Surely 2002 Can't Be As Bad?
By Steve Wallage, Wed Sep 26 00:00:00 GMT 2001
The mobile industry has accepted 2001 as its 'annus horribilis' but most assumed 2002 would mark a recovery. Financial analysts are starting to disagree.
It is easy to be highly negative on the opportunities for the mobile industry in 2002.
Markets are becoming saturated and there are pressure on prices. The demand for mobile data and value-added services is unproven. GPRS may continue to disappoint, and users could prefer to wait for 3G services that operators are still promising to launch before the end of 2002.
The media is licking its lips at a chance to talk about the stupidity of a mobile industry that has simply wasted billions of dollars on licenses for technology that no-one is prepared to pay for.
There has still been a strong sense in the mobile industry that the market will turnaround in 2002, and that much of the negative comment is ridiculously over-the-top. However, an increasing number of financial analysts have been questioning whether the market will indeed recover in 2002. These concerns are now examined by market sector.
The financial analysts were still positive on the growth in mobile infrastructure revenues for the first half of this year. Then came the cuts. For example, ING Barings reduced its 2002 figure for global mobile infrastructure spending, in June, from EUR 80bn to EUR 71bn.
Merrill Lynch is now forecasting that global wireless infrastructure spending will fall 5% in 2002, an even worst performance than it is predicting for 2001 (when it believes the market will end at the same level as 2000). Although it sees as a number of factors behind this, the key reason is believed to be pricing pressures on vendors.
Lehman Brothers have forecast that the market will be up to 10% lower in 2002 than 2001. They agree with Merrill Lynch about pricing pressure and also see mobile operators constrained by debt, and vendors constrained by technology delays.
ABN Amro stands out from the crowd with its forecast that the mobile infrastructure market will grow 10-15% in 2002.
The pessimism has began to be shared by the vendors. Kurt Hellstrom, CEO of Ericsson, commented at their September 4 strategy and technology summit, that he expected to see only "flat to moderate growth" in mobile infrastructure in 2002.
The reasons for the pessimism are easy to fathom from the mobile operator perspective. Take the example of Vodafone. It has stated that its capital expenditure for the years to March 2002 and March 2003 will be 10% than originally indicated. It has also indicated that, beyond 2006, capital expenditure will fall to under 10% of sales. Vodafone is already making far better usage of its purchasing power, and in creating common platforms across its subsidiaries. It claims that the decision to develop 3G at 384kbit/s across its operations saved the company around EUR1.3bn in expenditure.
The market for infrastructure will undoubtedly be tough in 2002 but the second half seems likely to improve as it becomes clear that infrastructure sharing does not lead to major reductions in expenditure, and operators need to invest in nationwide GPRS roll-out and the beginnings of their 3G deployment. Winning criteria for vendors will include flexibility, time-to-market and applications.
Mobile terminal estimates have quickly fallen in 2001 - for example, in July JP Morgan cut its 2001 estimate from 425-475 million to 400-425 million.
Merrill Lynch is forecasting that only 410 million mobile terminals will be sold in 2002. They believe that this is due to saturated markets, the lack of compelling applications and the replacement period for terminals remaining at 34 months. Financial analysts also agree that the 2002 mobile terminal market will be driven by upgrades. WestLB Panmure estimate that upgrades will represent 64% of the market in 2002.
However, there has been increased optimism that GPRS could drive growth in 2002. For example, on September 4, Matti Alahuhta, president of Nokia Mobile Phones stated that GPRS terminals would represent 50% of GSM handsets in two years.
Mobile operators are beginning to believe that availability issues for GPRS terminals will be overcome. For example, Vodafone have stated that while they currently offer two different GPRS terminals in the UK, by the end of 2001 this number will reach 30.
There are also some tentative signs of the business demand for mobile data. O2 (formerly BT Cellnet) has announced that it has sold 5,000 RIM BlackBerry devices in the first three weeks it was offered in the UK. Recent trading statements from the US have also been more positive on the mobile terminal business. Motorola reported increased sales and profitability in its handset business, while chipset suppliers such as RF Micro Devices and National Semiconductors have reported increased wireless demand.
Vendors are likely to worry less in 2002 about total terminal sales, and more about profitability and product mix. Consolidation among vendors could also make the market a little more manageable in 2002.
Mobile operator revenues
Morgan Stanley Dean Witter downgraded recommendations across the European mobile operators on August 31. Its rationale; that GPRS will not be "a key enabling technology" as the consumer demand will not reach expectations.
JP Morgan believes that, "GPRS will obviate the need for most carriers to deploy WCDMA". Most financial analysts see mobile operators waiting until 2003 before commercially offering the service.
Yet, European mobile operators are confirming their commitment to deploy 3G. Vodafone has re-iterated its commercial launch date as the second half of 2002, while Ericsson has suggested it will provide 'volume deployment' of 3G handsets in 2003.
Despite the concerns about market saturation and low mobile data revenues, actual figures from mobile operators have been fairly encouraging in recent months.
Vodafone has indicated that its ARPU across Europe is now stabilizing, beating its earlier prediction that it would continue declining until mid-2002. In reality, the picture on ARPU varies widely by operator and country.
The Telia second quarter 2001 figures show it increased its ARPU in Sweden and Norway. Yet, in Japan, the August 2001 subscriber net addition number was the lowest for two years, while in Finland August 2001 additions were 36% lower than the previous August.
In 2002, the gulf between mobile operators seems likely to grow. Some of the larger operators will really leverage their global and pan-European presence, to build economies of scale and strong brands. Overall, it seems likely that ARPU, although this is a poor metric of mobile success, will grow in 2002.
The three key issues that will determine the growth of the mobile market in 2002 are; the wider economy, the ability of mobile operators to market and develop new services supported by the industry, and whether mobile operators will only tentatively support GPRS for fear of cannibalising and undermining 3G services.
The wider economy, which particularly includes the growth opportunities within China, has historically been a strong indicator of telecoms growth.
The financial analysts are tending to be too pessimistic on the mobile market. And even if they are right and 2002 shows negative growth for the mobile industry, then 2003 is likely to record a strong recovery.
Steve Wallage works and writes for the451. Steve has more than 13 years of experience as a technology analyst specializing in telecommunications.
Most recently, he was a principal analyst at Gartner Group tracking the voice, data and IP service markets for the carrier, vendor and financial community. He predicted how these markets are likely to grow, and helped develop the business plans of leading vendors while analyzing key trends in the market.