Next Gen Telcos

Yves Gassot

CEO, IDATE

Data: the growth engine for the telcos?

 
Over the past two decades, growth in the telecom services sector has essentially been carried by the explosion of mobile telephony. This explosion in particular has fostered the adoption of competition policy in Western countries and the take-off of telephony in emerging countries.

Since the market has now reached a certain level of penetration, revenue growth for mobile services is losing momentum. The impact of competition, regulation and the widespread use of VoIP on fixed networks (and much more gradually on mobile data networks) are overriding additional income from new subscribers, and revenues are falling.

This situation may prove even more severe when combined with the impact of the economic crisis, as seen in Southern Europe (or when a price war is added to the mix with the arrival of a new market entrant, as seen in France).

Does the story end here?

Maybe not. While the sector is certainly likely to grow more sensitive to macroeconomic influences and still be partly driven by low-cost players, we cannot forget that the sector is seeing a radical transformation with its rapid inclusion in the world of Internet.
Most consumers will soon have smartphones. Well over 50% of Web users now access Facebook via their mobile devices. Data represents the largest share of traffic on mobile networks. Data traffic on mobile networks will have risen by 133% in 2011. Meanwhile, traffic generated by a smartphone rose to 155 MB/month on average (with 1% of smartphones representing around 25% of total traffic). According to Cisco, this could reach 2.6 GB/smartphone/month by 2016.
Yet, consumers have the feeling that operators’ solutions are essentially based on minutes of talk-time and that their interest in mobile Internet is likely to be expressed mainly in the choice of a smartphone.
This is particularly the sentiment in Europe. In the United States, which leads the market in LTE deployment, things are different. Operators have managed to ride the wave of the iPhone and other smartphones, generating substantial increases in their data revenues. According to ML-Bank of America, over a period of four years (from Q2 2008 to Q2 2012; in USD/subscriber/year), data ARPUs grew: from 11.60 to 20.46 for AT&T; from 5.50 to 7.72 for Deutsche Telekom (Europe); from 6.05 to 9.41 for France Telecom (Europe); from 12.18 to 23.69 for Verizon Wireless; and from 8.09 to 8.95 for Vodafone (Europe). This difference in performance seems to provide the main explanation [1] for the disparities observed on either side of the Atlantic: a decline in ARPU (voice and data) of around 30% in Europe over the past five years (reaching average ARPU of about 27 USD), and a stable ARPU in the United States (at around 51 USD).
Aggregate revenues for telcos in the markets of Europe and North America are moving in opposite directions, with a 9 point gap (stable over a year): -4.1%/year versus +4.9%.

Clearly behind this gap are the effects of differences in market structures (and intensity of competition). Many are starting to underline the concentration of the US market and, more specifically, the dominant positions acquired by AT&T and Verizon Wireless. The resources that Sprint will likely gain from Softbank (and to a lesser degree, the T-Mobile/MetroPCS merger) will help to shake up this virtual duopoly for post-paid subscriptions. Over the next few quarters we may see a significant fall in data tariffs, which are currently much higher in the United States than in Europe.
However, and without considering the relative effects of competitive intensity in Europe, it seems important again to highlight the lead American operators have taken in "tiered pricing". Since the summer, in particular, AT&T and Verizon have put solutions on the market that combine incentives for single-subscriptions shared by several mobile devices (smartphones, laptops, tablets, etc.) and caps that grant rights measured in GB. Naturally, these solutions are accompanied by an unlimited SMS and voice service, meaning that for 10 GB of data, users pay just a little more than a simple data option as an add-on to the voice subscription. [2]
Three concepts govern this type of pricing:
• encourage higher data consumption by including several devices in a single subscription;
• protect against competition from OTT communication services by abandoning solutions that bill for calls per-minute;
• and abandon unlimited data solutions that accompanied the launch of the first smartphones and USB sticks.
A shared subscription for several devices should also have a positive impact on churn.

The table below sets out the "Share Everything" solutions available from Verizon Wireless.

AT&T recently commended this approach, stating that in just five weeks it had signed up two million such contracts, with more than a third opting for the service up to 10 GB (i.e. 120 USD + 30 USD, for a single smartphone). Meanwhile, and without breaking its unlimited data contracts, the operator began applying a reduction in speed to these subscriptions (beyond 2 GB), fueling debate.

Another example of pricing innovation is Swisscom’s more radical approach of offering customers a choice of subscriptions that also include unlimited voice and SMS, as well as unlimited data. The only parameter is the access speed.

The ideas supporting such an audacious approach (although arguably founded on higher prices than in other European markets) are as follows:
• revenues from voice and SMS are likely to disappear,
• consumers are unable to measure megabytes and want no surprises on the bill,
• what they ultimately perceive is the connection speed.

Swisscom adds that this type of pricing is also the one that ultimately best reflects the predominance of fixed costs (opex & capex) for telcos. The company also recognizes, however, that this new pricing strategy could initially produce a slight erosion of revenues.
Pricing policies elsewhere in Europe are changing but the intensity of competition in some markets has, above all, forced telcos to defend their position by adopting a low-cost approach. Prices are generally much lower there. In France, unlimited voice and SMS solutions with 2GB or 3GB can be found for around 20 EUR.

In UK, The Everything Everywhere tariffs have just been published for the launch of its LTE service (1800 MHz), which is offered at a premium rate in relation to comparable 3G tariffs (typically GBP 30 for unlimited SMS & voice with 2GB.

The launch of 4G thus seems to offer an opportunity that European telcos cannot afford to miss. Not only does it provide a chance to introduce a new means of differentiation between competitors in terms of the quality of access offered, it also allows them to steer clear of the low-cost "corner". It is also a good time to implement a new segmented offer based on objective and explicit criteria for consumers, feeding their hunger for mobile Internet devices and applications. Then perhaps, telcos might hold out hope of stabilizing and boosting revenues?

Yves Gassot, CEO, DigiWorld by IDATE

[1] The sharp decline in call terminations should naturally be considered, affecting sales (but not at least margins), alongside a less severe decline in voice revenues.

[2] Verizon charged USD 80 for 10GB in its data option at end-2011.