A “rude awakening” for tech investors…

Telecoms and mobile computing have expanded to dominate the tech sector. Industry events, with the Mobile World Congress in Barcelona being the flagship, have exploded over the last five years and now dominate the industry. It’s the arena with the biggest fights and interesting opportunities for investors – and the fireworks will continue in 2013 according to Danish telecoms analyst John Strand.

Famous for his controversial predictions and propensity for confronting CEOs with very sticky question, Strand says 2013 will be good for consumers, but tough for telecoms companies in their fight to differentiate.

“The competition that began in Scandinavia has spread to Europe and will grow to other parts of the world,” he explains.

“We will see prices fall, and operators in highly penetrated markets will price to win customers, whether or not it is profitable. We characterise this competition as lemmings in a brutal race to commit suicide. Specifically we will see operators compete with data packages and for international traffic,” he predicts.

“For consumers in many markets, this means they get more data in the same package. In other markets, they will experience getting a free data add-on when they buy a voice, SMS, or MMS package of a certain size. In Denmark one month of mobile voice and data equals the price of a large pizza and a two-liter bottle of cola.”

Similar price avalanches are set for South Africa.

Strand also predicts that LTE – the next generation of mobile broadband – will be commoditised in 2013. In South Africa, Vodacom was first to market with commercial LTE and has other operators hot on its heels.

According to Strand, operators were hoping to charge premium prices for LTE and this is not going to happen.

“As prices in the mobile broadband market are squeezed, we will see the trend spread to other broadband markets … Operators will try to limit the loss by earning revenue with value added services, but don’t expect VAS to replace lost revenue from expected higher LTE premiums,” he says.

Strand adds that there are opportunities for operators to think outside the box, however, and the greatest benefit of value added services for them will come in the form of marketing.

Another prediction is that smartphone subsidies will begin to disappear in much of the world in 2013, along with the concept of “free phones”.

“Heavy competition and price cuts will force operators to reduce or eliminate subsidies for mobile phones,” says Strand.

“We have already seen the trend in a number of countries, and the instalment model has already shown success. This will be a blow to the smartphone market, and things are likely to get difficult for hot products such as the Samsung Galaxy 3, the Apple iPhone 5, and the Nokia Lumia 920. Customers may be less enthused to buy when they realise what the phone actually costs,” he explains.

“We believe that handset manufacturers will face increasing challenges in 2013 and with some country variation, will rethink their value chain which relies largely on operators for selling phones.”

When it comes to regulation and legislation, Strand says authorities will finally add substance to their broadband targets for 2015 and 2020.

“Naturally it plays better for politicians to paint golden dreams rather than focus on the reality of their sub-optimal policies and the hard facts about the bandwidth that people use today,” he says.

While governments talk about better broadband, the real focus will be on improving the situation for those at the bottom of the market, especially in rural markets, adds Strand.

Finally, Strand predicts a “rude awakening” for investors in the sector.

“If you are an investor in telecommunications, it is hard to see the good news. Investors who have enjoyed supernatural returns will likely see share prices come back to earth,” he says.

“There are only two ways that operators can compensate for low prices – consolidation or massive cost cutting, as we saw 10 years ago. We see two forms of consolidation. Light consolidation is when two or more operators build an infrastructure together. Heavy or classic consolidation is when two or more operators are merged into one. If investors are optimistic, we would advise them to reconsider their faith,” recommends Strand.

“We see no new technology or offering that creates new revenue for mobile operators. 2013 will be a tough year with difficult decisions in the boardroom.”

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