5 Years after launch of 3G Mobile Broadband Services, adoption by consumers is far from satisfactory. Smartphone penetration levels, 3G/4G penetration levels, data volumes per subscriber and the pricing of data of data per MB along the pricing curve are therefore the key drivers behind revenue growth market-by-market.
Smartphone and 4G penetration levels are in part driven by the extent of the rollout of 3G and 4G networks, but the other key driver is affordability, namely GDP levels and the price of handsets. GDP per capita levels continue to rise a bit modestly in the last 2 years and the continued decline in price of smartphones should help adoption at a faster rate in the next 18 months.
An even more important driver of competitive dynamics is a change in the number of players. In particular, the introduction of a well capitalised new entrant [Reliance Jio], in our view, the single most damaging structural change that can happen in a cellular market, given that it triggers: (1) higher spectrum costs, (2) higher capex (as a new entrant is forced to build nationwide coverage), (3) tariff competition and (4) increased marketing expenditure. The tariff competition (for example, the introduction of unlimited data plans) and increased marketing expenditure are the natural result of the new entrant attempting to fill its empty network and attract revenue over its fixed cost base.
However, it is important to note how our neighbor and World’s most envied Economy China has embraced the Telecommunications Sector. The Chinese Government has directly set market structure and technology choices. In addition, during the 2G phase from 1997 to 2008, the regulator directly set retail price points. After the (government-mandated) shift to a three-player market in 2008, the regulator has allowed price points to be set by competition. Regulatory interference picked up again in December 2013, focused on the timing and technology of 4G licensing. In addition, regulatory interference in tariffs intensified in April 2015 (with the “higher speed lower price” policies) and in October 2015 (data rollover).
Finally, rising data revenue, offset by a potential drag on voice and SMS revenue, will drive overall cellular revenue growth. The underlying industry structure, and resulting competitiveness, will affect both the success in monetising rising data volume, and the pace of voice and SMS cannibalization.