Many Challenges Remain for Mobile Communications

Transcription

1 Market Analysis Many Challenges Remain for Mobile Communications Abstract: The marketplace for mobile services, terminals and infrastructure has been affected by the economic slowdown and the high cost and minimal return on investment in 2.5G and 3G network launches. By Tole Hart, Bryan Prohm, Delia MacMillan and Jason Chapman Strategic Market Statements During 2003, handset vendors will introduce novel mass-market features such as color screens, Java, MMS and embedded cameras to stimulate end users to upgrade, accelerating regional replacement rates for mobile terminals. Fewer than one dozen W-CDMA networks will be launched during 2003, creating a revenue shortfall that will result in the withdrawal of at least one leading mobile infrastructure vendor from the worldwide W-CDMA infrastructure market before the end of the year. Mobile operators are increasing spending on solutions that optimize existing mobile networks and deploying/consolidating back-office systems to ensure that revenue from mobile data is not lost through inefficient mediation, inflexible charging/billing and slow integration of content and application partners. Gartner Dataquest predicts that in 2003 there will be a slight increase in mobile operators outsourcing what has traditionally been seen as core network engineering and maintenance functions. The current pricing plans/tariffs of mobile data services will adversely effect massmarket adoption of GPRS and cdma2000 1x-based services during Service providers must focus on data services that entice end users to subscribe and that are priced in a way that customers can see the value per transaction/content type. Publication Date: December 5, 2002

2 2 Many Challenges Remain for Mobile Communications A Market in Flux The evolution of the mobile market can be described as continued growth of voice services and a step-by-step process of bringing data services to market. This process of bringing data service to market has met several roadblocks, including: cost to build out networks, lack of compelling applications, a limited ecosystem for bringing applications to market, limited handset availability, patchy rollout of service, poorly designed pricing plans and inept customer service. The companies that have been able to work through this maze have been fairly to highly successful. Examples include NTT DoCoMo, KDDI and Nextel. And these companies have set themselves up for future success in data services, with customer-focused data pricing and a large stable of applications. However, the road to third generation (3G) is not without pitfalls, even for some of these companies. The lack of success of 2.5G and 3G services, and subsequent retrenching of the carriers has slowed growth in the mobile terminal business and resulted in decreased growth in the infrastructure business (see Table 1). To turn this around will require a comprehensive focus on applications and services attuned to end-user wants and a renewed focus on service toward existing and new mobile customers. The start of that awareness is being reflected in mobile services (from a few standout carriers) but Gartner Dataquest does not expect it to occur in full stride until Table 1 Total Mobile Market by Region (Millions of U.S. Dollars) CAGR (%) Asia/Pacific 133, , , , , , , Central Eastern 18,152 23,932 30,870 35,179 38,051 41,522 43, Latin America 34,806 31,399 29,182 31,807 35,313 39,176 41, Middle East and Africa 20,258 19,105 21,979 24,254 25,577 27,482 29, North America 93, , , , , , , Western 132, , , , , , , Worldwide 432, , , , , , , Source: Gartner Dataquest (December 2002) Market Expectations and Challenges by Segment Mobile Terminals Forecasts for global mobile terminal devices suggest that the global market is on the cusp of a genuine recovery in demand that will result in reasonable annual growth through However, the revenue picture appears to be more problematic for manufacturers, as little or no growth is expected during the forecast period.

3 Several phenomenon underpin these trends, including the slowdown in prepaid sales in Western and Latin America, and slowing rates of sales to new-to-mobile end users worldwide. To a lesser degree, replacement cycles have stagnated in mature Global System for Mobile Communications (GSM) markets, partly because of a lack of compelling new devices. Furthermore, only a handful of current mobile data applications and services appear potent enough to energize the installed base to upgrade to new terminals. Compounding some of the previously mentioned problems is the limited coverage and reliability of network services, which is motivating some users to wait until these wellpublicized network growing pains are resolved. Emerging markets, in particular China and Central and Eastern, are still experiencing strong growth. Naturally, they have become critical markets for mobile terminal manufacturers during Demand in many emerging markets, however, tends to trend toward low-end phones, suggesting that manufacturers' efforts to raise average selling prices (ASPs) during the transition to a more mobile data-enabled handset portfolio may not prove as successful as once envisioned. The lackluster consumer response to 3G services in Japan and the worldwide delay in widespread deployment of W-CDMA networks are also having a negative impact on the forecast for mobile terminal demand and revenue (see Table 2). However, Gartner Dataquest believes the global transition to sales of 2.5 and 3G terminals will accelerate during 2003, accounting for as much as 60 percent of total global mobile terminal device sales. Table 2 Mobile Terminals Market by Region (Millions of U.S. Dollars) CAGR (%) Asia/Pacific 29,693 29,442 30,176 31,740 33,952 37,725 40, Central and Eastern 3,816 7,435 9,135 8,471 7,263 6,721 5, Latin America 8,807 6,838 6,257 5,932 5,712 5,615 5, Middle East and Africa 5,875 1,406 1,927 2,145 2,328 2,402 2, North America 20,508 19,964 20,380 22,212 22,999 22,594 22, Western 37,472 33,537 27,925 29,411 25,591 24,918 22, Worldwide 106,170 98,623 95,799 99,911 97,843 99,974 99, Source: Gartner Dataquest (December 2002) 3 Mobile Services The mobile services markets continue to grow through 2002 with the majority of the growth coming from emerging areas such as China and Central(seeTable3).Wehavealsoseenmodestgrowthinmore mature markets such as Western, United States and Japan. Latin America has seen its growth slow because of poor economic conditions.

4 4 Many Challenges Remain for Mobile Communications The growth in Short Message Service (SMS) use is continuing in areas where it has been traditionally strong, such as and Asia, and is beginning to make inroads in North America with the introduction of intercarriers' messaging and increased carrier focus on marketing of SMS services, even for prepaid users. There has been a slow uptake in the 2.5G and 3G services throughout the world as carriers deal with rollout, handset availability, pricing, network interoperability and network utilization issues. There has been less-thanexpected demand for the FOMA 3G network in Japan, and less-thananticipated demand for 2.5G services in Japan and North America. Some of the main issues that carriers have to address are coverage, quality handset availability, affordable service and compelling applications. In, many of these issues have been solved, and the next step will be to attract users to the service with compelling applications and reasonable pricing tariffs. North America is six to 12 months behind in terms of fully implementing 2.5G networks across all carriers. We do expect 2003 to be another teething year, and in 2004, we expect to see a strong ramp-up in data subscribers and usage. Prepaid and prepaid-like plans continue to support the growth of the mobile market, especially to the youth segments and underdeveloped country markets. Carriers have made attempts to manage prepaid more effectively in and North America, and in some cases this has meant offering prepaid under a different brand than the typical postpaid service. We expect prepaid to continue to be an important driver with a majority of new growth coming from less-developed countries where prepaid is a preferable solution. During the next several years, Gartner Dataquest expects increased demand for telematics and machine-to-machine applications as networks become more ubiquitous and services providers look for other areas to increase revenue. However, inflexible billing and back-office systems, coupled with high equipment costs, will slow adoption in many of these markets. Table 3 Mobile Services Market by Region (Millions of U.S. Dollars) CAGR (%) Asia/Pacific 90, , , , , , , Central and Eastern 11,008 12,243 16,804 21,771 25,299 28,418 30, Latin America 21,296 20,325 20,013 23,048 25,962 28,725 30, Middle East and Africa North America Western 12,187 14,751 16,603 18,731 20,576 21,777 23, ,889 77,886 91, , , , , ,721 88,446 99, , , , , Worldwide 276, , , , , , , Source: Gartner Dataquest (December 2002)

5 5 Mobile Infrastructure The mobile infrastructure market has experienced another tough year, with operators in the mature markets continuing to reduce their capital expenditure forecasts and equipment vendors continuing to revise and reduce their revenue forecasts quarter on quarter. Still suffering from the 3G license acquisitions, large international mobile operators have slowed down their 3G-rollout schedules, and some have started to write down some of their 3G investments, with some operators such as Telefonica Moviles and Sonera severely cutting back their international 3G aspirations. These market conditions have meant that the revenue and equipment volumes from the 3G rollouts are not being seen and realized as quickly as vendors originally anticipated. In addition to the challenges of 3G deployment, the uptake of packet data services has not been as widespread as the vendors would have liked. Without the introduction of compelling services or billing models that encourage usage, the impact from data on existing networks will continue to be minimal. As data services often consume voice capacity on the network, the more data usage there is, the more operators need to invest in their networks; without the data uptake this additional network requirement is not generated. In addition to this, operators are more willing than in previous years to allow the quality of service to suffer as congestion rises and capacity buildouts are curtailed. Regionally, the mature markets of Asia, North America and Western are seeing reductions in their mobile infrastructure revenue (see Table 4). Latin America is also suffering as economic conditions combine with the global downturn in telecom to put additional pressure on operators and equipment vendors. Only the emerging regions of Africa, Eastern and the Middle East are seeing growth in their infrastructure markets as political stability, fixed substitution and rapid uptake of services continue to drive expansion. Despite the short-term challenges that the market faces in the next year or two, the longer-term outlook for the mobile infrastructure market remains positive. Operators will need to expand their networks as subscriber numbers and traffic volumes continue to increase, although at a slower rate than in previous years. As data applications finally start to gain traction among users, the infrastructure vendors will benefit, as capacity becomes a driver for network deployments. There will also be potential new sources of revenue. This includes areas such as network optimization, where operators seek to squeeze every last drop of capacity from current networks, and network outsourcing, which appears more compelling as operators focus more on the end user and less on technology, as O2 Netherlands has done.

6 6 Many Challenges Remain for Mobile Communications Table 4 Mobile Infrastructure Market by Region (Millions of U.S. Dollars) CAGR (%) Asia/Pacific 12,588 14,567 12,447 12,333 12,342 12,954 13, Central and Eastern 3,329 4,254 4,931 4,937 5,489 6,383 6, Latin America 4,704 4,236 2,912 2,827 3,639 4,837 5, Middle East and Africa 2,197 2,948 3,449 3,378 2,674 3,303 3, North America 9,225 9,634 7,166 7,538 8,663 9,253 11, Western 18,706 13,685 8,728 8,842 10,062 12,816 15, Worldwide 50,748 49,323 39,632 39,855 42,870 49,545 55, Source: Gartner Dataquest (December 2002) Gartner Dataquest Perspective Our expectation for the services market is that voice services will continue to grow at a modest level and continue to be the majority of revenue during the next five years. Data revenue is expected to continue to grow at a modest rate in 2002 and 2003 and begin to ramp up, as services, subscriber equipment and infrastructure become more mature. Sales of low-end mobile terminals will continue to show strength as developing world markets continue to account for the majority of sales to new-to-mobile end users. Sales of packet data-enabled 2.5G and 3G terminals will account for the majority of global mobile terminal device sales for the first time during 2003 and will penetrate the mobile massmarket even further during 2004, commensurate with greater mass-market acceptance of mobile data applications and services. During the same time period, novel handset features such as color screens and polyphonic sound will act as catalysts to drive replacement sales. In short, modest growth is finally returning to the mobile terminal market, but vendors must be increasingly flexible to win the loyalties of more-fickle end users. For infrastructure vendors, 2003 is anticipated to be another tough year. In addition to slowing demand for infrastructure, the very competitive marketplace is driving aggressive price erosion. Any rebound in infrastructure equipment investment will depend on the uptake in mobile data services in 2003 and However, we expect a relatively strong uptakeofnewserviceswithproductssuchasmultimediamessaging Service (MMS) and Java applications coming to market and handset vendors keeping up with demand for these new services. Gartner Dataquest Recommendations The role of the mobile network operator is pivotal in reviving the mobile market through mobile data and other enhanced services because of its unique position, which is directly in front of the end user. Success or failure rests squarely on the shoulders of the mobile carriers, and it's up to them to find the right partnerships that will bring useful applications to the business and the consumer markets. It addition, the carrier plays the

7 central role in building out the network to meet the end users' coverage requirements and pricing the product so that it is satisfactory to the customers, as well as allowing for adequate margins. So far, those criteria are not in place and will be required for wireless data to be successful. Lastly, pricing and customer service are the biggest unanswered questions for mobile carriers to address. Mobile terminal and infrastructure vendors will provide an important supporting role. Mobile terminal availability for these new services is a key aspect, but handset usability is an often overlooked but essential factor in placing these new services in their best light. Better integration of new services (packet data and MMS) into existing user interface (UI) paradigms will grow in importance. Equipment vendors are responsible for providing equipment that will meet both the carrier and the end users' needs for rollout and coverage. In addition, equipment vendors must ask themselves whether they are providing the equipment that will allow carriers to make money from their services. Carriers are certainly asking that question, and it will likely come up more as IP-based data networks come into greater prominence. 7 Key Issue How will mobile communications develop, and which forces will drive market growth and future opportunities?

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