Looking back at 2013, consolidation and rationalization has been a major theme across the TMT industry as firms seek to improve their competitive positioning. In the mobile sector we saw Hutchinson 3G as a consolidator in Austria (acquiring Orange) and Ireland (a bid for O2 Ireland), T-Mobile USA merging with MetroPCS, and Telefonica seeking to buy E-Plus in Germany. The equipment vendor NSN went from being Nokia Siemens Networks to Nokia Solutions and Networks with the exit of Siemens from the JV. And in the device sector, Microsoft’s bid for Nokia’s handset division ended months of speculation and brings Microsoft into line with the platform+device strategy of Apple, Blackberry and Google. As we discuss below, much of this has to do with scale and the competitive intensity of our industry today.

2013 Year-End Review and Industry Predictions for 2014: Insights on the Telecoms, Media, and Technology Sector

By Cartesian

Tradition dictates, as the year draws to a close, that we reflect upon the events of the last 12 months and consider what the future holds.

2013: The Year That Was

A Year of TMT Megadeals

M&A deal volume may have been down across the global economy, but deal value in the TMT sector was up on 2012, buoyed by a string of high-profile megadeals. Vodafone’s exit of Verizon ($130bn) took top billing, entering the all-time charts at number 3. Other notable transactions included Softbank’s entry into the US market through the acquisition of Sprint ($21.6bn) and Liberty Global’s acquisition of Virgin Media ($23.3bn) to gain presence in the UK. Altogether, TMT M&A activity totaled $438.5 billion through Oct. 2013, an increase of 61.6% on the same period in 2012 ($271.4bn).

Deal rationale for the operators has been varied: improving returns though scale, as we discuss below, has featured; achieving growth through geographic expansion is on the agenda for some; and for fixed-mobile tie-ups, mergers offer access to backhaul and a broader product portfolio. Going into 2014, we see no signs that appetite for deal-making is abating. Predators abound and there are many interesting targets.

Scale Matters

Scale economies have always been important in telecoms networks and this year the topic moved to center stage. In September, the European Commission published its much trailed proposal for a telecoms single market in Europe. The Commission argued that fragmentation in Europe denied local operators of reaching a comparable scale to their peers in large single markets such as the US which, it argued, causes lower profitability and hence less investment in network infrastructure. We would tend to agree, but know from experience that many of the toughest barriers to operating across borders are technical and commercial, rather than regulatory.

Whilst there was broad agreement across industry that consolidation in Europe would be beneficial, the regulators favor cross-border deals as a means to scale-up rather than in-market deals: examples such as Hutchinson/Orange in Austria have been granted with strings attached to satisfy competition concerns. The optimal number of operators in a given market – to meet competition and investment objectives – remains to be fully worked through. Navigating these shifting currents will be a key challenge in 2014.

What Lies Beyond?

The decline of fixed voice services (in revenue and volume terms) has been charted in many countries over the last 10 years. Much of this value has shifted to mobile, however in 2013 we saw fresh evidence that mobile voice and messaging services may also now have peaked in several mature markets. Competition from over-the-top (OTT) substitutes such as WhatsApp and Viber combined with the millennial generation’s preference for messaging over calling are putting revenues for these core services into reverse. And it’s not just a problem for mature markets – OTT is on the rise in developing markets too.

Operators are defending against the immediate threat from OTT with a range of measures, including changes to price plans, launching their own OTT services and in some cases striking partnership deals with the barbarians at their gate. Looking further out though, it is clear that operators will need to find new sources of value to sustain and grow their businesses. Examples this year included further moves into adjacent industries such as payments, advertising, media and energy.

Security under Scrutiny

Public concern over privacy and security ratcheted up a couple of notches in the summer following disclosures by Edward Snowden on the wide scope of intelligence gathering by America’s NSA and its counterparts in other countries. Snowden’s revelations shed light on the NSA’s ability to intercept communications and access user data in many high-profile online services. In reaction, eight of these firms (Apple, Google, Microsoft, Facebook, Yahoo, LinkedIn, Twitter and AOL) published an open letter calling for reform: an interesting twist given several have previously faced criticism for their own data-gathering activities.

The letter from the eight makes perfect sense though: if the public do not trust their services, they will avoid using them. Network operators face similar challenges as they explore opportunities to monetize customer data. Through 2013, we saw example use cases ranging from measuring footfall to real-time credit rating. We expect to see more in the way of tangible commercial and societal benefits in 2014.

 

Not Forgetting…

There were a number of other noteworthy trends:

LTE network deployment and adoption rocketed.

2013 saw the launch of over 100 LTE networks, bringing the global total to 250 as of December. Meanwhile, LTE subscribers increased by over 200% and are forecast to exceed 190 million worldwide. Collectively, the US and Asia-Pacific account for the most of this early growth.

Smartphone shipments exceeded feature phones globally for the first time, and smartphones now dominate in several countries.

Phablets emerged – potentially at a sweet-spot for enterprises not wanting to buy employees both a tablet and smartphone.

“Wearables” entered the telecoms lexicon in the shape of smart watches, glasses and a range of personal sensor devices.

With the number of mobile phones soon to exceed the number of people on the planet, OEMs are clearly looking to grow the number of devices per person.

In the US, there was an explosion of alternate device financing programs from MNOs as they sought to wean their customers off the traditional (and expensive) subsidy model.

We predicted this would come about in our letter the year before last. The change will force MNOs to find other ways to retain customers and add value to their customers.

White space radio technology made significant progress.

In the UK, Ofcom announced a large-scale technical trial with participants including BT, Google and Microsoft. We also saw proposals on both sides of the pond to release more spectrum for mobile broadband.

Fiber broadband continued to make the news, particularly in regard of reaching unserved areas (not-spots).

Where public money is involved, the politics, economics and funding of these programs are often contentious. Private capital has also been grabbing headlines – see for example Google’s Project Link in Uganda.

The momentum around SDN and NFV gathered pace.

Following the dramatic strides made in virtualizing servers over the last few years, we expect these technologies to cause profound change to future network design. Potentially the biggest change to hit network architecture since the transition to IP, their capacity for disruption shouldn’t be underestimated.

Customer management and billing systems are becoming ever-more complex.

Operator billing, partnerships with OTT providers, content/service bundles, and personalized promotions are forcing service providers to seek more agile and feature-rich solutions. 

2013 Prediction Review

In December 2012, we made ten predictions for 2013 – here’s how we did:

Prediction for 2013

Did It Happen?

There will be consolidation in the device manufacturer industry

 

YES

Nokia/Microsoft fits our thesis of a US tech giant as acquirer. Blackberry appears an obvious target for 2014.

A major mobile virus will strike

 

NOT REALLY

Mobile virus activity increased over 600% year-on-year, but there was no catastrophic strike. Android remains the primary target for mobile malware (90%+ of threats).

Cellular data consumption growth will slow significantly in the US

 

NO

We had expected that MNO deployment of Wi-Fi would provide some immediate relief. However early signs are that growth in 2013 continued, fuelled by appetite for streamed content on LTE.

Windows 8 will see slow adoption

 

YES

Windows 7 reached 10% adoption in under 5 months, while Windows 8 took over a year. Microsoft will hope this turns around in 2014 with the UX changes in 8.1 and the end-of-support for XP.

Flash memory adoption accelerates

 

YES

Acceptance of flash as an alternative to HDD has grown, with NAND revenue increasing 28.8% to $29B in 2013. Acquisitions also highlight the growing importance of flash, with WDC acquiring STEC for $340M (Jun. 2013) and Virident for $685M (Sep. 2013).

NoSQL will gain traction in big businesses

 

YES

NoSQL is being used by a slew of Enterprises including AOL, BMW, NTT DoCoMo, Starbucks and LG. Revenues for NoSQL likely to exceed $525M in 2013, vs. $286M in 2012. 

Carriers will use their networks to differentiate their cloud offerings

 

NO

To date, carriers have pursued a mix of strategies with some having more network-centric clouds (e.g. AT&T Network-Enabled Cloud), while others double-down on core cloud capabilities (e.g. the new Verizon Cloud). This opportunity remains underexploited.

Set-top boxes will get smarter

 

YES

We saw several new platforms launched this year with smart features such as recommendation engines and personalized features (e.g. Comcast's X2, Cox Contour), plus mobile device integration for STB control and complementary content (e.g. DIRECTV, AT&T U-Verse).

A big content aggregator (or two) will be acquired

 

NO

There was continued speculation of potential deals (e.g. DIRECTV, Yahoo, and others linked with Hulu), but no consummation this year.

Big operators will get “small”

 

YES

Last year we predicted operators would increasingly invest in small tech firms as they sought to increase the pace of innovation. There are now plenty of examples of Telco backed VC, incubators and acquisition of start-ups.

Wholesale will be key to operators' LTE roll-out strategies

 

NO

The examples to date (e.g. EE/Phones4U in the UK and Optus/iiNet in Australia) provide only limited support for this prediction. Operators have focused instead on offering LTE access at a premium in the retail market. M2M may be the catalyst to change this over time.

Capacity-sensitive wholesale pricing will come to wireless

 

NOT REALLY

We saw one deal of this type in 2013, but for the main, operators have clung on to traditional usage-based billing.

 

Predictions for 2014

Looking forward to the year ahead, here are our predictions for 2014:

1. There will be further consolidation of network operators.

Despite a very strong 2013, we believe this party is just getting started. We expect M&A activity in both (and between) fixed and mobile sectors as players seek to gain scale, acquire mobile backhaul capacity, and enable quad-play bundles. Deals will be both in-country and cross-border with deal sizes from $100s of millions to $10s of billions.

2. European LTE ramps up – and sharply in some cases.

Mobile operators in Europe will start to make up some of the lost ground in LTE deployment and adoption. With some MNOs having already declared there will be no price premium vs. 3G, and consumers already holding LTE devices, this could move faster than expected in certain markets.

3. Mobile payments start to get traction in the US and Europe.

We have been waiting a long time for this, but could 2014 be the year? Our optimism has improved since Isis launched in the US; Google could also make a move with Host Card Emulation on Android.

4. Mobile roaming becomes increasingly political.

Following Europe’s lead, political pressure to reduce/remove mobile roaming premiums will mount in other regions (e.g. Africa, GCC, Asia Pac and LatAm), driven by development and growth agendas.

5. The online content aggregators see some M&A action.

We called this in 2013 but it didn’t happen. Potential scenarios include acquisition by a Telco or MSO/CableCo, or maybe we will see mergers, e.g. a marriage of Netflix and Pandora to offer a total home media subscription package.

6. Operators seek big value in Big Data.

Concrete examples emerge of network operators leveraging Big Data analytics to optimize operations and create new business models. Operators acknowledging the opportunity to gain significant new insights on customer behavior, preferences, etc. from communications data, which can be monetized both internally and externally.

7. There will be more large-scale online security incidents.

Following examples like Adobe in 2013 (where, depending on who you believe, between 38 and 150 million username/ password pairs were compromised), we expect more bad news next year. In the short-term, the majority of users will struggle on with managing multiple passwords online, but beyond 2014 we see a bright future for key-chain apps and federated identity.

8. Content driven operators are forced to hike prices.

The communications industry continues its polarization around providers of value connectivity and providers of high-class content. Pricing in the latter group gets driven upwards by a scramble for top tier content rights.

9. Ultra HD TV makes slow progress.

4K TV sets drop below $5,000 but adoption struggles to get off the ground, thwarted in the short-term by a consumer market which has already upgraded its TV recently to HD, and by a content-provider community distracted by 3D.

10. The cloud giants increase their share.

Assuming the NSA revelations do no lasting damage, Amazon and Google will increase their penetration of the enterprise cloud market through continued investment and leveraging their scale advantages.