Author(s): Marina Koytcheva
A month after the UK's historic referendum in which 52 percent of the voters declared their wish for the country to leave the EU, emotions have cooled down and some short-term changes have become clear. Here we share our early assessment of what the political and macroeconomic changes will mean to our forecasts of the telecom and mobile device markets in the UK.
Two main drivers of short-term change to the consumer technology and telecom markets stand out. First, the pound fell to its lowest level against the dollar in over 30 years and has remained more or less stable there. In addition, and at least partially resulting from the fall of the pound, consumer confidence is reported to have seen its biggest drop in over 20 years. Put very simply, in the near term British consumers can buy fewer imported goods, such as petrol, Australian wine, Dutch cucumbers, and are less willing to part with their money.
Mobile phones, smart wearables, tablets, connected TVs and other consumer electronics are mostly manufactured in, and with components from, Asia and are priced predominantly in dollars. Thus, they are now among the goods that are more expensive in pounds.
For example, the average price for an iPhone sold globally in 4Q15 was $690 or £455. At current exchange rates this is £521 — 15 percent higher than six to nine months ago. As much as the UK market is important for manufacturers of consumer electronics and for the distribution channel, most companies, with the notable exception of Apple, simply cannot afford to swallow the price difference, or at least not all of it. Apple might be able to afford it, but is unlikely to be willing to do so. This means that the price rise will have to be passed on at least partially to consumers.
Higher prices, coupled with low consumer confidence, will have a double effect: some people will postpone the purchase of a new smartphone or smart wearable; others, who have already prolonged the life of their current mobile device and need a replacement, will be willing to consider cheaper options. As a result, it's likely that the demand for mobile phones will see an even deeper decline in 2016 than we projected in our April forecast, and the product mix will shift to include fewer high-end devices. Similarly, the demand for some smart wearables will pick up more slowly in 2016 than we forecast in April, especially as wearables are yet not considered a must-have product by most people. So our hardware forecasts for the UK market in 2016 are likely to see a downward revision in the next review.
When it comes to telecom and media services, there's no reason to expect higher prices in the near term. But in the longer term, operators will face a higher cost in pounds of new network infrastructure, for example 5G, and will have no access to EU funding through the Horizon 2020 programme. So they'll have to pass on that higher cost to consumers. However, lower consumer confidence and shrinking telecom budgets as the price of imported goods grows could result in a fierce hunt for bargains. This is likely to translate into a faster shift to SIM-only mobile contracts and cheaper bundles of services than we previously expected. Churn is likely to rise and operators' average revenue per customer may take a hit. This will result in further intensifying of competition in the mobile market, which is keenly expecting the launch of Sky Mobile. The fact that the broadband market is already cutthroat will heap more pressure on mobile players.
Mobile connectivity and broadband are now so essential that people are likely to keep them. However, we could see optimization of spending on content and media. Attracting first-time pay-TV customers on long contracts will be harder in the next couple of quarters. Furthermore, households that subscribe to multiple content providers like Netflix, Amazon Prime and pay-TV might consider cutting some of these and keeping only one or two, or shifting to smaller packages, even if it means having access to less exclusive content. This isn't a new phenomenon, but it could intensify in times of low consumer confidence.
The macroeconomic uncertainty and the possible hit on consumer spending are likely to negatively affect enterprise spending on devices and telecom services as well, at least in the short term until companies gain clarity on the new environment and adapt to it.
It's worth emphasizing that these are all short-term expectations, likely to hold for the next six months or so. It's still too early to say what the long-term effects of Brexit will be. The uncertainty in the economy is likely to remain, at least until we know what trade deals the UK will be able to strike with other countries. On the other hand, consumers generally tend to adjust to the new reality and their confidence will improve — the key question is when. We need to see how consumer demand in the third quarter evolves before adjusting our long-term UK market forecasts late in 2016.