The UK telecommunications market was valued at £23.84bn in the year ending March 2003; Key Note estimates this to have increased to £25.06bn in the year ending March 2004. In recent years, the rate of market growth has slowed, reflecting slower global economic growth and continued downward pressure on prices in an intensely competitive market.
This report looks as three main sectors: the fixed-line market; the cellular or mobile market; and the broadband and leased line market. Since 2000, mobile revenue has been the most dynamic sector of the market along with those areas of the market related to data rather than voice transfer - especially Internet traffic - with broadband connections growing rapidly.
Key Note expects the telecommunications market to experience improved rates of market growth between the years ending March 2005 and 2009 but also to continue facing problems in generating profits. Broad social trends, such as the rise of the information society, are making telecommunications more important. However, the industry will continue to have to live with the high levels of accumulated debt that were taken on to finance third generation (3G) licenses, network developments and past acquisitions. The telecommunications market is also seeing the degree of competition intensify - a factor encouraged by new competition-promoting legislation - which, in turn, is putting downward pressure on end-user prices. The consequence of this is the growing importance of scale in the industry as profit margins come under pressure: a scramble for market share is underway.
The need to write off large amounts of goodwill and adjust profits for exceptional items stems from decisions taken in the late 1990s, when leading players - especially those in the mobile sector of the market - made over-optimistic assumptions about potential industry growth. Based on these, companies used debt to finance acquisitions and buy 3G licenses, both of which, in hindsight, had highly inflated valuations.
Cellular operators are now being extremely cautious and circumspect when planning the launch of 3G services. Only one service is fully operational in the UK, although all the major operators are now set to introduce some form of 3G services in 2004; these will not necessarily be full-scale consumer services.
3G is unlikely to be a major mobile service in the UK until 2006 and, until then, General Packet switched Radio System (GPRS) services look set for rapid growth. The longer-term potential for 3G could be hampered by the expected growth in Voice over Internet Protocol (VoIP) services delivered through Wireless Fidelity (Wi-Fi) Local Area Network (LAN) technology, although cellular operators will undoubtedly capture an important share of this market.
The future competitive nature of the industry will depend to a large degree on the shape of British Telecommunications (BT). BT rivals claim that if BT is broken up into two operations (Retail and Wholesale), this will make the market more competitive, although BT argues that this is not the case as it claims BT Retail does not get preferential treatment from BT Wholesale. Even without a break up, the dominant player in the fixed-line market will face increased competition in the future. Legislative pressure will continue to impact on BT's business while a newly merged NTL and Telewest will be a much more significant competitor to BT than both are individually at the moment. A broken up BT would also face more intense competition from rival broadband providers.
More generally, VoIP services are set to become firmly established in the 2004/2005 period, with major operators such as BT entering the market in 2004. This could have significant long-term implications for the voice revenues generated from both fixed and cellular networks.
The growth of VoIP and 3G services is increasing the importance of new billing- and operation-support systems for telecommunications operators. In the future, the ability to offer highly flexible pricing structures will be vital in the market.
In the coming 5 years, Key Note expects cellular and data services (especially IP networks) to continue to grow at a much stronger rate than other sectors of the telecommunications market. Key Note has identified six key growth markets over the years ending March 2005 to 2009.
In the mobile sector, the key opportunities are:
mobile video - including video telephony
premium mobile content offered by the network operators rather than third parties, such as sports, travel, entertainment and mobile games
GPRS - at least until 2006 and 3G thereafter.
In the fixed-line sector, key opportunities are:
Asymmetric Digital Subscriber Line (ADSL) services, although profits may be hard to generate
video telephony
premium services delivered via broadband networks.
Overall, telecommunications revenue is expected to show improved rates of growth between the years ending March 2005 and 2009 compared with the the years ending March 2003 and 2004, reflecting improved global economic conditions and the uptake of new services such as 3G and broadband applications.
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