2005 Looks Tough For Mobile Operators
By Steve Wallage, Thu Dec 02 08:00:00 GMT 2004
It's that time of year again when people start polishing their crystal balls. For some, it means a chance to look with renewed optimism at a market -- unfortunately, Christmas may not hold joyful tidings for mobile operators.
I recently chaired a panel with two board members from the IT side from fixed telcos and two people in similar roles from mobile operators. They had all been at conferences that day covering entertainment, VoIP, billing and content management. All were equally interested in the four topics. When asked what were their key priorities for 2005, a fixed telco CIO replied cost savings, IP networks, facilitating and billing new content and entertainment services, and new technologies such as WiMAX. One of the mobile panelists added maximizing efficiency of 3G, but the other answers were exactly the same. The four panelists also agreed that in three to five years’ time, the distinction between fixed and mobile would start to disappear in a world of bundled and broadband services. For their leading, and high-margin customers, it already is.
And that’s the central challenge for mobile operators in 2005: how do they ensure are not increasingly similar to the fixed operators, facing the same challenges of legacy networks, intense competition, falling prices and lack of growth? Can they manage what the fixed operators have generally failed to do, and move beyond the bottom steps of the value chain?
Data services are supposed to be the great savior of mobile operator revenues, as they point each quarter to them growing as a percentage of total revenues. But we will see downward pressure on data pricing and a move, if not next year, then in 2006, to flat-rate pricing.
Why? Prices are far too high. This is as true of SMS as 3G. According to Merrill Lynch research, an SMS costs an average of €0.01 in Japan and Korea compared to €0.11 in Europe. Pressure here may not come from regulators but it will come from competition, and could also be a side effect of the introduction of mobile IM. Although some operators plan to charge for mobile IM in the same way as SMS, it is seen by consumers as a free service. Businesses, too, have complained bitterly and frequently about the high cost and complexity of GPRS and 3G tariffs.
Flat-rate pricing, which has already happened in Japan and Korea, will be foisted upon mobile operators by user pressure and competition. Interestingly, at the CIO panel there was an inevitability that Europe would move to flat-rate data pricing, with a further reason being the billing complexity of so many new services.
Pressure on ARPUs will come from many areas. A recent tariff study suggested that basic mobile pricing in the UK is unchanged since 1998, despite the cut in costs for operators and the massive fall in fixed pricing over this period. Regulatory challenges will come at the fringes, where still much of the profit is made, such as roaming.
MVNOs will be a much bigger thorn in the side of mobile operators, as the pressure on the mobile network owners forces many to look at their wholesale opportunity. TeleDanmark, using the Easy brand, plans to launch in 12 markets. Tele2 and Virgin have similarly ambitious plans. Other competition will come from major brand owners such as supermarkets and other retailers. The Danish model will become much more common; that is, using the Internet as a sales and distribution channel, having pre-paid customers with no upfront subscription, two or less tariffs and no subsidized handset or minimum subscription period. Call tariffs nearly halved in the first six months of 2003 when such competition started in Denmark, as is now well-documented, but the impact will not be as high in other countries and, in the UK, TDC has said that it does not even want to be the cheapest provider. However, it will put more downward pressure on the core revenues of the mobile operators.
Do the lessons from Japan hold any good news? According to Merrill Lynch forecasts, 2003-08 ARPU growth in Japan will be -3.3% a year.
What is becoming clearer is the importance of the top 10-20% of the customer base – those high usage customers who are early adopters of new technology. The mobile operators who can win and retain those customers, typically the number one or two operator in a given market, will be in a much stronger position.
There will be a lot of talk in 2005 about the mobile operators’ ability to meet the mobile needs of corporate customers. Unfortunately, business customers do not want to work with the mobile operators for much more than basic connectivity. Equally, IT partners do not see the mobile operators as much more than a bandwidth provider – a similar problem to the fixed operators.
New Mobile Services
Take a look at the agenda for the 2005 3GSM World Congress – lots of new mobile services being talked about, but very few that are different from those discussed in 2004. And most are still several years away, such as mobile TV.
If they need 3G, and this is a big if, and new devices for such services, it will take time. Merrill Lynch says only 12% and 14% of the Vodafone customer base in Germany and the UK, respectively, has migrated to Vodafone Live! handsets in the last two years.
But will new mobile services mean new revenues for the mobile operator or for a third party? There will be growing evidence in 2005 of a willingness for content providers to bypass the operator, and users downloading content to a PC and then to their mobile device.
An optimist may call 2005 a year of transition for the mobile operators, with the real benefits of 3G flowing through in 2006 and beyond. A realist is more likely to say it is a clear indication of how the market will develop.