Media and Communications: Risk
Telecommunications Equipment:
Mobile telephone sales suffered from the decline in non-food consumption before recovering in the 2009 second half.
Network equipment had another difficult year in 2009. No significant improvement is expected in 2010.
Like most other non-food consumer products, global sales of mobile telephones suffered from the crisis. They declined from the 2008 third quarter until the 2009 second quarter before gradually beginning to grow again. Overall, the total number of units sold in 2009 stagnated. Japan, Latin America, Central and Eastern Europe and the Middle East saw their sales decline. In contrast, they increased in Asia and, against all odds, in Western Europe, and stagnated in North America. In this lackluster context large manufacturers lost market share not only to Koreans with their hot-selling touch-screen equipment but also to Apple and RIM, beneficiaries of the craze for smartphones whose share of total mobile telephony sales has been growing strongly in volume terms (15%) and even more so in value (30%). This explains why the world market in value terms has increased slightly in 2009. Although margins are currently very large in this segment, they will narrow with the arrival of new actors and the increasing presence of the general public in the customer base. Operators are counting on "democratization" of this type of equipment in the hope of increasing average revenue per subscriber. Towards that end, they are determined to influence consumer prices by turning to Asian manufacturers. Mobile telephone manufacturers meanwhile have been inclined to develop their range of dedicated applications, which have proven very profitable, and penetrate the netbook segment reflecting the increasingly blurred line between PC and telephone in mobile internet. And at the low end, inexpensive models are not to be neglected, tight margins notwithstanding, in view of the considerable prospects for volume sales in developing markets. Manufacturers offering a full range of products thus enjoy greater strategic flexibility. Sales will continue to recover in 2010, particularly in emerging and developing regions where the expansion of grey markets will, however, prevent legitimate manufacturers from benefiting fully. The network equipment market was tight again in 2009 with the intense price competition stoked by new Chinese actors, compounded by the decline (down 6%) of demand from telecommunication operators and companies in general, which have cut back on investment. The disappearance from the scene of the Canadian Nortel through bankruptcy and consequent acquisition of its assets by various competitors only resulted in a marginal easing of the pressure. Growth is expected to be slightly positive in 2010, albeit it in a still highly competitive context. Chinese manufacturers will continue to leverage their booming domestic market and their good positions in the other emerging markets, which generate half of operator demand. Although currently suffering more than Internet specialists, historic equipment makers are expected to ultimately benefit from the extent of their ranges and global presence. They have moreover been benefiting increasingly from network management and maintenance business subcontracted out by operators.
Telecommunications Operators:
With turnover totaling $1,440 billion, the global telecommunication services market is expected to grow 2.6% in 2009 (source Idate). Revenues from fixed-line services will contract further (down 6.1%) with Internet-access related revenues (up 7.4%) not sufficing to offset the inexorable decline of fixed telephony under way since 2002. Conversely, mobile telephony will remain dynamic (up 5.7%). But a noticeable slowdown has even gripped this highly competitive growth segment. In emerging regions (India, China, Brazil) the growth has been spectacular. With revenue per subscriber tending to contract, however, operators have been putting the accent on developing abroad in other emerging countries. In 2010, the sector is expected to continue to grow, up about 3.5%.
Although not very cyclical, telecommunications services have been affected by the crisis, although less severely than other sectors. Competition has grown more intense, consumer behavior has changed, and, on balance, fundamental trends underway these past three years have accelerated. Mobile telephony and related services thus dominate the sector in both industrialized countries and emerging regions with four billion people now using mobile telephones.
In the United States, operators will benefit from government investment spending but will be hampered by new regulation.
In the United States (24% of the global market), revenues are expected to begin growing again in 2010 notably with a resumption of investment by companies in smartphones. Operators will derive support from the Obama administration's decision to devote $7.2 billion to finance the development of broadband Internet in rural areas. Concurrently, however, the federal government is strengthening a regulatory framework that until now has been relatively accommodating toward large operators. The new regulations are expected to impose greater transparency in network management to make access available to all content providers on an equitable basis. That will likely affect pricing structure and access fees billed by historic operators. The regulator will intervene in particular cases involving commercial practices as exemplified by the ruling requiring AT&T to give up its exclusive rights to the I-Phone throughout the country in 2010. This new context will stoke competition among historic operators, which will also be affected the social costs associated with staff pensions and by arrival in the market of low cost regional operators like MetroPCS and Leap Wireless.
Europe: saturation of the market has weakened distributors.
In Europe (27.6% of the global market), the sector's growth will be weak with some markets continuing to contract (Germany), others stagnating (United Kingdom), and still others growing just slightly (France and Italy). All Western European markets are highly saturated, even over-equipped with an average penetration rate of 119% compared to 87% in the United States and 84% in Japan (source European Commission, March 2009). And the poor economic conditions in 2009 have stoked the price war raging in mobile telephony in particular. Austria, Germany, the United Kingdom (the country currently with the lowest prices and stiffest competition), Belgium and Iceland have experienced the most spectacular price declines, ranging from 30% to 50%. European price regulation directives have also put pressure on margins. In 2010, national regulators will allocate new mobile-telephony frequency bands to European operators, which will doubtless intensify existing competition. But this will not jeopardize the solidity of the great majority of operators with their well developed operations in high growth emerging markets enabling them to maintain satisfactory margins. Meanwhile, their performance will remain under pressure in 2010 from the exchange rate trend of the currencies in those markets against the euro.
Saturated Japanese and Korean markets
Operators in Japan (and South Korea) will continue to contend with a context of falling prices and, to protect market share, continue the race for innovation and could suffer in the current period of economic slowdown from their limited penetration of emerging markets.
In emerging regions, high penetration rates in cities and low profitability in rural areas have forced operators to develop internationally.
In India, the low 35% penetration rate of mobile telephony notwithstanding, the competition among the 11 operators present in the market has been fierce. Although volume growth has remained strong, margins have been narrowing as a result of severe price erosion: prices per minute in India are the lowest in the world. The focus on volume business in conjunction with a lack of mobile telephony frequencies to penetrate Indian rural areas is expected to prompt larger operators to pursue their development abroad, particularly in Africa. In 2010 the challenge in India for Indian and global operators will be the sale by the government of 3G licenses affording Internet access via mobile telephones. With the licenses to be put up for auction the sale prices are expected to be very high.
The situation is not very different in China, where the world mobile telephony leader China Mobile has announced that its margins were under pressure with revenue per subscriber trending down. With the market completely saturated in urban areas, the recruitment of new subscribers in rural areas will only exacerbate the trend. China Unicom and China Telecom are faced with the same problem just when they have to forge ahead with construction of their 3G networks (with $14 billion already invested in the first nine months of 2009). China Telecom, which added mobile telephony to its range in 2008, has suffered meanwhile a decline in fixed telephony subscriptions. The three operators may have to reduce operating costs in coming months, shutting down their overblown distribution networks.
In Latin America, the Brazilian market (4% of the global market) has been growing strongly (up 6% in 2009) thanks to the emergence of a dynamic middle class. But the penetration rate in cities could reach very high levels likely to prompt the various operators to pay more attention to rural areas and thus run the risk, as in other emerging countries, of seeing revenues per subscriber decline.
