The Future of TelecommunicationsNew Strategies for a New World

2011

In This Report

1 An Industry in Transition

2 The Developed World: Fixed + Mobile = Competitive Advantage

4 The Developing World: Slowing Growth and Intensifying Competition

7 Priorities for the New Era

Published by:

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The year 2010 marked a turning point for the global telecommunications industry. After 20 years of growth, the 2G mobile voice business, driven by enormous growth in emerging markets, reached an all-time high of five billion connections. At the same time, developed markets began to see a surge in demand for mobile data, which is driving growth throughout the ecosystem: Smartphones went from niche to mass-market, the launch of the iPad put tablets on the map, and 4G became a reality. Seizing the data opportu-nity, Web giants Facebook, Google, and Skype began expanding their reach in the communications market.

Wireless World

2G voice and SMS 3G/4G data

Emerging market momentum

Developed market renewal

Global empire building National/regional depth

Premium services Universal connectivity

Fixed World

Copper Fiber

Universal (basic) Focused & premium

Handset World

Phones Smartphones

Nokia, Samsung & LG iPhone, RIM & Qualcomm-Android

Network Equipment

Five major independent companies Three major entities

Major Shifts in the Service Provider Ecosystem Underway

An Industry in Transition

A new era is dawning for the telecommunications industry. As data services come to replace voice services as the greatest driver of growth, the rules of competition are changing for mobile operators, handset makers, and network equipment companies. Over the past decade, the greatest growth occurred in developing markets, where the demand for mobile voice skyrocketed. The leaders were mobile operators that excelled in innovation, market making, and entrepreneurship. Over the next 10 years, surging demand for data will provide tremendous growth potential for the large, established operators that provide both mobile and fi xed services in developed markets. The companies that lead the way in the new era will focus on national and regional scale, cost and capital management, and simplifi ed market propositions.

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In developed markets, the fast-growing demand for data services is beginning to have an impact on fixed-line service providers as well as purely mobile opera-tors. It will fuel the expansion of fiber-optic networks, which are valuable for underpinning advanced wireless networks that combine Wi-Fi and cellular technologies. Yet, at the same time, fiber-optic networks have high capital costs, which means that fiber won’t be ubiqui-tously available. So the companies that have fixed and mobile assets will become more competitive in the years ahead.

These developments are ref lected in the changes to the leader boards for fixed and mobile revenues between 2005 and 2010 (Figure 1).

Leading service providers in developed markets are already shifting their focus from universal telephony to high-quality, super-fast Internet services and TV. Even enormously successful mobile operators like India’s Bharti, with 188 million subscribers and $10 billion in revenues, pale in comparison to companies with fixed-line networks, such as Deutsche Telekom, Comcast, and Telecom Italia.

The financial firepower of Telefónica, AT&T, and

Verizon. These companies have created substantial value by combining fixed and mobile assets, building regional scale through consolidation, tightly control-ling costs, and managing capital with discipline. With more than $100 billion each in revenues, AT&T and Verizon are world leaders even though their revenues are mostly confined to the American market. Any move on the part of either company to buy assets over-seas would be profound for the industry worldwide. Verizon, however, will have issues to resolve around Verizon Wireless, its joint venture with Vodafone.

Potential for Vodafone. After a period of stagnant growth, Vodafone has placed great emphasis on tight financial discipline by building solid cash f low and by selling off minority stakes in companies like SFR. With the increased importance of data in developed markets, Vodafone’s scale and position in Europe, along with its improved financial management, should better position the company for regional growth in the near future.

The Developed World: Fixed + Mobile = Competitive Advantage

Leading service providers in developed markets are already shifting their focus from universal telephony to high-quality, super-fast Internet services and TV.

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The strength of Comcast and Time Warner. Both U.S. cable companies are in the top 30 in the 2010 revenue table, signifying the revenue-generating power of TV and high-speed broadband over fiber. Moreover, both are well positioned to support the widespread use of femtocells to improve mobile coverage and capacity. They point toward a fiber-rich future that integrates fixed, wireless, and TV services.

As these developments suggest, we are likely to see a fundamental role reversal between fixed and mobile in developed markets. Over the next 10 years, mobile operators will be the ones providing universal (i.e., basic) service, and fixed operators will provide high-performance premium services—the inverse of what we saw 25 years ago.

Figure 1Mobile Leader Board, Fixed and Mobile, by Revenues (in billions)

1. NTT 91.1 1. AT&T (SBC Classic) 123.9 16. China Telecom 21.0 16. Sprint Nextel 32.2

2.Verizon Communications

74.9 2. NTT 116.4 17. BellSouth 20.5 17. China Unicom 24.5

3. Deutsche Telekom 70.6 3.Verizon Communications

107.3 18. América Móvil 16.9 18. Telstra 24.3

4. Vodafone 59.9 4. Deutsche Telekom 86.0 19. Telstra 16.6 19. Brasil Telecom 22.2

5. France Telecom 56.9 5. Telefónica 80.6 20.Bell Canada Enterprises

15.1 20. Vivendi 21.7

6. Telefónica 44.9 6. Vodafone 71.6 21. KPN 14.1 21. Time Warner Cable 18.6

7. SBC Classic (AT&T) 43.9 7. China Mobile 71.3 22. TeliaSonera 11.0 22. KPN 18.2

8. Sprint Nextel 38.2 8. France Telecom 61.7 23. China Unicom 10.8 23.Bell Canada Enterprises

17.5

9.Telecom Italia Group

35.4 9. KDDI 41.1 24. Telenor 9.8 24. MTN 16.1

10. BT 33.6 10. Comcast 37.4 25. Orascom/WIND 8.8 25. TeliaSonera 15.9

11. China Mobile 30.1 11.Telecom Italia Group

36.6 26. Time Warner Cable 8.8 26. Telenor 15.8

12. AT&T (Classic) 27.2 12. SoftBank 34.4 27. STC 8.7 27. Orascom/WIND 13.5

13. KDDI 26.0 13. BT 32.6 28. Singapore Telecom 8.0 28. Singapore Telecom 13.4

14. Vivendi 23.1 14. China Telecom 32.4 29. Portugal Telecom 7.6 29. VimpelCom 12.2

15. Comcast 21.1 15. América Móvil 32.2 30.Rogers Communications

6.6 30.Rogers Communications

11.7

Exits Risers Fallers

2005 RANKINGS $BN $BN $BN $BN2010 RANKINGS 2005 RANKINGScontinued

2010 RANKINGScontinued

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As the leader boards for mobile subscribers demon-strate, the past several years have witnessed a tremen-dous rise in demand for mobile services in emerging markets (Figure 2). A number of entrepreneurial opera-tors capitalized on that opportunity, and they quickly became global leaders. They have the opportunity to play at the top table, but slowing growth and intensi-fying competition will pose daunting challenges.

Winners in Asia and Latin America. The data shows clearly that the greatest mobile growth last decade occurred in Asia, followed by Latin America. By 2010, China Mobile, Bharti, América Móvil, China Unicom, MTN, Telenor, Reliance, MTS, Telkomsel, VimpelCom, Tata, and China Telecom each had acquired more than 80 million subscribers. Although emerging market growth is now beginning to subside, these companies are positioned to be major players in the next phase of the industry’s development.

Emerging Middle East Powerhouses? Five Middle Eastern companies—Orascom/WIND, Zain, STC, Qtel, and Etisalat—entered the global stage. By 2010, Orascom/WIND and Zain began to falter. Etisalat, Qtel, and STC remain committed to global expansion. They have the opportunity to become global leaders but may face some headwinds in the next few years.

Russians on the Rise. Operators in Russia have the potential to become the new global telecommunica-tions challengers. VimpelCom has made a bid for Orascom/WIND; MTS and other Russian companies may make similar moves in 2011.

The Developing World: Slowing Growth and Intensifying Competition

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Figure 2Leader Board by Mobile Subscribers

SUBS SUBS SUBS

1. China Mobile 142 1. China Mobile 493 1. China Mobile 567

2. Vodafone 117 2. Vodafone 346 2. Vodafone 343

3. China Unicom 81 3. América Móvil 178 3. Telefónica 210

4. T-Mobile/DT 61 4. Telefónica 154 4. América Móvil 200

5. Orange/FT 56 5. T-Mobile/DT 150 5. Bharti 188

6. NTT DOCOMO 45 6. China Unicom 140 6. China Unicom 152

7. América Móvil 41 7. Orange/FT 126 7. MTN 134

8. Verizon Communications 38 8. Orascom/WIND 108 8. T-Mobile/DT 132

9. Telecom Italia Mobile 35 9. Telenor 104 9. Orange/FT 127

10. Telefónica 31 10. MTN 103 10. Telenor 117

11. AT&T Mobility 24 11. Bharti 102 11. Reliance Communications 117

12. Cingular 23 12. MTS 100 12. Orascom/WIND 113

13. Turkcell 21 13. Verizon Wireless 88 13. MTS 99

14. Vivo 21 14. Reliance Communications 80 14. Verizon Wireless 93

15. O2 20 15. AT&T Mobility 80 15. Telkomsel 93

16. Vivendi 20 16. Telkomsel 76 16. AT&T Mobility 93

17. Sprint PCS 19 17. Telecom Italia Mobile 73 17. VimpelCom 87

18. MTS 19 18. Zain 70 18. Tata Teleservices 84

19. SK Telecom 18 19. Turkcell 68 19. China Telecom 83

20. KDDI 16 20. VimpelCom 64 20. Telecom Italia Mobile 75

21. KPN 14 21. NTT DOCOMO 55 21. BSNL 73

22. Nextel 13 22. Axiata 55 22. IDEA 67

23. WIND 13 23. BSNL 54 23. Axiata 67

24. TeliaSonera 12 24. Qtel 51 24. Qtel 60

25. Telenor 11 25. Sprint Nextel 49 25. NTT DOCOMO 57

26. VimpelCom 11 26. Vivo 47 26. MegaFon 52

27. Hutchison 3 11 27. MegaFon 45 27. Sprint Nextel 49

28. KT Freetel 10 28. Tata Teleservices 43 28. Vietnam Mobile 49

29. Vodacom 10 29. Vodacom 41 29. TeliaSonera 44

30. PLDT 10 30. China Telecom 39 30. PLDT/SMART 44

2003 RANKINGS 2009 RANKINGS 2010 RANKINGS

Exits Risers Fallers

6 |

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Focus on National Depth and Aggressive Cost and Capital Management

Value is passing from traditional voice and text services to the provision of reliable mobile broad-band connectivity. Customers will gravitate toward the service providers with the best networks in their markets, so building national or regional depth now matters more than achieving global breadth.

Consolidation and capital spending will be critical. Mergers and acquisitions, used over the past decade to build global empires, will now serve a different purpose: to improve competitive positions in-market. Consequently, the companies with the ability to consolidate will be the movers and shakers in the new environment.

During the past fi ve years, the best way to manage capital was to use profi table, developed world opera-tions as cash cows and to put every spare dollar toward building a customer base in emerging markets. But over the next fi ve years, operators will need to make major capital investments in network capacity and quality to build in-market depth.

Vodafone, for example, may get a better return from investing in data in existing markets than in making international acquisitions. Investing in LTE, refarming 2G spectrum for 3G services, or buying up domestic competitors may all prove more benefi cial than expanding into Africa.

Greater Competition in Emerging Markets

Meanwhile, much of the developing world will be the stage for intensifying competition, further price wars, lower ARPUs, and continued rapid growth in operational costs. Subscriber numbers will continue to grow, but revenues will rise more slowly and profi t-ability and cash fl ows may fl atten or decline.

Most signifi cantly, the huge market valuations of developing world operators will diminish, resulting in a substantial loss of acquisition currency. Until recently, companies like Bharti, Etisalat, and América Móvil were the big buyers. Going forward, they will likely sell off small peripheral operations in weak posi-tions and focus on building in-market depth.

Priorities for the New Era As the demand for mobile data surges in Europe and North America, mobile operators that want to get ahead must revisit their voice and SMS-centric businesses and build new data-centric operating models. National scale, aggressive cost and capital management, and simplifi ed pricing will all be essential.

8 |

Simplified Pricing Structures

In 2010, most mobile operators continued to deploy excessively complex tariff schemes, particularly in voice and text, because this was how they made money in the past. But with the build-out of better data networks, the advent of smartphones, and growing competition from Web players, we believe that pricing structures that the consumer can easily understand will generate more value. To wit, Facebook, RIM, Skype, and Google Voice are using a combination of simplicity, convenience, and value to make inroads into the markets for mobile short messaging and mobile voice. These moves are likely to accelerate the long-term decline in the value of the operator voice and SMS business.

Meanwhile, mobile operators’ simple data tariffs are becoming more complex. Many operators recently reintroduced tiered packages (i.e., pricing based on volume) to profi tably accommodate the small number of customers who account for much of their data traffi c. These schemes will be severely tested in 2011 as congestion grows and quality of service (i.e., average speed) deteriorates. Consequently, we predict that 2011 will see both the beginning of pricing based on quality of service rather than on volume, and the beginning of competition based on network quality.

Challenges for Handset and Network Equipment Companies

The changes affecting mobile operators are being echoed in the broader telecommunications ecosystem. In the handset market, innovative smartphones devel-oped by Apple and RIM have undermined the leader-ship of Nokia, Samsung, and LG, forcing Motorola and Sony Ericsson to do a major strategic rethink.

That, however, is just the fi rst chapter of the smartphone story. In 2011, handsets powered by what PRTM calls “Quadroid” (the Qualcomm chip/Android operating system) will make waves at the high end of the mobile phone market, pitting a more open and diverse ecosystem against the closed systems of Apple and RIM. Just like the Windows-Intel combination that dominated the PC market, Android—running on ARM-

based processors from Qualcomm and others—could assume a leadership position in the handset market.

Nokia, Samsung, and LG also must make some major strategic decisions. They will need to deter-mine if they should persist with their own operating systems, fully embrace Android, or fi nd a new way to compete altogether. For Samsung and LG, Quadroid may offer as much opportunity as their own operating systems. For Nokia, it is a huge decision; one that must be made in 2011.

The advent of 4G networks also threatens to further upset the stability of the network equipment industry. The widespread adoption of 3G saw the demise of Motorola, Nortel, Lucent, Alcatel, Nokia, and Siemens as independent players. Similarly, the spread of 4G (mainly LTE) in 2011 will spur the next wave of consolidation. In all likelihood, the current fi ve—Ericsson, Huawei, Nokia Siemens Networks, Alcatel-Lucent, and ZTE—will be winnowed down to three major entities. Which companies will survive remains to be seen.

New Landscape, New Opportunities

The 1970s and 80s saw long-distance fi xed tele-phony dominated by AT&T, BT, MCI, and WorldCom. What followed was an era of mobile voice, which saw the rise of Vodafone, China Mobile, and Telefónica. We are now entering a new 20-year era, which will likely be characterized by high data volumes on mobile and fi ber networks, and by increasingly seamless fi xed and mobile and TV services.

If the leader boards are any indication, enormous change is in store for the telecommunications industry.

Success in the new data-orientated landscape will require fundamentally different operating strate-gies from those that worked in the past. National and regional depth, consolidation and scale, cost and capital management, and simplifi ed pricing will be critical to competitive advantage.

New opportunities and new battlegrounds abound for the companies prepared to seize them.

For more information, please contact:

Ameet Shah, Director, PRTMashah@prtm.com

Dan Hays, Director, PRTMdhays@prtm.com

Mohamed Kande, Director, PRTMmkande@prtm.com

David Percival, Director, PRTMdpercival@prtm.com

John Tysoe, Managing Director, The Mobile Worldjohn.tysoe@themobileworld.com

Since 1976, PRTM has created a competitive advantage for its clients by changing the way companies operate. PRTM’s management consultants work with senior executives to develop and implement innovative operational strategies that deliver breakthrough results. The fi rm is a leader in operational strategy, supply chain, product development, and customer value management. PRTM has 19 offi ces worldwide and serves major industry and global public sectors.

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