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.
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.
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.