Report based on CEO interviews, Part III, "Whither Wireless?":
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Whither Wireless?
Third in a series
Ernst & Young LLP, Contributed Research
After interviewing 95 CEOs and senior executives (on the condition of anonymity) about the forces shaping the global communications industry over the next five years, Ernst & Young LLP (New York) has distilled these 95 visions in "The Connected Society," a special report released this week at Telecom 99 + Interactive 99. The Telecom 99 Show Daily is pleased to present excerpts from this report (see part 1 and part 2). Today's segment looks at mobile wireless, and tomorrow's issue will cover long-distance services. The future is a two-line world: one for fixed broadband and one for mobile wireless.
Most communications industry CEOs agree with the two-line world prophecy: that customers in the near future will use mobile wireless for voice communications and fixed lines for broadband data. Those who do not subscribe to that view agree that mobile wireless will be the standard for voice transmission; it's just that they believe it eventually will be widely used for data transmission too.
"Voice local loop will be wireless," says one CEO. "Mobile telephony will become the standard for voice transmission," says another. "For voice services, mobile will dominate." "Mobile will 'eat' fixed, or traditional, telephony," says yet another. n You get the idea: Mobile wireless will become the standard model for voice communications in the connected society.
Several CEOs hold that wireless will be limited to voice because it won't have the data throughput needed soon enough to impact the five-year picture. "Data will not overtake voice through mobiles because there is a constraint on how much bandwidth you can pump over the wireless frequencies," says one executive.
But others hold an opposing view: "There will be a teleservices boom and, therefore, a boom in broadband access to networks, as well as a growing need for interactive services from every kind of terminal, both mobile and fixed." "Consumers will begin needing mobility as they access data." Some are succinct and emphatic: "All communications will be via mobile in the future." It's a lively debate, with very different worldviews ensuing from the divergent projections.
Basic Instinct?
Let's explore the driving forces behind the sudden shift to mobile wireless, after more than a century of getting along just fine with fixed lines. The number of mobile wireless subscriber lines is growing approximately six times faster than fixed lines and will surpass the number of fixed subscriber lines by 2008.
Whether mobility is a basic human instinct deriving from the time of nomadic tribes or an outgrowth of hectic late 20th-century life, people today have fully embraced the idea of being connected regardless of location. "Customers demand anywhere, anytime connection now," one CEO says.
Wireless is also a fast and cost-competitive way to enter the local loop for voice services. We see this happening in both developed and developing nations. In developed nations, it's a way for competitors to enter; in developing nations, it's simply the fastest way to build out service.
"Wireless is increasingly cost-competitive with fixed, especially in new infrastructure areas," says one executive. Wireless minutes and revenue, however, are growing slowly, compared with wireless subscriber growth, owing to the pricing differential that has trained cellular users to minimize calls and call times. Recent downward pricing trends should stimulate usage and may accelerate minute and revenue growth.
Evolution Toward Saturation
Ernst & Young has developed a model of the evolution of mobile wireless services that can inform strategic thinking and help predict market dynamics in a given service area. The model describes four stages in the development of any mobile wireless market: alternate, complementary, substitution and saturation.
In the alternate stage, fixed-line service is either not available or very limited. We see this today in many developing countries. In the complementary stage, developing mobile service complements a well-developed fixed-line infrastructure, and the two services coexist. This is the standard in most developed countries.
In the substitution stage, mobile begins to displace fixed-line service for voice communications. Early pioneers in this direction are in Europe, particularly Scandinavia. In the saturation stage, where mobile telephony is ubiquitous, it is used for data and video as well as voice, and there is a cornucopia of diverse choices in mobile personal communications devices, as well as system-to-system communications for remote activation. This is truly a future view.
Characteristics and drivers of each stage are different. And it's important to note that this evolution isn't necessarily linear and will be different for each geographical region. For instance, an area that begins in the alternate stage is likely to bypass the complementary stage.
Alternate and Complementary
Insufficient supply of fixed lines is the key driver for the alternate stage scenario, which takes place in countries that are still developing their basic telecommunications infrastructure (see "A World on Hold"). "Wireless is definitely becoming a substitute for landline phones in China," one CEO says. According to 1994 data from Ernst & Young, 72 percent of the world's countries have waiting times of more than a year for a fixed line.
Complementary-stage markets exhibit high growth in subscriber lines, minutes and revenue, resulting in a market where everyone seems to have a mobile telephone in addition to their home or business line. This is triggered by wireless pricing declines that stimulate both new subscriptions and increased usage by existing subscribers.
"Fares for mobile usage will keep going down, but usage will increase," explains one CEO. So despite the moans by mobile wireless service providers over price erosion, the silver lining is that price erosion will stimulate demand for more minutes by more users.
But even as usage increases, a significant obstacle to profitability is churn, which rose past 27 percent in 1997 in the U.S. "Aggressive pricing and churn will continue until one of us bites the dust," predicts one CEO.
This environment-falling prices, growing usage and poor profitability-sets the stage for mobile wireless to encroach upon fixed-line telephony.
Substitution Strategy
In the substitution stage, things start to get really
interesting. Mobile wireless subscribers actually begin shutting off their fixed lines. "The fixed/mobile convergence anticipated three years ago will not take place," says one CEO. "Instead, we will see a rapid substitution of fixed with mobile."
A primary industry driver of the substitution stage is the declining profitability per subscriber. Capturing fixed-line revenues will allow providers to move to positive profit growth. ?Wireless will begin to replace wireline once price parity is achieved,? an executive says.
Only one country is already in the substitution stage-Finland, where mobile wireless subscription passed fixed-line subscription during 1997. Sweden, meanwhile, stands on the threshold. The last year in which Telia AB (Stockholm), the nation's PTT, had a net addition of fixed lines was 1992. The phenomenon is not limited to Scandinavia; it is becoming worldwide.
Hitting Saturation
This is the stage where broadband data communication becomes wireless and mobile, and PCs, intelligent devices and mobile phones merge into "smart user terminals," which become ubiquitous and greatly varied by customer need. "Customers will be more mobile and require data more than they require voice," a CEO says.
The saturation stage requires standards and technologies that are still on the drawing board. Many industry executives are skeptical of ever getting to this stage because of the continuing advantage fixed lines will have for carrying broadband data. But so much energy and money are being invested here that Ernst & Young expects to see the most advanced areas of the world (in terms of mobile wireless evolution) to begin edging into the saturation stage at the very end of our five-year time horizon.
"The most important products will be multifunctional personal assistants, with PalmPilot functionality and mobile phone capability," says one CEO. "People will want to do all the things they currently do on a landline phone on a mobile phone," adds another.
But because subscriber growth for the third-generation wireless systems necessary for high data rates isn't anticipated until 2004-and they will require several more years after that to achieve ubiquity-the vision expressed in these CEO quotes lies just tantalizingly beyond our time horizon.
Wireless Challenges
CEOs in wireless companies face challenges no less daunting just because many of them agree that the growth in the voice business is headed their way. Since most of them also own wireline providers, they must wrestle with developing business and pricing models that help migrate subscribers from wireline to wireless at the pace that works for them.
They must figure out how to leverage complementary networks across multiple providers and geographies, and where to build, buy and partner. They must prepare for investments to exploit unrealized potential in developing countries. And they must develop strategies for moving beyond the complementary stage, where most developed nations are today, to substitution- and then saturation-stage business models.
All of these decisions and plans must be made against a backdrop of uncertainty over technologies, standards and markets.
For more information or to request an executive summary of the report, e-mail Ernst & Young's Global Communications Consulting Services at globalcommunications@ey.com.
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