|Topic:||Next-generation lifestyle services|
|Author:||Jan Erik Kristiansen and Anna Bartz|
|Title:||(Jan Erik Kristiansen) Partner and Director of European Operations, and (Anna Bartz) Consultant, ICT Europe|
|Organisation:||Frost & Sullivan|
Jan Erik Kristiansen is a Partner and Director of Frost & Sullivan; he manages their Global Growth Consulting Team and is Director of European Operations. Mr Kristiansen has 21 years of strategy consulting experience, having worked on more than 100 strategy design and implementation projects on a global scale. Before joining Frost & Sullivan, Mr Krisiansen worked as Partner/Director or Consultant in various consulting firms (Arkwright Group, OC&C, Bain & Co). He started his career with FMCG (Procter & Gamble). Mr Kristiansen holds an MBA from ESSEC, Paris (France). Anna Bartz is a Consultant with Frost & Sullivan ICT Practice in Europe, focusing upon market development/entry strategies, regulatory and commercial due diligence. Ms Bartz oversees the development of thought leadership pertaining to the CEE and CIS telecom markets. Prior to joining Frost & Sullivan, Anna Bartz worked in market intelligence with Lexmark International and with a start-up software services company in Poland to support their entry into the ISP market. Ms Bartz holds a double MSc, from University of Economics in Poland and from ESCP-EAP in France.
The Central and Eastern European market for telecommunications services is catching up – at varying rates – with its Western European counterparts. Analysis of the market distinguishes three market groups within the region that differ according to their GDPs, telecom penetration and usage. All market groups want the same next-generation lifestyle services that are found in Western Europe but the lack of infrastructure and investment funding will dictate quite different market growth patterns in each of these market groupings.
Rather than just buying a really neat handset, todayís users want to be able to interface with the web, videoconference, and send multiple text and picture messages. What they are beginning to expect is an always-on communication service for use at work and at play, on any device they choose, and that combines voice, video and data seamlessly. They now expect mobility as a feature of every application and will switch networks if they donít get what they want. This is what we mean when we talk about next-generation services. We are discussing the degree to which technology helps define who we are and how we live or, in other words, the lifestyle services market. This is the result of a major transformation of the end userís buying power over the past several years. Before, technology drove, but also limited, what customers bought, whether it was a new application or a new piece of hardware. The model has changed quite drastically. In essence, what we see now is the shifting emphasis from technology to the user experience. Now, the customer holds the key. This requires operators to move from a product-driven approach to a more customer-centric model. On the supply side, this puts a lot of pressure on the operators to provide customised, blended services to remain relevant to their customersí lifestyles. While these pressures operate on industry in liberalised western markets, there is a big question about the suitability of such a product strategy in the Central and Eastern Europe, CEE, market environment. Segmenting a complex market CEE shows strong growth potential across telecoms market verticals. The region is almost the size of Western Europe, however only about 15 per cent of the value of the Western European telecom market. The marketís growth rate is currently more than five per cent and its growth should exceed Western Europeís two per cent growth rate for at least the coming ten years. This picture is more interesting when we look at key economic indicators: GDP per head is growing at about six per cent within CEE countries, compared to 2.6 per cent in Western Europe. With the exception of CIS countries, the markets are within the European Free Trade Area, making the CEE an extremely attractive market for investment. Although there is some concern that this is merely catch-up growth, one of the key lessons of developing telecoms markets is that technology often provides striking results and unpredictable responses. Examining the statistics, we see a very different picture. When country penetration rates – a weighted average of ICT market segment penetration rates – are indexed against per capita GDP, we discover that Eastern Europe has highly segmented levels of market maturity. Understanding each stratum of the regionís markets, then, requires examining many factors to determine a suitable approach to this growing pool of potential customers. Chart number 2 shows country penetration rates indexed against GDP per head. Three distinct clusters of countries appear on this matrix. The first cluster of countries (e.g. Russia, Ukraine, Serbia and Albania) has low GDP per head and low-to-medium penetration rates. In these ëfollowerí countries the market liberalisation process and deregulation have only just started. Therefore, incumbents enjoy a very privileged and protected position and the number of players operating in these markets is quite limited. Subscriber growth rates are very high, although growth is primarily driven by basic voice and data services. The second cluster of countries (medium and large markets such as Poland, Hungary and Lithuania) has medium GDP per head and medium-to-high penetration rates; these are the economies that experienced significant economic transformation during the 1990s. The interesting thing about these transitional markets is that they have high penetration levels – penetration of mobile is comparable with Western European averages – however in terms of economic parameters they differ considerably from countries such as France, Germany or Sweden. While this cluster accounts for the second largest potential market, more than 20 per cent of the regionís population, it is not certain that these countries will continue the same degree of forward momentum towards liberalisation and market development. EU accession has helped these markets advance significantly by mandating the legal framework required for an open market. As a result, major international operators such as Deutsche Telekom, Telefonica, Telia Sonera, Telenor and Vodafone have established their presence in this region. Finally, the third group of reasonably advanced countries – the regional outliers such as the Czech Republic, Estonia and Slovenia – garners much attention due to medium-to-high GDP per head and high penetration rates. It is notable that this market has disproportionately large uptake rates. For instance, as much as 92 per cent of Internet subscriptions in Estonia are now broadband. The underlying market dynamics there are similar to those of Western European markets, with operators facing stiff competition and high customer churn. Before moving on to the discussion of drivers of next-generation services, it is important to qualify this by highlighting four points: ï First, GDP per capita development is a major driver but some smaller, less diversified economies have been quite successful due to their levels of FDI, foreign direct investment; ï Second, small local populations and proximity to larger, more developed telecommunications infrastructures are key enablers of high telecom penetration rates and advanced, next-generation service demand; ï Third, a medium penetration rate is not universally indicative of the underlying market structure. For instance, in certain countries broadband usage outpaces dial-up, while mobile is growing in all cases. This has a strong bearing on any assessment of telecom penetration rates; ï Lastly, there is a strong ëfollower effectí from sub-regional nodes such as Austria that drive the market in countries with large migrant populations such as Hungary, Slovenia and Croatia. Will evolving demand drive next-generation lifestyle services? A significant point needs repeating about CEE market segmentation and the underlying market dynamics – the demandside drivers of next-generation ëlifestyleí services differ widely by sub-regional cluster. Chart number 3 illustrates the evolution of next-generation service drivers in the three clusters of countries in both the medium (3-5 years) and long term (5-10 years). The immediate conclusion is that the mediumterm opportunities for providing lifestyle services can be found in both mature and transitional markets. This conclusion does not, however, take into account the role of infrastructure and supply-side dynamics. The lagging GDP of transitional markets tends to soften the growth in demand for lifestyle services. This demand should grow in the short and medium term, as the infrastructure and supply base grow to catch up with demand. Once this situation levels out, and the GDP per capita in these countries grows closer, then we expect infrastructure to be the remaining issue. On the supply side, operators face several challenges associated with offering lifestyle services in CEE. First, and most important, there are gaps in the local infrastructure. Considerable investments are needed, but operators are unwilling to assume the risk without assurance as to the length of the pay-off period. Secondly, there is an issue with complex billing for these types of nextgeneration services. Lastly, customers need to be equipped with multimedia devices to take full advantage of the new services. This requires operators to develop partnerships with different players in the value chain (device suppliers, content and applications providers, and even each other) to jump-start these markets. It may be the case that sharing of network development and operations among operators is necessary for the market to grow. We can expect this can make operators stronger and better positioned to face changing demand. With increasing per capita incomes and greater competition, buyer power in CEE is evolving rapidly. While the key drivers for next-generation services in CEE are the same as those in Western Europe, the context is different. This will drive both blending and customisation of services as CEE begins to behave in the manner of more mature markets. Still, the key challenge of overcoming the lack of infrastructure investment in the region remains. Investors can only be certain of one single unifying factor in the region: complexity of demand. To this, there is only one universal solution: enduring, cross-sector, value-adding partnerships that focus on satisfying the customerís requirements and mitigate the risks, limitations and challenges posed by local infrastructure development timescales.