Telecommunications Predictions, TMT Trends 2009 - Part One

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...