Mobile Inflection Points

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Mobile operators need to transform their tariffs to accelerate the process of becoming data operators and to get to the less-risky position that fixed operators currently occupy.

According to research firm Gartner, smartphone sales exceeded feature phone sales for the first time in the April-to-June period. Worldwide mobile phone sales totalled 435 million units. Smartphone sales accounted for 225 million units, up 46.5% from the previous year. Feature phones totalled 210 million units, down 21%.

Two recent reports by Analysys Mason, ‘Western Europe telecoms market: trends and forecasts 2013–2018’ and ‘The struggling Western European operator business: costs, convergence and competition’, analyse the difficulties that European mobile operators currently face.

Recent results from larger operators in Europe already show faster decline in mobile retail revenue than in fixed, and we forecast that mobile will represent a declining share of total operator retail telecoms revenue during the next five years. This is an interesting inflection point, marking the end of a trend that dates back to the dawn of mobile telephony, by which mobile’s share of spend has increased year-on-year. But is this just a temporary process of re-adjustment for mobile?

Several factors underpin this forecast. Not least is the still-fragile economic climate, and the greater reliance that the mobile sector has on discretionary spend. However, mobile telecoms revenue has in most Western European countries decoupled from changes in GDP, and is now performing significantly worse than economies as a whole.

Mobile Voice Overhang

A key factor is mobile’s dependence on legacy non-data services compared with fixed-line or cable. This indicates that the period of re-adjustment whereby operators become data-centric still has a long way to run for most mobile operators. Individual operators are exposed to a greater or lesser extent, but overall retail service revenue from services other than IP data accounted for 76% of the total for mobile in 2012 in Western Europe.

Fixed operators’ exposure to voice is substantially lower, and operators now benefit from not having the overhang of voice revenue that has gradually been lost to mobile. The calculations are rather more difficult because of the problem of allocating line rental revenue. Line rental has traditionally been counted as voice, but the perceived value of line rental is shifting inexorably to broadband. Generally, a naked broadband service still incurs a line rental element that costs about two-thirds of the cost of a full line rental. Assuming this, 67% of fixed operator revenue (excluding content) in Western Europe came from data in 2012.

Unit costs of mobile transport as it moves to IP are declining, and it is a moot point whether the growth in the volume of mobile data is strong enough in Europe to make total transport costs increase. For voice and messaging, costs will decline fast because there is no growth in volume. Over-the-top (OTT) services represent a different – though not directly equivalent – service model, whose production costs are a fraction of those of traditional mobile voice services. Operators can respond with lower-cost models, but declining costs and a competitive market will tend inexorably to declining revenue.

Mobile voice appears to be the most discounted part in the marketing of quadruple-plays. The knock-on effect is a swift erosion of the value of mobile voice in the market as a whole. For example, almost all of the revenue and EBITDA erosion caused by Free Mobile’s entry to the French market (with an entry-level EUR2 per month offer when bundled with a fixed triple-play) was attributed to mobile, whereas revenue attributable to fixed-line services did not shift from its long-term trajectory.

Fixed-only operators can disrupt mobile

Fixed service revenue is less reactive to underlying macroeconomic factors than mobile. In fact, fixed-line bundles have the best take-up in some of the more economically challenged countries. Rapid growth in fixed broadband data consumption (average NGA usage for many operators is already close to 100GB per month) and the ubiquity of Wi-Fi in-home is making the long-term case for full in-home fixed–mobile substitution much weaker. We are not forecasting revenue growth from fixed, which of course still has its own overhang of (PSTN) voice, but we do expect more stability.

Some fixed-only plays are set to enter and disrupt mobile. As it becomes more data-centric, wireless traffic is moving to locations where fixed operators can supply most customer needs at lower cost and price. Intense competition for influence in this space is only just starting. Several European fixed and cable plays already have substantial public Wi-Fi offers, in some cases complemented by Fon or proprietary community Wi-Fi offers. BT Wi-Fi’s figure of 13PB of public traffic in the 2012–2013 financial year already represents a significant share of out-of-home-or-office mobile data, and its rate of traffic growth far outstripped that of any mobile operator. Some of these same fixed players have unused FD and TD 2.6GHz LTE spectrum, and can launch low-cost mobile data services that prove disruptive to mobile pricing and value. Co-locating 2.6GHz picocells and femtocells with public and private Wi-Fi opens the way to start complementing data with low-cost mobile voice for metro areas and the home (for more information see Femtocells, 2.6GHz and FTTx: can BT and other fixed operators worldwide build mobile businesses?).

 

Swifter investment and bolder tariffing

LTE investment in Europe is generally a couple of years behind North America and Asia–Pacific. However, some European operators have had LTE for long enough to be able to report the effects on revenue, which are so far mixed. Interestingly, it appears often that data-only subscriptions rather than smartphones have driven the better performances (see The launch of 4G can improve revenue performance, but cannot alone compensate for difficult market conditions).

Mobile operators need to transform their tariffs to accelerate the process of becoming data operators and to get to the less-risky position that fixed operators currently occupy. They need to make this process as swift and painless as possible, and to do so many need to be much bolder with tariffing.

Mobile data will never be less expensive than that of disruptive fixed players, but MNOs can do two things to compete:

They need to convince their customers that signing up to a big plan is an attractive option. Faster device refresh times are key here.

They need their customers to believe that their incremental usage of mobile data is inexpensive. The kind of multi-device plans that have proven effective in the USA are key here, although AT&T and Verizon’s prices would be unthinkable in Europe. We note that some – and not just the data-centric mobile-only plays – have started to offer multi-device plans but there is a long way for the European sector to go.

 

 

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