Brian Eriksen Noer reports for www.InvestorIdeas.com. 
November 2004  

A battle for market dominance in the swiftly evolving wireless phone/messaging industry is being fought right now. Carriers such as Verizon Wireless and Sprint are going head to head with data hardware vendors like Dell and HP, as well as cellular mobile hardware providers like Motorola and Nokia, in a battle for the lucrative business/professional market share. As more data intensive applications become the norm (and that sector is really heating up – witness the popularity of Research in Motion’s Blackberry device), which company, and indeed, which type of company, will become a market leader still remains to be seen. The consensus is, however, that small local wired phone carriers are going to have a hard time.  

The Battle Heats Up

The telecommunications sector is experiencing a substantial shift in the leading companies, and in the types of companies, that are going head to head to reap the benefits of market share. Wireless technology is evolving at light speed, and industry players are finding that wireless data applications are becoming deal makers or breakers in many business’ communications strategies.  

At the moment great opportunities exist for many different types of industry participants to stake their market share claims. Wireless carriers, cell phone hardware, and PC hardware manufacturers all have the possibility of dominating the industry.  The outcome depends on what type of company will evolve to capitalize on and provide the types of services, service packages, and products, that an increasingly data dependent marketplace requires. In addition, these players will have to take into consideration that the way in which wireless products and services are sold differs greatly from region to region, on a global basis.  

Spending Projections

In 2005 Michael Weaver, Managing Director with the Fitch Ratings Telecommunications and Cable Group, predicts a head to head battle between carriers who offer a full portfolio of services packaged in different ways. "Obviously the cable operators have a window of opportunity with their VoIP (Voice over Internet) offering being more widely marketed in the next year in very interesting bundles, featuring both voice and video. The incumbent local exchange carriers (a telephone service provider within a specific geographic area), however, will not realistically be in a position to push this type of package until 2006."  

The increased interest in data intensive applications could grow the wireless industry size from $1bn in 2004, to $2.5bn in 2005. Growth in North American subscriber numbers is also expected, and churn rates (customer turnover for carriers) should be leveling off.  

"We see spending happening in areas like capacity and coverage, which are both service quality issues, but also on high speed data access," Weaver continued. "We would expect that spending levels would be similar to this year but with that focus."  

American Customer Service Lags Behind Europe

Several defining features of the global wireless market show divisions in the way that the industry is evolving across the globe. One example is illustrated by the divergent operating strategies and customer service orientations of carriers in different countries.  

Carriers in Europe have become very proactive in the area of customer analysis and retention. Europe is a more mature wireless sector due to their high consumer penetration levels, whereas North American subscriber growth rates are still high, and therefore the market tendency is to keep sourcing new clients. The North American market has not yet begun to see offers segmented by consumer analysis on a grand scale.  

“Churn rates are below 1.5% in many European markets and for certain North American operators," said Rory Buchalter, analyst with Dominion Bond Rating Services. “In order to increase margins, a key area of consideration is of course to decrease the churn rate. One way to do that is for a carrier to know their customer base intimately, in other words, to be aware of consumer segmentation. There is a greater focus in Europe on something called retention cost. As consumers are running up higher bills, carriers abroad assign credits based on spending amounts. They realize that when, for example, a new handset comes out it is more profitable to get that handset out to their premier users to generate bigger revenues.”  

Data Is “the New Black”

Increasing numbers of business users are now more willing to cut the communications cord as data service applications become increasingly standard. The wireless standard, for example, is moving towards speeds that are similar to broadband. Verizon Wireless’ EVDO (Evolution Data Only) system can now reach speeds between 300 to 500 kilobits per second.  

Through the increasing introduction of data applications for business users, DBRS’ Buchalter sees tremendous potential for further growth. “We see users, who in the past would not consider wireless for their total communication needs, giving this option a closer look as speeds, services, and features evolve. Companies can now rethink the way they do business because wireless gives them more flexibility.”  

Going forward, the growth of data applications is essential. Right now in the North American market, as a percentage of revenue, data accounts for about 10% of revenues, but looking ahead perhaps ten years, Buchalter projects that data could work its way up to 50%.  

The Market Wants What the Market Wants

NOP World Technology is one of the top ten global market research agencies, providing research by specialty industry sectors. NOP World recently published a revealing survey of 407 IT and telecom decision makers. The online survey respondents were chosen based on their role in the IT and telecom decision making process. The surveyees reflected a variety of company sizes and involvements in different technology types.

One of the results of the survey was a useful overview of the essentially different sets of vendors or brands for the type of wireless data that is currently being used by businesses. "On the voice side we saw market dominance by traditional cell phone companies like Motorola and Nokia," said Richard March Senior Vice President with NOP World Technology. "And on the data side, for example the downloading of files by business users who access their company databases, we saw the more traditional PC type of hardware vendors like Dell and HP leading the market."

Blackberry – The Feel Good Success Story

The one crossover success story in NOP's study was the Blackberry device from Research in Motion. Blackberry showed up as one of the top three brands of choice for both voice and data. March conjectured that in projecting how the convergence of voice and data will evolve in the near future, Blackberry seems to be in somewhat of an enviable position. "The Blackberry device is being used in both capacities. The company boasts brand loyalty among their users for both voice and data applications. Blackberry also recently met certain security standards from the federal government in terms of their operating systems."

The issue for Blackberry then is whether they can continue to own this growth phase straddling both voice and data, or whether one of the more traditional powerhouses from either the voice or the data side will move into a lead position? Already, other companies are nipping at their heels. Palm, noted for its PDAs, has created one of the hottest new devices in this sector with its Treo smart phones, which combine the PDA and cell phone with other popular consumer features such as built in cameras.

One element to consider in answering this question is to determine which applications will emerge as a force to drive business use? As more data intensive applications become the norm, will that tilt market dominance more in favor of the hardware vendors? March states that the issue of form factor will be an element in the process. "Ease of use for end users may tilt the market more towards the mobile handset side. People have become used to the small devices that they are carrying now."

Another issue in this battle is that of battery life. If both voice and data are to be combined on one device, a greater strain is of course placed on a battery. Security issues also top the list of concerns. Once an end user's data is loaded up on one mobile device, how will it lock up if the device becomes lost?  

The Carriers Also Want Their Slice

March's study found that the current crop of large cellular carriers will also play a major role in the evolution of the new wireless sector. "In focusing on the hardware side, whether it be Nokia, Motorola, HP, Dell or Blackberry, we also saw the carriers playing a large role. It was interesting to note that when we spoke to IT and telecom decision makers about which primary vendor they prefer to work with in the sector, 4 out of 10 of the respondents selected their current carrier. Right now the carriers are in the spotlight, because when it comes down to wireless data, be it voice, text, or graphics driven, end users really need the coverage and reliability of a major carrier. A really feature rich device is useless if you are not getting that signal through."

Therefore carriers like Verizon Wireless, Sprint, and so forth, are being considered by the IT decision makers as being key players in a business's wireless strategy. "It was interesting to note," said March, "that we saw a division on the hardware side between voice and data, but the carriers emerged as the one set of players in this whole game that were favored by IT and telecom decision makers; whether they plan to implement primarily a voice or a data strategy."

Operating Systems- Does Microsoft win this battle as well?

The final major issue that was highlighted by NOP World's survey was that most respondents stated a preference for a consistent operating system across the voice and data devices on a wireless basis. "Of course Windows has taken over most of the market on the PC side, and that's what people want to see on the wireless side as well (one consistent operating system). Interestingly we did not find that kind of unanimous or majority support however for a single hardware device. The jury is still out on whether businesses want to put all of their wireless functionality onto one device."

Microsoft is definitely considered to be a critical player in this market. How the hardware provider battle plays out and how Microsoft chooses to work with them are still two issues that Microsoft has to evaluate, before they are able to implement a market strategy. And then the emerging key players have to evolve into meeting the needs of the market. The fact that industry participants have stated that they want to have a single unanimous operating system puts Microsoft in a position that they can capitalize on.  

Companies to Watch

"Companies that we favor in the sector," said Fitch’s Weaver "would include Verizon Wireless, a blue chip performer that promises strong growth and does offset some of the wire/line pressures that are currently being experienced. We think that Comcast, on the cable side, is a very strong operator that will be a long term competitor and obviously has very good growth prospects, particularly with the introduction of HDTV, digital video recorder functionality, and voice over IP, this year."  

"Companies that will struggle a little more in the coming year are ones that are locked into traditional services. Rural telephone operators face a lot of regulatory risk with potential changes to switched access revenues and Universal Service Funding. They may offer ADSL but they are not in a position to implement broadband plans like SBC and Verizon Wireless. They are at a disadvantage and it could be a difficult year for them."  

NOP World’s March also saw troubled waters ahead for the smaller rural carriers. “I do not see many opportunities for small local carriers to position themselves in the evolving strategies of this sector. On the issue of mobility, people in the US, are going to be traveling across the country, and coverage and reliability are really going to drive events and successes. The major carriers are really the only ones to be in a position to provide this type of coverage."

Brian Noer

Brian Noer has a degree in Business and Economics from the University of Western, Ontario . His career in the financial markets spans fifteen years and several continents, including: Manager with The Bank of Montreal in Canada, Associate Analyst with the structured finance group at Moody’s Investor Services in the UK, and Editor for several financial trade magazines in the UK for both Thomson Financial Publishing and Euromoney PLC (titles include Thomson’s trade magazines “The International Securitisation Report”, and “Capital Market Strategies”, and Euromoney’s “Asset Finance International”). Brian recently joined the InvestorIdeas.com portal team as a Writer, Editor and Research Associate.  

Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp  

©Copyright InvestorIdeas 2004 

TOP