos will reach into their pockets for capital spending only when there's some proven operational saving attached.
Low-cost suppliers like Huawei will continue to do just fine, as will anyone with a good Unix/open source skills base as more and more Internet-standard equipment is used behind a radio network made as cheaply as possible. Get used to seeing OpenSS7, Asterisk, jabberd and friends replacing exotic telco protocols and products.
We expect 2009 to see a lot of telcos follow the Iliad route: a few big'n'cheap Cisco routers, a bunch of open source software, some good engineers, and a bit of creativity.
Webbification continues, with the integration of telephony and messaging into online applications. Location-based services will also continue their gradual emergence from the IT hackers, with traditional telcos having less of a role than previously thought.
Everyone will think WiMAX is a failure, but they'll be wrong -- it's actually a quiet achiever. Yes, but it's being deployed in the emerging markets only, they will say. In other words, where all the really interesting stuff (and money) is. Also the WiMAX operators don't have legacy business models to worry about cannibalising, and also won't want to compete head-on with the cellular operators who have better coverage & scale. This makes them disruptive.
[Ed. - our research agenda for 2009 will explore these issues in more detail]