Article | 2016 Telecommunications Outlook

Article | 2016 Telecommunications Outlook
8th December 2015 Atheneum Team

What crucial trends are driving the industry? 

Multiple key trends are driving the growth of the telecommunications industry. There’s the global thirst for connectivity, as the world seeks universal internet access and the manifold benefits that flow from that. Addressing that unstoppable desire is the Smartphone, which is a trend – nay, a tectonic shift – all by itself. Another trend surrounding the Smartphone is an app ecosystem, whose massive revenue potential has just begun to be realized. Add to that wireless delivery of television programming and other content, and you can see that we live in exciting times for the telecommunications industry, despite analysts’ fears of a maturing business.

Let’s begin with the Smartphone. Historically, when we talked about telecommunications, we generally were talking about POTS (plain old telephone service), and then cell/mobile phones. These devices wrought amazing changes in the world because they enabled everyone to talk to each other. (And then, for teenagers to not talk to each other as they texted away.) The rise of the telephone networks underpinned much of the growth in the 20th century, because it enabled accelerated national, and then international commerce. Then, the cell phone leapfrogged the need for copper cables and made personal communications affordable and available to almost everyone in the world in just 30 years from its introduction.

The impact of the Smartphone promises to be even greater than its predecessors, because it ties the incredible potential of the Internet to affordability and mobility. It has changed, and will continue to change, life on this planet in massive ways, hopefully mostly for the better.

Of course, we know all this, you say. We’ve all had Smartphones in our pockets for a while now, and yes, we can’t live without them. But isn’t the business maturing, and how is the telecom business going to grow in the future?

Good question, so let’s look at the big picture. Far from being in a mature, slowing business, I believe that we are just at the beginning of the Smartphone era. In fact, I’m predicting that the Smartphone business will be 300% bigger in 5 years than it is today.

In the old days, when we just had landlines and cell phones, we turned to either of those to speak to people, and later, to our mobile to send a text. When we wanted to send an email, or to Skype someone, or do online banking, or to Google information, we turned to our computers. Now, more people have Smartphones than have computers, and the majority of that activity is shifting from the computer to the Smartphone, and it’s happening fast.

Because every human activity involving connection is available in the ecosystem that has sprung from the Smartphone, it’s as though this device has spawned a new kind of Internet, one that is beyond what we imagined a few years ago. This “Internet of Apps” will multiply the network effect of connectivity to a truly gigantic scale as the rest of the world catches up to the privileged one third of the world who have Smartphones today.

The boundaries between the telecom business and the computer business are disappearing, and huge macro trends are colliding to transform everything as the Internet of Things takes shape. So, as we look at the telecom landscape of the future, connectivity, in any shape or form and from any device, is what the business will be all about.

This means that telecom’s role will be much broader than ever before, because it is potentially stepping into the role of internet service provider, banker, advertising medium, television broadcaster and much more. For example, is a TV show streamed via an LTE connection different from one broadcast by a network? The only real difference is the broadcast frequency and the receiver. There are sound reasons why Verizon bought AOL, and content and advertising platforms are just part of it.  Other telecoms have the opportunity – with imagination and courage – to usurp many of the roles formerly occupied by other players and reap big rewards.

As wireless broadband speeds increase, computers and even TV’s will potentially become just large Smartphones, running the same apps and feeding into the same ecosystem.

In fact, “Smartphone” will become an outdated word because the “things” that are connected to each other, using Smartphone technology but not necessarily with any human attached, will number about 20 billion worldwide in less than 10 years. We’re entering a Smartworld – The Internet of Things.  But that’s another discussion.

Let’s get back to what these long-term trends mean for the current eye of the hurricane: the Smartphone, and the nearer term numbers. I believe there’s considerable reason for optimism.

Analysts have punished Smartphone stocks, especially Apple, because they believe Smartphone growth may be slowing or stopping. But it seems to me as though we are in fact still near the beginning of a Smartphone era which promises to radically reformat the world for a long time to come.

The Smartphone is only 7 years old. It has already transformed the telecom business, and how we live, in ways that no other product has ever done.

History can help us try to predict where we are within the evolution of this “trend”, which is really a very meaningful shift in how the world operates. Let’s look at other world-changing products to try to understand where we stand in the change continuum that has been wrought by the invention of the Smartphone.

The train made long-distance travel possible. It took fifty years or so after its invention to say that the railroad networks were widespread enough to be truly world-changing in their ability to move large numbers of people, and to enable massive freight transportation. It’s unlikely that the first train inventors foresaw the existence of subways in most major cities on earth, but one thing led to another, as the “network effect” always does.

Then the automobile freed the common man to be able to travel independently beyond his town or village.  Yet it took 22 years after its invention in 1886 for mass production to begin to make the car affordable for the masses in the US. It took another 40 years for the car to achieve real global reach, thereby changing the world landscape (albeit not always for the good).

Air travel changed the way people were able to travel between countries by making it fast and affordable. Enough people could be carried at a low enough price to make global travelers of us all. The first jets in 1944 led to initial jet travel in the 1950’s, with big leaps forward with the Boeing 707 in 1960 and the biggest leap of all in 1969 with the Boeing 747, which radically changed the numbers of people who could participate because the numbers it carried made the cost per seat affordable. (Interestingly, the Boeing 747, which was expected to have a 20 year lifespan, is still being sold today, 46 years later.)

It’s clear that world-changing inventions need about 20 years before really transformative changes take place on a worldwide scale.  It’s easy to argue that trends move faster today, and the speed of Smartphone change may be a case in point. But the macro, global picture still takes quite a while to change. If that were not so, we’d all have self-driving electric cars by now. We’re in the eighth year of the Smartphone Era. I’m betting that the 20th year will be even more astounding.

Why? Because the key to massive global adoption is always mass production and affordability, and the Smartphone is still in a relatively early stage in that process. The true democratization potential of the internet will not be fully realized until everyone has a Smartphone, and we’re only one-third of the way there. With universal access to apps, the network effect of global connectivity will be magical, as it was when everyone got a telephone, but on a deeper scale. The spread of wifi alongside faster wireless networks just accelerates the growth.

So the big trends to look for in telecommunications are massive global penetration of the Smartphone, (and the accompanying growth in Smart Things, such as the automated home and the Connected Car), plus the exponential growth of the knowledge and money ecosystems that flow from a fully networked global community of Smartphones and other Smart devices.

Ultimately, ecosystem revenue should be much bigger for carriers and phone manufacturers than the sale of phones themselves. That, of course, depends on how much carriers want to become bankers, brokers and retailers. Either way, massive revenue will flow from globalized connectivity. Don’t believe it? Think back just 7 years, to the dawn of the Smartphone. If Uber and Airbnb, among thousands of other apps, could transform traditional businesses this fast, what else lies ahead.

What market segments will experience the most growth and why?

Clearly, the developing world will have the fastest Smartphone penetration growth over the next four years, with India leading the charge. In technology, very few people aspire to downgrade. Research shows that the humblest flip phone owner in India or Africa aspires to own a Smartphone one day. More specifically, an iPhone. To the extent Apple is prepared to offer creative financing/subscription models so that mass numbers of people can afford their phones, they will probably experience a growing share of the global Smartphone mix, although Android phones will easily remain the overall leader.

The graph below illustrates the shift. Today we see the top 5 countries accounting for most of the shipments, with China leading, followed by the US. In 2019, China will still lead, followed by India, then the US. Meanwhile, the rest of the world after the top 5 will account for about half of global shipments. Remember, these are shares of a much, much bigger pie.

Smartphone Graph

Meanwhile, the renewal market will also keep upgrading. It’s likely that Apple’s iPhones will continue to grow at a faster rate than Android devices (off a smaller base). That could easily change, but the rate of growth is not really the point. The Smartphone pie as a whole is going to get much bigger, which is a fact “rate of growth” analysts appear to be missing. We’re at about 2.5 billion Smartphones in the world today, and there should be over 8 billion in the world by 2020. I estimate about half the growth will come from new customers, especially in developing markets, and about half from renewal customers.

At Apple’s recent year-end earnings call, analysts repeatedly asked CEO Tim Cook about the iPhone’s prospects for the next quarter. Clearly, they are worried that iPhone sales will suddenly fall off a cliff, even though the company reported record revenues, earnings and strong plans for the future.

These analysts don’t seem to be getting the big picture trend. By focusing on the rate of growth, they get alarmed if it falls off slightly quarter to quarter in a particular market such as China or the US. What they are not looking at is the gross number of Smartphones being sold globally, and all the implications of having an expanded network of users participating in the ecosystem. Of course the percentage rate of growth will decline over time, because it’s being measured against a hugely increasing base. The larger questions are: how many Smartphones are being sold worldwide, how much revenue is being generated, and how long until the global market is saturated?

There are two big reasons for optimism here. First, new owners. With about 2.5 billion Smartphones in the world today, we’re about one third of the way to global saturation. So looking at the macro picture for telecom, the future is bright on a global basis for the simple reason that everyone wants a Smartphone and right now only one third of the world has one. As I mentioned earlier, the enablers of true global penetration of world-changing technologies are mass production and affordability. In the case of the Smartphone, we seem be on the threshold of some clever maneuvers by manufacturers that will kick these into high gear. I anticipate that about half of the roughly 5.5 billion Smartphones that will be sold in the next four years will go to new owners, mostly in developing countries.

The other half will go to phone replacement because the rate of replacement of existing phones looks like it will also accelerate. So the mature markets will not be declining, or even standing still – they just won’t grow as fast as the emerging markets. You’re not going to keep the phone you have now for another 3 years, are you? There was a stampede to get iPhone 6. A year later, there was another stampede by existing owners to get iPhone 6S. When iPhone 7 comes out, does anyone think current owners are going to sit on their hands

What are they key challenges?

It may be that innovation of core Smartphone functions will slow down. For example, how much better can you make the camera?  Maybe that will slow down adoption of new models. It may be that wifi and wireless data networks in some emerging markets don’t grow fast enough to justify the purchase of Smartphones. It may be that Smartphones remain too expensive for much of the population in new markets. It may be that there is a more severe economic downturn in, say, China. It may be that repressive governments may hold back Smartphone adoption in some places.

However, recent history suggests that none of these will stand in the way. iPhone 6 record sales have been followed by iPhone 6S record sales. It’s very likely that new models will still be bought at a tremendous rate, for a few reasons. One is increasing speed of internet access and of the processors. Another is the rapid proliferation of LTE high speed broadband networks, even in developing countries. Another is expanding screen sizes, as “phablets” become the norm.

But the most profound change for both the new and the replenishment numbers is the changing ways to finance the purchase of phones. This promises to speed adoption of new models in the more saturated markets, and, surprisingly, to help make Smartphones more available and affordable in emerging markets.

“The vendor landscape and product offerings are really unique at the moment as many markets are seeing consumers become more aware of alternative buying options when it comes to paying for their smartphone,” said Ryan Reith, Program Director with IDC’s Worldwide Quarterly Mobile Phone Tracker. “In mature and subsidized markets, we now have a wide range of operators offering equipment installation plans (EIP), as well as early trade-in options.”

One example is the Apple iPhone Upgrade program. This just-launched program will mean that current iPhone owners get an unlocked new iPhone, with AppleCare, for just $32 a month. After a year, they can get a new iPhone and just keep going. That means they are not tethered to a long term carrier contract in order to pay off a subsidy. They could easily choose a no contract plan, such as Straight Talk in the US, which offers unlimited calling, text and data on the best networks for just $45 a month. So, if the unlimited service and the phone together cost just $77 a month, and you can change your phone every year, why would you need a contract? (Full disclosure: I was responsible for the naming, development and launch of the Straight Talk brand at my former employer, TracFone Wireless, the US subsidiary of America Movil.)

Regardless of which carrier is chosen, the demise of the phone subsidy means that no-contract options will flourish. With iPhone Upgrade, you’ve changed your allegiance from your carrier to Apple. The long term effects of this change on iPhone sales will only be felt over the next year or two, but the prognosis is good.

With these changes in mind, let’s look at the iPhone numbers to see if we can get a grasp on how many are likely to be sold not in the next quarter, but in the next four years. The iPhone is widely regarded as the first Smartphone, and even though it’s the first, I believe it’s really just at the beginning of its product lifecycle. (After all, that other world-changer, the Boeing 747, only peaked after its initial 20 years.)

Apple Graph

There are more iPhones sold than babies born in the world every day. Recently, Tim Cook revealed that 700 million iPhones have been sold so far (in a little over 7 years), with about half of those sales coming in the last two years. The next four years promise to triple the total number of iPhones sold to over 2 billion by early 2020, even with an average increase of only 5% per quarter (which is lower than most analysts predict). Historical year over year increases have been much larger than that, but let’s be conservative. There will of course be bumps in the road, but the trend is up – in a big way.

Meanwhile, about 1.7 billion Android devices have been sold so far, with Google recently announcing that over 1 billion Android devices will be sold in the next year. We’re looking at over 6 billion Android devices sold globally by 2020. This suggests that the global train is picking up speed, even though it may have reached cruising speed in the early adopter markets, such as the US.

So, if we aggregate the scraps of information released, we find that roughly 2.5 billion Smartphones have been sold in the world today, and that number will increase by over 1.5 billion per year for the next 4 years. In other words, we will end up with 8.5 billion Smartphones sold into the global market by 2020, which is slightly more than one for every person on the planet.

This means that the Smartphone business will grow about 300% in the next four years. Let’s say 1 billion of those phones are obsolete and no longer in use. That still leaves us with 7.5 billion Smartphones at the end of 2019, versus a maximum of 2.5 billion today.

You thought this business was huge now? It’s still on a steep growth curve. Obviously, most of the growth will come from developing countries. And just as clearly, not everyone in the world will be able to afford a Smartphone, much less an iPhone, in just four years. (Cost is not the only barrier: of course, the building out of fast data networks is a big dependency, but one that is being addressed at significant speed).

So let’s say that two thirds of the world population will have Smartphones in the next four years, versus the one third who have them today. The large populations of youth in Africa, India and multiple other areas will not be denied. Just as they found ways to acquire cell phones, so will they achieve Smartphones. Of course, they all want iPhones or Samsung Galaxy’s, and not all will be able to afford them. But Apple and the other manufacturers are going find ways to make them affordable for a larger audience. The subscription model that Tim Cook announced for the iPhone is the tip of a very large iceberg.

Earlier, I suggested that mass production and affordability are the barriers to complete Smartphone penetration worldwide. Here’s how I think the yearly phone replacement model helps the business across the board. Let’s say you, in a mature Smartphone market, decide to trade in the iPhone 6 you bought a year ago for an iPhone 6S. Apple has already recovered their costs on the first phone, and now they’re selling you a more expensive one. What happens to that perfectly good iPhone 6 you just traded in? Presumably, it goes off to a developing country to be resold at a lower price. So Apple gets to resell a phone it has already manufactured at a price the new market can afford, and at an excellent profit. The same refurbish and resell model will apply to all Android devices as well.

To me, it’s abundantly clear that we are early in the Smartphone era because we have massive numbers of new users and improved devices on the horizon. True global saturation of Smartphones may take a few more years to achieve, but the next decade should deliver a world where everyone has fast Internet access via the Smartphone.

The magical network effects that ensue when nearly everyone is connected are still ahead of us.

EXTRA: The Coming Ecosystem Explosion

And that brings me to the next big trend: the rise of the ecosystem. The Smartphone is one doorway into an ecosystem of apps, search engines, personal communications, music, video and many other functions. Because operating systems and devices – from Smartphones to Smart Watches to tablets to computers to Connected Cars- are vehicles for delivering a common app experience, it doesn’t matter which device is accessing the Internet. It’s the shared interoperability that matters.

That’s why, for example, Apple is talking about iOS as the important thing, not quarterly iPhone sales. And that’s why they will be able to sell some iPhones at lower prices in the future and still make more money. They are in a customer acquisition and retention business through an array of great devices, but even more importantly through a shared world of apps and content. That means they can offer subscription models for people to update their iPhones frequently, because it’s not just about the phone per se. It’s about winning and retaining the customer. The profit per iPhone is not the most important metric in the long run; it’s how many Apple customers are there, how long are they retained, and what’s their lifetime value? When you triple the size of your ecosystem in four years, as Apple is likely to do (especially when you factor in iPads, Apple Watches and computers), it can have a powerful effect on overall revenue and profitability.

These are the numbers that get really exciting. Telecom manufacturers and carriers have an opportunity to own the opportunities for content and services, or leave it all to others and extract a toll for delivery. When most of the world is paying for information delivered through the Android, iOS or other devices, the number of services sold may ultimately become as important as the number of devices. And who knows what those services will be when most of the world is able to get educated, entertained and earning from applications we haven’t envisaged yet?

The Ubers, Airbnb and Netflix’s of the world tell us that the Smartphone changes everything. And when Smartphones are affordable enough, they will change it for everyone. As I said, we’re just at the beginning.

About the Author:  Derek Hewitt is the former Senior VP of Marketing at TracFone Wireless Inc, the $6 billion US subsidiary of America Movil, fourth largest global telecom company. He was previously President of iMedia Learning and global VP of Digital Marketing for Philips Electronics. Now an independent marketing consultant, analyst and TV producer, he is also CEO of Online Broadcasting Corp, which is engaged in providing broadband solutions in remote locations in Africa.