Europe’s mobile business faces key transitions of business model, suggests Declan Lonergan, Yankee Group (News - Alert) VP. With markets saturated, revenue growth now is driven by new sources such as mobile broadband and mobile Internet, while the traditional voice and messaging market is flat, or worse.
That means mobile network operators must reevaluate their market strategies. They have to decide what customer segments to go after, which services to prioritize and what handsets to promote. Most companies seem to be focusing on mobile broadband, mobile Internet, smartphones and high-value customers. But you can see the problem: if all the carriers focus on the same segment, potentially-ruinous competition is the likely result.
Longergan suggests more attention to legacy services is warranted.
Though core voice and messaging businesses are struggling to produce any meaningful revenue growth and are declining in several cases, T-Mobile Germany actually saw an increase in voice usage in 2009 of more than six percent. Telecom Italia (News - Alert), on the other hand, experienced a 7.7-percent decline in voice revenue.
Over the last decade, text messaging revenues have helped sustain average revenues per user as voice pricing has softened. But average prices for texting services have been declining, and uptake of mobile broadband is growing fast.
For Vodafone (News - Alert), which relied on messaging for 13.4 percent of its mobile service revenue in the three months to December 2009, non-messaging data accounted for 11 percent. For some service providers, including Telefónica O2 Spain, “other” mobile data is already larger than person-to-person text messaging.
But while the share of revenue accruing from traditional services continues to decline, voice and messaging will remain important for the foreseeable future, Lonergan said. The fundamental value offered by these communications-centric services is not going to diminish, even as customers transfer some of their monthly spend to app downloads and mobile browsing.
The point, he said, is that carriers can’t afford to ignore their bread-and-butter business while they go off in pursuit of new high-growth opportunities.
To be sure, smartphones now represent an opportunity to sell broadband services. Some 53 percent of T-Mobile’s (News - Alert) new postpaid customers bought smartphones in the fourth quarter of 2009.
Across its European footprint, Vodafone sees the smartphone share of handset sales increasing from 25 percent today to 30 percent to 40 percent during its 2010 to 2011 financial year.
The iPhone has had a positive early impact on Orange U.K.’s revenue, which increased 4.4 percent in the fourth quarter of 2009.
But the smartphone-centric strategy has a downside in that it produces a negative impact on customer acquisition costs. In T-Mobile Germany’s case, the iPhone launch was a key contributing factor to its postpaid CACs increasing by almost 17 percent, from €184 in 2008 to €215 in 2009.
Orange U.K. also experienced higher customer acquisition and retention costs, which contributed to shaving 1.2 percentage points off the company’s EBITDA margin.
“Focusing on smartphones is fine, and the herd will continue along this path,” says Lonergan. “But it would be a mistake for MNOs to do so at the expense of maintaining a balanced handset portfolio, which will be critical in enabling them to stay relevant to all key customers, including the mid- and low-end segments.”
Mobile Internet will be a great source of new revenue for operators in all markets, but voice and text revenues will remain vital as well.
To be sure, Yankee Group estimates that mobile broadband users reached 25 million in Western Europe in December 2009, and expects growth to 86.5 million by 2014.
Also, there is a difference between the profitability of smartphone broadband and that of PC dongles. Eelco Blok, managing director of KPN’s international mobile business, acknowledged that the business case for mobile Internet is better than that for PC mobile broadband due to the lower level of network investments required to maintain good mobile Internet service quality.
But data products other than texting do not always match the profitability of voice and text messaging services.
Partly as consequence of the smartphone phenomenon, just about every leading European operator has become convinced that its future lies in attracting high-end customers. But there are only so many high-end customers to go around.
The emphasis on smartphones and a strategy of targeting high-end customers go hand in hand. Both present challenges. For example, KPN in the Netherlands is selling more smartphones with two-year contracts. But KPN’s focus on high-value customers has been one of the factors behind a reduction in the company’s consumer mobile users, which declined from 6.7 million to 6.5 million between the third quarter and fourth quarter of 2009.
Another factor was KPN’s decision to eliminate prepaid handset subsidies, which is in keeping with its strategy of prioritizing high-value postpaid customers.
Operators can expect steady increases in data revenue over the next five years, even as competition and downward pricing pressure intensifies.
Yankee Group is projecting mobile data revenue will increase from €36 billion in 2009 to €49 billion in 2014. It’s also pretty clear the traditional mobile services market is close to saturation in developed markets, at least when measured in terms of revenue.
It therefore is completely logical for operators to focus on the new growth categories. But it would be a mistake to neglect the legacy relatively voice and messaging business. Traditional services will still account for 84 percent of the market by 2014.Gary Kim (News - Alert) is a contributing editor for TMCnet. To read more of Gary’s articles, please visit his columnist page.
Edited by Marisa Torrieri