A growth industry in transition
Communication services have grown as a share of gross domestic product and disposable income over time in more developed as well as emerging markets. In emerging markets the correlation between telecom penetration and economic growth is strong.
Telecommunication is a growth industry undergoing significant change. People grow increasingly dependent on having constant access to electronic communication for work, entertainment, social life and care. People want to be able to reach all communications services wherever, whenever and on their own personal device. Businesses strive to become more efficient, profitable and at the same time environmentally friendly. Modern telecommunications are opening new opportunities for companies to improve in all these areas.
Evolving customer behavior and new technology – allowing attractive and easy-to-use services – drive migration from traditional fixed voice services to new mobile and IP-based services in the more developed markets. In emerging markets, with young and large populations, low mobile penetration and growing economies, mobile usage and subscription numbers increase fast.
The need to always be connected drives demand for more bandwidth. Transmission for fixed broadband has grown rapidly over the past five years and demand for higher network speed is increasing dramatically.
In such a context telecom operators are faced with numerous opportunities but also some challenges.
Throughout 2008 intense competition and regulatory intervention continued putting prices under pressure in our markets.
The year was also marked by financial turmoil and macro economic slowdown. The downturn became much more severe as the year progressed, and the global economy was exceptionally weak in the fourth quarter. TeliaSonera operates in a relatively non-cyclical or late-cyclical industry and we saw no marked effect on our earnings. Looking ahead though, we need to prepare ourselves for a potentially drawn-out economic downturn that may affect consumer and corporate behavior.
In general terms, basic voice spending is expected to hold fairly stable, even though the migration to mobile services could be pushed. However, it seems likely that customers' appetite for adopting new and innovative services could be held back, particularly if the downturn lasts for several years.
Telecom expenditure as part of GDP in some of TeliaSonera's markets, 1975–2006
Source: Ovum, 2008
Customer trends
Customers are becoming increasingly dependent on constant access to electronic communication: for work, socializing, entertainment, shopping and information. The market is converging both in terms of services and devices, and customers expect the same services regardless of device. Simplicity is a key driver of customer satisfaction.
These trends apply mainly to our more developed markets. While the trends in many ways are similar in our emerging markets underlying drivers contrast due to demographic, economic and infrastructure differences.
New ways of socializing are gaining ground while voice calls in total generally grow or hold stable. The take up of new non-voice services is growing with SMS, chatting, email and online communities.
Simplicity drives mobile data usage
The single most important driver of non-voice traffic is the increased use of mobile broadband, which is developing into a strong complement as well as in some cases a substitute to fixed broadband. In a few years from now more families are likely to have mobile broadband connections for each family member as a complement to the household's fixed broadband connection. A key driver behind this development is built-in mobile SIM-cards in laptops.
Telecom services are becoming increasingly device centric, meaning that each screen – TV, computer or handset – allows users full access to all digital applications, content or files. More advanced handsets with new attractive user interfaces, such as the Apple iPhone 3G and other smart phones, make customers more apt to use advanced services, which in turn drives mobile data traffic.
Handsets in use per generation
Source: AnalysysMason, 2008, Western European Mobile Market:
Trends and forecasts 2008–2013
Take-up of business services such as fleet management and other logistics services can be expected to accelerate. One growth area is mobile applications, such as business-to-business solutions for electronic locks and employee access rights.
In 2008, non-voice services represented around 20 percent of mobile revenues in Western Europe and are expected to grow to 30 percent in 2013 (AnalysysMason, 2008). Key drivers are simplicity, both when it comes to the actual services and to mobile phones, and transmission speeds.
Mobile market revenue sources
Source: AnalysysMason, 2008, Western European Mobile Market:
Trends and forecasts 2008–2013. See Glossary for definitions.
Online socializing increases consumer power
Virtual communities and online social networking sites are powerful and popular means for social interaction. Internet-based services are becoming increasingly important for private businesses and the public sector alike. The power of the consumer is growing.
Social networking sites emerged in the mid 2000s, and since then growth has been dramatic. The sites are used for several purposes, but the largest communities focus on personal contacts and social interaction as a complement to meeting physically or talking on the phone. Photo sharing is an important feature. Other communities are focused on professional networking and enable users to stay in touch, and facilitate recruitment and career planning. Another category encompasses content sharing, such as music or video clips. Yet another interest group is communities, aiming at sharing expertise or exercising influence.
Mobile access to social networks
Usage of interactive sites has the potential to strongly increase consumer power, particularly in the so called messenger generation, people aged 35 or younger. The private individual can spread and share views and attitudes fast and widely in a way that only large media houses had the power to do before. At the same time, the internet communities present businesses with the opportunity to use the sites as a marketing channel, not only for advertising but also by creating profiles or virtual spaces where their offerings are presented.
Blogging is another means of interaction on the internet that is rapidly picking up. Today, most blogging takes place over a computer but as mobile screens, internet access and pricing schemes are becoming more user-friendly, blogging over the mobile is expected to increase.
Many of the major online social networks are adding mobile features and creating mobile interfaces enabling customers to upload photos and other content to the site. Thus, online socializing is also an important driver of mobile data usage, according to AnalysysMason's Mobile social networking and case studies, August 2008.
Online media consumption
Modern communications fundamentally change the way we consume media. Information and entertainment have long been among the most attractive services over the internet. With the introduction of smart home gateways, new possibilities are opening up as the TV set and the computer come together; both connected to the internet. The internet moves into the living room and develops into a service around which friends and family can jointly participate not only to watch TV or video, but to share photos and music as well as play online games or socialize with others over the internet.
Customers are particularly interested in accessing music via the computer or mobile. Digital distribution of music is steadily gaining ground at the expense of physical distribution, as it allows instant access, at the time and place preferred by the user. Related to this is the Track-ID facility on several mobile phones which allows the customer to identify the artist and the title by simply clicking on the mobile. Similarly, customer value is brought by video-on-demand which allows the customers to “rent” a movie without having to go to the video store, but rather to pick out a movie and access it directly via the connected TV set and view it whenever preferred.
Migration of voice
Voice services remain the core business of telecommunications. However, the voice business is in a period of transformation where a growing number of customers choose to have a mobile connection only. Mobile voice price premium has long been an obstacle to mobile migration in some of our markets. Today, such premiums are reduced to levels where mobile is affordable and in some countries mobile voice is already cheaper than fixed voice.
Voice minutes Western Europe
Source: AnalysysMason, 2008
Mobile voice premium to fixed voice
Telecom Market Matrix Western Europe
Telecom Market Matrix Eastern Europe
Western European Mobile Market: Trends and forecasts 2008
In Finland, only about 20 percent of all voice call minutes come from the fixed network, while the equivalent share in Sweden is approximately 60 percent. In all our markets, to varying degrees, there is a potential to grow revenue by moving traffic to the mobile networks where customers can place and receive calls on their personal phone, wherever and whenever it suits them.
In parallel, customers migrate from traditional fixed voice to voice over internet protocol, or broadband, so called VoIP. The development towards IP technology is driving a change in price models as well as business models.
Growing demand for triple play
The penetration of broadband among European households is steadily increasing with the Nordic countries in the forefront. Broadband constitutes the base on which the customer can find a variety of services, not only telephony and access to the internet, but also media services such as TV and video-on-demand, VoD. At the same time, there is an increasing demand from private consumers and businesses alike for accessing services independent of technology, and converged offerings will continue to increase.
The connected home – often referred to as triple play – with convergence of broadband, TV and telephony, is a step in this direction. Triple-play penetration is fairly low today, but as the services grow more attractive, more people will see the possibilities and advantages of a connected home. As a result, over 15 percent of households in Western Europe are seen having adopted triple play in 2013 (AnalysysMason, 2008).
As technology advances and more services are converged into one single offering, so called smart home solutions, simplicity will be even more important to attract consumer attention.
Multi-play services penetration
Source: AnalysysMason, 2008, Multi-play services in Western Europe: Market sizings and forecasts 2008–2013
Demand for interaction drives IPTV take up
As broadband infrastructure is being upgraded to cater to services that offer enhanced user experience, so called rich media services, digital broadband TV, also called IPTV, is gaining ground. Having learnt from the internet world, customers recognize the value of interaction. Demand for interaction is a key driver behind the take up of IPTV. The number of IPTV customers as a share of the total number of pay-TV households in Western Europe is seen rising to around 15 percent in 2013, from 9 percent in 2008 (AnalysysMason, 2008).
The digitalization of the TV networks opens up for a higher degree of interactivity as well as new types of services. From a consumer perspective the freedom of choice will increase, as TV programs and movies can be consumed at any given point in time. VoD services show the way and are expected to have the greatest potential of rendering additional revenues. As TV is becoming IP based, the possibility to consume media over multiple devices will be a fact.
People want all gadgets in one
More gadgets and devices - such as TV sets, computers, game consoles and MP3 players - are being equipped with built-in connectivity for easy access to online services. Customers would like as few boxes and cables as possible, and would be prepared to pay for professional help when setting up electronic equipment.
Driven by customer demand and technological achievements, the distinction between the mobile phone and laptop is becoming blurred. Today, the functionality of a mobile phone is not very different from that of a PC and simultaneously, new PC models like netbooks are optimized for internet browsing. Another trend is that private consumers now buy high-end terminals that were previously demanded by business customers only.
Need for efficiency and less travel
Modern telecommunications are opening for new opportunities for companies and public sector organizations to manage and operate more efficiently. Companies are using more integrated functions that require fast, stable and secure connections and on top of that secure, reliable and appropriate applications. Particularly corporate customers want services that combine accesses with network and service integration.
Demand to access the same service irrespective of device is evident in the business segment. Such services include ordinary emails as well as intranets and specific applications like order systems. Working out of the home is becoming more and more common. Secure internet and intranet access means employees can work just as efficiently outside the office walls. Reasons for wanting to work from home include less travel and more flexible hours. Secure and fast access allows business travelers, maintenance workers and others with many hours spent outside of the office to become more efficient.
As businesses seek to improve processes and employee efficiency, they turn to purchasing entire communications solutions rather than seeing access as one service and application as another independent component. Today many business customers buy communications as a complete service offering, for example a remotely hosted platform that manages security, voice, data, video and other applications.
Care for the environment
The negative impact on the environment from telecom services is quite modest compared to that of other industries. Rather, the networks and services bring opportunities for businesses and individuals to reduce their environmental footprint.
Care for the environment is a key concern for consumers and businesses today and has developed into an important buying criterion. Many investments will be made with the environment in mind.
A growing trend closely related to the telecom industry is the non-moving movement, where business travel is replaced by telecom services such as telephone calls, tele conferences, video conferencing and net meetings. In other words, modern communication can result in fewer business trips and at the same time enable more company contact. Costs are extremely low in comparison with business travel, and the individual sees the value in the ability to work from home.
Emerging markets
Eurasia is the growth engine of TeliaSonera. In many respects customer demand is the same in our emerging markets as in the Nordic and Baltic countries, and similar technology and services trends apply. There are however some underlying differences in demography, economic development and telecommunications availability.
With less developed fixed line infrastructure and a mobile market only partially penetrated, the growth potential in our emerging markets lies in growing the customer base significantly, increasing mobile usage, and further ahead also in mobile data.
TeliaSonera is present in Eurasia with majority-owned companies in eight markets, and via associated companies MegaFon in Russia and Turkcell in Turkey, including Turkcell's subsidiaries in the Ukraine and Belarus. TeliaSonera also has a financial holding in Afghanistan.
The discussion below concerns Kazakhstan, Azerbaijan, Uzbekistan, Tajikistan, Georgia, Moldova, Nepal and Cambodia, the markets where TeliaSonera has majority-owned operations.
Young and sizeable populations
The markets of our majority-owned operators vary in size from Moldova with 4.3 million inhabitants to Nepal with 29.5 million. The combined population is 110.8 million, more than three times the size of the Nordic and Baltic markets with a combined population of 31.8 million.
The demographic differences are large, with ageing populations in the Nordic and Baltic countries and significantly younger populations in our emerging markets. In Eurasia, people younger than 15 make up on average 30 percent of the population, whereas the equivalent shares in the Nordic and Baltic regions are 17 percent and 14 percent, respectively. Looking at people aged 65 and more they represent 17 percent on average of the populations in the Nordic and Baltic region, but as little as 6 percent in Eurasia. The demography in Eurasia opens for a rapid take up of telecommunications services, as it is usually the young that more readily take on new technology-based services.
Age group distribution
Source: CIA WORLD FACT BOOK 2008
The emergence of a middle class with increasing real wages, together with rising local consumption, foreign direct investment and the opening up of regulatory frameworks all add to the positive development of our mobile markets in Eurasia. In several of them, exports of natural resources such as oil and gas are the largest underlying drivers of business activity. Correlation between growing telecom penetration and economic growth is strong.
Untapped markets
Mobile penetration in the markets where TeliaSonera has majority-owned operations is still fairly low, with the exception of Kazakhstan. The average penetration rate was around 44 percent in 2008, compared with 130 percent in the Baltic countries and 117 percent in the Nordic market.
As the standard of living improves, demand for and take up of services will grow even faster and show in mobile subscriptions, the use of value added services, internet use and the number of broadband connections. So far, internet user penetration remains low in Eurasia, and so does PC penetration.
In the Nordic countries, the number of broadband subscriptions expressed as a percentage of inhabitants was 36 percent in 2008. Penetration in the Baltic countries reached 17 percent, but in Eurasia only about 1 percent. The low broadband penetration in Eurasia opens for future opportunities to expand into the mobile broadband business. Particularly in the Nordic markets and to a certain extent in the Baltic countries, mobile broadband serves as a substitute or a complement to an already existing service, but in Eurasia mobile broadband connectivity represents a new market with high growth potential.
Regional telecom penetration
Source: TeliaSonera 2008 estimates, based on ITU World Communication/ICT Indicators Database, 2007. Penetration per population.
A voice market with growing demand for data services
As GDP per capita is lower in our emerging markets than in western markets, price sensitivity is higher. Not only low-price mobile phones but also easily available prepaid offerings are therefore must haves for operators.
Customers in these markets are not only focusing on basic quality issues such as coverage, but are also interested in SMS-based information services, MMS and ringback tones. The share of such services of total revenues is increasing and in the most penetrated markets – Georgia and Azerbaijan – ranges between 10 and 15 percent. 3G networks and services are made available by some operators in Moldova, Georgia, Tajikistan, Uzbekistan and Cambodia and they are expected to be introduced in other countries as well, to meet a growing demand for broadband data communication.