Telcos at crossroads in data boom era
Telecoms groups will make more money from data than from voice calls by 2017, in a significant turning point for a sector "in the middle of an identity crisis", according to analysts.
As revenues from voice calls globally continue to decline, they are on track to be overtaken by data within five years, on the back of the rapid proliferation of smartphones and tablet computers, as well as 4G mobile-broadband networks.
These "connected" devices have caused a boom in consumer demand for movies, social media and gaming on the move, as well as growth in the less obvious "internet of things" â€“ where data are transferred to and from cars, and even home appliances.
According to research for the Financial Times by GSMA, which represents nearly 800 mobile operators in 220 countries, the provision of mobile data services already accounts for about one-fifth of operator revenue.
This share is forecast to increase to 44 per cent, or $500bn, by 2016, and to 53 per cent, or $648bn, by 2020 â€“ exceeding revenues from traditional voice services.
The GSMA describes a growing market for connecting machines and everyday objects to the internet, creating an overall vision of a "connected life" â€“ in which large telecoms groups want to play the central role.
At present, however, the reality is rather different. Telecoms companies have so far been made to look slow by nimble technology groups that have seen their share prices rocket on demand for digital services. By contrast, growth at major telecoms groups has been sluggish at best during the past decade's communications boom.
Mobile operators will carry additional digital services, the GSMA says, but may not see much profit from this increase, given the more commoditised market for this so-called "dump pipe" business. Their role will simply be to transport the higher margin digital content.
But for those that can evolve their business models, the prize is a $800bn market, estimates the GSMA. For this reason, it has called on the operators to focus on those higher-margin digital services, and extra applications.
"The telecoms sector is in the middle of an identity crisis," said Robin Bienenstock, analyst at Bernstein. "Data has become all important for future growth â€“ in terms of both the 'internet of things' and in that mobile phones are becoming pocket-sized computers. Becoming a low-growth utility stock is exactly the risk."
If the operators are able to provide additional services â€“ such as billing, identity and security â€“ with their customers' data connections, GSMA projects a potential 80 per cent increase in revenues in eight years: from $1,000bn in 2012 to $1,800bn in 2020. Otherwise, it says, revenues will grow only at about 2 per cent a year, on average, across the world.
Tavares Lattibeaudiere, head of connected living at the GSMA, said: "This is right at the beginning of the data growth curve, so the options taken now will define revenues in the future. We are seeing an explosion of things needing to be connected."
The market for machine-to-machine connections â€“ which link, for example, cars or hospitals diagnostic machines to the internet â€“ is seen as particularly important.
The GSMA highlights revenue opportunities for companies that can design, implement and manage these services.
Some applications still appear futuristic. Last month, Siemens demonstrated a fridge with cameras and visual-recognition software able to send recipes and shopping lists to a smartphone. But other applications, such as connecting cars, security systems and utilities to the internet, are becoming common and a new source of revenue.
For example, a security alarm can provide a telecoms operator with basic connectivity revenues but could generate additional income if the company designs, supplies, installs and monitors the entire system.
The GSMA says that, unless such new business is embraced, there is a danger that operators could become suppliers of just voice and data connection packages, with correspondingly sub-inflation revenue growth.
Investors are already favouring stocks with "data stories", according to analysts. AT&T, for example, has won plaudits for its "digital life" platform.
Simon Weeden, an analyst at Citi, says that US operators, which already use 4G networks designed for mobile broadband, are ahead of their European peers. This, he said, partly explained the premium at which shares in US groups trade.
"We are not far off having more people on smartphones than not, while tablets and laptops consume a lot of data."
Revenue from calls will decline as more customers come to expect effectively free voice services, making investment in next-generation 4G mobile networks a priority if mobile operators are to sustain their revenue growth from data.
"For investors, data ARPUs (average revenues per user) will become the key metric," says Ms Lattibeaudiere, head of connected living at the GSMA â€“ but she adds that simply providing access to data will not be enough, as data pricing is likely to be as competitive as voice.
The GSMA research captures the telecoms sector mid-evolution: making the transition from an industry that connects people via telephones to one that provides connectivity to the internet â€“ and services, applications and content that can be accessed when on the move.
Ms Bienenstock says: "Companies are adapting slowly, with some trying to buy into the value chain through bolting on businesses and others looking to incubate them within their groups."
Some, she concludes, are doing this better than others. Analysts see telecoms groups divide into two distinct types in the next decade: those that drive revenues forward on new technology and services, and those that are seen by the market as lower growth companies â€“ whose customers expect data to be provided as cheaply as calls and texts are today.
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