Is the Telecom growth story over?

The introduction of the mobile phones saw revival of the telecom industry. The industry has been in the high growth phase for the last two decades and in this period, many Governments across the world introduced deregulation which further induced growth. All the players in the ecosystem – telecom operators, handset vendors, telecom equipment vendors and value added service providers benefitted from the high growth. However, it seems that the high growth phase is now over and the wealth can either be distributed amongst ecosystem players or some companies can benefit at the expense of others.

Global Subscriber Base

The new subscriber additions are slowing down and are coming mostly from India, China and Africa. The last four years saw almost 3 billion subscriber additions but only 1.6 billion subscribers are expected to be added in the next four years which straight away means that the subscriber addition would get roughly halved (refer the chart above). Many of the new subscribers would be people who would buy an additional SIM and may not necessarily add to the revenues of an operator. After removing the multiple SIM factor from the new subscriber additions, the new subscribers in the next four years are likely to be less than 1 billion. The new subscribers are likely to have a much lower ARPU and the ARPU of the existing subscribers is also likely to come down due to competitive intensity leading to lower tariffs.

Global Revenues

The above chart shows revenues of 128 networks across the world. It is clearly evident from the above chart that the telco revenues are under pressure since middle of 2007 and in fact declined in second half of 2008. My prediction is that we are already past the peak of voice revenues and data revenues can be the only savior for the industry

There are multiple reports that indicate that the growth in the telecom space has reduced substantially. According to a report published by Hot Telecom and Total Telecom, the global telecom services revenue reached US$1.5 trillion in 2006 and should grow by an average of 4.2% till 2011 to reach US$1.9 trillion. This report was released pre-recession and even then the annual growth rate projected for services revenue was just 4.2%. The market capitalization of all the companies in the industry is likely to stagnate if the industry growth is projected to be as low as 4.2%. Another report from the Telecommunications Industry Association (TIA), whose primary membership is network equipment vendors, released its annual report and outlook for the global telecommunications industry, and it shows a decline in worldwide revenue for 2009, a first in the more than 20-year history of the TIA report. The anticipated drop this year is 3.1 percent.

Even in the emerging markets, the things are not that rosy. In the quarter ending June’09, the telecom services revenue declined in India for the first time ever as compared to previous quarter. Till last year, the monthly revenue growth was around 3% and now it has fallen despite the high subscriber additions (~ 15 million new subscribers are being added per month). If the subscriber additions are for real, then the ARPU has certainly declined big time for the Indian operators. The increasing competition is leading to bloodbath in the market place. The tariffs have declined significantly and the usage has not grown leading to lower overall revenue for the sector in India.

In a situation of low growth in the industry, there is a fight for market share leading to blood bath. Market share fights are always more expensive than market expansion. We are likely to see higher tariff wars in future, at least for one year till some sanity returns to the industry. At the same time there would be pressure from regulatory bodies to reduce roaming and data charges which so far were holy cows. This phase would be followed by a consolidation phase where the larger operators are likely to acquire smaller operators in growth areas of Africa or the operators in emerging markets would try to come together to get synergistic advantages.

However, all is not lost for the Telecom industry. There are a lot of things the different players in the industry can do to stimulate growth. First of all they should try to increase ARPU and refrain from reducing tariffs to fight out the competition. Secondly, the focus should be on cost reduction by outsourcing or network sharing. Thirdly and most importantly, give the consumer a reason to spend more. It is not that the consumers are unwilling to spend more money; it is just that they have no real reason to do so. Apart from voice, there is no real killer application on mobile phone. Mobile data services are yet nascent and still to catch on the imagination of the consumers. Mobile internet surfing may not be a big draw on the mobile phone due to limited screen size but other services that utilize connectivity in the background could be useful. If the data services are priced attractively and if no premium is charged on data services while roaming, there could be substantial increase in uptake of mobile internet services. In other words, I am advocating flat rate data tariffs irrespective of the place you are in across the globe. This would be possible only if the operators do not get into the tariff war on voice and start to focus on data services. In this scenario, a lot of users would start using local search, navigation and location based services while traveling. The industry needs to come together and develop mobile specific content that would enhance uptake of mobile TV, videos, etc.

Telecom industry has always gained from extracting value from the adjacent industries. Handset manufacturers sucked the value out of radio and camera industries. There are many similar opportunites in the adjacent industries that are waiting to happen. Mobile Payments and remittances is one such example. Enterprice applications utilizing cloud computing is another area where there is immense untapped value. There are practically no mobile appications for the enterprise segments. Even simple applications like sales force automation, SAP data entry, etc. are missing. Telemetrics and M2M are still a virgin territory. Predictive maintenance could be the next big thing, and wireless is the big enabler for this.

There is no doubt that the growth projections for Telecom industry are low but the potential is still there provided the industry players come together to exploit the opportunities. In the initial few years of mobile telephony, there was little need for collaboration but now without collaboration, it is unlikely that the Telecom industry is going to come out of stagnation.

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[…] entering SAS lounges and when boarding.“SAS continues to save valuable time for our customers. Is the Telecom growth story over? – telecomcircle.com 10/14/2009 The introduction of the mobile phones saw revival of the telecom […]

Rohit Agarwal
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Rohit Agarwal
6 years 8 months ago

If we are talking about the number of people buying a SIM, certainly there is an upper limit. However if we see M2M communication, I think that the number of subscribers can rise significantly depending on the number of machines. Further this segment will need only Data may also help to increase the ARPU.

Mirek Kula
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Mirek Kula
6 years 8 months ago
This is really a good article. It deals mostly with the top line revenue, but if one considers: • enormous investment the Telcos are making to stay ahead of the data traffic demand curve • significantly lower margins in “$/per bps” terms on the bandwidth being added • the new subscriber growth is increasingly in the market segments that are cost sensitive (hence raising prices or up selling is not so much of an option) … the bottom line will also begin to suffer. It does not take a genius to figure out that Telcos need new services that people… Read more »
Fred Stein
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6 years 8 months ago
Another excellent article. Thanks Mohit. I see 2 factors. The recession; And the collapse of obsolete business models. I’ll discuss the latter. For years, the SPs have focused on raising “ARPU”, while many have complained about the ‘walled garden’. ISVs, especially gamers, complained about the “Carrier Problem”, where the carrier would take up to 50 % of their sales price. The rising ARPU was easy money for operators, with ringtones, SMS, wall paper creating nice revenue for tiny cost. We’re now seeing, most dramatically with the iPhone, that revenue is going to the ISVs, and to SAAS that is outside… Read more »
Srdjan Djordjevic
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Srdjan Djordjevic
6 years 8 months ago

Excellent analysis Mohit!
Telecom will still continue to growth in number of users as well as diversity of services, applications and solutions, but more on new tecnologies (mainly faster data transmission/4G) and interoperability between existing vendors and technologies (mobile, fix lines, Internet, finance/M Banking).
But regarding revenue, You are absolutely right, they must looking for new models.

Paul Harper
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Paul Harper
6 years 8 months ago

Having worked in international telco for a good number of years & looking at the current marketplace, there are, to my mind, still plenty of opportunities for growth.

SE Asia : Cambodia, Laos, Vietnam are all sub 25%, near neighbour Thailand is 120% for mobile,

Central & Latin America provide good growth opportunities for both broadband & mobile

Sub Sahara Africa provides the greatest potential, Nokia introducing low end 3G enabled handsets could be a real gamechanger.

For more developed regions, its all back to convergence, a trend we have see acroos the board with Vodafone, FT, DT & Telefonica

ankur maheshwari
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ankur maheshwari
6 years 8 months ago
Hi Mohit, World over the voice revenues have witnessed a decreasing trend and data revenues are increasing. Western Europe, where penetration of mobile handsets have crossed more than 100% ( e.g. in Italy its nearly 130%) the markets are saturated, as a result companies are looking for alternate ways of revenues (more focus on innovative data services to increase ARPU) and newer markets (India, China, Africa and the Latin Americas). The Asian countries like India and China which have perhaps the lowest ARPUs are attractive destinations because of huge volumes involved. China Mobile has the world’s largest subscriber base in… Read more »
Hemanth Rao
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Hemanth Rao
6 years 8 months ago
“Agree on your views of revenues dipping and operators having to shift their focus from voice to data and VAS. Yes there are still quite a few virgin territories which are to be explored on the mobile application front. I have a feeling that there is a growing focus on this from operators across, Face book, You Tube, Twitter it all there is it not? Its just a matter of time before the a large chunk of the PC/laptop market is sucked away too like the camera and radio. But yes data tariffs will be the key to fuel this… Read more »
Vivek Vadakkuppattu
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6 years 8 months ago
As a guy who attends standards meetings and has lots of customer interaction I can put my salary on the fact that the telecom growth story is far from over. Operators and equipment manufacturers are putting in millions each year and for good reason. There is lots of untapped market especially in emerging economies like India and China. Also lets not forget the fact that people are expecting more services from their phones and operators. In a recent poll, 35% of the people told they were willing to give up even basic necessities instead of a cell phone. As quite… Read more »
Roland Orlie, P.Eng.
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Roland Orlie, P.Eng.
6 years 8 months ago
Mohid: I would not look at it this way at all. Business is there to generate a profit and that happens when the consumer receives REAL or PERCEIVED value. He is then willing to pay. This brings you quickly to the value-chain analysis. During the previous meltdown of the ICT business, companies went under or almost because they were investing in the links of the value chain that simply did not produce any value. Mobile communications, for example, has done well because it provided value through ACCESS, meaning mobility for them. When you then do the kind of studies we… Read more »
Arapat Sangklab
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Arapat Sangklab
6 years 8 months ago
Hi Mohit, I believed we need to look at the basic drivers and factors behind the growth of Telecom beyond simply more populations and affordability to see clear values. The first gen of Telecom, we have connectivity thanks to the “phone”. “Mobility” give birth to second gen and we have extend this connectivity to any time and anywhere. The third gen claimed ability to do “networking” enhancing our social and work collaboration thanks to the “internet cloud” Since many years ago, all the operators and consultants have been working on analyzing subs behavior and lifestyle to properly cater for right… Read more »
Sudershan Banerjee
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Sudershan Banerjee
6 years 8 months ago

“Hi Mohit,

The ownership levels in India are still in low two digit numbers, ARPUs are also very low, so there is enough headroom for growth in numbers and in value.”

SB

Mithun Ravindranathan
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Mithun Ravindranathan
6 years 8 months ago
1. Wireless Data: We’re still at the tip of the Iceberg when it comes to Wireless Data numbers. With the steady increase in sales of Laptops YOY, there is scope for operators to leverage Wireless data at an affordable cost. 2. Consolidation: With increase competition such in today’s scenarios comes Consolidation. The player with the strong fundamentals and numbers will rule. 3. Innovation: The good ole cellphone has come a long way from simply making calls and then on texting and now checking emails. Hi-Speed Internet access coupled with the fact the the Internet is every changing, can give birth… Read more »
James Walker
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James Walker
6 years 8 months ago
Not being one who’s intimately involved yet still affected by telecom I’d have to say you can chalk it up to convergence. You have users partaking in mobile services only available on their personal computers a few years ago. The revenue drop is likely due to a slow worldwide recession that’s been going on for at least 2 years. For providers to stay afloat they’ve had to bundle lower cost packages and move away from expensive “pay per use” plans. Once we saw the advent of VOIP in the enterprise and long distance communication over facilities like Skype the convergence… Read more »
Jignesh Purohit
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Jignesh Purohit
6 years 8 months ago
“Not exactly, considering that the domestic tele density is pegged at 40%, Yes it would be fair to add that the measurement parameter has taken a paradigm shift with focus on Revenue rather than Gross numbers becoming the criteria to arrive at a Valuation of a Telecom Company. The recent tariff wars triggered with per second billing has certainly taken a toll on Company’s Revenue and ARPU’s, But it would be interesting to see if these tariff’s are the hurdles for the new yest to be launched companies Vying for the Share in the telecom Market which is already ower… Read more »
Cristina
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Cristina
6 years 8 months ago

great piece of analysis Mohit, thanks for sharing your thoughts
wondering now how are these guys doing on R&D and, more importantly, partnering approaches

suman kumar
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suman kumar
6 years 8 months ago

Interesting article. There is potential for Mobile Voice penetration in Asian and African countries which in volumes will be huge from industry standpoint. Potential for data / commerce services is huge. I agree to your views that industry has to collaborate to tap these opportunities as these are not only high technology innovations, but also to be implemented with right customer experience

Sudeep Tandon
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Sudeep Tandon
6 years 8 months ago

“I agree with the view that the telecom growth story is far from over. Just last year, Etisalat (a telco active in MEA region, with growing presence in West and South Asia) entered the Indian market. Voice revenue growth may be slowing, but there’s a lot still to come in data services especially mobile based financial transactions.”

Robert Syputa
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Robert Syputa
6 years 8 months ago
The easy stages of subscriber growth that developed upon basic voice and messaging communications is at a high saturation rate for much of urban-suburban organized societies. At the basis of this growth has been the inherent utility and productivity gains delivered by extending communications between people and organizations. However, what remains are several new frontiers that extends benefits of the pervasive, personal nature of wireless networks to multiple devices and applications. Roughly defined, these will deliver a combination of a) social networking and entertainment value, and b) Increased personal and organizational and group productivity gains. Some factors that drive growth/benefits:… Read more »
Praveen Sadalage
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Praveen Sadalage
6 years 7 months ago

We have different situations in different markets, while growth rate might be low in established/developed markets, it is a different story in emerging and underdeveloped markets like S.Asia and Africa, where users are getting exposed to having a phone and internet. The growth story is not over yet. A serious look at the growth drivers like coverage and cost of usage to subscribers in these markets will definitely matter.

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