Highlights:
- Tough economic conditions will reduce the number of major wireless operators and infrastructure vendors.
- To help maintain service quality, operators limit bandwidth "hogs" and institute pricing resembling airline tiers.
- A device competitor will close the gap with the iPhone, but Apple may stay on the leading edge with a disruptive, next-generation media offering.
We anticipate that economic pressures will accelerate convergence of telecom and the Internet, affecting telecom services in unexpected ways in 2009.
We will see internet firms take a larger role in funding technology innovation. To save money, even more consumers will substitute wireless voice and data for wireline.
1. Traditional wireless players: No safety in the middle
Wireless operators and manufacturers stuck in the middle of the pack when the credit markets froze are in a precarious position. One or more of these companies is acquired or broken up for its piece parts.
In the US carrier market, AT&T and Verizon continue to jockey for top position by growing organically and acquiring companies. Smaller carriers such as Leap Wireless, Metro PCS, and US Cellular post gains with a ruthless focus on specific segments. Sprint, and to a lesser degree T-Mobile, are left vulnerable.
In the vendor segment, Nokia Siemens and Ericsson lead with more than 60% market share. In emerging markets, Huawei and ZTE set the price floor. Those in the middle"”Motorola, Alcatel Lucent, and Nortel"”are suffering. The outcome‾ The ranks shrink by one major operator and one major infrastructure vendor.
2. Cord cutters "leap" to unlimited plan carriers
As economic pressures increase on America's families, the trend toward substituting mobile voice for traditional wireline service accelerates. For the first half of 2008, US government researchers said 18% of American households had cut the cord completely, and 31% reported getting all or nearly all their calls on wireless phones. Primary access line losses at AT&T and Verizon averaged 9 percent over the past year. Companies like Leap Wireless and Metro PCS, which focus on wireline replacement at the low end of the market, see their fortunes improve dramatically.
With more mobile Internet options available from Clearwire (XOHM) and T-Mobile, fixed mobile substitution for data services encroaches on traditional broadband. However, those substituting mobile broadband for DSL and cable primarily are younger consumers and lower income residents who move frequently.
3. Private equity slows investment, internet innovators may benefit
Large private equity and venture capital firms bypass high-tech investment opportunities except those with the lowest risk profiles. The result is stagnation for innovation in the traditional wireless industry. Very few, if any, large-scale deals are announced except fire sales for companies with solid cash flow that can achieve attractive "unlevered" returns.
Many smaller, VC-funded companies who sell to operators and infrastructure vendors struggle to get additional funding. Innovation may further shift to the major internet firms, such as Google, Apple, and Microsoft, which have a longer history of supporting and acquiring leading-edge firms. That could increase the competitive threat to traditional wireless operators.