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Interviewer: Paul Lee
Interviewee: Ric Williams

PL - Hello, my name is Paul Lee, a director at Deloitte and a lead author of the predictions series. Predictions is an annual series of views on the global technology, media and telecoms sectors which Deloitte has published for the last eight years.

In this podcast, I'm talking to Ric Williams, leader of the telecommunications practice for Deloitte UK.

In terms of the telecoms predictions for '09, there is obviously the backdrop of a significant challenge in the financial sector and the global economy, but there's still lots of innovation which is around and one of the predictions is around some of the innovation that we're seeing within what we traditionally have called the mobile phone. Could you talk a little bit more about that prediction?

RW - Paul, I think it's very interesting that to look, you know, historically mobile devices have really meant mobile phones and those mobile phones have got more complicated and have introduced and combined different technologies. I think actually what we're seeing is with the significant reduction in integrated chip sets, what we will see is the introduction of dedicated devices which may be integrated into other products so rather than everything being in the phone, what we will see is specialist devices which some would call M2M or machine to machine communication or computing and that maybe in the remote controls in your home for instance to allow more monitoring of what you're doing, what you're watching on TV, maybe tracking voting or other aspects of the use of your television for instance.

PL - So we could see a step change in the ubiquity of mobile and probably even mobile and wireless becoming almost invisible because it's so ubiquitous within everything that we do.

RW - I think that's right and I think actually Paul if you look at the number of mobile networks or, and I think mobile networks is the right way to think about it, it's not just the technologies that have been in the mobile phone but with wi-fi and wi-max technologies. What we're seeing is overlapping network coverage and therefore devices can switch between one or the other as you see with the iPhone. But each equally the integrated chip sets allow the devices to communicate over the most efficient one of those networks and therefore we will have much more wide spread M2M devices.

PL - And what we're looking at is a reduction in the chip set prices from about probably about $10 or so to about $2 so it's quite a fundamental shift in the underlying costs.

RW - The economics have changed fundamentally and I think actually that clearly that makes it cheaper for the manufacturers. I think actually the interesting aspects are going to be what do the operators do to actually try and drive usage of the network and how they are going to charge for that usage.

PL - And following on from that one of the predictions we've got is around smart phones which are both a boon for the operators but also they also have their challenges along with them. What do you see is the outlook for smart phones in '09?

RW - Well I think it's interesting. I think historically or over the last couple of years, smart phones have been growing at 35% per annum. The number of smart phones, the rate of growth will probably drop to more likely 15-20% for '09 against a mobile market which is growing at 3 or 4% or maybe even less. Clearly the global economic situation makes it very difficult to predict what growths going to be. So smart phones will continue to grow faster than the market, but the rate of growth, that differential, is going to drop off. And what that may do is present some challenges for the operators in how they look at the subsidy models that have existed to drive smart phone adoption.

PL - So the big challenge for the operators or the big dilemma is do you actually up your subsidies on smart phones and try and get people to use smart phones more in anger, so not just for voice but also for data or do you go back to a lowest common denominator of basic phones or feature phones which are mostly around just for voice?

RW - And I think that's exactly it because I think smart phones are much more expensive so in those markets where subsidies are prevalent, which is most of the developed markets, the operators will be considering whether they can continue to subsidise smart phones at the levels that they have. And smart phones have become ever more smart, but actually what we would call feature phones kind of fill the gap behind the smart phones and the feature phones have more features that consumers may want. Be it music or cameras. How the operators seek to promote the use of those different devices I think is going to be a big challenge for them.

PL - And one of the things which the smart phone has enabled is the applications store or catalysed the emergence of the applications store, which again is a dilemma for the operator because it could be regarded as something which usurps their traditional role as being the relationship holder with their client or the end user. But also could be regarded as a means of driving traffic particularly for data and data has been the challenge for most of the industry for most of the decade.

RW - That's right and I think, you know, apps stores or the downloading of applications onto mobile phone devices has become much more significant. I think in 2009 we're expecting probably 10 billion applications to be downloaded, which is at least three for every single mobile phone user in the world. Now what those applications are and how they're used is going to be interesting but how the operators can structure their relationship with the apps store so they benefit rather than just being the provider of the dumb pipe to connect the consumer to the apps store, I think is an interesting challenge. I think I would expect operators to seek to embrace apps stores and to enjoy the benefits of ownership and participation in apps stores.

PL - And probably also what we're seeing is the proliferation of dumb pipes so it's not just one dumb pipe as you were saying but lots of different flavours of pipe and operators arguably have a role in that?

RW - I think operators definitely have a role in that, I think the challenge that we are going to see and I think we've talked about this before in previous predictions which is around the capacity of the various mobile infrastructures to carry all the traffic. That is going to continue to be an issue and whilst operators have had very lucrative EBITDAR margins, it has often been the rate at which they have to replace or upgrade their networks and therefore their net margin that has been more of a challenge. So yes they have a lucrative current cash flow model, but it's a very capital intensive model. What we're going to see from the increase in demand now is real pressure on where the operators need to invest in growing their infrastructure. Be it around the radio access network because you have many more consumers downloading data or whether it's actually in the backbone network and which operators have to invest in which areas, I think is going to be a very interesting question and what we may see, indeed what we will see is much greater network sharing, network collaboration and it'll be interesting to see the regulators response to that because operators will not be able to build their own individual infrastructure to compete on a purely infrastructure basis because they just won't be able to afford it.

PL - And if we do have a change in competition, so if we have a move to at least a single call network, from a M&A perspective or a wider corporate finance perspective, what does that mean?

RW - Well, clearly at the moment we are in a situation where people generally in most markets have their own networks. If we see those networks being joined together, which we have seen with 3G networks in the UK, you know, there is the structuring of that and how the parties define their economic interest in that network infrastructure. How they will agree to fund further network roll out and deployment and the investment in the radio access network. Whether actually what we might see is, if you like, a pure infrastructure player seeking to buy the networks of the operators, particularly in those areas where the economics are more marginal where an infrastructure investor may be better placed. So actually I think it will be one of the drivers for continued corporate finance activity in the telecoms space.

PL - And you'd expect if there is a divergence between those who are the few infrastructure players and those who are based more on the resale then you will need to have a different set of core skills according to which side of the fence you came down on.

RW - I think that's absolutely right and to be honest, that division has been seen, you know, in the history of mobile telecoms if you look at the MVNO the mobile virtual network operators and the success of Virgin Mobile in the UK market, that was a very different skill set, a very different set of attributes from the established infrastructure based operators.

PL - Okay, well thank you very much for your round up of the predictions and look forward to the next set, next year.

RW - Thanks very much Paul.