2017 Telecommunications Industry OutlookInterview with Craig Wigginton

Growth opportunities and challenges in an ever-connected worldThe telecom sector continues to be a critical force for growth, innovation, and disruption across multiple industries. Perhaps nothing demonstrates this more clearly than the smartphone. Smartphones have become a hub for much of what we do, directing the activities of virtually all of our connected lives—in both work and personal settings. They are the conduit for both content and a myriad of applications, including videos, music, in-store payments, online commerce, and remote control of our connected homes and vehicles. As we enter 2017, we anticipate even more opportunities for telecom to meet the needs of the mobile consumer.

What can we expect from smartphone digital assistants in the future? How close are we to a device that mimics aspects of the human brain? Our latest trends report explores new technologies, challenges, growth opportunities, and key emerging areas in the telecom industry.

2017 Telecommunications Outlook

Where do you see opportunities for growth in 2017?

The growth in smartphone usage signals continuing opportunity for all telecom sub-sectors, including wireless and wireline/broadband carriers, network equipment/infrastructure companies, and device manufacturers. Nevertheless, we expect there could be a change in how these opportunities are manifested. Within the carrier segment, investment in emerging areas has historically focused on “connectivity-first,” which has allowed carriers to leverage their core strengths, including their networks. However, in 2017 we may see a shift toward areas with a higher growth potential that go well beyond carriers’ core connectivity business.

Two potential areas of focus are content and the Internet of Things (IoT). The long-standing promise of delivering content to any screen is finally becoming a reality, enabled by advances in network technology and higher speeds, as well as enhanced content at the carrier level, whether owned or resold. The consumer-oriented “things” that comprise the IoT—including wearables, connected cars, smart homes (e.g., lighting, security, entertainment), and the government and enterprise-connected “things” such as smart businesses (e.g., fleet management), and smart cities (e.g., parking, city lighting, asset monitoring and tracking, and video security)—are likely areas of growth in

the coming years. Consumer demand for digital technologies that make it easier to control their homes and cars has grown, and will help to drive incremental revenue in the ecosystem.

There also remains significant opportunity for mergers and acquisitions (M&A), and on the heels of some substantive announcements in 2016, 2017 is likely to be another big year for deals. One thing that may help push some deals across the finish line is the prospect of less regulation from government agencies. While the specifics of the new administration are yet to be determined, early indications are that anything is fair game for reevaluation.

Growth in the mobile industry has been dramatic by virtually any measure, and despite some reports of a slowdown, we still expect to see growth in 2017. True, simple innovations such as advanced wearables (e.g., those incorporating augmented or virtual reality) may take a few years to emerge, and more complex ones, such as fully autonomous vehicles, are farther out. But one thing is undeniable: penetration and use across the ecosystem continues to increase in many key categories. For evidence one need look no further than our latest Global Mobile Consumer Survey (GMCS):

• US consumers are looking at their devices more than 9 billion times a day in the aggregate—up 13% from last year.

• Smartphone sales are still strong, with penetration up 10% year over year, and the highest growth percentages coming in the 45-54 and 55+ age demographics—groups that have previously lagged behind younger consumers.

• While they are still relatively niche products, wearables such as smart watches and fitness bands have seen tremendous percentage growth. Smartwatch penetration doubled from 2014 to 2015 and tripled in 2016; smartwatches have now penetrated roughly 12% of the mobile consumer market in the US.

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While 2017 won’t see our roads suddenly filled with self-driving cars, it will be an important year for carriers to consider their future role in autonomous vehicles, since connectivity will be central to the many activities and services surrounding this emerging sector.

What should businesses be mindful of as they plan for growth?Carriers should continue to focus on providing data and voice services that are high quality, reliable, and affordable. The challenge in 2017 will continue to be the focus on capital allocation. Carriers will need to make upgrades to their core connectivity infrastructure, which in the case of the coming shift to fifth generation (5G) mobile networks may run well into the billions of dollars. And, they will also require significant capital resources to fund such areas as the IoT, autonomous vehicles, industry verticals, M&A, and international expansion. Carriers will need both a clearly articulated strategy and an efficient approach to capital spending to maximize their investments.

As carriers seek to remain competitive, operations is one area that is ripe for improvement. Many telecoms still rely heavily on manual processes; the

availability of new technologies and innovations may make 2017 the year of digital transformation for carriers in both in the US and globally. Areas with the greatest potential for digital improvement include customer care, sales, and billing. For example, there is an opportunity to use the Internet and social media channels to serve customers directly (versus relying on a call center), and in fact we have already seen dramatic improvements in this space.

Beyond operations, though, telecoms will not be able to achieve rapid growth without upgrading their network infrastructures. Data usage has been increasing dramatically, a trend that is expected to continue in the year ahead. Core connectivity still drives the majority of carriers’ income, and the future of connectivity will remain central to their

strategies in 2017. 5G trials and initial market deployment will be a key focus in 2017. In addition, carriers will want to think about ways to rationalize networks and offer improved and expanded services to customers—through use of small cells, network densification (adding more cells to serve more customers), installing more fiber infrastructure, and improving spectrum efficiency.

Finally, operators will be moving away from proprietary, hardware-based network equipment to software-based network functions with technologies such as Software Defined Networking (SDN) and Network Function Virtualization (NFV). This shift should allow them to manage their networks more efficiently and effectively, and be more responsive to changes in consumer preferences.

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The rise of 5G networks promises to spark an enormous wave of change starting in 2017. While the technology has not yet been fully defined, carriers are proceeding with lab and field trials for at least the basic connectivity elements in their race to stay competitive. The promise of 5G—more speed, greater efficiency, and less latency—will be essential to supporting connected things in the future. There could well be a push to launch 5G to consumers in trial markets by the end of 2017. We expect there will be full, mass market 5G coverage by approximately 2020.

Autonomous vehicles will be another important market to keep a close eye on in 2017. Once thought to be the stuff of science fiction, the autonomous vehicle has quickly emerged as a viable and highly desired product for consumers. In fact, according to this year’s GMCS, there has been a nearly 50% increase in consumers who say they are likely to buy an autonomous vehicle—and a near doubling of those indicating they are “very likely” to do so. While 2017 won’t see our roads suddenly filled with self-driving cars, it will be an important year for carriers to

consider their future role in autonomous vehicles, since connectivity will be central to the many activities and services surrounding this emerging sector.In addition to these widely talked about advancements, two lesser-known innovations may make a big splash in 2017—biometrics and machine learning for smartphones.

We expect that in 2017 the active base of smartphones equipped with biometric fingerprint readers globally will top 1 billion. If each sensor is used an average of 30 times a day, that sums to over 10 trillion aggregate “presses” globally over the course of the year. There are numerous potential use cases for this technology in retail, financial institutions, the government, and even schools.

With their ability to biometrically verify identities, smartphones are uniquely positioned to serve as all-in-one sources of critical information: who a person is, where they are, and what they intend to do. Other biometric authentication mechanisms (e.g., facial or retinal recognition) are also likely to pick up steam in the coming years and may become

a staple of workforce authentication in addition to customer authentication. We also expect that in 2017, over 300 million smartphones globally—or more than a fifth of units sold—will have on-board neural network machine learning capabilities. These capabilities are driven by computer models designed to mimic aspects of the human brain’s structure and function. Why is this important? Because it can allow smartphones to perform highly sophisticated functions such as indoor navigation, augmented reality, speech recognition, and even learning an individual’s daily tasks and preferences, enabling “digital assistants” like Siri and Alexa to be more proactive.

For example, imagine your phone recommending what time to set an alarm based on your first meeting of the day, the weather, and projected traffic patterns! Connectivity and mobility have become firmly entrenched in our lives, and their power to shape them seems almost limitless. We expect that the ongoing change and innovation in this space will make 2017 an exciting year for the telecom sector.

What do you see emerging in the sector?

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