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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.
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InvestorIdeas 2004
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