Tariffs Slashed - Not If, But When
By Steve Wallage, Mon Feb 09 10:15:00 GMT 2004

A new breed of discount operators with their cutthroat pricing is challenging incumbent operators' complex and high pricing model. What are their chances?

Strand Consult's latest research studies the potential impact of new discount operator using Denmark, which they regard as 'hell on earth' for mobile operators.

Strand Consult defines a new breed of discount providers based on Danish companies such as Telmore and CBB. These are not 'me-too' providers looking to offer 15-20% off standard operator tariffs. This breed of companies uses the Internet as a sales and distribution channel, has pre-paid customers with no upfront subscription, two or less tariffs, and offers no subsidized handset or minimum subscription period. The two core assumptions are that price is the driving force behind mobile provider selection and voice is still the predominant traffic.

The statistics coming out of Denmark show the threat posed by such discount providers - monthly subscriptions are disappearing and call tariffs nearly halved in the first six months of 2003. Telmore already has over 500,000 subscribers, but it is servicing them with a grand total of only 78 employees.

It's easy to dismiss such dramatic price erosion as a Danish phenomenon, and indeed many mobile operators are neglecting the threat to their business. Mobile operators have a number of justifications why it wouldn't happen in their markets.

First, would users trust Web-based providers and be driven by price alone? The intuitive answer is a sure 'Yes' and the evidence is strong from other industries. Strand Consult use the discount airlines, such as Easyjet, as being powerful examples. In the telecom world, discount operators such as Gratistelefon, which was initially set up in Sweden, offers free fixed minutes in return for listening to 10 seconds of advertising. Not only was it a great success but the average user was something of a surprise - not your regular penny-pinching students but Swedes in their thirties with above average income.

Second, would mobile operators (network owners) 'allow' discounters in? Of course, it would be a cartel if all the operators worked in concert to prevent their business from being cannibalized? Unfortunately, in the European mobile market, there is at least one (often weaker) mobile operator who would be keen to get the extra traffic and revenues of the discounters.

Third, wouldn't the impact from discounters be limited until they reach a critical mass of market share? One of the lessons learned from Denmark, and also from the airline industry, is that the impact can be much greater than merely market share loss. Incumbent mobile operators would need to adapt and reduce prices to compete with discounters.

Fourth, aren't many consumers and businesses tied in to longer deals and bundled packages? Complexity of offerings has been a great ally for mobile operators, making tariffs comparison a nightmare. However, discounters are pushing simplicity and much lower prices. Regulators keen to show their success in driving down prices coupled with number portability are all acting in favor of the discounters.

Some of the discounters, on the other hand, will also start gaining some strong market power of their own - look at the strength of Virgin Mobile (possibly soon to be listed on the UK Stock Market) or increasingly Tele2. Of course, some consumers will always be driven by having the latest handset and are prepared to stick with their existing operator to get it. However, this still leaves out a vast number of users out there. In the fixed market, surveys have shown that at least a third of consumers are driven by price alone.

Strand Consult conclude that all mobile operators need to work hard on driving their costs down, as Europe can't escape the challenge of the discounters. They compare the operators of the future with supermarkets, having to work extremely hard to attract and retain customers.

As the threat of discounters becomes real for operators, they will show all their cunning in fighting the challenge. But the momentum of discounters will be too much, and the impact of 3G too far away. Telia Refill, with call costs cut by up to 50%, will be one of many new discounts from incumbent operators. Voice prices will come down sharply - it's just a question of how they long they can hold it off.