Three UK has a great 5G opportunity but needs to do some growing up first

Three is positioning itself to fully exploit the 5G opportunity, but you have to wonder whether it can deliver the high standards it is setting itself by just repeating what it has always done.

“We are going to take 5G by storm, we believe it is ours to own,” said Shadi Halliwell, CMO of Three UK, at a London briefing this week.

There is certainly an element of truth to this statement; the UK connectivity market has pleasantly evolved into the environment which will allow Three to flourish. Data is king as we head towards 5G and with the on-going challenges in delivering broadband which meets consumer expectations, the conditions are ripe for disruption.

Three has always sold itself as a brand designed for the data-intensive consumer and this is the promise of 5G for the moment. Without Release 16 from the 3GPP, 5G is little more than upgraded 4G, but this won’t matter for Three. The brand proposition is already well established and 5G allows the team to double-down on this position.

There are a lot of other factors which will help the team here also. The telcos has never been shy about hyping its contiguous 100 MHz of spectrum, or that it is has a greater horde of assets than its competitors. Being late to market also might help, taking a bigger picture approach than rivals seeking to win the ‘first’ tagline.

But if Three is going to be a serious competitor, it has to evolve its image.

Chasing after the data-intensive consumers is all well and good, but this is only one segment. Presenting itself as a challenger to the status quo is all well and good, but it doesn’t create a sense of robustness and heritage. Colourful marketing campaigns and undermining competitors with cheeky messaging is all well and good, but it doesn’t appeal to more conservative consumers.

If Three wants to compete with the big boys of the UK telco industry it has to present itself as a brand which is robust, dependable, reliable, competitive, consistent, mature and creative. It might be ticking a few of these boxes at the moment, but not all of them. And until it ticks more, it will remain a brand with a niche appeal.

Make-The-Air-Fair-1

In the UK, we like quirky, we like imagination and we like the underdog, but only to a certain degree. We also like brands we can trust and rely upon, especially when we are going to be paying for a service which is increasingly dominating more aspects of our lives. We’re conservative, especially when dealing with money.

At the moment, Three is like that mate you like going to the pub with. He’s fun, adventurous and there will never be a dull moment as you set the world to right. However, the other telcos are dependable friends which you can go to with real-world problems. When it comes to spending money, most UK consumers will want to side with the dependable friend.

This is evident in the market share statistics over the last couple of years, which have remained largely static. Using Ovum’s WCIS, O2 leads the UK for mobile subscriptions with 36%, EE sits in second with 33% and Vodafone holds 20%. Three is in a distant fourth with 11% market share of mobile subscriptions in the UK.

Three has created an interesting brand identity, and it has worked in attracting some customers, but this is a niche. If Three wants to steal subscriptions from its competitors, it has to be more than a plucky outsider, it has to grow up and evolve its offering.

This is not to say Three does not have an excellent opportunity.

As mentioned above, 5G is going to encourage consumers to use more data than ever before. This will be the case over the coming months, and these trends will gather momentum as designed-for-5G services and applications emerge. Three is in a good position here, both in terms of the brand heritage and the spectrum assets it controls.

What is also worth noting is the focus is not only on 5G. Three is refarming huge swathes of 3G spectrum into 4G and a £2 billion investment in the network will also help 4G speeds improve across the country. However, with this article focusing on 5G, you can see from the image below the telco is certainly creating a more stable foundation to grow in the future.

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The constant issues with broadband has created an environment which is ripe for disruption. Just look at the progress alt-nets are making in the fixed world. With its UK Broadband acquisition, Three can offer FWA solutions to broaden the portfolio of services it can offer customers.

Looking at the FWA offering, there is a great opportunity for Three to enter the world of convergence. If priced correctly and the right data allowances offered, bundled FWA and mobile contracts could challenge BT in its pursuit of providing a seamless connectivity experience everywhere and anywhere.

Perhaps the most interesting aspect of this product is the plug-and-play nature. In theory, customers should be able to open the box, plug in the router and away it goes. No more waiting for engineers, it’s the simplicity which will sell it. A beta test is underway in Camden to ensure the reality of plug-and-play lives up to the promise, but this is a very interesting approach.

And finally, onto pricing. Being last to market offers Three a chance to see what rivals are going to charge. Yes, the rivals might be able to attract early adopters, but undercutting competitors on price could work very well, especially as 5G enters the mainstream. Both EE and Vodafone have unveiled very expensive tariffs, so it will be interesting to see how Three approaches this dilemma.

The new text-to-switch initiative from Ofcom will also help here. No-longer will customers have to endure the painful process of hopping around a call centre to cancel a contract, it is now (theoretically) a simple SMS.

Three does have a genuine opportunity to make substantial headway in the 5G era, but it needs to evolve its image and offering. Albert Einstein once said ‘the definition of insanity is doing the same thing over and over again but expecting different results’; if Three’s approach to 5G is the same as 4G, it might make gains, but it would not be a surprise to see the competitive landscape in the UK remain the same.

We would not like Three to ditch the image which has created, it clearly works with some demographics, but it needs to have more than one string to the bow if it is going to improve on an 11% market share.

Google points to security risk of Huawei ban, but what about commercial threat?

Google might have national security concerns about prohibiting Huawei from using the Android operating system, but it should also be worried about a potential threat to its market dominance.

If you are looking for a market with almost zero movement in terms of competitive threat, the OS segment is a prime example. With Google’s Android and Apple’s iOS, there is pretty much no-one else in the market worth considering. KaiOS has a fraction of the market, thanks to a focus on feature phones, while Nokia and Microsoft still have some legacy share, but realistically the duopoly of Google and Apple reign supreme.

That said, Huawei’s OS could prove to be a pain the Google’s side should all the pieces fall into place. It is of course a massive long-shot, but it is definitely a risk Google executives should be considering.

According to the Financial Times, Google has warned there could be some unintended consequences to the Huawei ban. With Huawei currently prohibited from using Android in any of its devices moving forward, Google is suggesting a rushed attempt to create an alternative could result in software bugs and an OS which is more susceptible to hacking. Huawei has already said it is progressing well with its own OS and should tensions between the US and China continue to rise, it will likely be debuted in the near future.

This is a risk but not something which is likely to concern the White House. It would not be a stretch to imagine the answer being ‘so what?’, if the Huawei OS has bugs that’s China’s problem. Google has reportedly approached the Commerce Department to request being exempt from the ban, allowing it to continue providing security updates to Huawei devices powered by Android, though it would seem these pleas have landed on deaf ears thus far.

Increasing the risk to national security is certainly an unintended consequence of Trump’s Executive Order to blacklist Huawei doing business with US firms, but there do seem to be more instances of friendly-fire each week.

During the immediate aftermath of the Huawei ban, several US firms were hit hard. US companies such as Xilinx, Skyworks Solutions, NeoPhotonics and Qorvo watched share price crumble away as they were effectively banned from engaging their biggest customer. Some have recovered slightly, but the damage has not been completely wiped out.

Another potential consequence to the ban is Huawei emerging on the other side of the conflict still intact. This could possibly be worst case scenario for the White House, as it would be a PR victory for the Chinese government and Huawei would be in a stronger position, no-longer dependent on the US. The OS market is one place US dominance could be notably challenged.

Huawei is currently the second-largest smartphone manufacturer in the world. This is down to a number of different factors, such as the price/quality comparison though its supremacy in the China market should not be underappreciated.

The China market itself might not be a massive concern to Google, as it is largely banned there, though other markets which are closely linked to China might be more of a concern. Android itself is an excellent springboard to profits for Google. Applications such as Gmail, Maps and Chrome as installed on devices as default, providing an outstanding link to monetization. As the second-largest smartphone manufacturer over the last few quarters, Huawei is a very good source of revenue for the Googlers.

If Huawei’s OS proves to be effective and it manages to convince international users that it is a brand which is worth persevering with, a third OS could enter the ecosystem. There are of course a lot of moving parts to consider, establishing trust with the consumer is going to be the biggest issue here as we suspect there will be some PR assault challenge the credibility of the OS and links to the Chinese government, but it is a realistic possibility. If it is anywhere near as good as Android, Huawei’s OS could gain market share and could chip away at Google’s profits.

That said, we can’t see Huawei making a significant challenge to Android’s dominance in the European markets, were the Huawei smartphone has seen good adoption trends, but there are others. Asia, for instance, or Africa, where Huawei’s cheaper devices may be more appealing than competitors. These are also nations which have largely managed to steer clear of being caught in the tension between the US and China.

As mentioned before, there is a lot which needs to go right for Huawei to gain a foothold and break the Android dominance around the world, but it is a realistic possibility, if only a long-shot. Usability and trust are two factors but developing the ecosystem would be another. The Google Play Store is a monstrous library of apps, and Huawei would have to offer something similar to be appealing to consumers.

Another unintended consequence is perhaps Huawei emerging as a more innovative and resilient player on the technology scene. By removing its reliance on US suppliers in certain areas of the supply chain, Huawei will be forced to move more capabilities in-house or search for new companies to plug the holes.

Huawei already had a sneak-preview of the damage which can be done through the US Entity List. ZTE was almost forced to extinction by the Trump signature on an Executive Order, which perhaps encouraged Huawei to invest more in HiSilicon, its own fabless semiconductor company based in Shenzhen. The more the White House forces Huawei to stand on its own, the more powerful Huawei could become.

The intended outcome of this action from the White House is surely to weaken China’s flagbearer in the telco and technology world, but if Huawei can ride the wave of adversity, it might just emerge as a much more powerful, innovative and influential player, free from any reliance on the US technology sector.

Full-year global smartphone market declines for the first time

For five consecutive quarters the global smartphone market has registered year-on-year decline, marking the first time it has shrunk on annual basis since the first iPhone defined the category in 2007.

The size of the contraction is believed to be around 4-5%, according to some research firms. Among the leading smartphone makers, Huawei was the only one that has bucked the trend by increasing its sales volume and vastly improving its market share. By some estimate it is almost neck and neck with Apple.

“Huawei grew 35 percent and shipped a record 205.8 million smartphones globally in full-year 2018,” said Woody Oh, Director at Strategy Analytics. “Huawei is now just a whisker behind Apple, who shipped 206.3 million iPhones last year. Huawei is massively outgrowing the iPhone and we expect Huawei to overtake Apple on a full-year basis worldwide for the first time in 2019.”

In general, the leading Chinese brands, including OPPO, vivo, and Xiaomi (in addition to Huawei) have been aggressively expanding overseas to compensate the weak domestic market. According to the estimates by Counterpoint Research, 46% of the Chinese brands’ total volume was shipped outside of China, up from 33% a year ago. “The collective smartphone shipment growth of emerging markets such as India, Indonesia, Vietnam, Russia and others was not enough to offset the decline in China, which was responsible for almost 1/3 of global smartphone shipments in 2018. With China showing little or no sign of recovery due to various politico-economic factors, Chinese brands are looking to expand overseas,” said Shobhit Srivastava, an analyst from Counterpoint. “To increase market share, Chinese brands have been aggressive in both hardware/software design and marketing.”

Despite being badly hit in the smartphone market in 2018 (and foreseeing continued difficulties in 2019), Samsung was still able to hold on to the overall market leader position. “Samsung shipped 69.3 million smartphones worldwide in Q4 2018, dipping 7 percent annually from 74.4 million units in Q4 2017. Samsung remains the world’s number one smartphone vendor, despite intense competition from Apple, Huawei and others across core markets of India, Europe and the US,” commented Neil Mawston, Executive Director at Strategy Analytics.

Calculating Q4 was made further complicated as this was the first quarter that Apple would not publish the iPhone shipment volume (though it continues to publish iPhone revenues). We sampled three research firms’ published numbers on the market size and vendor share, each of them making their judgement call on Apple as well as other firms that do not publish their shipments.

Both Counterpoint Research and Strategy Analytics believed Apple sold 66 million iPhones in the final quarter of 2018, presumably by applying the announced year-on-year 15% decline of iPhone revenues directly on the volume. This is a crude methodology, as it would assume the average selling price (ASP) of the iPhones has remained constant from a year ago. The new models released in 2018 were sold at much higher price points than their predecessors from 2017. To couple this with Apple’s decision to discontinue some older, cheaper models, the iPhone ASP should only go up, which means its volume decline should be bigger than 15%, though by how much is anyone’s guess.

On the other hand, Canalys estimated that 71.7 million iPhones were sold in Q4, or a 7% decline from Q4 2017. As a matter of fact, the firm, based on this estimate, declared that Apple overtook Samsung to be the market leader in Q4. This calculation implies Apple must have vastly discounted the iPhones to drive up volume. This is not entirely impossible, but it has not been reported broadly.

Smartphone 2018

Apple iPhone sales plunged by 20% in November – Counterpoint

Facing more affordable competition from the Chinese brands, the iPhone’s total sales suffered a 20% decline in November, with the cheaper XR model outselling the more expensive models, according to an update from Counterpoint.

The research firm published its monthly update on iPhone sales for November, estimating that the decline was across the board. In Europe and North America, replacement cycles are getting longer while operators are reducing their subsidies, both trends playing to the decline of iPhone sales.

One exception was China, where the sales held largely thanks to the 11.11 (“Single’s Day”) sale, where all online channels would hand out discounts. However, the China market is expected to go down in December. On one hand the Single Day sales already satisfied much of the demand; on the other hand, the ongoing trade war with the US has pumped anti-American sentiment into some consumers, which Tim Cook also employed to explain away the weakness in its phone business.

When it comes to the model breakdown, Counterpoint said the best-selling model was XR, the cheapest among the three new models recently launched. More specifically, the 64GB version, the one with the smallest memory, was selling the best. This is in stark contrast to a year ago, when the best-selling model was the then newly launched iPhone X, the most expensive one in the new line-up. The research firm also concluded that when looking at the performances of the two most expensive models of the two years, the “iPhone XS Max, when compared to iPhone X during the same month last year, shows a 46% decline in sales.”

iPhone-November-Sales-2017-vs-2018

The decline should not come as a surprise though. In all markets the Chinese brands are gaining momentum, not the least in emerging markets like India, where smartphone market is still expanding. “iPhone has never achieved a significant share of the Indian market because it’s just too expensive. It rarely makes it above 1% of the overall market or 2% of the smartphone market. Recent changes to import taxes made the cost even more prohibitive. Apple has now decided to start assembling in India through Foxconn. This should help offset the import taxes it currently has to pay. This move may also be a hedge against potential damage from the ongoing China/US trade war.” Peter Richardson, research director and partner at Counterpoint told Telecoms.com. “However, while Apple’s brand is certainly well-regarded, Indian consumers have become accustomed to the quality of Chinese Android products, from players such as Xiaomi, Vivo and Oppo. It is questionable whether they will see the value in iOS relative to these Chinese players that are innovating much faster. Huawei (and Honor) has also been a marginal presence so far, but is expected to grow relatively quickly, adding to the market’s competitive landscape,” Richardson added.

Even in the more advanced markets Apple has shown weakness for a while. Earlier we reported that Apple was compensating the Japanese operators to offer discount and considering reviving iPhone X in Japan to boost sales.

Jio leapfrogs Idea and Vodafone for second place in India

The Telecom Regulatory Authority of India (TRAI) has unveiled the monthly growth statistics for July and India is still the market which keeps giving.

Looking at the wireless segments to start with, Jio is once again dominating. Overall, the market grew by 10.5 million subscriptions taking the total to 1.15 billion. This number is already pretty staggering, though when you consider the total population of the country is over 1.3 billion there is still room for growth. In most developed markets the mobile penetration (the total number SIM cards) exceeds 100% of the population, while there are numerous cases of this percentage going north of 110%. Looking at these statistics in the simplest of terms, there is still potential for another couple of hundred million subscriptions in the country.

Of course, Jio is capitalizing most from the insatiable appetite of the Indian digital society. When looking at the total number of subscriptions secured by the telcos, Reliance Jio captured roughly 91% of the new customers, boosting its subscription base by 11.7 million. Amazingly, the 609,000 subs captured by Vodafone or the 313,000 attributed to Bharti Airtel are nothing more than footnotes; how many markets are there were you could say that!

The end result is continued momentum for Jio. As you can see below, Jio has leapfrogged both Vodafone and Idea in the market share rankings. That said, with the much-anticipated merger on the horizon it won’t be long before the combined entity hits top spot.

Telco Net Adds Market Share
Reliance Jio 11,796,630 19.62%
Vodafone 609,974 19.3%
Bharti Airtel 313,283 29.81%
BSNL 225,962 9.8%
Idea 5,489 19.07%
MTNL -9,914 0.3%
Reliance Communications -31,814 0.004%
Tata -2,357,690 2.1%

Perhaps the most amazing aspect of these statistics is in the broadband market however. The staggering growth of the mobile segment will continue for at least the short- to mid-term future, though with a total of 22.2 million broadband subscribers there is an incredible opportunity for the right offering.

Just to put these numbers in perspective, the broadband would have to grow 50-fold to even come close to the same scale as mobile. Admittedly, it significantly more expensive to invest in infrastructure for a future-proofed broadband network in comparison to mobile, but this is an area which seems primed for the right disruption.

Of course, with disruption comes uncomfortable truths. Jio might be on an upward trend, collecting subscriptions and hiring generously, though the consequence of this disruption has been market consolidation. In the most general terms possible, consolidation is never a positive for the job market, while the Financial Express is reporting job losses of 50,000-75,000 in the Indian telco market across 2018.