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Wireless carriers face subscriber slowdown
Press release, February 13; Michael McManus, DIGITIMES [Tuesday 13 February 2007]

As the global wireless industry convenes today for its biggest event of the year, the 3GSM World Congress 2007 in Barcelona, Spain, carriers participating in the event face a major challenge: how to maintain revenue growth amid a dramatic slowdown in new handset subscribers.

At the 3GSM event, manufacturers are expected to show their latest products, ranging from high-end music-enabled wireless handsets and smart phones that are designed to appeal to sophisticated users in developed regions, to Ultra Low-Cost Handsets (ULCHs) that are targeted at low-income users in the third world. These products can counteract the impact of the subscriber slowdown by drumming up new revenue streams and by attracting new customers that previously couldn't afford handsets. But will these efforts be enough to maintain growth in handset hardware and service revenues?

Subscriber slowdown

After rising by an average of 25% in 2004, 2005 and 2006, global handset subscriber growth will decelerate to 12.8% in 2007, according to iSuppli's Wireless Systems service. The slowdown will continue during the following years, with subscriber growth dropping to 9.6% percent in 2008, to 7% in 2009 and to 5.7% in 2010.

Global handset subscriber growth forecast, 2004-2010 (Percentage growth in subscribers)

Source: iSuppli Corp. February 2007

In parallel with the slowdown in subscriber gains is a major drop-off in production growth for handsets. In 2004, 2005 and 2006, Handset unit production grew by an average of 19.3%. In 2007, the growth will slow to a mere 9.1%, followed by 6.9% in 2008, 4.8% in 2009 and 3% in 2010.

Global handset production growth forecast (Percentage growth in unit production)

Source: iSuppli Corp. February 2007

The slowdown in new subscriber growth and the deceleration in handset sales translates directly into deteriorating market conditions for wireless carriers, said Dr. Jagdish Rebello, director and principal analyst for iSuppli. Carriers and their handset suppliers need new strategies to counter the impact of this phenomenon.

Quality over quantity

With fewer new subscribers to be found worldwide, carriers need to focus on squeezing more revenue out of their existing customers in developed regions. One way to boost the Average Revenue Per User (ARPU) is to offer enhanced services that subscribers are willing to pay for.

In pursuit of this goal, wireless carriers are offering services including Internet access, mobile television and music playback capability, all of which command a higher ARPU than basic voice communications. By 2010, the market for handset content, including music, video and gaming will expand to nearly US$36 billion, up from US$7.7 billion in 2005, according to iSuppli's Mobile Multimedia Content service.

However, even new mobile content services are in a constant state of flux, with ringtones already having peaked, ringback tones gaining momentum, and mobile TV services just debuting worldwide.

Applications such as digital imaging, mobile TV, video and audio streaming, music downloads and interactive gaming are imposing significant changes on handset design, requiring higher resolution displays, more powerful processing, increased memory densities, removable flash cards and local interfaces to connect to PCs, such as USB. Carriers that can marry compelling content and services to affordable yet attractive hardware stand to increase their ARPU and counteract the impact of slowing subscriber growth.

Embrace the ULCH

Developed regions of the world have reached near saturation of handset subscribers. In 2006, North America achieved 93.2% wireless subscriber penetration, with South Korea at 83.2% and Japan at 74.2%. This is the major factor behind the worldwide slowdown in subscriber growth.

In contrast, the globe's developing nations and regions have much lower wireless penetration rates, with Latin America at 48.3%; China at 24.4%; Africa, the Middle East and Australia at 23.6% and India at a mere 13.5%. However, this situation is changing rapidly, with penetration in 2010 rising to 65.5% in Latin America; to 36.6% in China; to 34.8% in Africa, Middle East and Australia and to 31.5% in India.

For wireless carriers to achieve any significant increase in subscribers during the next three years, they must find a way to tap into growth in the less-penetrated regions. In less-affluent countries including India, the key to cashing in on this growth is to offer ULCH phones, i.e. phones that cost US$40 or less.

For India and other developing regions, the next phase of growth will be driven by low-end phones," Rebello said. To serve this area, manufacturers need to drive down their phone costs.

Many handset makers have jumped into the ULCH business, offering handsets priced at US$30-$40. To support this trend, semiconductor suppliers have begun offering single-chip solutions for ULCHs that dramatically reduce the Bill-of-Materials costs for such phones. Wireless carriers must leverage such solutions to offer phones that are not only inexpensive, but that appeal to the specific needs of consumers in these regions.

iSuppli analysts will be at 3GSM this week studying how the latest developments in products and carrier strategies fit in with the trends described above.

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