Technology, Media & Telecommunications Predictions 2014 Contents Foreword 3 Technology 5 The $750 billion converged living room: a plateau approaches 6 Wearables: the eyes have it 10 One became many: the tablet market stratifies 13 Massive Open Online Courses (MOOCs): not disruptive yet, but the future looks bright 16 eVisits: the 21st century housecall 20 Media 23 Doubling up on pay‑TV 24 Television measurement: for better and worse 26 Broadcast sports rights: premium plus 28 Performance rights lift recorded music revenues 30 ‘Cordless’ video‑on‑demand leaps in Sub‑Saharan Africa 32 Telecommunications 35 Short messaging services versus instant messaging: value versus volume 36 Phablets are not a phad 39 The smartphone generation gap: over‑55? There’s no app for that 42 ‘Ruggedized’ data devices at $250: reinventing the business case for mobile field force 45 Recent Deloitte thought leadership 47 Contacts at Deloitte Touche Tohmatsu Limited (DTTL) and its member firms 48 Endnotes 49 Technology, Media & Telecommunications Predictions 2014 1 Igal Brightman, 1945‑2013 This edition of TMT Predictions is dedicated to the memory of Igal Brightman who passed away in August 2013. Igal was the Global Managing Partner and Chairman of the TMT Industry Group for nine years, and his tireless energy and enthusiasm helped define much of our practice, including thought leadership. Igal was a pioneering, unflinching supporter of Deloitte’s research into the TMT sector. He was a steadfast advocate of the need for professional services firms to blend functional skills with leading industry knowledge. He was passionate about investing in research, and through Igal’s support from its launch in 2001, TMT Predictions has become one of the flagship research titles used by Deloitte members firms in over 80 countries around the world. Igal has left us, but his many legacies live on, including Deloitte’s commitment to thought leadership. As used in the Predictions, “Deloitte” refers to the Deloitte Touche Tohmatsu Limited member firm TMT practices. 2 Welcome to the 2014 edition of Deloitte’s predictions for the technology, media and telecommunications (TMT) sectors. TMT Predictions’ objective is to identify critical inflection points we believe should inform industry strategic thinking, and to explain how we think these will manifest over the next 12-18 months. Our perspectives are built around hundreds of discussions with industry executives, analysts and commentators, along with tens of thousands of consumer interviews. As in each year that we have published a set of predictions, the core drivers of disruption in the sector remain the same: processor speed, connectivity and storage. For the past decade, these three drivers have enabled massive advances in the utility, ubiquity and spend on connected devices. In 2014, we expect five connected devices which constitute the converged living room – TVs, PCs, video game consoles, smartphones (including phablets) and tablets – to generate $750 billion in revenue. Despite launching a mere four years ago, tablets are already mainstream and approaching maturity, in that the category now describes a wide, and widening, range of capabilities, sizes, user bases and uses. The largest component in the converged living room group, smartphones ($375 billion revenue in 2014), are nearing saturation among most age groups, although there is still a prime opportunity among people older than 55 – a demographic likely to experience one of the steepest rises in penetration rate this year. Smartphone and tablet vendors are emphasizing ruggedness as a key differentiator, which will make the cracked screen even less common in 2014. This focus also has the benefit of making consumer devices increasingly appropriate for use in non-office environments, and in 2014 we expect a rugged field- force device will cost as little as $250. New device form factors are expected to be launched in 2014, with wearable computers being one of the most talked-about categories. We predict sales of smart glasses, watches and wristbands will reach 10 million units in total this year, and will generate about $3 billion in revenue; significant, but modest when compared to revenues from devices in the converged living room. By contrast, revenue in the low billions is very significant for the recorded music industry, which has seen falling revenues over most of the last two decades. In 2014, we foresee one component of recorded music, performance rights fees, which are paid for use of music in public, to reach $1 billion for the first time ever. This contrasts with the $25 billion broadcast rights for premium sports (a 14 percent increase on 2013), or the $100 billion forecast for text messaging services. As is common in the TMT market, volume does not always equal value. While text messages will only represent about a third of all messages sent from mobile phones, they will account for close to 100 percent of revenues, with mobile instant messaging (MIM) services generating about $2 billion. A decade ago, broadband started at 128 Kbit/s. In 2014 multiple markets will feature speeds of over 100 Mbit/s and higher. The steady growth in bandwidth has enabled, and will continue to enable a steady widening of the scope of services than can migrate online. For example, we expect faster broadband will help move aspects of healthcare online, with 100 million eVisits – online medical interactions – projected to take place in 2014. The super-fast broadband speeds that are now increasingly available also enable more video to be delivered online, which is a key factor behind the tens of millions of homes expected to double up on pay-TV by subscribing to an additional broadband- delivered service. As a portion of viewing of TV migrates online, measurement has to follow to ensure viewing, particularly among younger viewers is captured. This year, viewing data for countries representing over 100 million viewers should start to incorporate TV consumption on laptops, tablets and smartphones. Foreword Technology, Media & Telecommunications Predictions 2014 3 Video-on-demand services are predominantly offered in fast broadband markets, however service is also possible in regions currently lacking extensive broadband infrastructure. Satellites can relay movies and TV programs onto the ever larger hard drives of digital video recorders (DVRs), enabling providers to offer over a thousand hours of on-demand programming. Most of our predictions focus on the next 18 months. However one topic, the emergence of Massive Open Online Courses (MOOCs) merits both a near-term assessment (modest adoption) as well as a longer-term view (significant take-up). The focus of our Predictions varies from year-to-year, but one theme appears constant: the impact of TMT on our behaviors steadily deepens. In the time it took to read this foreword, over 100 million messages will have been sent via smartphones around the world. We wish you all the best for 2014 and trust you and your colleagues find this year’s Predictions a useful stimulant for your strategic thinking and market actions for the year ahead and beyond. Jolyon Barker Managing Director Global Technology, Media & Telecommunications Deloitte Touche Tohmatsu Limited As in each year that we have published a set of predictions, the core drivers of disruption in the sector remain the same: processor speed, connectivity and storage. 4 The $750 billion converged living room: a plateau approaches 6 Wearables: the eyes have it 10 One became many: the tablet market stratifies 13 Massive Open Online Courses (MOOCs): not disruptive yet, but the future looks bright 16 eVisits: the 21st century housecall 20 Technology Technology, Media & Telecommunications Predictions 2014 5 Deloitte predicts that global sales of smartphones, tablets, PCs, TV sets and video game consoles will exceed $750 billion in 2014, up $50 billion from 2013 and almost double the 2007 total (see Figure 1)1. Combined global sales of these five products have grown remarkably since 2003, with trailing five-year compound annual growth (CAGR) of 6-12 percent per year over a decade (see Figure 2) (although year-over-year growth has fluctuated from a high of 27 percent in 2010 to a low of -3 percent in the recession year of 2009). In contrast, the growth rate for the global semiconductor industry was only 3.1 percent between 2000 and the end of 20122. However a plateau appears likely: sales are expected to continue growing, but at a slower rate than over the past 10 years, with an estimated ceiling of about $800 billion per year. These five categories of consumer electronics devices are closely related in that they are currently the five largest by dollar value, are all multi-functional, and each plays a key role in entertainment and media consumption. Also, all five of these devices have benefited from common technology such as processors and screens (except for video game consoles, all of the devices make use of high resolution LCD technology)3. In contrast, other large segments such as portable video games devices, eReaders and feature phones tend to focus on a single function and thus have a narrower impact on general media consumption and entertainment. Figure 1: Combined global sales revenues of smartphones, tablets, PCs, TV sets, video game consoles (1999‑2018) 0 100 200 300 400 500 600 700 800 900 2018E2017E2016E2015E2014E2013E2012A2011A2010A2009A2008A2007A2006A2005A2004A2003A2002A2001A2000A1999A PCs Smartphones Video game consoles TVs Tablets Source: Deloitte, 2013 Figure 2: Five year CAGR (2003‑2018) for combined global sales revenues of smartphones, tablets, PCs, TV sets, video game consoles 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 2018E2017E2016E2015E2014E2013E2012A2011A2010A2009A2008A2007A2006A2005A2004A2003A 5 year trailing CAGR (%) Source: Deloitte, 2013 The $750 billion converged living room: a plateau approaches 6 The simultaneous growth of these five devices created a virtuous circle over the last decade. For example, to supply the massive volumes of LCD screens required for large, flat HDTVs, manufacturers built plants capable of producing 400 million square meters of screens annually by 20134. This drove prices for laptop screens down, which in turn focused research and development on better, smaller screens; which eventually led to high resolution screens for smartphones and tablets that made those devices much more appealing and useful. There has also been a virtuous circle with solid state memory: the need for gigabytes of flash memory for each of a billion smartphones and tablets led to new manufacturing capacity and increased production volumes that lowered prices, which helped enable the creation of powerful gaming systems and ultrabooks. Also, massive economies of scale drove down prices for lower-end PCs, tablets and smartphones such that large numbers of less affluent families in emerging and developed markets could afford them. This further increased scale and enabled even less expensive devices, such as the $100 smartphone. Further, the virtuous circle doesn’t merely enable the low-cost smartphone; it makes possible the perennially improving smartphone, as well as the $100 tablet. These mutually beneficial forces allowed the five categories to grow at an aggregated average CAGR of 11.8 percent between 2004 and 2014 (estimated), almost four times faster than the underlying semiconductor industry, and almost twice as fast as global GDP, which in constant dollars grew at an annual rate of six percent between 2004-2014 (estimated)5. However, this impressive growth rate appears to be reaching a plateau. Between 2006 and 2012, annual PC industry sales oscillated within a narrow band of $210-$240 billion. But in 2013, sales declined by 12 percent to under $200 billion, and many analysts forecast an additional four percent decline in 20146. A constant decline in average selling prices (ASPs) means that while PC unit shipments may shrink by less than five percent annually over the next five years; revenues may fall at a faster rate. The market for TV sets has also been shrinking since peaking at over 115 billion dollars in 2011: 3D technology, integrated connectivity, and voice and gesture control have not enticed consumers to upgrade their TV sets more frequently or at a higher price. Television set ASPs have been declining slowly since 2007; however, that erosion might be slowed or even reversed over the next five years by demand for Ultra High Definition (UHD) 4K TV sets, which are likely to command premium prices. Yet even with this possible boost, TV set sales in 2018 are expected to rise by less than $10 billion over the 2014 forecast of $105 billion. New video game consoles were introduced in late 2013. Although early combined sales figures in markets where the new devices have been released have been higher than for prior generations of consoles7, the console business, at around $10 billion per year, is unlikely to make much of a difference on the more than $750 billion base. These trends suggest that smartphones and tablets need to be the main engines for growth in the connected living room market. Technology, Media & Telecommunications Predictions 2014 7 Sales of smartphones should continue to grow, in units and revenues, but the rate of growth is likely to decline. Globally, feature phones are now a minority of sales: the steepest part of the growth curve for transition to smartphones has already occurred. The smartphone upgrade cycle is lengthening: while some people still line up to be the first to own the latest phone, the average consumer is happy with their current phone for longer than in 2008 and 2009, when each new model was a dramatic improvement over the previous model. Between 2007 and 2013, the handset upgrade cycle lengthened by over 25 percent, from less than 19 months to more than 24 months8. The majority of smartphone sales over the next five years are likely to be in the developing world. These price-sensitive buyers are already having an impact on ASPs: in late 2013 the decline in smartphone ASPs dragged down overall mobile phone ASPs by four percent. While smartphone sales in 2014 are expected to rise to about $375 billion, a 12 percent year-on-year increase, smartphone sales in 2018 are only expected to rise to $430 billion, a 15 percent increase over four years. In 2014, tablet sales are expected to reach 285 million units and surpass $100 billion. Falling ASPs are being driven by the growing share of compact tablets (8.5 inches or smaller), which are typically lower-priced. ASPs of classic format tablets (nine inches or larger) are declining. Overall tablet ASPs fell 10 percent in 2013, and if that price decline continues then annual tablet sales are likely to remain near the $100 billion level through 2018. Revenues for each individual category may turn out to be somewhat higher or lower than expected, but combined sales across all five categories are likely to be fairly steady and predictable – plateauing at roughly $800 billion annually after a decade of double digit growth. Revenues for each individual category may turn out to be somewhat higher or lower than expected, but combined sales across all five categories are likely to be fairly steady and predictable – plateauing at roughly $800 billion annually after a decade of double digit growth. 8