Mobile Phone Industry in Denial About Economy

I'm increasingly of the opinion that many in the mobile industry are being insufficiently pessimistic about 2009. I keep hear people saying "Oh, nobody will ditch their mobile account". Well, yes, in the same way they won't ditch food, either. But I wouldn't want to be selling foie gras, or running an expensive but undifferentiated restaurant at the moment.

In particular, I'm curious to see if the sudden burst of growth and enthusiasm around smartphones will be the unstoppable bandwagon that some observers believe. Generally in a recession, people like "cheap luxuries" (pizza delivery does well, for example). I'm not sure that top-end phones and ongoing data plans fit into that category.

I also think that there will be a big focus on the cost side for operators in 2009. Handset subsidy and increasing customer support and returns costs will be a major focus. Some operators will also try to position themselves as saving costs for their customers - we already see offers suggesting people can "save money after Xmas", by deferring handset upgrades for a few months in favour of receiving a large cut in their bills instead.

At a retail level, there will be more shopping-around. Customers will start to question whether they really need 600 minutes, or free video-calling credit they don't use. There has already been a notable shift to rolling monthly contracts, and a broad range of SIM-only propositions for use with unlocked phones. I've seen that 3 UK now has a 6-month contract - perfect for economy-worriers.

The other thing I've been discussing with people concerns investment and capex. This year will see a range of spectrum awards - 2.6GHz in various other countries, 3G licences in India and so on.

I'm particularly interested to see whether bidding for UK 2.6GHz spectrum is much more muted than it would have been in the past - or whether impending capacity problems for mobile broadband will make the operators grit their teeth and do it anyway. I spent a lot of time looking at this for a governmental body last year, but before the full grip of the recession hit. What's now clear is that any potential bidder relying on debt to fund spectrum purchase or network build-out will be having second thoughts. I'm not expecting too many adventurous expeditions from North American or Asian companies fancying their chances in a highly-crowded market, either. On the other hand there are 5 operators - and 2500-2690MHz isn't enough for all of them to get 2 x 20 MHz for future LTE deployments.

My friends over Telco 2.0 have been musing about whether we'll see a push to make spectrum purchases more linked in to commercial success, perhaps by revenue-share arrangements. I think that's an interesting notion, but would probably take years of consultation and hand-wringing by all concerned.

My bet is that the UK auction will be moderately successful (if it goes ahead, given the interminable legal wranglings about spectrum & reallocation of 900MHz GSM frequencies which are currently blocking its progress). I'll have a punt that total receipts will be in the £1.5-2bn range - reasonably substantial, but nowhere near some projections I heard last year.

Overall, I think that the industry is going to have a couple of wake-up calls in Q1-Q2, as financial results start to unveil the grim realities. I don't think that some company's share prices have enough pessimism built-in yet - too many analysts and investors see the sector as counter-cyclical. I'm not seeing many signs that the much-vaunted fiscal stimulus moves by various governments will be of direct benefit yet - if anything, I reckon the fixed side of telecoms stands to gain more, by pushing state-funded fibre build-outs.

As I've said before, I'm not taking a glass half-empty view because I really want to. It doesn't do my own business any good if nobody is buying research reports or consulting services or speaking engagements. But at the same time, I think I need to be realistic - and I still meet quite a few others who seem to be enjoying the warm glow of their rose-tinted spectacles.

And lastly, getting back to the question of whether mobile use really is sacrosanct in a recession, a tip-o-the-hat to Patrick for highlighting a story about someone who actually has binned his phone outright...

Disclosure: None

Comments

[Timeline St...:]

Good article Mr. Bubley.

This would seem to favor a longer product cycle so that carriers can: (1) optimize the economics of existing mobile technology on their network; (2) avoid unanticipated launch costs; and (3) regain some power in the struggle that commits them to higher subsidy in order to get the latest new model.

For one example, and using your argument, the hype over the Palm Pre must be misdirected, given the necessity for high carrier subsidy to support the high build cost. Yet, without having ever sold a single unit, signed up a single subscriber, or sold a single app, the share price has tripled in anticipation.

I won't disguise my bias here. iPhone is the best positioned to thrive amidst this new environment that you describe for the following reasons for both users and carrier:

*It's the most differentiated
*It's constantly improving due to App Store
*It offers the best overall mobile browsing experience, justifying the data charge and perhaps for some users replacing a monthly internet access bill, especially if AT&T introduces tethering
*Even with a high cost to carrier, it's worth it for conversion and stickiness of users
*Number in the field will lower per unit carrier support costs while subsidizing the 3G buildout

It certainly doesn't hurt Apple that they have built a massive pile of $12 billion in deferred revenues in selling 20 million iPhones. This money will continue to be recognized for 2 years.

Feel free to correct me. I am by no means a mobile expert. I'm just an investor trying to learn more and creating theories to be tested all the time.

Jan 11 07:52 AM

[mollytjm:]

i agree about the iPhone which i think the apps store has made nearly bullet proof. even if you watch your minutes, you still can game and use your apps and email. it is possible to print from it now, with a paid app.

one thing about the smartphones is the emotional aspect. when people feel worried , they want to feel they're in close contact with everyone and everything and they check in a lot.

i had thought about getting a GameBoy or something like that....but now with the iPhone, i realize it's fun enough playing games there and you can play some things 'head to head' now. and i had thought about a Kindle...but i downloaded a book and found that reading it was very easy...so now i have over 20 books on my iPhone. and i still packed my little radio on the last trip i took...but now i have downloaded the radio apps so i won't be replacing that either.
so i think the iPhone is making inroads into spending habits where we aren't really looking right now. i don't know what it will mean for computer buying, but for some other products, i think the impact is going to be clear, soon.

Jan 11 10:41 AM

[Timeline St...:]

Hi mollytjm....the list of apps gets longer and better every day. Anything you can do with a wireless connection, a high-resolution screen, a microphone, a speaker, an accelerometer and a GPS is fair game.

Want a guitar tuner? Done.
Want a music identifier? Done.
Want Photosynth? Done.
Want voice search? Done.

And on and on. The head start that Apple has is mind-boggling.


On Jan 11 10:41 AM mollytjm wrote:

> i agree about the iPhone which i think the apps store has made nearly
> bullet proof. even if you watch your minutes, you still can game
> and use your apps and email. it is possible to print from it now,
> with a paid app.
>
> one thing about the smartphones is the emotional aspect. when people
> feel worried , they want to feel they're in close contact with everyone
> and everything and they check in a lot.
>
> i had thought about getting a GameBoy or something like that....but
> now with the iPhone, i realize it's fun enough playing games there
> and you can play some things 'head to head' now. and i had thought
> about a Kindle...but i downloaded a book and found that reading it
> was very easy...so now i have over 20 books on my iPhone. and i still
> packed my little radio on the last trip i took...but now i have downloaded
> the radio apps so i won't be replacing that either.
> so i think the iPhone is making inroads into spending habits where
> we aren't really looking right now. i don't know what it will mean
> for computer buying, but for some other products, i think the impact
> is going to be clear, soon.

Jan 11 01:55 PM

[KenC:]

Of course, any consumer has to look at his budget and decide what is essential and what isn't. Is that landline essential, when you have an iPhone? Nope. Okay, that saves $40. Are those premium cable channels essential? Nope, okay, some more saved there. Is that sports package necessary? Nah, football season is over. Is the Netflix account necessary? Heck, yeah, I'll just go out to the movies less. And, on and on. What it comes down to is utility. If the smartphone in your pocket is not doing giving you enough bang for your buck, then by all means, can it. The difference between the smartphone and the other items most consumers will consider canning is that most smartphones come with 2-year contracts. The decision to can usually comes at time of renewal, and since that comes in 2-year cycles, one would assume that smartphones as a sector would be relatively cushioned compared to other non-essentials.

Jan 12 12:12 AM

[Zoltan L. K...:]

Maybe this is the right time for mobile operaters to rethink their business model. You cannot really skim developed markets anymore, the competition is intensifying. To better go after developing markets they have to cutomize their offerings for low budget customers and maybe to treat basic service more like a commodity.

Jan 12 02:11 AM

[Dean Bubley:]

The iPhone example is an interesting one - but coupled with other factors it's still quite a US-centric model that doesn't work quite so well elsewhere.

Bear in mind that in the rest of the world, the majority of people use prepaid cellphone plans (often with unsubsidised devices), not monthly contracts. iPhones can be $500-1000 upfront in those cases.

SImilarly, "ditching the landline" is unlikely in markets which tend to use ADSL rather than cable for broadband, especially if there is no legal imperative to sell unbundled DSL without an associated PSTN telephone account. Generally it is only the economically disadvantaged that "cut the cord" - it's not aspirational, except in a few countries like Finland.

I'd certainly agree that Apple is better-placed than the Android ecosystem at this point in time. Slightly less true of non-US markets where people generally buy high-end Nokias because of brand, or basic preference for their voice and SMS user experience.

Also, worth noting that in many parts of the world users would rather have a mobile broadband USB modem for their notebooks, than a smartphone.

Dean Bubley

Jan 12 08:13 AM

[Mr. 3G:]

I believe this market will always be divided in a similar fashion to the PC world, i.e. PCs cater to business and MACs to creativity. So, the Iphone OS and apps store will likely remain the choice for people who need to use their phone to learn the names of songs they don't know, but not for people who want to run mobile business apps and get a decent amount of battery life. I don't have an iPhone, I have a Blackberry Curve, and judging from what I hear I would never be able to tolerate the battery life on the iPhone, or it's middle of the road email program. I also suspect that very, very few people would buy the iPhone if they had to pay full price. I am otherwise a huge fan of Apple, but I think it's a little Pollyanna-ish to think the iPhone is anything other than a toy. What I am waiting for is the sub-1 pound notebook computer with EVDO rev A and a big enough screen to actually view the majority of a given document.

Jan 14 05:48 PM

[borisb:]

wireless phones regardless of how smart they are become commoditized.

Jan 16 09:14 AM