Smartphones penetration in the world

The balance between voice and non-voice revenues in developing countries has not been reached yet. At the same time the cannibalization of revenues from basic services by OTT players is happening: only in 2011 the voice revenues reached almost the same level as non-voice revenues. Usually high penetration rate of smartphones provides to the operators high ARPU due to the active use of value added services (VAS) and on the contrary it can increase the level of use of OTT services and results in revenues decrease of voice and SMS. J son & Partners Consulting presents main results of the research of the global experience in building operators strategies in the view of smartphones penetration rate. Smartphones penetration in the world Smartphones are an ideal form-factors for operators: it provide an appropriate MbOU of 1.2 Gb per month (in comparison USB modems consume 10 15 GB of traffic) and usually increase subscribers ARPU for 35 50%. The average global smartphones penetration rate is 18 20% and varies by operators and regions. According to Google/Ipsos MediaCT the highest penetration rate of smartphones today is in countries with the high GDP and development of telecom markets level (see the table) Credit Suisse forecasts the increase of smartphones market (1,8 bln.pcs until 2015) first of all due to the growth of not very expensive devices (up to 200$). They become available to the billions subscribers in the developing countries. 1

Table. Ratio of population revenues and smartphones penetration rate (SPR) in different countries Countries GDP per person, $ thousands * SPR, %** Norway 99.4 68 Australia 64.9 65 UAE 64.8 74 Sweden 55.1 63 USA 49.9 56 Russia 14.3 36 Hungary 12.7 34 Brazil 12.0 26 Argentina 11.6 31 Turkey 10.6 30 Malaysia 10.3 35 Indonesia 3.6 14 Vietnam 1.5 20 India 1.5 13 Source: IMF, 2012 (*), Google/Ipsos MediaCT, 2013 (**) Main growth drivers of global smartphone market: Depreciation of radio-electronic components; The availability of operators' tariffs; Subsidize of expensive smartphones models by operators; Common work of operators and vendors in development of less expensive smartphones for mass market and expanding the retail sales; Development of 3G and LTE; Increased ARPU level of smartphone users; The popularity of social networks and OTT-services. Constraints of smartphone market growth: The continuing low income level of population in the majority of developing countries; An unstable global economic situation; Still high prices on smartphones in comparison with featured phones; Lack of frequencies unitization of LTE networks in the world; There is no common industry policy regarding the voice transfer in LTE. According to Credit Suisse the number of smartphones owners will be 2.35 bln.people with market volume of 1,18 bln. devices per year. Main growth driver increase of less expensive devices (up to 200$). 2

Influence of smartphones penetration rate on operating indices of operators. «Heavy» subsidize of expensive smartphones (e.g. Apple Iphone and LTE-smartphones) influence the profitability of operators. On the other hand, smartphone users ARPU is higher than featured phone users ARPU (30 50%). Smartphone users generate 50 times more traffic than the users of featured phones. As a result smartphones have the main traffic volume of operators networks. In 2012 the average SPR was 18% while smartphones generated 92% of mobile traffic (Source: Cisco). The increase in revenues of data transfer due to the growth of SPR usually does not cover the decrease of operators revenues from traditional services (voice, SMS). There are several internal and external reasons for that, particular, price reduction due to the competition, deeds of regulators and growth in popularity of OTT services due to the growth of SPR on the network. According to Yankee Group every 10% of growth of SPR in Europe is a reason for decreas of revenues from voice and SMS services of operators for 1,5 bln. USD yearly. This is mainly due to the use of OTT services on smartphones. The policy of cellular operators in connection to OTT services. Nowadays OTT services market is fragmented not only globally but also in separate countries. The vast amount of all types of messengers, chats, social networks and VoIP services are presented in the developing countries, where such services are daily necessity as for subscribers in order to cut the costs. At the same time OTT services market is less fragmented in developed countries, it gives an opportunity to operators to sign agreements with companies for services that are mostly in demand. Usually there are two main categories: the implementation of operator s billing for paid services in OTT apps and price reduction for their use. In the first case operators are getting new source of income due to the small commission for transferring funds from subscriber s account to OTT service account. In the second scenario even without tariffs on traffic, operators receive additional income due to the growth of traffic as the number of users and clicks-through limited free services are expanding. Nowadays Skype, Facebook and Twitter executed such agreements. Viber is also announced the readiness for this cooperation. Nowadays mobile operators developed several ways of cooperation with OTT services players. First is partnership and including some particular OTT services in the general operators' packages; secondly development and launch of their own similar services and thirdly the common work of Joyn industrial assosiation GSMA in terms of work under new standard RCS. Blocking and slowing the speed access are not being used a lot these days. 3

The increasing penetration rate of smarphones and operators strategies in different macro regions In 2013 for the first time the sales of smartphones were more than sales of featured phones. Such sales were due to the price reduction of smartphones, expanding penetration of mobile broadband access networks (3G/LTE) and growth in popularity of different online services. The following growth of «smart phones» penetration rate will have different impact in developing and developed countries. On the way to avoid becoming a bit tube for external online-services, operators will have to develop new business directions with a high level of intellectual components, same is already happening in Japan. The largest revenue share from traffic transfer in the revenue structure is very interesting because the smartphones penetration rate in Japan networks is still low. In this view two major Japanese operators NTT DoCoMo and KDDI didn t try to slow down the income decrease from this direction (a lot of global operators are trying to do right now) but start to develop new business strategies that can be binned as a general direction of digital services. US operators follow this model. In USA SPR is 64%, traffic share in the operators revenue structure is close to 50%. In this view US operators start to develop LTE networks and as a result to transfer the current subscribers on the shared plans in addition to the packages that include unlimited voice services, SMS and data traffic. This actions stimulate the connection of new devices and increase the consuming traffic and operators revenues. On the other hand this strategy helps to be competitive with OTT services and avoid drastic decrease in revenues from traditional operators services due to the availability of unlimited offers for voice and SMS services. Average penetration rate of smartphones in Europe was 49% in 2012. The key trend of European cellular market was the increasing gap between increase of traffic and operators revenues together with decrease from voice transfer and SMS services due to the SPR growth and use of OTT services by smartphones owners. European operators use two ways in order to avoid market stagnation and revenues decrease. One way is a continuous geographic expansion on the developing markets. Because of this process most global operators feel much better in comparison with local operators that provide services only for developed markets. Second way is an attempt to keep the current subscribers on the developed markets by launching new and more appealing tariffs. For example, it could be packages of services for users of smartphones (voice, SMS, traffic) that also include package of fixed services (wired broadband access, IPTV, fixed telephony). 4

Fig.1. Comparison of SPR on developing and developed markets with a revenue structure of operators. Source: Wireless Intelligence, Huawei Analysis, 2012 The increase of ARPU on the developing markets is happening due to the growth of penetration rate of smartphones and growth of consuming data traffic. The increase in revenues from data transfer in the future can fully or partially cover losses from traditional voice segment. It is possible to say that the intensity of use of different online-messengers, VoIP-clients and chats is much higher on many developed markets despite of low revenues of population in the developing countries. Influence of SPR on the operation indices of the Russian operators. Main trends for Russian developing markets are domination of revenues from voice services and SMS; relatively low revenue share from data transfer less than 16% of operational revenue. At the same time smartphones market is expanding because of price reduction for the devices (up to $153), active cooperation with vendors, combined offers and development of retail sales with less expensive devices. 5

Fig. 2. Average retail price for smartphone in Russia, $, 2009-2016 455 379 348 350 340 329 318 308 2009A 2010A 2011A 2012A 2013E 2014F 2015F 2016F Source: J son & Partners Consulting, 2013 Penetration of smartphone in the price range up to $90 is 39% (in the previous year this rate was 1%), in the price range from $90 to $153 51% (29% in the previous year). The total penetration rate of smartphones in Russia is 20-25%. In the capital and big cities this rate is much higher in comparison with an average level of OTT services. But all these trends do not affect Russian operators yet, because of roaming and interconnect voice revenues in Russia increased in 2012 for 4,4% versus 2,3% in 2011, and SMS revenues increased for 1,5%. Fig.3. Total income of Big 3 SMSoperators in Russia, 2011-2013, bln.rub +1,5% Fig.4. Total income of Big 3 operators from voice services* in Russia 2010-2013,bln.RUB -0,5% +0,5% +2,6% -0,95% 18,8 19,3 164,2 162,6 2011 2012 1H 2012 1H 2013 2010 2011 2012 1H 2012 1H 2013 *not include revenues from roaming and interconnect Source: J son & Partners Consulting using the operators data, 2013 г. The critical level of SPR when OTT services start to play a major role in revenue decrease of traditional services is within 35-50%. Taking into consideration the experience of developing countries, it is possible to state that the users of smartphones with a low SPR in developing countries (10-20% while in developed countries is 50-70%) are trying to cut their costs for connection and use OTT services. Russian operators start to develop and launch their own OTT services and gain experience that is accordance with global trends. 6

Detailed results of the research are presented in the full version of the report: «The importance of smartphones penetration rate for operators strategies. Global experience» (82 p) Content Resume 1. The influence of penetration rate of smartphones (SPR) on operational indices of cellular operators. 1.1. Implications for cellular networks 1.2. Implications for voice services 1.3. Implications for data transfer 1.4. Threshold level of smartphone penetration 2. Drivers and restraining factors influencing the SPR in the network. 2.1. The quality of operator s network. Availability of 3G/LTE technologies. 2.2. General economic indices of the country and income level of population 2.3. Price reduction on smartphones 2.3.1. Development of operators retail sales 2.3.2. Subsidizing 2.3.3. Cooperation with vendors 2.4. Competitive environment 2.5. Industrial tendencies 3. Strategies of the operators 3.1. In the view of technological development 3.1.1. Aggressive implementation of LTE 3.1.2. Evolution of 3G networks 3.2. In the view of cooperation with OTT players 3.2.1. Cooperation 3.2.2. Banning 3.2.3. Developing the alternative services 4. Global operators experience 4.1. Strategies of operators in North America 4.2. Strategies of operators in European Union 4.3. Strategies of operators in Asia-Pacific region 4.4. Strategies of operators for other macro regions 5. Operational indices of the Russian operators in the context of global experience. 6. Forecasts and prospects of the mobile operators in view of industry trends and growth of SPR Conclusions and recommendations List of companies mentioned in the report 7

List of Figures Fig. 1. Influence of Apple s iphone subsidizing on AT&T profitability Fig. 2. Influence of Apple s iphone subsidizing on profitability of European operators Fig. 3. How ARPU of british smartphone holders are differ than general phones, by age categories Fig. 4. Vodafone revenue structure by countries in 2012-2013 Fig. 5. Differences in the use of smartphones and general phones by subscribers in Indonesia Fig. 6. Comparison of consumed levels of traffic by Apple iphone users and smartphones on Android OS Fig. 7. Operators revenues structure on the developing and developed markets with penetration rate of smartphones Fig. 8. Key factors that American users take into consideration in order to choose a smartphone Fig. 9. GDP share spending on cellular connection of the population in developing and developed countries Fig. 10. Average retail price on smarphone in Russia, $, 2009-2016 Fig. 11. Level of smartphones TSO for subscribers in different countries Fig. 12. Comparison of consuming traffic by cellular networks vs smartphones owners with Wi-Fi and based on Android OS and ios devices in UK Fig. 13. Revenues diversification on the cellular industry in 2003-2022 Fig. 14. Comparison of dynamics of voice traffic growth and data traffic in the global cellular networks, 2007-2013 Fig. 15. Operators «cross»: revenues falling, consumed traffic is growing Fig. 16. The spectral efficiency of radio technologies 2G/3G/4G Fig. 17. Comparison of consumed traffic by smartphones on Android OS in 3G and LTE networks Fig. 18. Forecast of number of 2G/3G/LTE subscribers until 2017 Fig. 19. Traffic share using OTT apps (generated by smartphones holders on Android OS in 3G and LTE networks) Fig. 20. Dynamics of OTT services users by types of services, until до 2016 Fig. 21. Penetration rate varies by regions, operators offers, gender situation, economic development of country etc. Fig. 22. Operators answers on the following question: «How do you fight OTT services»? Fig. 23. ARPU dynamics from data transfer and voice services on USA market Fig. 24. Traffic costs in different countries (USD/Gb) Fig. 25. Dynamics of revenues of European operators from data transfer and voice services Fig. 26. Dynamics of revenue structure of Japanese operators in 1990-2015 Fig. 27. Dynamics of revenues of NTT DoCoMo operator in 2011-2013 Fig. 28. The most used services in South Africa by smartphone holders Fig. 29. ARPU decrease on the key European markets, USD Fig. 30. ОТТ-players that played the key role in decrease of operators revenues. List of Tables Table 1. Comparison of operators margin in smartphones subsidizing Table 2. Comparison of income of population and penetration rate of smartphones in different countries Table 3. Offers of OTT services operators in some developing countries Table 4. Offers of OTT services operators on the developed markets Table 5. Key operational indices of the largest USA operators Table 6. Operational indices of the Russian largest operators at the end of 2Q 2013 8

List of companies mentioned in the report Vimpelcom Megafon Rostelecom Airtel Alcatel America Movil Analysys Mason Apple AT&T AXIS Backcell Azerbaydzhan Blackberry British Telecom Chetan Sharma Consulting China Mobile China Telecom Cisco ComScore Credit Suisse Deutsche Telekom DiGi Malaysia Dropbox DTAC Thailand ebuddy EE UK Ericsson Etisalat Egypt Facebook Google Android Ipsos MediaCT GSMA HIKE HTC Huawei Hutchison Three Indosat Informa Telecoms &Media KakaoTalk KDDI KPN Netherlands KT LG Uplus Line MediaTek Mobidia mobilesquared Motorola Mozilla Netflix Nimbuzz Nokia NTT DoCoMo Oi Brazil Orange Ovum Pandora Pinger Portugal Telecom Prologix Qtel Qualcomm Quantum Web Reliance Communications Reliance India Rewheel Samsung Saudi Telecom Seven Networks Signals Research Group SingTel SK Telecom, Skype SMART Philippines, Smart Sprint StarHub STC Saudi Arabia, Strategy Analytics Tefficient Telcel Tele2 Telecom Italia Group Telefonica Telenor Telstra Three Ireland, TMN T-Mobile USA Tre Italy Turkcell Twitter Verizon Wireless Viber Viva Bahrain, Vivacom Bulgaria, Vodafone WeChat WhatsApp Microsoft Windows Wireless Intelligence XL Axiata Indonesia Yahoo Yankee Group YouTube ZTE The newsletter was prepared by the J'son & Partners Consulting Company. We exert every effort to provide actual and forecasting data representing the situation in full and available at the time of the publication of the material. J'son & Partners Consulting reserves the right of revising the data after publication of some new official information by individual players. CONTACT FOR MORE INFORMATION: Pavel Ermolich Commercial Director Pavel@json.ru www.json.ru 9