Weathering the storm

Amid a growing global economic crisis, emerging markets appear to be performing relatively well, and the telecommunications industry appears to be one of the driving forces behind this resilience.

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By  Andrew Kitson Published  November 12, 2008

Amid a growing global economic crisis, emerging markets appear to be performing relatively well, and the telecommunications industry appears to be one of the driving forces behind this resilience.

The economies of four key emerging markets - Brazil, Russia, India, and China (collectively referred to as the BRIC economies) - have been growing at a phenomenal pace over the last 10 years and threaten to dominate the global economy by the middle of the current century.

Their mutual interdependence on one another as major suppliers of raw materials and consumers of goods and services means that they have the ability to weather the worst of the economic crises afflicting other, more developed markets.

And their telecommunications industries are expected to drive their continued growth, with revenues from fixed-line, broadband and, in particular, mobile services growing even faster than the annual rate of increase in Gross Domestic Product (GDP) in each country.

Juniper Research believes that, in 2007, these four countries' telecoms markets were worth a combined US$256.1 billion. This represents an annual increase of 15.7% and growth of approximately 111% over the course of the last five years. We also expect to see further growth of just over 12% in 2008, which would yield a total value of $287.1 billion and which will again surpass average annual GDP growth in each country.

By the end of 2007, the combined mobile subscriber base of these countries totaled 1.045 billion, representing cumulative annual growth of 27%. Annual average growth over the five-year period to 2007 was approximately 33%. As regards fixed-line and broadband services, all four markets - with the possible exception of Brazil - can be said to be chronically underserved by these platforms, which remain much more expensive than mobile services. Therefore, mobile will be the principal driver for telecoms for the foreseeable future.

Historically, the mobile markets in the BRIC economies developed on a regional basis. Generally, the first cellular licensees were subsidiaries of the local fixed-line incumbents, while privately-owned alternative operators arrived some time later once it had been proved that there was sufficient demand for these relatively expensive services. The situation was rather different in India, where private operators were the first on the scene and the incumbents arrived much later.

In time, and as rising demand for mobile telephone services grew faster than operators could meet that demand, smaller and less effective operators were absorbed by their larger rivals and the first nationwide licensees began to emerge. This process continues to this day, with several key mergers and takeovers announced in all four countries in 2008.

Some of these nationwide operators have now amassed sufficient technical expertise and cash reserves to allow them to expand far beyond their home markets. Thus, we have seen Russia's Sistema Group (owner of Mobile TeleSystems) invest in India and look to other Asian markets for growth opportunities, while China Mobile has entered Pakistan and is also looking to enter underserved Asian markets for its future growth. Meanwhile, Indian giants such as Reliance and Bharti are also spreading their wings to take in Europe, Africa and the Middle East.

Mobile market growth

Juniper Research envisages that the BRIC mobile market will be serving almost 1.209 billion subscribers by the end of 2008, increasing to 1.644 billion in 2013. Less dynamic growth in the well-served markets of Brazil and Russia will offset continued strong rates of growth in China and India (likely due to the delayed introduction of 3G in these latter two markets), meaning that annual subscriber growth rates will fall steadily over the 2008-2013 period, falling to 3.3% by 2013.

In Brazil and Russia, 3G adoption is very much in its infancy, with services having only been launched on a regional basis in the second half of 2008.

China has yet to say when it will authorise its three network operators to offer 3G services. India plans to tender 3G licences soon, but the process is being opposed by full-mobile GSM and limited mobility CDMA operators, each of which has its own agenda to protect.

Nevertheless, future growth prospects will largely be confined to switching customers from low-value prepaid services to high revenue-generating postpaid and value-added offerings and replacing 2G connections with 3G accesses. WiMAX-compliant radio spectrum has been auctioned in both Russia and Brazil, albeit in a haphazard and uncoordinated manner.

Thus, there are a number of entities that can potentially offer mobile and nomadic WiMAX services in these countries, but which may lack sufficient technical and financial resources to make the most of these assets. Further sales of WiMAX spectrum should be carried out in a more focused manner. India plans to auction WiMAX frequencies in the near future, but the process may be derailed by anticipated objections to the planned 3G licence tender, which is due to be held first.

China, too, sees WiMAX as being of great use in rolling out low-cost basic and advanced services to areas where its mobile and fixed-line networks do not reach, but is currently stoutly opposed to the use of mobile WiMAX, which it believes would undermine its investment in 2.5/2.75G mobile networks and its Xiaolingtong limited mobility services, which serve as an effective substitute to traditional fixed-line connections.

ARPU and service revenues

With retail prices falling, operators increasingly promoting and bundling SMS, and handsets becoming ever more versatile and essential to everyday life, data usage is visibly growing in all of the BRIC markets. Juniper Research believes that data ARPU will rise from $1.94 in 2008 to $2.49 in 2013, representing average annual growth of 5.1% over the 2008-2013 period. By 2013, data should account for 29.7% of all service revenues.

With respect to data ARPU, Juniper Research believes that growth will be driven partially by a significant increase in SMS adoption, but increasingly through growth in take-up of rich-media services.

We believe that historically mobile operators have missed an opportunity by excessive pricing of such services but that most will remedy this by markedly reducing both data download costs and the price of content such as ringtones and games. We believe that this, plus the richer content made possible via 3G and latterly 3.5G technology, will result in substantive rises in data revenues in all four countries.

Meanwhile, voice will become less important or valuable, as voice ARPU is expected to fall from $8.05 in 2008 to $5.90 in 2013; this represents an average annual decline of 6%. Overall, operator-billed ARPU will decline by an average of 3% per annum over the 2008-2013 period, due primarily to:

• A modest increase in the proportion of prepaid users within the overall subscriber mix

• Increasing competitive pressures on pricing, notably from MVNOs (as well as a large number of new entrants in India); and

• Regulatory intervention on matters such as interconnection, number portability, and roaming charges.

Andrew Kitson is a senior analyst with Juniper Research.

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