Mobile Operators - Arthur D. Little

Transcription

January 2005
Mobile Operators
More effort required
Contacts
EXANE BNP PARIBAS
Antoine Pradayrol
[email protected]
Exane, Paris: +33 1 44 95 53 64
ARTHUR D. LITTLE
Bruno Duarte
[email protected]
Arthur D. Little, Paris: +33 1 55 74 29 53
Jean-Luc Cyrot
[email protected]
Arthur D. Little, Paris : +33 1 55 74 29 11
2
Mobile Operators
Executive summary: more effort required
In this report, we demonstrate that, in an environment where growth is no longer a
given, European mobile operators still have several internal levers for boosting free
cash flow:
Operators will put more effort into growing under-penetrated customer segments,
boosting fixed-mobile substitution and developing mobile multimedia. Against the
backdrop of slower growth, their levers include increased segmentation of their client
base and more sophisticated pricing.
–
We reiterate our scenario of generally stable margins in Europe. Many operators
have lots of room to cut costs; besides, we believe that threats to the competitive
status quo should not be overestimated.
–
European mobile operators became much more profitable between 2000 and 2004.
However, most of these gains were achieved in 2002 and 2003; 2004 was
characterised by accelerating revenue growth, but slower progress in terms of free
cash flow generation. This situation, together with increasing competition in some
countries, regulatory pressure and rapid technological change, has fed doubts by
investors on the sustainability of FCF growth in the sector.
Competitive landscape: threat to status quo is not as great as it looks
Our analysis shows that the key factor for value creation in a market is the asymmetry
of market share among operators, i.e. the control of the one or two leaders.
The “destabilising forces” are well known, including UMTS new entrants, MVNOs,
potential MBWA new entrants (Mobile Broadband Wireless Access, which covers many
new radio technologies enabling high-speed mobile services, including WiMax), and, of
course, regulation.
Against these are many “status quo forces”, for example 3G allows the leaders to win
back their marketing lead, while controlled distribution networks help stabilise market
share. The most powerful mobile operators should also be able to withstand new
competition from operators using MBWA-type technologies, as they will use these new
technologies to complement their overall offer of services and cut their costs, as they
are doing with WiFi, leaving little room for new entrants.
Cost-cutting: two to three margin percentage points within reach
In our view, mobile operators have significant capacity to cut opex. Many have not yet
truly begun to cut their costs aggressively and, in our view, have scope to gain two to
three percentage points in opex/revenue before subscriber acquisition and retention
costs (SARC) over the next five years.
The main sources of savings that we identify are network opex (via optimisation or
outsourcing), customer services (greater segmentation of services and self care), IT
and service platforms (offsetting mobile multimedia costs through optimisation and
centralisation) and administration.
We expect SARC (as a percentage of revenue) to level off at 2004 levels in 2005 and
2006, with sluggish growth in handset volumes and a limited increase in unit costs,
owing to the slow adoption of 3G, competition between equipment makers and
optimisation of distribution networks.
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Mobile Operators
Growth: segmentation and pricing will help to catch the last growth
opportunities
We forecast revenue growth in the European mobile sector (in the five largest countries)
at 7% in 2005e, 4.6% pa in 2004-07e and 3.3% pa over 2004-10e. Slower subscriber
growth is pushing operators to increasingly segment their marketing approach. We have
identified four growth drivers, which each make a roughly equivalent contribution to sector
growth: voice traffic from existing customers, residential mobile data, increased
penetration of the “new segments” (the under-15s and over-65s), and corporate mobile
data.
Table 1: contribution of various segments to sector growth
EURbn
1
2004e
2010e
Voice, existing customers
o.w. termination
o.w. outgoing
Residential data, existing customers2
o.w. SMS
o.w. new data
Customer growth in specific segments
<15 years
>65 years
Corporate data
Corporate data
Machine-to-machine
72.3
17.9
54.4
12.4
11.2
1.2
8.4
3.6
4.8
0.4
0.4
0.0
76.2
13.4
62.7
19.6
7.3
12.3
13.2
6.0
7.2
4.6
2.4
2.2
CAGR (%) Difference
0.9
(4.6)
2.4
7.9
(6.9)
46.6
8.0
9.2
6.9
53
37
N/A
3.9
(4.4)
8.3
7.2
(3.9)
11.0
4.9
2.5
2.4
4.2
2.1
2.2
Contribution (%)
19
(22)
41
36
(19)
55
24
12
12
21
10
11
Total
93.4
113.6
3.3
20.2
100
1
Service revenue in the five largest European countries: Germany, Spain, France, Italy and the UK.
2
Revenue excluding content revenue for subscribers between 15-65 years of age.
Source: Exane BNP Paribas, Arthur D Little
Fixed-mobile substitution: both a defensive and an offensive approach. Voice will
continue to make a positive contribution to mobile revenue growth. We forecast a 0.9%
average annual increase in voice revenue from existing subscribers from 2004 to
2010e.
Fixed-mobile substitution, which we identified in our report last year as a major growth
opportunity, will constitute both an offensive manoeuvre and a defensive necessity for
mobile operators. Volumes still offer an attractive opportunity, as in 2004, over half of
voice traffic in Europe was still in fixed-line networks, with few exceptions (e.g. Austria).
However, the threat to prices per minute is increasing due to pressure from consumer
associations and governments, stiffer competition in the corporate segment, the
increase in unlimited fixed-line calling offers with the development of VoDSL, stress on
mobile VoIP (not fully warranted, in our view) and long-term pricing pressure brought
on by MBWA technologies.
Against this backdrop, operators are developing proactive tariffs on 2G, and even more
on 3G. These include increasingly generous bundles with incremental rates closer and
closer to wireline, particularly in on-net traffic, mobile-to-fixed calls and evening and
weekend calls. We still believe that these offers can help raise voice ABPU (average
voice bill per user).
Residential mobile data: no certainty on the winning model. We forecast 8%
CAGR in residential mobile data revenue, raising ARPU from EUR4.5/month currently
to EUR7.3 by 2010e. Our scenario assumes slow adoption of 3G and mobile
multimedia services by the mass market: only roughly 20% of European mobile
subscribers on 3G at end-2006e and 35% of mobile multimedia active users in 2010e.
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Mobile Operators
There is still considerable uncertainty on which model will prevail in residential mobile
data. Operators are competing with new players that are specialists in their respective
fields (e.g. Yahoo!, TV stations, majors, Apple, etc.), and which have successfully placed
all their marketing power behind a clearly identified service. In contrast, operators are
trying to push several services at the same time, with limited success so far.
Pricing is a key issue. Vodafone’s current per-event pricing strategy does not appear
the best suited for 3G. We believe that access packages would be more efficient, as
they would be consistent with operators’ mass market approach, enable them to build
attractive bundles, develop customer habits and secure ARPU, offer more attractive
music download tariffs and protect SMS revenue. Experience shows that unlimited
packages can also create value. Some operators fear that this approach would turn
mobile data traffic into a commodity.
New segments: weak ARPU but strong margins. The major European countries still
count several tens of millions of customers to win over in the under-15 and over-65 age
brackets. The low ARPU of such customers will dilute average ARPU, but will offer
good profitability, as operators better segment their offers (low-cost products).
Country conclusions
We conducted more than 40 interviews with a wide range of divisional managers in
most European countries (see page 8) in order to have a broad view of the issues and
trends facing European mobile operators. However, we have based our quantitative
analysis on the five largest countries in Europe.
We believe that the countries in the greatest danger of deteriorating free cash flow are
Italy and the UK, whereas France, Spain and Germany, for various reasons, will mostly
escape stiffer competition.
5
Mobile Operators
Arthur D Little-Exane BNP Paribas report, fourth edition
Below is a reminder of our January 2004 report’s conclusions, Leaders hit back. We
have split them into two categories: our on-target projections and overestimated or
underestimated topics.
On target projections
“European mobiles still have strong potential for growth”. In fact, they outstripped our
2004 growth forecast, for example posting service revenue growth of about 10% versus
our 7.5% estimate. In 2005 and thereafter, there is still potential although obviously
lower.
“Operators have the capacity to raise voice bills per subscriber” thanks to adapted
tariffs (developing ever-larger packages). In 2004, stronger-than-expected growth in
subscriber numbers led to stable voice ARPU. However, adjusting for dilution from new
subscribers, growth in voice bills is about 3%.
“Mobile multimedia and 3G will need some time to take off”. Apart from SMS, mobile
data services are still at a fledgling stage. The main operators officially launched 3G at
end-2004, but we reiterate that mass market 3G will not truly take off before 2006.
“A niche strategy is not a viable option for Hutchison 3G”. By the end of 2004,
Hutchison 3G had won around 2 million subscribers in the UK and over 2.6 million in
Italy.
“Competitive risk is real but local, particularly where Hutchison 3G is present”, notably
the UK and Italy. In 2004, the Italian market deteriorated significantly (notably via
increased pressure on prices). As expected, the difference in the intensity of
competition from country to country is rising.
“The leaders are back and investing in growth”. Vodafone has started winning market
share. 3G poses a strategic dilemma for challengers.
Overestimates and underestimates
“Margins should stop rising”. The correction was a little stronger than expected in 2004
notably because of the acceleration in handset sales. We maintain our scenario of a
stable average margin over the next few years, as risks to the competitive status quo
should be put into perspective and because operators have the capacity to cut costs.
“The UK market was more resilient than expected”. Margins narrowed but growth in
subscribers and ARPU was stronger than expected. We believe that the risk that cash
flow will deteriorate remains strong over the next few years in the UK.
The potential for stronger growth in the German market was not realised in 2004. We
expect an acceleration in 2005 on the back of the 3G launch and greater efforts by
German operators on tariffs.
We overestimated the MVNO risk in France. There is a risk, but even in a negative
scenario, the impact will not be felt before 2006.
6
Mobile Operators
Contributors
Arthur D. Little
Exane BNP Paribas
Team
Team
-
-
Jean-Luc Cyrot
Bruno Duarte
Nicolas Petit
Charles Olivier Siouffi
Other contributors
-
Arno Wilfert (Germany)
Jesus Portal / Christine Ribas (Spain)
Roberto Marelli / Valeria Casula (Italy)
Ignacio Garcia Alves (France)
Trevor Brigmall / Chris West (UK)
Konstantinos Apostolatos/ Jasper Boessenkool
(Netherlands)
-
Jean Fisch (Belgium)
Karim Taga / Thomas Strohmaier (Austria, Croatia)
Morten Schmidt (Switzerland)
Bo Lenerius (Sweden)
Grant Greatrex (Portugal)
7
Antoine Pradayrol
Stuart Birdt
François-Pierre Arth
Pierre-Antoine Machelon
Laurent Mathieu
Matteo Novelli
Mathieu Robilliard
Marketing analyst: William Beavington
Mobile Operators
Acknowledgements
We would like to thank all the non-Exane BNP Paribas and Arthur D. Little contributors
who worked on this project. In particular, we thank the people we interviewed at the
following operators, service providers and telecoms equipment suppliers:
Mobile operators
Germany: E-plus, T-Mobile
Austria: Mobilkom, One, T-Mobile, 3 Austria
Belgium: Proximus, Scarlet, Telenet
Spain: Telefónica Móviles, Vodafone Spain
France: Bouygues Telecom, Orange France, SFR
Italy: Vodafone Italy, 3 Italy
The Netherlands: KPN Mobile, Telfort, T-Mobile NL, Scarlet
UK: mmo2 UK, Orange UK, Virgin mobile
Switzerland: Orange, Sunrise, Swisscom Mobile
IT Hardware
Alcatel, Axalto, Motorola, Microsoft, Nokia, Option, Philips, Siemens, Sagem
Service & content providers
American Greetings Interactive, Cityvox, Free, Haiku, Tele2, Universal Music
Resellers
Debitel, Darty
8
Mobile Operators
« This report is authored by Exane and draws upon research and analysis of both
Exane and Arthur D Little. The conclusions are the results of the aggregation of public
materials and information provided in the course of recent interviews with a sample of
industry players. At no point in the development of this report was access given to the
research team to client confidential information held by Arthur D Little as a result of our
recent and ongoing consulting work in this area. Use of this report by any third party for
whatever purpose should not, and does not, absolve such third party from using due
diligence in verifying the report’s contents.
Any use which a third party makes of this document, or any reliance on it, or decisions
to be made based on it, are the responsibility of such third party. Arthur D. Little, its
affiliates and representatives accept no duty of care or liability of any kind whatsoever
to any such third party, and no responsibility for damages, if any, suffered by any third
party as a result of decisions made, or not made, or actions taken, or not taken, based
on this document.
Arthur D. Little does not make investment recommendations, in this report or otherwise,
and nothing in this report should be interpreted as an opinion by Arthur D. Little either
on market forecasts or on the prospects of specific companies. »
9
Mobile Operators
Contents
Executive summary: more effort required ______________________ 3
Arthur D Little-Exane BNP Paribas report, fourth edition ____________________ 6
Competitive stakes: focusing on status quo forces ______________ 11
2000-2004: from growth to free cash flow _______________________________ 12
Market asymmetry is a key differentiating factor __________________________ 14
3G favours the leaders _____________________________________________ 16
Proprietary distribution favours the status quo ___________________________ 19
The MBWA risk can be managed _____________________________________ 22
No change in our conclusions by country _______________________________ 28
Cost-cutting: back to the fore _______________________________ 29
Pre-SARC opex: a top-down analysis shows high potential _________________ 29
Quantifying from the bottom up: many opportunities_______________________ 37
SARC: controlled rise ______________________________________________ 41
Growth: four growth engines of similar size ____________________ 44
Fixed-mobile substitution: offensive and defensive ______________ 47
The threat: an inevitable decline in unit prices ___________________________ 49
The answer: proactive tariffs _________________________________________ 56
Will 2005 be the year growth takes off in Germany?_______________________ 62
Residential mobile data: in search of a model __________________ 63
3G: off to a slow start ______________________________________________ 64
Caution in the face of major challenges and new competitors _______________ 67
Pricing: a defining decision __________________________________________ 69
Marketing usage instead of equipment _________________________________ 74
Corporate data: a big niche ________________________________ 77
Datacards, WiFi and Blackberry: EUR2.4bn in 2010e______________________ 77
Machine-to-machine: EUR2.2bn ______________________________________ 79
New segments: low ARPU but solid margins___________________ 81
Untapped growth potential in children and over 65s _______________________ 81
Low cost offers lead to positive free cash flow ___________________________ 82
Arthur D. Little presentation ________________________________ 84
Exane in a nutshell_______________________________________ 85
10
Mobile Operators
Competitive stakes: focusing on status quo
forces
The key to value creation in any one mobile market is, in our view, asymmetry in
market share among players, generally reflecting one or two very strong market leaders
and/or relatively weak challengers. Asymmetry is least apparent in the UK and has
recently been weakening in Germany, Italy, Spain and Belgium. Market share in France
has remained steady.
Competition in the European mobile market appears to have increased in the last few
quarters. Against the backdrop of strong revenue growth, progress in cash flow
generation was slower in 2004 than in 2003: in Q3 04, the EBITDA margin dropped by
almost two percentage points vs Q3 03. This suggests that competition in Europe is
intensifying:
as expected, the roll-out of Hutchison 3G has had a marked impact on competition
in several countries, in particular the UK and Italy. H3G had reached almost 2m
customers in the UK at year-end 2004, and more than 2.6m customers in Italy;
–
margins have also suffered from the across the board acceleration of handset sales
(see pages 41-43).
–
The “destabilising forces” are well known. They include UMTS new entrants (Hutchison
3G in the UK, Italy, Sweden, Denmark and Austria), mobile virtual network operators
(MVNOs) already established in a number of countries, possible MBWA new entrants
(see pages 22-27) and, of course, regulation.
Nevertheless, we think that asymmetry in most European markets will persist, as
numerous “status quo forces” are at play:
Events appear to confirm the conclusions presented in our January 2004 report with
3G making it possible for leaders to win back their marketing lead over challengers.
Vodafone wants to win market share thanks to 3G, but it will take a very measured
approach so as not to destabilise its markets.
–
Controlled distribution networks, which are increasingly important for operators,
constitute a major stabilising factor especially for the leaders’ market shares.
–
The implementation of new technologies such as MBWA poses a real competitive
risk in the long term, with the possible entry of new competitors using these
technologies. The most powerful mobile operators should, however, be able to
withstand the pressure. As is currently the case with WiFi, the leaders should move
quickly into the new technologies in order to enrich their offers and reduce costs,
leaving little room for new entrants.
–
Taken together, these factors support our analysis that, among the five largest
countries in Europe, the risk of deterioration in the competitive climate is greatest in
Italy and the UK. Conversely, competition in France, Spain and Germany is unlikely to
stiffen very much.
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Mobile Operators
2000-2004: from growth to free cash flow
Between 2000 and 2004, mobile operators have moved from a phase of rapid growth,
with uncertain profitability for many of them, to a phase of relative maturity, with strong
free cash flow generation.
The charts below compare the situations in 2000 and 2004, showing, for the given
year, the relationship between the size of an operator (measured in terms of its
penetration of a country’s population, i.e. the number of subscribers divided by
population) and its intrinsic profitability (operating free cash flow before subscriber
acquisition and retention costs, or pre-SARC EBITDA, less capex).
Chart 1: Profitability* of mobile operators, as a function of population
penetration, in 2000
400
300
EUR/year per suscriber
200
100
0
-100
2
-200
R = 0.5317
-300
-400
-500
-600
0%
10%
20%
30%
40%
50%
Source: Exane BNP Paribas estimates, Arthur D Little
Chart 2: Profitability* of mobile operators, as a function of population
penetration, in 2004
400
EUR/year per suscriber
300
200
100
0
-100
-200
R2 = 0.4714
-300
-400
-500
-600
0%
10%
20%
30%
40%
* EBITDA before subscriber acquisition and retention costs (SARC), less capex, per customer per year.
12
50%
Mobile Operators
With the rapid development of subscriber bases, operators as a group have naturally
shifted to the right on these charts. Given the significant leverage in terms of size in this
business, this has raised profitability significantly.
However, operators have not settled for merely moving to the right of the curve. The
curve itself has risen significantly, reflecting the efforts of operators to improve their
profitability—cost cutting, capex reduction—, particularly those still below the 15%
penetration barrier. In 2000, the penetration threshold for positive OpFCF was about
15%, but in 2004, all operators in the sample, including those between 5% and 10%
penetration (excepting Hutchison 3G) were in positive OpFCF (pre-SARC).
This shift in the curve is illustrated in the chart below, which shows that the main
advances were achieved in 2002 and 2003. In 2004, the FCF per subscriber curve
barely moved compared with 2003.
Chart 3: Profitability of mobile operators as a function of their penetration on
population, 2000-2004
Pre-SARC OpFCF
(EUR/year per suscriber)
280
200
120
40
-40
-120
-200
0%
6%
12%
18%
24%
30%
36%
42%
48%
Penetration in the population (%)
2001
2002
13
2003
2004
54%
Mobile Operators
Market asymmetry is a key differentiating factor
Between 2000 and 2004, the differences between the national markets have become
more distinct. For example, at one end of the scale annual OpFCF exceeds EUR100
per capita in Spain and Italy, but barely reaches EUR30 in the UK at the other end.
Chart 4: Per capita OpFCF in Europe
140
120
OpFCF per inhabitant (EUR)
100
80
60
40
20
0
-20
-40
France
UK
2000
Germany
2001
Italy
2002
Spain
NL
2003
Total
2004
National variations are related to the difference in the intensity of competition, and more
specifically, the number of operators and the weight of the leaders.
We have tested several factors. Our conclusion is that the most relevant indicator of the
differences in profitability by country is the degree of market share asymmetry. This
asymmetry corresponds to the capacity of the market leader to hold on to a large chunk
of the market coupled with the weakness of the challengers.
We measure this asymmetry using an “asymmetry indicator”, as follows:
AI = (market share of leader - 50%) + (20% - market share of challengers)
The correlation is clearly apparent in the following chart, which presents OpFCF/capita
in relation to our asymmetry indicator over time in six European countries.
This chart highlights several points.
The countries where asymmetry is historically greatest (to the right of the chart:
Belgium Spain and Italy) are those where OpFCF/capita has grown fastest.
–
The countries displaying the weakest asymmetry, e.g. the UK, have the lowest
OpFCF/capita. The UK market is particularly characterised by the absence of a true
leader able to impose “discipline”.
–
Countries where the trend is toward the left of the chart, i.e. corresponding to
declining asymmetry, have seen a deceleration in OpFCF/capita, e.g. Italy, Belgium
and the Netherlands in 2003-2004.
–
14
Mobile Operators
The slowdown in Germany is, in our view, related more to the temporary constraint
imposed by investment in 3G as part of the UMTS licence, rather than to a structural
deterioration in the German market. The weight of the two German leaders (over 30%
market share each) makes it possible to continue to successfully control the market.
–
The French line remains on a vertical trend, with asymmetry constant and continued
growth in OpFCF/capita, which reflects the “value” strategy of the challenger.
–
Chart 5: OpFCF per capita in relation to market asymmetry, 2000-2004 (EUR/yr)
150
2004
125
2003
OpFCF per capita
100
2002
75
50
2001
25
2000
0
-25
-50
-60%
-40%
-20%
0%
Asymetry factor
20%
France
UK
Germany
Spain
Netherlands
Belgium
40%
60%
Italy
The next chart confirms that the market share gains made by challengers in the past
few years have been mainly at the expense of incumbents.
Chart 6: Revenue market share of the leaders, market number twos, and
challengers in six European countries*
50%
Leaders
45%
40%
No 2
35%
30%
25%
Challengers
20%
15%
Q1 03
Q2 03
Q3 03
* France, Germany, Italy, Spain, Portugal, Netherlands.
15
Q4 03
Q1 04
Q2 04
Q3 04
Mobile Operators
3G favours the leaders
Challengers will have a tough time continuing to gain market share after the arrival of 3G.
Until now, the challengers have been able to use their available network capacity as a
vector of differentiation, in order to target big users (larger packages) or serve
numerous market segments via MVNOs. The arrival of 3G removes the advantage of
available capacity and the leaders are taking back the marketing initiative.
The leaders need UMTS to increase their voice capacity; small operators do not.
This has led to the situation whereby almost all the leaders (Vodafone, Orange,
T-Mobile, etc.) but only a handful of challengers have launched 3G (see below and
page 65).
–
As we discuss further on, the 3G offers from Vodafone and Orange are fully
consistent with the objective of increasing customer use, for voice and data alike. This
should help both companies to win back ground in segments where consumption is
highest.
–
How will the challengers respond?
Challengers have two broad choices: to either follow the leaders and invest in 3G, or
seek other ways to differentiate themselves, e.g. by investing in EDGE and/or MBWA
technologies instead of 3G.
In the short/medium term, the “leader advantage” will be most marked in countries
where the challengers choose not to invest in 3G. Ultimately, however, it will be in the
interest of the challengers in all countries to avoid jeopardising the status quo; they
know that they lack the resources to sustain a price/SARC war against the leaders,
given their narrower FCF margins.
We have identified two country categories. The first category comprises the countries
where the challengers are abreast of or slightly lagging the leaders on 3G: the UK,
Germany, Italy, Spain. The second category includes the countries where the
challengers are hesitating and are seeking strategies that will allow them to avoid
investing in 3G: France, Belgium, the Netherlands.
Table 2: Challengers’ stances on 3G
Challengers’ choices
France
Bouygues Telecom: EDGE, no 3G before HSDPA (2006-2007)
Germany
E-Plus is deploying a 3G network (using very tall radio masts to save on capex but
possibly at the expense of service quality).
mmO2 is deploying a limited 3G network (EUR1.0-1.5bn capex), and benefits from a
roaming agreement with T-Mobile
UK
All operators have launched 3G or will launch in 2005, under pressure from H3G
Italy
Wind has launched 3G, under pressure from H3G
Spain
Amena has launched 3G, including a mass market offering. Nevertheless, it invested
significantly less than its major rivals (see chart below)
Netherlands
T-Mobile, Orange and Telfort pending. Orange plans to launch 3G in 2006; Telfort has
outsourced the planning and roll-out of its 3G network; one of the challengers
envisages switching directly from EDGE to HSDPA or MBWA, without investing in
“UMTS release 99”
Austria
All operators have launched 3G, including challengers, under the pressure from H3G
Belgium
Base began to invest in UMTS at the end of 2004 with the official launch planned at
end-2005 (licence requirement); Mobistar wants to launch UMTS and EDGE
16
Mobile Operators
Chart 7: 3G network in Spain – number of base stations, September 2004
3500
3000
2500
2000
1500
1000
500
0
Leader
Number 2
Challenger
Source: Telefonica Moviles
Some challengers intend to roll out EDGE services rapidly in an attempt to differentiate
themselves. The main advantage offered by EDGE is the possibility of extensive
broadband mobile data coverage, far greater than the current UMTS coverage. This is
because EDGE can be readily deployed throughout an existing 2G network at a low
incremental cost. In contrast, the high fixed investment required by UMTS means that it
will be deployed only gradually, beginning with the areas of greatest population density.
As a result, a marketing battle cannot be ruled out between the “big” UMTS operators
(high speed but imperfect coverage) and the “small” EDGE operators (lower speeds but
better coverage). Some of the big operators also intend to invest in EDGE, notably
Orange France and TIM. However, so far, Vodafone, Telefonica Moviles and
mmO2 UK have said that they will not invest in EDGE.
EDGE will not close the gap with 3G
Fundamentally, we do not think that EDGE will be enough to compete with 3G.
We do not consider the coverage argument applies to voice and data in equal
measure. Moreover, the segments in which mobile data consumption is strongest
largely coincide with densely populated areas, which will be covered by UMTS.
Conversely, although access to Internet content is slower with EDGE than with 3G (the
speeds are currently 80kbit/s vs 140kbit/s), customers will not really notice the
difference. Similarly, we estimate that revenue from interactive games will be roughly
equivalent on EDGE and on 3G.
EDGE will, however, lose out against 3G on new applications requiring a faster
connection. For example, whereas it takes three minutes to download one minute of
music with EDGE, it only takes one minute with UMTS; the arrival of HSDPA in 2007
will make 3G even faster, widening the gap with EDGE. Also, UMTS will support new
video applications that EDGE cannot, such as video phones. However, we are prudent
regarding the potential of these applications.
EDGE also loses out on unit costs, which are twice as high per megabyte on EDGE
than on UMTS for a given capacity. This will prevent challengers that adopt EDGE from
being more aggressive on data service prices than the leaders.
17
Mobile Operators
Finally, EDGE brings nothing to voice offerings. As we have seen, the challengers will
no longer have the capacity advantage on voice. The leaders will be able to at least
catch up with the challengers on capacity, and likely overtake them: 3G will allow the
leaders to offer more attractively priced voice offerings thanks to a theoretical decline in
production cost per voice minute.
Certain challengers want to combine EDGE with rapid investment in the new MBWA
technologies. However, these technologies will not suffice for the challengers to
reposition themselves versus the leaders in the short term (network coverage too
limited, insufficient handset range). Thereafter, the leaders will also invest in the most
efficient MBWA-type technologies. Thus, it will be difficult for the challengers to
differentiate themselves in this area.
Vodafone will not rock the boat
Vodafone has repeatedly stated that it intends to win market share in the coming years.
During the company’s Investor Day in September 2004, management announced that
an objective of its One Vodafone programme was to generate an additional GBP1.1bn
in operating free cash flow through additional revenue resulting from market share
gains. This target is equivalent to winning one point of market share from the other
mobile operators during the next three years (excluding new entrants such as
Hutchison).
Vodafone is concentrating on its 3G launch to improve its image, in particular among
young (25-35 years) and corporate customers, by emphasising its innovative profile.
Some may fear that Vodafone is about to take an aggressive competitive stance like
KDDI in Japan: having announced that it intended to use 3G to win market share, KDDI
started a price war in mobile data. We do not believe that the situations of the two
companies are analogous, however. For Vodafone, 3G is an opportunity to enhance its
value-creating differentiation by polishing its brand image, rather than a means to crush
the market.
Vodafone’s objective of winning one point of market share over three years and gaining
five million 3G subscribers in Europe by March 2006 cannot be compared with KDDI’s
stated target of winning more than 50% of customer net additions in the Japanese
market during the next three or four years (KDDI currently has 26% of total customers).
One of Vodafone’s key objectives will be to protect revenue and EBITDA; management
has firmly stated its determination to maintain margins. Therefore, its aggressiveness
on prices and subsidies will remain limited.
Furthermore, the appetite for new mobile multimedia services in Europe is far less than
that demonstrated by the Japanese. Thus, even if Vodafone were to propose an
aggressive multimedia offering, the customer response would be milder and less
immediate than was the case for KDDI’s innovative, aggressive 3G offer.
18
Mobile Operators
Proprietary distribution favours the status quo
Most operators are increasingly seeking to increase the contribution to revenue from
their controlled distribution networks (proprietary boutiques and exclusive distributors).
In our view, this will help keep market share stable and may well allow the leaders to
reinforce their positions.
The sales generated through a proprietary network are of better quality than those
achieved though uncontrolled stores. More significantly, the real value of these
networks is the guarantee of a “natural” market share: for some operators, we estimate
that this exclusivity is worth enough to justify maintaining a large number of
“unprofitable” controlled shops (i.e. shops whose costs are higher than commissions).
In addition, increasing the proportion of sales achieved through their proprietary
networks, as Orange, mmO2 and Vodafone are aiming to do, gives operators a
stronger negotiating hand versus indirect distributors. This may in turn weaken the
challengers, who are more dependent on indirect distributors than are the leaders.
Controlled distribution creates better quality sales
Churn rates are generally held to be lower and ARPU higher on sales generated
through controlled networks than on non-controlled sales.
We do not consider comparisons of churn rates to be very meaningful, as the
measures are skewed by the differences in the type of clientele; i.e. subscribers that
choose to go to a controlled boutique are a priori more loyal than subscribers that go to
multi-operator stores.
Conversely, ARPU generated on a subscriber recruited through a controlled store is
generally higher than that on other subscribers. This is because retail staff in a
controlled store focus on upselling, whereas their counterparts in some ordinary outlets
are more concerned with the number of sales made. Consequently, even if some
subscribers who have been “upsold” later switch to a smaller package, the average
ARPU stays higher in controlled networks. This phenomenon was confirmed during the
course of our interviews and was also commented on in the financial communications
of mmO2 and Vodafone, for example (see table below).
Table 3: Operators’ public comments on the benefits of proprietary distribution
Operator
Comment
Vodafone UK
GBP4-5 of additional ARPU, lower SACs, more products sold per client
mmO2 UK
Higher ARPU
Vodafone Germany
64% of Vodafone live! sales and 80% of the new voice tariff bundles are made through
the proprietary network vs 42% of total sales
The leader advantage
Each point of sale has a different economic pattern: 1) a proprietary outlet is mainly a
fixed cost for the operator (costs only loosely depend on the number of sales made);
2) a franchise outlet generates mostly variable costs, but provides some advantages of
the proprietary shops; 3) a competitive, uncontrolled point of sale represents a variable
cost, mostly in the form of commissions paid.
19
Mobile Operators
As a result, it is theoretically more profitable to have controlled outlets in areas with a
dense population and to sell through uncontrolled outlets in less densely populated
areas. In the middle, there are areas where the optimal points of sales are franchise
outlets. In the textbook case presented in the chart below, the equilibrium between the
two extremes is 3,000 gross sales a year.
Chart 8: Profitability threshold for a proprietary sales outlet
Interest of the
competitive model
100
Interest of the
franchise outlet
Interest of the
proprietary outlet
Cost/ sale (EUR)
80
Uncontrolled outlet
60
40
Proprietary outlet
20
0
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
Sales/outlet/year
This textbook assessment misses one essential factor, however. It ignores the fact that
a controlled outlet sells only the operator’s own products whereas an indirect sales
outlet pits the operators against each other (each operator’s market share is close to its
average share).
Thus, for an operator with a large network of controlled outlets, the value of the outlets
is far higher than that suggested by the economic equation above. This additional value
is the value of exclusivity. Consequently, it may be worthwhile for an operator to retain
a controlled outlet that is below par, on the basic economic criterion, as its closure
would mean losing a proportion of customers to indirect outlets resulting in a
mechanical loss of market share.
For a leading operator in a large European market, our calculation suggests that the
value of this potentially lost market share (due to the closure of a proprietary outlet) is
two or three times the annual cost of the outlet, thus justifying the continued existence
of such proprietary stores. This demonstrates that an operator with several controlled
outlets has an advantage in the market.
Furthermore, the advantage to any operator of increasing the proportion of proprietary
sales is twofold: better ARPU and a stronger position against indirect resellers and
competitors.
Shifting sales away from the indirect networks to proprietary stores leaves the former
with a weaker hand when it comes to renegotiating commissions. This leverage is
especially strong if the operator’s offering is sufficiently differentiated to be a “must
have” for distributors.
20
Mobile Operators
Also, this weakening of the indirect distributors may result in the closure of some
indirect stores. Challengers generally have less extensive proprietary networks than the
leaders and are consequently more dependent on indirect resellers. For a challenger,
the loss of an indirect outlet constitutes a potential loss of market share.
The figures published by operators such as Orange, mmO2 and Vodafone all show a
clear trend towards increasing the proportion of controlled sales (see chart below). The
significance of this is increased by the fact that there is no obvious, easy response
available to the challengers.
Chart 9: Change in the proportion of controlled sales at some operators’
100%
80%
60%
40%
20%
K
ng
U
ng
O
ra
O
ra
e
Al
ne
Controlled distribution
-Q
3
e
03
O
U
ra
K
ng
e
Q
3
Fr
04
an
ce
-2
00
4
Q
3
04
04
l.
-
-Q
2
da
fo
Vo
Vo
d
U
K
Vo
d
U
K
-Q
-Q
1
3
04
04
3
00
-2
U
K
m
m
O
2
2
m
O
2
m
m
O
m
U
K
U
K
-2
00
2
0%
Indirect distribution
No obvious response for challengers
A challenger with a small controlled network must a priori also try to increase the
proportion of direct sales. But doing so is not so easy. Simply opening a new store is
not a guarantee of additional sales as there is a risk that the store will merely attract
sales that would otherwise have gone through a reseller. Thus the challenger’s overall
market share could remain unchanged, but with the added burden of the investment in
the new store.
One way to get around this for challengers is on-line sales. An often cited example
demonstrates the strength of this retail method: Telmore, the Danish MVNO which has
been purchased by TDC, won 10% market share in five years by selling exclusively on
line. TDC, together with easygroup, wants to replicate this success story in the UK with
the launch of easymobile.
Most major mobile operators have taken note—notably those cited above,
i.e. Vodafone, mmO2, France Telecom—and are now focusing on growing the online
retail network: online sales have the advantages of a controlled network at a lower cost.
21
Mobile Operators
The MBWA risk can be managed
The next few years will see the introduction of several new mobile network access
technologies, in particular Mobile Broadband Wireless Access (MBWA) technologies.
These developments could have a double impact. First, the value of the addressable
market could fall, owing to a decrease in capital invested in the networks. Second,
competition in the mobile markets could intensify, as some of the MBWA licences will
probably be attributed to new entrants by European governments.
In practice, we believe that our forecasts already make sufficient allowance for price
cuts. We also consider the risk of MBWA new entrants to be over-stated: MBWA
licences will not be free; the break in terms of costs compared with UMTS and HSDPA
should not be over-estimated. At the same time, with MBWA unlikely to be available on
a mass-market scale before 2007, the incumbent operators will have time to adapt, for
example, by pre-empting some frequencies and deploying their own offers based on
the new technologies. As was seen with WiFi, the mobile operators have the
wherewithal to take advantage of the new technologies before serious competition is
able to develop. MBWA is also an opportunity for mobile operators to compete with
fixed-line operators on broadband access.
Technologies capable of delivering more for less, but not truly before 2007
Announcements of new technologies destined to bring new services to broadband
mobile have been streaming out for several quarters. The “traditional” mobile
technologies grown out of GSM and CDMA are being joined by new technologies such
as WiFi, WiMax, UMTS TDD, TD-CDMA, Flash OFDM, etc. We have concentrated on
comparing these new technologies with those used in Europe, i.e. the GSM and UMTS
“families”.
Whereas GSM and UMTS were developed in the classic standardisation process with
ITU, the new technologies are either full proprietary developments, e.g. Flarion, Navini,
ArrayComm, IPWireless, or emerging in standardisation forums of the IT world (IEEE),
e.g. WiFi (802.11b/g), WiMax (802.16d/e; NextNet, BeamReach and Airgo
technologies) and 802.20. The WiMax Forum now comprises 185 paying members
versus 50 in January 2004.
The new technologies share several common features:
high bandwidth (transport capacity): up to several dozen Mbit/s compared with a
few Mbit/s at best with HSDPA and HSUPA, the most advanced developments from
UMTS so far;
–
–
full IP integration;
mobile data and voice at greatly reduced cost. The often quoted reference—even
though it is not relevant, notably because of much narrower coverage—is the
household WiFi antenna, which may cost a few tens or hundreds of euros, compared
with several thousand euros for a UMTS base station;
–
also the new technologies sometimes implicitly offer the prospect of being able to
deploy networks on free frequencies, i.e. for which no licence is required and
consequently with no ex ante restriction on the number of players in the market.
–
22
Mobile Operators
Conversely, for WiMax, the prospect of a truly mobile GSM-type service as opposed to
a hotspot WiFi-type service is poor. Full mobility requires that the network and the
handsets be capable of managing the “handover” smoothly, in other words not losing
the connection as the user moves between cells. Even if non-mobile technologies
cannot entirely replace mobile technologies, they are not without impact for the mobile
operators. Although they cannot completely satisfy the requirements of mobile users,
they will address customers who are in a fixed spot. We estimate that some 40% of
mobile usage is indoor (at home or in the office). This suggests that there are two
commercial possibilities for these non-mobile technologies: purely non-mobile nomadic
offers, based on WiFi-type hotspots; and offers that combine a hotspot service (for
indoor use) with a complementary fully mobile service with the same handset and billed
as a single package (e.g. BT’s BluePhone).
Regarding costs, on pages 53-54 we calculate that the unit cash costs (opex+capex)
on these new technologies will be some 10% to 15% lower than those on 3G, which
are themselves around 20% lower than 2G unit costs.
Nevertheless, the timetable for these developments is still very uncertain, especially as
regards handsets. Although the first WiFi enabled handsets are beginning to appear, all
of the players are very cautious on the subject, having had their fingers burnt with the
delays encountered perfecting GSM/GPRS/UMTS handsets.
Our conclusions:
WiFi already addresses part of the mobile market, i.e. corporate data applications,
assuring data transport at far higher speeds and at much lower cost than existing
mobile networks (GPRS/UMTS).
–
HSDPA and HSUPA will strongly reduce transfer times (downlink for HSDPA, uplink
for HSUPA) and the cost per Mbit for UMTS networks (as does EDGE for GSM/GPRS),
with a customer impact as of 2006 (for HSDPA; 2007-2008 for HSUPA).
–
WiMax in its non-mobile form will go even further than WiFi in terms of speed,
coverage and unit costs. WiMax will replace/complete WiFi hotspots as of 2006.
–
“Mobile WiMax” is not yet fully defined and will not be ready (i.e. with handsets)
before 2007 or 2008. In theory, it could then compete with UMTS in the very high
speed segment in densely populated areas.
–
In the meantime, some proprietary technologies will be up and running, e.g. OFDM
for which voice-enabled handsets are expected in 2006 (Flarion/Siemens
collaboration), but their overall impact will remain limited.
–
23
Mobile Operators
Chart 10: New technologies – speed vs mobility
Speed (Mb/s)
City
Home
100 Mb/s
Urban area
Rural area
(broadband)
Semi-urban aera
UWB
WiMax
(IEEE 802.16e)
10 Mb/s
WLAN
(IEEE 802.11X)
1Mb/s
3GPP evolution (HSDPA, HSUPA, UMTS TTD/ TD-CDMA)
Proprietary MBWA (Flarion, iBurst, Navini)
3G / UMTS – CDMA EV-DO
Bluetooth
EDGE
DECT
GSM/GPRS
0.1 Mb/s
Indoor
Personal
Outdoor
Widespread mobility
(travel speed +
geographic coverage)
Urban mobility
Mobility
* Speed shared among users.
Chart 11: New technologies – maturity
2G
CDMA IS-95A /
CDMA 2000 1x
CDMA2000
1x EV-DO
GSM /
GPRS/EDGE
UMTS/
W-CDMA
4G
Flarion*
UMTS HSDPA/HSUPA iBurst*
TDD / TD-CDMA
Mobility
Mobile
3G
802.20
Navini*
Airspan*
WiMax 802.16a/e
Portable
WiFi
802.11x
Fixed /
static
position
Mature
Developing
Maturity
* Independent developments driving the standardisation process (listing not exhaustive).
24
Mobile Operators
MBWA new entrants are probable
Mobile technologies use frequencies (see table below). MBWA and the other new
technologies use the frequency bands historically reserved for wireless local loop
(WLL) applications, around 3.5 GHz, as well as lower frequency bands which were
sometimes used by old analogue mobile technologies (450 MHz).
Table 4: What frequency with what technology?
Frequency band
Technology
450 MHz
CDMA
900 MHz
1.8 GHz
1.9-2.2 GHz
2.4 GHz
2.5-2.7 GHz
3.4-3.6 GHz
5.7 GHz
GSM 900
GSM 1800
UMTS
WiFi, WLAN
MMDS
WLL
WiFi, WLAN
UMTS-TDD
UMTS-TDD
UMTS-TDD
UMTS-TDD
Flash OFDM
Comment
Regulated
TD-CDMA
OFDM, iBurst
Used
Used
Not recommended
Not universally
for telecom
Weak coverage Non regulated
available
applications
Used
Source: Arthur D Little, Exane BNP Paribas
In most countries, these frequency bands have already been partly attributed within
wireless local loop licences, either national (France, Italy) or regional (Germany, UK,
Spain).
Nevertheless, we cannot rule out new entrants stepping into the ring armed with the
new technologies. There may well be “MBWA new entrants” as there are “UMTS new
entrants” in certain European countries.
In France, scenarios recently published by the telecom regulator as part of a public
consultation process suggest that there is at least one and possibly two nation-wide
licences; there are licences available in Italy (four national licences), Germany and
Spain (regional). In the UK, PCCW has 3.4 GHz licences with national coverage. At this
stage, it is developing a broadband fixed service in Reading, but hopes to expand the
service nationwide, and has not excluded developing mobile services in the future. In
Sweden and Germany, the regulators have recently decided to attribute new licences in
the 450 MHz band. There is also one UMTS licence available in France.
Table 5: MBWA frequency availability in the five largest European countries
Country
Frequency band
Frequency already attributed
France
Around 3.5 GHz
Fixed operators: Altitude Telecom
Germany
Around 450 MHz
Data operators: T-Mobile, Inquam
Around 3.5 GHz
Fixed regional operators: Airdata, BayNet, Broadnet
1.5, 2.0, 2.5-2.7GHz
Various
Public consultation by Ofcom
(frequencies available between 2005
and 2007 depending on the case)
Around 3.5 GHz
Broadband operator: PCCW
Ofcom is looking at the possibility of granting
new 3.6 GHz licences
UK
Available frequencies
Two 3.5 GHz licences (probably one national
and one regional
Two 2 GHz licences (probably regional)
Yes, in some regions
Italy
Around 26 GHz and 28 GHz
Mobile operators: TIM, Vodafone, Wind
Yes: 4 licences
Spain
Around 3.5 GHz
Fixed regional operators: Broadnet, Euskaltel
Yes, several operators that obtained a
regional licence have collapsed.
Source: Arthur D Little, Exane BNP Paribas estimates
Generally, regulatory decisions will be crucial in these matters: attribution method,
obligations imposed and rights granted to licence holders e.g. authorisation to provide
voice services, freedom to choose the technology, ability to use other mobile operators’
networks through national roaming deals, etc.
25
Mobile Operators
For the time being, the terms of the licences already attributed to WLL operators forbid
the provision of mobile services (except in Austria as well as the UK, where it remains
an open question, with mobile operators opposed to too wide an interpretation of
PCCW’s licence). This ban could be lifted in the future as frequency deregulation
gathers pace within the European Union. In particular, should the current holders
choose not to offer mobile services, more ambitious operators with eyes on the mobile
market could acquire their licences.
Don’t overestimate the MBWA risk
We have not changed our scenario for the European mobile sector to specifically
factor-in a MBWA new-entrant risk. Our forecasts already assume significant drops in
unit prices (pages 47-62).
First, some countries may attribute regional MBWA licences only, for example Germany
and Spain. This would constitute a big hurdle for anyone seeking to create a national
competitor on MBWA.
Second, the MBWA frequencies, at least those capable of carrying a comparable
service to those offered by mobile operators would almost certainly come at a cost;
governments have woken up to the importance of setting a value on what is a scarce
public resource. The actual cost that would be charged remains a major area of
uncertainty, but we believe there will be no such thing as a free lunch. Licences may be
awarded either through tenders, with payment of a licence (e.g. as with UMTS
attribution in France and Spain), or through auctions (e.g. UMTS in the UK and
Germany). Besides, with the advent of spectrum trading in Europe (officially launched
since December 2004 in the UK, the first large European country authorising spectrum
trading), the frequencies already attributed could be sold by the holders to new
entrants.
Third, the rupture on cost will be less significant than may appear (see pages 53-54).
In our view, the difference will not be as prevalent as during the shift from 2G to 3G.
Moreover, the 3G / MBWA cost gap will be even narrower in 2006 or 2007 when the 3G
networks will have been upgraded with the adoption of HSDPA and HSUPA, bringing
unit costs down further for the existing operators.
Last but not least, it will be at least two or three years before mobile MBWA has a
significant impact on the market. This gives the mobile operators ample time to prepare
by developing proactive tariffs (pages 56-61), and adopting MBWA, as they did with
WiFi (see table below).
Table 6: Number of mobile operators’ WiFi hotspots*
Countries
Operators
France
Orange
SFR
Vodafone
T-Mobile
T-Mobile
Vodafone
MmO2
Vodafone
UK
Germany
Spain
Number of hotspots
Around 2,000
200
1,300
Several hundred
3,500
300
500
180
* The fixed subsidiaries of certain incumbents also have several hotspots: Swisscom Eurospot in Switzerland
and throughout Europe, BT in the UK (2,600).
26
Mobile Operators
The operators’ close ties with their customers (including billing and an increasingly
detailed intelligence in their usage, etc.) will give them a considerable advantage in
developing comprehensive offers integrating the new technologies. The new entrants
will have to be content with a single-technology offering that cannot meet all the service
demands, or they will have to seek an MVNO-type agreement with a mobile operator
(which may not be that forthcoming).
We believe that these technologies give mobile operators, who are confronted with
fixed-line operators’ ADSL offerings, the opportunity to become competitive in the
broadband Internet market, both in terms of speed and cost.
The chart below shows future developments in mobile network architecture: from one
access technology (GSM) to several complementary technologies (GSM, UMTS, WiFi,
WiMax, etc.). In the future, the same operator will integrate more technologies but
continue to have access to the same customer via two key mobile architecture factors:
the SIM card (inserted in the customers handset) and HLR (a computer that manages
the SIM and customer data base and authorises access to the network and services).
Chart 12: More technology does not mean more operators
HLR
HLR
2G access network
2G
3G
WiFi
WiMax
access
access
access
access
network
network
network
network
SIM card
SIM card
Client
Client
(…)
Source: Exane BNP Paribas
Many of the operators that we have spoken to have emphasised their determination to
integrate all the new technologies into their networks, both to pre-empt the markets and
to optimise their networks. This is true of Orange and Vodafone in particular.
Vodafone’s CEO, Arun Sarin, has specifically stated at analysts’ meetings that the
company would adopt the most efficient technologies, including 802.16, when they are
ready. In Italy, the mobile operators have already snapped up some of the available
MBWA frequencies. In Germany, T-Mobile was just granted a 450 MHz licence and
wants to invest in the Flarion/OFDM technology.
27
Mobile Operators
No change in our conclusions by country
In the table below, we present a qualitative assessment of the various risk factors and
“status quo forces” in each country. The results below confirm the analysis that we
presented in our report last year: the competitive environment is likely to remain fairly
stable in Spain, France and Germany; the greatest sources of uncertainty are Italy and
the UK.
Table 7: Summary of the risks and status quo factors in the big European markets
Asymmetry
Status quo factors
Controlled
distribution
Big packages,
low per-min. prices
3G new
entrant
Risk factors
MVNO
MBWA
Total risk*
Germany
+
-
-
-
=
=
=
Spain
+
+
-
-
-
=
++
France
+
+
+
-
+
+
+
Italy
+
-
=
+
-
+
-
Netherlands
-
=
+
-
+
+
-
UK
-
+
+
+
+
+
--
*Status quo factors minus risk factors.
– France. Bouygues Telecom will probably stay focussed on the top end of the
market and on profitability. The two principal risks in France are the development of
MVNOs and the eventual arrival of MBWA new entrants. Against this, the operators
have already built up strong defences, with very low prices per minute and tight control
over distribution.
Germany. mmO2 and E-Plus have both decided to launch 3G, but are constrained
by weak free cash flow. The strong market share held by T-Mobile and Vodafone
assure asymmetry, which favours stability. The German market offers considerable
potential for growth, and the operators have begun to be more proactive on tariffs.
There is little risk of 3G triggering a dramatic deterioration in the competitive climate.
MVNO risk (with E-Plus reported to be looking at MVNO opportunities) and MBWA
rivals should not be excluded, but the potential attribution of regional licences would
reduce the impact of the latter on national mobile operators.
–
Italy. The intensity of competition in the Italian market has increased with the arrival
of H3G, and also with the pressure from Vodafone and Wind. Asymmetry is rapidly
diminishing. The efforts of the existing operators to raise their defences are not helped
by the widespread use of prepaid tariffs and the absence of subsidies.
–
Spain. With just three operators and no MVNOs, competition will remain relatively
mild. Nevertheless, the market has become less asymmetric as a result of Amena’s
market share gains, Vodafone’s renewed commercial aggressiveness and the
development of number portability. Moreover, the arrival of MBWA competitors should
not be overlooked.
–
UK. The market is tough, with five operators including a 3G new entrant, plus
numerous MVNOs. Market shares are fairly symmetric. These risk factors are all well
known. Nevertheless, the UK operators are going through a phase of rapid adaptation,
especially with regard to tariffs and proprietary distribution. This should help stabilise
the situation. MBWA developments must also be watched, i.e. deployment of PCCW
and the attribution of additional licences.
–
28
Mobile Operators
Cost-cutting: back to the fore
In our view, operators are in a strong position to reduce opex. Competitive pressure in
each market will ultimately determine the margin trend: cost cuts that will be used to
widen the margin and those reinvested in marketing drives (acquisition and retention
costs, lower prices) will vary depending on the country. Nevertheless, the operators’
ability to cut costs as prices continue to fall is clearly a positive factor. Given our
analysis of competitive stakes, we reiterate our scenario of stable mobile operator
margins, on average in Europe.
We believe that many mobile operators have yet to tap seriously into their very high costcutting potential, as, up to now, they have focused on other aspects, notably revenue
growth. We estimate that around two to three percentage points of opex/revenue can be
saved in five years on costs (excluding SARC), despite the additional costs linked to the
development of mobile multimedia and the rollout of UMTS.
Regarding SARC, we forecast a stabilisation in 2005 and 2006 (as a percentage of
revenue), i.e. a more favourable trend than in 2004 (which saw an increase), thanks to
the expected slow migration toward 3G.
Pre-SARC opex: a top-down analysis shows high
potential
Globally, over 2000-04, mobile operators have made productivity gains translating into
three EBITDA margin percentage points. However, these gains were made primarily by
a small number of operators, which we label “cash flow driven”. These operators
include subsidiaries of debt-laden groups, both leaders and challengers.
This category of operators, whose management set cash flow generation rather than
growth as a priority in recent years, managed to boost productivity sharply. Non-SARC
costs declined the equivalent of 5% of service revenue for the cash flow driven leaders
and 10% for the cash flow driven challengers.
Given the current growth slowdown, we expect those operators that have yet to
implement cost-cutting plans do start doing so now. Vodafone is a good example with
its One Vodafone programme, which, according to our estimates, aims at generating
savings equivalent to 1.5% of revenue in three years.
Overall, if these operators are able to catch up gradually to those peers that have made
the most progress, the mobile sector’s costs would shrink the equivalent of 2.5% of
revenue in five years.
2000-04: productivity gains equivalent to three percentage points
Between 2000 and 2004, the EBITDA margin before subscriber acquisition and
retention costs rose by six percentage points.
Part of this margin increase stems from the size effect, as mobile operators’ 12% revenue
CAGR over this period has made it possible to better amortise fixed costs. According to
our calculations, this effect contributed three percentage points to the margin, i.e. half the
margin expansion over the period. We calculated this effect using a cost function
obtained by regression on the sample of operators studied: pre-SARC opex as a linear
function of revenue, e.g. “fixed cost + 38% of revenue” (see Chart 14 below).
The rest of the margin expansion stems implicitly from improved productivity.
29
Mobile Operators
Chart 13: Pre-SARC opex on service revenue between 2000 and 2004
%
51
50%
3%
49
3%
47
45
44%
43
41
2000
Size
Productivity
gains
2004
Chart 14: Pre-SARC opex as a function of service revenue (EURm)
4 000
R2 = 0.9419
3 500
3 000
2 500
2 000
1 500
1 000
500
0
0
2 000
4 000
6 000
8 000
10 000
The sample comprised Orange France, T-Mobile Germany, Vodafone UK, Vodafone
Germany, Vodafone Italy, Vodafone Spain, Vodafone Portugal, Vodafone Sweden,
SFR (France), mmO2 UK, TIM Italy, KPN Mobile NL, Portugal Telecom TMN, Orange
UK, Orange Denmark, Orange NL, Orange Switzerland, Mobistar, T-Mobile UK,
Bouygues Telecom, Amena, Optimus, mmO2 Germany, KPN E-Plus, and Base.
The calculations include two restatements: 1) for the bill & keep in France (as if French
operators were paying for mobile-to-mobile interconnection since 2000, giving higher
costs and higher revenue), and 2) for estimated content revenue and costs (still low in
2004, but which will generate more revenue in the future with gross margins well below
those in the mobile operators’ traditional activity).
The latest trend further confirms the pre-SARC EBITDA margin increase, albeit more
slowly. The ratio of pre-SARC EBITDA to service revenue was still 64%
(i.e. incremental opex equalled 36% of incremental service revenue) in Q3 04.
30
Mobile Operators
Chart 15: Pre-SARC margin on service revenue in 2004 vs 2003
75%
70%
65%
60%
55%
50%
45%
40%
35%
30%
Q1
Q2
On total service revenues 2003
On incremental service revenues
Q3
On total service revenues 2004
Widely varying performance between categories of operators
We have divided European mobile operators into four sub-categories according to two
distinctions:
leaders vs challengers: we call leaders the number 1 or 2 operators on their
domestic market, and challengers the numbers 3 and 4. The first group has been
profitable for the past few years, while the second group, some of which had not
reached critical size in 2000 (thus generating negative FCF), realised more quickly the
need to improve operating efficiency;
–
“cash flow driven” vs “solid balance sheet”: the first label applies to subsidiaries of
incumbent operators facing considerable debt problems during the 2000-2004 period in
question, typically France Telecom and Deutsche Telekom; the second label applies to
all other operators.
–
The table below shows the composition of each sub-category.
Table 8: Operator sub-categories
Cash flow driven
Solid balance sheet
Vodafone UK
Vodafone Germany
Vodafone Italy
Vodafone Spain
Leaders
Orange France
Vodafone Portugal
T-Mobile Germany
Vodafone Sweden
Mobistar
SFR
MmO2 UK
TIM Italy
2
KPN Mobile NL
Portugal Telecom TMN
Bouygues Telecom
Orange UK
Orange Denmark
Challengers
1
Orange NL
Orange Switzerland
T-Mobile UK
1
Amena
Optimus
mmO2 Germany
KPN E-Plus
2
2
Base
Orange Denmark was sold to TeliaSonera in 2004.
2
We classify KPN’s subsidiaries as solid balance sheet companies because KPN solved its debt problems
before FT and DT. As a result, E-Plus was able to again focus on growth as from 2003.
31
Mobile Operators
The chart below shows that:
the challengers clearly benefited more from the size effect than the leaders. The
challengers grew 18% pa on average over 2000-04 versus 10% for the leaders;
–
productivity gains had a noticeably greater effect among cash flow driven operators
than among solid balance sheet operators: five percentage points vs zero among the
leaders, and 10 percentage points vs five percentage points among the challengers.
–
Chart 16: Pre-SARC opex on service revenue between 2000 and 2004 for the four sub-categories
OPEX/revenue (%)
50
49%
50
2%
48
Leaders
48
5%
46
46
44
44
42%
42
40
2000
Size
Productivity
gains
44%
40
2004
2000
Size
Productivity
gains
2004
OPEX/revenue (%)
80
11%
77%
19%
75
70
60
10%
55
65
5%
60
50
45%
45
40
43%
Revenue: +10% pa over 2000-2004
65
Challengers
0%
42
OPEX/revenue (%)
70
66%
1%
2000
Size
Productivity
gains
53%
55
50
2004
2000
Size
Productivity
gains
2004
Cash Flow Driven
Solid Balance Sheet
In absolute terms, cash flow driven operators have achieved better margins than “solid
balance sheet” operators (of equal size):
in 2004, the ratio of pre-SARC opex to service revenue was 45% for the cash flow
driven challengers versus 53% for the other challengers;
–
among the leaders, the figures are 42% for the cash flow driven operators vs 43%
for the solid balance sheet operators, a two percentage point difference. But this
comparison underestimates the gains achieved by the cash flow driven leaders,
i.e. Orange France and T-Mobile Germany.
–
Indeed, these two operators are subsidiaries of incumbent operators, while the solid
balance sheet leaders are mainly Vodafone subsidiaries. The mobile networks of the
first two companies draw largely on leased lines from the incumbent operators’ fixedline division (optimising the use of the fixed-line network in the form of opex for the
mobile division). The second group uses more radio-relay systems (capex). The result
is structurally higher opex for Orange France and T-Mobile Germany and structurally
higher capex for the others. We estimate the opex differential to be at least three
percentage points of service revenue:
at Orange France, leased lines represented 8% of revenue in 2002 versus 1.5% to
3.5% at Bouygues Telecom;
–
32
Mobile Operators
at TIM, they represented 3.6% of revenue in 2004 following a network optimisation
programme (they represented 4.5% of revenue in 2002);
–
in Germany, Vodafone’s capex has always exceeded T-Mobile’s: the cumulative
capex/revenue ratio was 10% over 2000-03 at T-Mobile versus more than 15% at
Vodafone. We can assume that, in the long run, the higher capex/revenue at Vodafone
is offset by equivalently higher opex at T-Mobile.
–
Correcting the opex/revenue ratios obtained above for this effect, we find that the cost
structure is now clearly more optimised among “cash flow driven leaders” than among
“solid balance sheet leaders”. We estimate the difference to be at least 5% of revenue.
The laggards will now work on costs
We believe that operators will focus increasingly on costs in the next few years:
generally, the revenue growth slowdown will lead the sector to examine its
operating efficiency. Lower revenue growth will reduce “automatic” margin gains: less
than 0.5 percentage points in margin expansion due to the size effect is expected
between 2004 and 2010 (apart from the few operators that are still on a strong growth
trend, thanks to market share gains);
–
with the arrival of mobile multimedia, operators want some increased room for
manoeuvre in order to maintain margins, as certain costs could rise: commercial costs
(see pages 41-43); costs of new services development; UMTS network rollout costs
and duplication of a number of functions when running a 2G and a 3G network at the
same time;
–
finally, the efforts made by some operators, particularly those that emerged from the
“TMT bubble” deep in debt, will force the others to try to catch up in order to maintain
competitiveness.
–
Chart 17: Forecast of the size effect on the opex/revenue ratio, 2004-2010e
OPEX/revenue (%)
OPEX/revenue (%)
44
44
43
42
Leaders
43
41.9%
0.2%
41.7%
0.2%
2004
Size
41
40
40
39
39
38
2004
Size
2010e
OPEX/revenue (%)
Challengers
OPEX/revenue (%)
45.4%
0.4%
45.0%
54
45
53
44
52
43
51
42
50
41
49
40
2010e
Revenue +2% pa over 2004-2010e
Revenue: +3% pa over 2004-2010e
46
42.6%
42
41
38
42.8%
2004
Size
2010e
52.9%
2.8%
50.1%
48
2004
Size
2010e
Cash Flow Driven
Solid Balance Sheet
33
Mobile Operators
Deutsche Telekom spoke recently of EUR1bn in savings per year on its European
mobile subsidiaries. At the end of September, Vodafone presented its “One Vodafone”
integration plan, along with quantified targets.
“One Vodafone” plan: opex savings of 1.5 percentage points of revenue
At its Investor Day on 27 September 2004, Vodafone announced that it was targeting
GBP2.5bn in synergies in three years, i.e. by its 2007/08 fiscal year. This figure is
expressed in relative terms vs a base scenario, which was not revealed. However,
some interesting calculations can be made.
Management gave the following figures:
on the 2007/08 horizon, the One Vodafone plan is to generate pre-tax OpFCF
(EBITDA-capex) of GBP1.4bn in the form of lower opex and capex, including the
savings on handset purchases, plus GBP1.1bn from additional revenue;
–
–
the group’s capex/revenue ratio is to be below 10% in 2007/08;
–
gains on handset purchases are to reach GBP0.3bn on the same timeframe;
the opex and capex affected by the programme, excluding handset sales, i.e. a total
of GBP11.5bn in spending in 2003/04, are to remain nearly stable (GBP11.7bn in
2007/08e), despite the group’s expected revenue increase, thanks to efficiency gains.
This corresponds to a gain of GBP1.1bn in OpFCF (these expenses would have
reached GBP12.8bn without the plan, according to Vodafone).
–
We have made the following calculations:
on the basis of a revenue forecast of around GBP40bn in 2007/08, the guidance of
capex/revenue below 10% implies GBP4.0bn in capex this year;
–
the GBP11.7bn in expenses in 2007/08 thus breaks down into GBP4.0bn in capex
and GBP7.7bn in opex;
–
this GBP7.7bn figure compares to the 2003/04 figure of GBP6.9bn on the same
opex scope (see table below);
–
as a percentage of revenue, Vodafone’s targets thus suggest that the opex affected
by the programme will decline from 21.8% to 20.4% of mobile revenue between
2003/04 and 2007/08, i.e. 1.4 percentage points on total revenue (or 1.5 percentage
points on service revenue) won over three years.
–
This means that the group’s guidance of maintaining a stable margin over the next few
years is consistent with other costs, particularly SARC, increasing by around 1.5
percentage points of revenue over the period.
34
Mobile Operators
Table 9: Analysis of the “One Vodafone” plan
GBPbn
2002/03
2003/04
2004/05e
2005/06e
2006/07e
2007/08e
Difference
CAGR (%)
Total revenues
Mobile revenues
o.w. mobile service revenue
o.w. mobile handset sales
Non mobile revenues
30.4
27.5
24.8
2.7
2.8
33.6
31.7
28.2
3.6
1.8
34.2
33.2
29.3
3.8
1.0
36.4
35.3
31.3
4.1
1.1
37.8
36.8
32.5
4.2
1.1
38.9
37.8
33.5
4.3
1.1
4.7
4.6
4.1
0.5
0.1
4.4
4.5
4.5
4.5
2.4
EBITDA
Mobile EBITDA
Non mobile EBITDA
11.2
10.6
0.6
12.6
12.4
0.3
12.8
12.7
0.1
13.7
13.5
0.2
14.3
14.2
0.2
14.8
14.6
0.2
2.0
1.9
0.1
4.9
4.8
19.0
(19.2)
(17.0)
(14.2)
(20.9)
(19.3)
(15.8)
(21.3)
(20.5)
(16.7)
(22.7)
(21.8)
(17.7)
(23.5)
(22.6)
(18.4)
(24.1)
(23.2)
(18.9)
(2.7)
(2.7)
(2.2)
4.1
4.3
4.2
o.w. opex in One Vodafone
payroll
other operating expenses
o.w. opex outside One Vodafone
interconnection
net acquisition costs
net retention costs
other direct costs
o.w. others
Non mobile costs
(6.2)
(1.8)
(4.4)
(8.0)
(3.3)
(1.9)
(1.3)
(1.7)
(2.7)
(2.2)
(6.9)
(2.0)
(4.9)
(8.9)
(3.8)
(2.0)
(1.6)
(1.5)
(3.6)
(1.6)
Capex
Mobile capex
o.w. capex in One Vodafone
3G
2G
Others
o.w. capex outside of One Vodafone
Non mobile capex
(5.2)
(4.9)
(4.5)
(1.7)
(1.6)
(1.2)
(0.4)
(0.3)
(5.1)
(4.8)
(4.6)
(1.6)
(0.9)
(2.1)
(0.2)
(0.2)
Total opex+capex in One Vod.
(10.7)
(11.5)
(11.7)
% of mobile revenues
Opex in One Vodafone
Opex outside One Vodafone
Capex in One Vodafone
Capex outside One Vodafone
(22.5)
(29.2)
(16.3)
(1.6)
(21.8)
(28.0)
(14.5)
(0.7)
(20.4)
(29.5)
(10.6)
(0.6)
Costs
Mobile costs
o.w. direct mobile costs
(7.7)
(11.2)
(3.8)
(0.9)
(4.1)
(0.9)
(4.2)
(0.9)
(4.3)
(0.9)
(0.5)
0.0
4.5
(0.3)
(4.8)
(4.8)
(4.9)
(4.8)
(4.8)
(4.8)
(5.0)
(4.9)
(4.0)
(0.1)
(0.1)
0.9
1.0
0.0
0.0
0.0
0.0
(9.1)
(0.2)
0.0
1.4
(1.5)
3.9
0.1
Gradual alignment with the leaders: 2.5pp improvement in the sector
We have built a top-down scenario using the following assumptions:
for “cash flow driven” operators, future gains in pre-SARC opex over revenue will be
low, via the size effect but also cost-cutting programmes underway, particularly at
Orange and T-Mobile: 0.3% in 2005 and 0.2% during the 2006-2010 period;
–
the “solid balance sheet” operators will catch up to “cash flow driven” operators in
terms of operating efficiency; this is expected to occur less quickly than what was
observed among cash flow driven operators in the past four years.
–
The chart below shows the trend of pre-SARC opex as a percentage of revenue for the
four sub-categories of operators, along with the sector average.
For the “solid balance sheet leaders” such as Vodafone’s subsidiaries, this trend
projection implies a 2.5-3 percentage point gain over five years, just ahead of the
implicit targets in the One Vodafone programme according to our previous calculations
(but the plan covers only three years).
Ultimately, the pre-SARC opex/revenue ratio is expected to remain significantly higher
for challengers than for leaders, due to the size difference. Moreover, in 2010, our
scenario includes lower costs for “solid balance sheet leaders” than for “cash flow
driven leaders”, owing to the use of leased lines by the latter, partly offset by the
difference in size between the two categories of players.
35
Mobile Operators
Chart 18: Pre-SARC opex/service revenue, 2004-10e – gradual catch-up scenario
58%
56%
54%
52%
50%
48%
46%
44%
42%
40%
38%
36%
2001 2002 2003 2004e 2005e 2006e 2007e 2008e 2009e 2010e
Cash Flow Driven Leaders
Solid Balance Sheet Leaders
Cash Flow Driven Challengers
Solid Balance Sheet Challengers
Market
36
Mobile Operators
Quantifying from the bottom up: many opportunities
The major cost categories of mobile operators, excluding subscriber acquisition and
retention, are described in the table below.
Table 10: The major cost categories of mobile operators and their determining factors
Type of costs
% of service revenue, Determining factors
2004
Interconnection
Potential gain
(% of service revenue)
6-18
Call termination rates; traffic mix
Network opex – excluding
interconnection
8-19
Network optimisation for the leaders
Network outsourcing for some challengers
1-2
IT/service platforms
3-5
Streamlining of IT expenses
Development of new applications for mobile multimedia
<0.5
Customer service
7-11
Call-centre optimisation and/or outsourcing
Segmentation of the service quality by client group
Development of self-care
0.5
4-6
Reduction of overhead
Administration
Total excluding interconnection
22-35
-
0.5
2-3
During our interviews, several operators highlighted the added cost of developing 3G
and mobile multimedia, notably regarding network opex (operation of the two networks:
2G and 3G), customer services (more calls), IT and services and services platforms.
Nevertheless, we estimate that the operators will be able to generate cost savings
equivalent to 2-3% of revenue by 2007. Apart from interconnection costs, which
represent between 6% and 18% of revenue depending on the operator and on which
management has no real room for manoeuvre (except development of on-net traffic,
which does not require interconnection payment, via adapted offers - see pages 60-61),
we have identified actions on each cost category: network opex, customer service,
administration, IT and services platforms.
NB: the wide range of percentages associated with the cost categories depends on the
following factors (apart from the efficiency gaps among the operators):
the different size of operators whose data were used, justifying a different weight of
costs as a percentage of revenue, as well as different market structures;
–
utilisation of leased lines (opex) by certain operators vs radio links (capex) for
others; bill&keep on mobile to mobile interconnection in France;
–
the near impossibility of obtaining cost figures for a sufficiently large sample of
operators on accurate and comparable scopes. Our reasoning in this section, while
inexact, is intended mainly to give an idea of orders of magnitude.
–
Network opex: optimisation and outsourcing worth 1-2 percentage points
On the basis of the sample of operators for which we have data, network opex
represents 8-19% of service revenue. These costs break down further as follows:
personnel charges (20-25%), equipment hosting (20-25%), transmission (10-30%) and
maintenance (30-40%).
We believe that this opex can be reduced by 1% of revenue for the leaders and 2% for
the challengers, despite the growing complexity of the networks with the launch of new
technologies such as UMTS.
Operators have shown a clear tendency to outsource an increasing number of
network-related functions:
this began several years ago with the search and negotiation for sites, which is now
outsourced by virtually all operators;
–
37
Mobile Operators
it was followed by maintenance: highly outsourced, except at a number of
incumbent operators with a plentiful workforce;
–
transmission towers were then sold in rural regions: Bouygues Telecom, T-Mobile
UK, etc.;
–
and now network management, implying the transfer of people and even assets
from the operator to the partner.
–
This trend stands out most among smaller operators in smaller countries. The
best-known cases are shown in the table below.
Equipment manufacturers believe that the arrival of 3G will strengthen this outsourcing
trend for minor operators that lack the resources to handle the growing complexity on
their own.
This phenomenon could spread quickly in the Benelux for several reasons: small size
of operators, competitive intensity, and scale effects (when an equipment maker
manages a network in a country, taking on a second network in the same country
allows it to pool a large number of resources and thus to optimise costs considerably).
Table 11: Some recent examples of outsourcing network functions in part or full
Date
Country
Operator Partner
Comment
2001
Sweden
Telia
Flextronics
Transfer of the team responsible for the network’s design, operation, maintenance, and management
2002
Netherlands Telfort
Ericsson
Complete network outsourcing: scheduling, design, implementation, operation and maintenance,
including the rollout of the future 3G network
2002
Austria
Tele.ring
Alcatel
Complete outsourcing of field activities on the network, including maintenance
2003
Austria
One
Alcatel
Complete outsourcing of the access and transmission network, including the scheduling and rollout of
2G and 3G networks, along with supervision, management and maintenance
2003
Spain
Amena
Ericsson
Maintenance and preventive maintenance of the GSM network
2004
Switzerland Orange
Nokia
Design, deployment and maintenance of the 3G network (access and core network)
2004
Belgium
Alcatel
Outsourcing of the network’s construction and part of operations
Base
Savings come from personnel costs, maintenance costs and transmission costs. One
equipment maker estimated that, in certain cases, savings can exceed 20% of network
opex.
Given the weight of these network costs, outsourcing can theoretically generate as
much as a four-point gain in terms of opex/revenue, although two percentage points is
certainly more realistic (10-20% gain on 10-20% of revenue).
As far as leading operators are concerned, the example of Orange shows that it is not
necessary to outsource the network to cut costs. Orange reported that in one year,
2003, it cut network opex by 4%. On the basis of information published by the group on
Orange France and UK’s costs, this figure represents a gain equivalent to 0.4% of
revenue in one year. As the TOP plan is a three-year programme, around 1% of
revenue over three years appears realistic.
We believe that, in 2004, operators started to shoulder the additional network costs
linked to UMTS (network deployment, operation and maintenance of the two networks),
given the acceleration of the 3G network rollout that year.
Deutsche Telekom publicly stated that in 2004, opex at T-Mobile Germany will have
risen by roughly EUR100m owing to the installation and operation of its UMTS base
stations. This corresponds to 1.3% of the operator’s service revenue in 2004.
38
Mobile Operators
In 2005-2006, additional UMTS costs should not be significantly higher than in 2004.
Thereafter, rollout efforts will be more limited and operators will increasingly optimise
their networks, meaning that additional costs will gradually taper off.
Customer management: around 0.5 percentage points
Customer management, including the costs of call-centres in particular, represents
between 7% and 11% of mobile operators’ revenue.
On the basis of publicly available data regarding Orange France, Virgin Mobile,
SR Teleperformance, TIM and Iliad, we estimate:
the cost of call-centres at 4-6% of revenue (10% for Virgin Mobile, which is smaller
with considerably lower revenue per client, while the call-centre cost driver is the
number of customers, not revenue);
–
the number of call-centre stations is approximately one for 2,500-3,500 mobile
customers…
–
–
…with a unit cost estimated at EUR50,000 pa.
We expect a strong move toward self-care to appear in the next few years. This trend,
in which customer service is partly outsourced to the customer through a web site,
should emerge from the combination of several major changes:
–
increasing Internet penetration in European households;
–
increasing “low price/low cost” offers for the market’s low-end segments;
and the realisation by operators that this service item - and its cost - is not correctly
“valued” by customers.
–
Table 12: Call-centre figure sample
Call centre headcount
Orange France
Virgin Mobile
TIM group worldwide
Iliad
2001
2002
722
6,500
786
2003
2004e
1,009
16,000
600
Customers / call centre employees
Orange France
Virgin Mobile
TIM group worldwide
Iliad
Cost / headcount (estimate), ‘000 EUR
Call centre costs (EURm) - estimates
Orange France
Virgin Mobile
TIM group worldwide
Iliad
Call centre costs / revenue (%) - estimates
Orange France
Virgin Mobile
TIM group worldwide
Iliad
2,002
2,956
3,033
40.4
42.1
29
273
33
3,926
2,480
2,333
43.8
45.5
44
700
17
16.8
3.6
11.5
9.4
5.9
5.1
Source: Exane BNP Paribas estimates
This coming effort on customer service costs has now been mentioned in the financial
communications of many operators such as Vodafone, TIM, France Telecom, and
many operators with whom we spoke in France, Austria, etc. France Telecom explicitly
stated that it is investing to develop self-care through voice portals and Internet portals
for its fixed line, mobile, and Internet access customers.
39
Mobile Operators
A number of operators have already minimised the amount spent on low-end
customers, thanks to their segmentation and CRM efforts (e.g. TIM).
Yet the work is far from finished. Orange mentioned that the “individual tagging” of
customers, by which the company will specifically adapt the resources applied to each
customer, should end in mid-2005. These efforts will lead to savings in the coming
years.
We do not believe that the commercial development of 3G over the next few years will
significantly raise customer services costs. In our opinion, 3G adoption will be very slow
(about 20% of subscribers equipped at end-2006e) and initially aim for small segments
of the market, particularly high ARPU customers. These are specifically those on which
operators should continue to focus in terms of customer service.
If we assume that the operators manage to generate 10% savings on call centre costs,
we calculate a potential gain of 0.4-0.6% of service revenue.
Administration: 0.5 percentage points in three years
Over the next three years, the size effect will be much weaker than previously, but not
disappear completely.
Administrative costs represent 4-6% of mobile operators’ revenue. We believe that the
operators will do whatever is necessary to keep these costs stable or reduce them,
despite increasing revenue.
The expected growth level implies an automatic gain of 0.5pp in terms of opex/revenue
over the next three years.
IT/services platforms: less than 0.5 percentage points?
Depending on the operator, IT and service platform costs represent 3-5% of revenue.
All operators that recently made announcements on their integration plans have
discussed their intention to optimise IT and services platforms. Given the effort required
to develop 3G services and based on the scarce data available, we have put the
potential gains into perspective.
For instance, Orange targets 10% savings on IT costs in 2005. Based on available
information on IT costs at Orange France & UK, we have made the following
calculations: given an estimated EUR600m in IT costs at Orange France & UK, 10% in
savings represents EUR60m, i.e. 0.3-0.4% of the combined Orange France & UK
service revenue.
As such, we believe that the deployment of new multimedia services should offset the
gains won on this line item, at least in 2005-2006.
40
Mobile Operators
SARC: controlled rise
Contrary to a widespread notion, we believe that the risk of an increase in subscriber
acquisition and retention costs (SARC) in proportion to revenue is low over the next few
years.
SARC is the result of multiplying a unit cost by a number of customer acquisition or
retention “actions”. We believe that:
the number of acquisition or retention actions should contract slightly in 2005 in
proportion to the number of subscribers. Handset renewals already rose sharply in
2003 and 2004, and we do not expect a strong acceleration in 2005. Moreover, the
number of net additions should fall in 2005;
–
3G penetration in Europe will be very slow in 2005, meaning that the average unit
cost will be weakly affected by the sale of 3G handsets. In 2006, when the proportion of
3G handsets will increase, the additional unit cost of these handsets versus 2G
handsets will have declined, leading to another weak impact;
–
major operators are increasingly able to apply pressure on retailers (see the section
on direct/indirect distribution on page 19).
–
Handset sales: not expected to rise in proportion to the number of
mobile customers
The three “sources” of handset sales are as follows:
– net additions of mobile subscribers. After very strong figures in 2003 and 2004, we
believe that the pace of new subscribers will slacken. In addition, a growing proportion
of net additions take the form of “SIM card only” packages, without the purchase of a
handset, through either “2nd card” offers (e.g. by Vodafone Germany) or offers from
MVNOs like Telmore in Denmark and Virgin Mobile in the UK;
churn: we expect stable churn on average, with a decline in the least competitive
countries and a slight increase in other countries, mainly the UK and Italy;
–
– handset renewals: this is a gradual uptrend, from 3% of the average number of
subscribers to over 13% in 2004 according to our estimates. However, the increase
expected for 2005 should not be stronger than the forecast decline in the number of
sales through net additions.
The chart below shows these three types of handset sales as a percentage of the
average number of subscribers during the period. NB: for the period between 2000 and
2004, the total number of handset sales for each year is assumed to be equal to the
figure provided by industrial sources on the handset market. The number of renewals
for these years is thus obtained by calculating the difference between total handset
sales and gross additions (net additions + churn).
41
Mobile Operators
Chart 19: Handset sales as a percentage of the average number of subscribers*
80%
70%
60%
50%
40%
30%
20%
10%
0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Net additions
Churn
Renew als
*Europe of 15 plus Switzerland.
We thus expect the ratio of total handset sales to subscribers to fall slightly in 2005 and
stabilise at around 40% over the next few years, versus a peak of 41% reached in
2004.
Concerning the average unit cost, we believe that the effect of additional subsidies on
3G handsets will be very diluted: assuming an additional cost per unit of EUR160 in
2005 (versus EUR250 in 2004; most sales in 2005 will be at the end of the year, thus
the unit cost of 3G handsets will have dropped), the average unit SARC will rise by
EUR8 (EUR129 versus EUR121).
This leads to a SARC/service revenue ratio that would remain broadly stable between
2004 and 2005 after an increase of nearly 2 percentage points of revenue between
2003 and 2004.
This scenario differs markedly from the Japanese scenario in several respects:
in Japan, the pace of handset renewals is much faster: handset sales exceed 50%
of subscribers, due in particular to a much higher number of customers taking
advantage of renewal offers: around 30% of customers each year, versus 15% in
Europe;
–
handset subsidies have historically been much more generous in Japan than in
Europe (around JPY30,000 i.e. EUR230 in Japan, vs less than EUR100 in Europe);
–
in all, SARC represents more than 20% of revenue of Japanese mobile operators,
versus less than 15% in Europe (where it varies from 5% to 20%, depending on the
country).
–
42
Mobile Operators
Table 13: Calculating SARC in western Europe*
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Total subscribers
Avg. no. of subscribers
242,131 290,976 311,628 338,032 363,441 377,438 384,693 390,521 395,359 399,470 402,751
198,295 266,553 301,302 324,830 350,737 370,440 381,065 387,607 392,940 397,415 401,111
Net additions
Churn
Gross additions
Renewals
Total handsets sold
Change in the sale of handsets (%)
87,672 48,846 20,652 26,403 25,410 13,996
7,255
5,828
4,838
4,111
3,281
39,797 55,991 65,971 67,826 71,780 74,409 76,595 77,350 78,165 78,833 79,533
127,469 104,836 86,623 94,229 97,190 88,405 83,851 83,179 83,003 82,944 82,814
6,331 10,564 17,077 27,671 47,810 61,123 68,592 71,707 74,659 76,304 78,217
133,800 115,400 103,700 121,900 145,000 149,528 152,442 154,886 157,662 159,248 161,031
(14)
(10)
18
19
3
2
2
2
1
1
% of average no. of subscribers
Net additions
Churn
Gross additions
Renewals
Total handsets sold
44.2
20.1
64.3
3.2
67.5
18.3
21.0
39.3
4.0
43.3
6.9
21.9
28.7
5.7
34.4
8.1
20.9
29.0
8.5
37.5
0
0
0
0
0
0
0
0
3G subscribers
3G % of total subscribers
% 3G adoption, y-o-y
0
0.0
0.0
0
0.0
0.0
0
0.0
0.0
0
0.0
0.0
6,525
1.8
1.8
28,954
7.7
5.9
2G unit SARC
3G addition
3G unit SARC
Average unit SARC
133
117
118
133
117
118
115
350
465
115
110
250
360
121
105
160
265
129
107
50
157
124
109
20
129
119
111
0
111
111
114
0
114
114
116
0
116
116
SARC/service revenue (%)
22.7
14.7
11.7
12.2
14.0
14.3
13.3
12.5
11.5
11.6
11.7
3G handsets/total sold (%)
3G handsets sold
o.w. churn and renewals
2G handsets sold
7.2
20.5
27.7
13.6
41.3
3.8
20.1
23.9
16.5
40.4
1.9
20.1
22.0
18.0
40.0
5
15
33
6,525 22,429 50,306
0
0
3,263
133,800 115,400 103,700 121,900 138,475 127,099 102,136
* Europe of 15 plus Switzerland.
43
1.5
20.0
21.5
18.5
40.0
1.2
19.9
21.1
19.0
40.1
1.0
19.8
20.9
19.2
40.1
0.8
19.8
20.6
19.5
40.1
50
70
79
80
77,443 110,363 125,806 128,824
14,477 36,368 63,874 93,903
77,443 47,298 33,442 32,206
75,998 138,964 212,959 274,890 309,812
19.8
35.6
53.9
68.8
76.9
12.1
15.8
18.3
14.9
8.1
Mobile Operators
Growth: four growth engines of similar size
We expect the European mobile sector (five large countries) to generate average
revenue growth of 7% in 2005e, 4.6% pa in 2004-07e and 3.3% pa in 2004-10e,
1
excluding content revenue( ). Between 2004 and 2010, this represents EUR20bn in
additional revenue.
Chart 20: Revenue in the five largest European mobile markets* (EURbn)
120
>65 years
100
<15 years
80
Machine-to-machine
60
Corporate data
40
New data
20
SMS
0
2004e 2005e 2006e 2007e 2008e 2009e 2010e
Outgoing
Termination
* France, Germany, the UK, Italy and Spain.
In our opinion, growth should derive from four growth engines of similar “size”:
Voice use by existing customers: EUR3.9bn in additional revenue expected despite
the drop in mobile termination revenue, with average growth of 0.9% pa;
–
Residential mobile data: EUR7.2bn in additional revenue, with partial SMS
migration towards new mobile multimedia services;
–
Additional penetration in the under 15 and over 65 age segments: EUR4.9bn in
additional revenue out to 2010;
–
Corporate mobile data: EUR4.2bn from PC connection cards, Blackberry and
machine-to-machine applications.
–
Table 14: Segments’ contribution to sector growth
EURbn
Difference
Contribution (%)
Voice, existing customers
o.w. termination
o.w. outgoing
Residential data, existing customers
o.w. SMS
o.w. new data
Customer growth in specific segments
<15 years
>65 years
Corporate data
Corporate data
Machine-to-machine
2004e
72.3
17.9
54.4
12.4
11.2
1.2
8.4
3.6
4.8
0.4
0.4
0.0
2010e CAGR (%)
76.2
13.4
62.7
19.6
7.3
12.3
13.2
6.0
7.2
4.6
2.4
2.2
0.9
(4.6)
2.4
7.9
(6.9)
46.6
8.0
9.2
6.9
53
37
NA
3.9
(4.4)
8.3
7.2
(3.9)
11.0
4.9
2.5
2.4
4.2
2.1
2.2
19
(22)
41
36
(19)
55
24
12
12
21
10
11
Total
93.4
113.6
3.3
20.2
100
1
The sale of mobile content will be accounted for in one of two ways: 1) not accounted for in operators’ sales. This is going to be the case for
content billed by operators on behalf of content suppliers, or 2) accounted as revenue, but these will be revenue generating a much weaker gross
margin than mobile operators’ traditional activities.
44
Mobile Operators
Segment-specific objectives
The slowdown in subscriber growth has prompted operators to increasingly segment
their marketing approach and adapt their cost structures to each segment.
Residential customers break down into three large segments:
The top of the market, which represents 10-15% of customers, whose monthly bills
exceed EUR50 and who already have large subscription packages (four hours or
more). The operators’ objective is to boost customers’ marginal use and keep them
loyal via even bigger packages at very attractive prices;
–
The middle of the market currently represents 65% to 75% of customers. This
includes both prepaid customers with ABPU over EUR10 and postpaid customers with
ABPU below EUR35. Operators need to migrate these customers to more profitable
offerings.
–
We discuss revenue targets for these two segments in the sections on fixed-mobile
substitution, regarding voice (pages 47-62), and mobile multimedia (pages 63-76);
The bottom of the market, which represents 15% to 20% of customers (prepaid for
which ABPU is below EUR10 and postpaid for which ABPU is below EUR20).
Operators have two goals: to grow the number of customers in this segment by
increasing penetration to include more children and elderly people, particularly within
families who are already customers of that operator (see pages 81-83), and to increase
the profitability of these customers.
–
The corporate market is a segment of its own, in which momentum is very different.
See pages 50-51 and 77-80.
2004: strong growth scenario confirmed
Growth of the large European mobile markets reached around 10% in 2004e. Over the
first 9 months, growth was 10.5% y-o-y, an acceleration compared to the pace
observed over the first 9 months of 2003 (9.6%).
Growth was even stronger than we expected in our report last year: since the beginning
of 2004, our revenue estimates have been continuously upgraded on the European
mobile sector: 10.1% expected today for 2004 vs 9% in August 2004 and 7.5% in
January 2004.
The main surprise was customer growth, which accelerated throughout 2004. The
average number of customers grew 9% y-o-y in Q3 04. Strong customer growth has
gone hand in hand with a slow down in ARPU growth: 1% y-o-y in Q3 04 vs 2% in Q2
and 3% in Q1. This was in line with our estimates - except in the Italian market, where it
was stronger than expected. See pages 58-59 for detailed analysis on mobile voice
growth.
45
Mobile Operators
Chart 21: Y-o-y growth of service revenue in the five largest European mobile
markets
16%
14%
12%
10%
8%
6%
4%
2%
0%
-2%
Q1 02 Q2 02 Q3 02 Q4 02 Q1 03 Q2 03 Q3 03 Q4 03 Q1 04 Q2 04 Q3 04
Service revenue
46
Average subscribers
ARPU
Mobile Operators
Fixed-mobile substitution: offensive and
defensive
We expect voice to continue making a positive contribution to mobile operators’ top-line
growth. This revenue enhancement will not only come from under-penetrated market
segments (see pages 81-83), but also from existing subscribers. We foresee 0.9%
voice revenue CAGR from existing subscribers over 2004-2010e, with usage growth
driving the gains despite price pressure.
While we have not materially modified the scenario we developed in last year’s report,
we would underline that the fixed-mobile substitution then identified as a major growth
reservoir for mobile operators is now both an offensive move and a defensive
necessity.
Pressure on per-minute prices is intensifying:
consumer groups and governments are stepping up calls for operators to pass part
of the value back to users;
–
–
competition is stiffening on the corporate voice market;
unlimited fixed-line rates will increasingly become the norm owing to the swift
development of IP voice services on broadband xDSL offers;
–
in the long term, development of mobile VoIP could ramp up, but we believe that
mobile operators will be shielded in the short term by several safeguards and will
remain more protected than fixed line operators even in the long term, owing to the
existence of relatively high per-minute rates for mobile call termination;
–
also looking out over the long term, additional deflation could be triggered by the
arrival of new MBWA technologies. However, we do not view this as a greater source
of upheaval than the advent of 3G.
–
The good news is that we see further scope to grow volumes; regardless of the
yardstick employed, mobile phone usage appears far from saturation levels in Europe.
In particular, over 50% of voice traffic transits through fixed networks in all of Europe’s
big countries.
We consider proactive pricing systems the best possible response from mobile
operators. This means building packages with incremental rates closer and closer to
those seen on the fixed-line side. The most recent 2G and 3G rates from European
operators are moving in this direction. Depending on the way in which such offers are
marketed, we continue to believe that they can help lift voice ABPU.
Voice revenue: +0.9% pa from existing subscribers
Except for users younger than 15 and older than 65, potential to increase subscriber
rolls is meagre. Penetration of the 15-65 age bracket tops 100% (107%e in terms of
SIM cards per inhabitant) on average in Europe’s five largest countries.
Depending on the country, revenue strides in this segment will come from additional
SIM cards or be reflected in ARPU growth, but both forms of growth will hinge on
higher usage by existing subscribers.
47
Mobile Operators
To simplify, we will approach this issue assuming constant subscriber numbers in this
segment, thereby reducing overall market growth to ARPU gains only: +0.9% pa in
2004-2010e, which corresponds to additional revenue of EUR3.9bn between 2004 and
2010, of which:
a EUR4.4bn decline in call termination revenue, i.e. higher volumes not offsetting
expected price declines (9% pa on average);
–
EUR8.3bn growth in outgoing voice bills, corresponding to ABPU growth (average
bill per user) of 2.4% pa.
–
This growth projection for outgoing voice calls forecast for 2004-2010 is relatively
cautious, as it corresponds to a slowdown compared to the numbers seen in 2004,
which we estimate at around +3%. This slowdown reflects the fact that pressure on
prices is growing more acute, gradually offsetting volume growth—which we still expect
to be vigorous.
The table below outlines our estimates for voice ARPU and its drivers (volumes,
prices): the per country data are based on all customers (i.e. include the dilution effect
from customers added in the below 15 and above 65 segments, which have lower
ARPU). The last lines of the table show ARPU before and after dilution.
Table 15: Our voice ARPU forecasts
2004-10e CAGR (%)
Minutes
Outgoing prices
Termination rates
Average prices
Voice ABPU
(excl. termination)
Voice AIRPU
(termination)
Voice
ARPU
France
UK
Germany
Spain
Italy
3.5
4.3
5.9
4.9
3.2
(2.7)
(4.4)
(2.9)
(3.3)
(3.7)
(13.0)
(9.5)
(8.0)
(7.1)
(6.5)
(2.3)
(5.5)
(3.8)
(4.2)
(4.4)
0.7
(0.3)
2.9
1.4
(0.6)
(9.9)
(5.6)
(2.6)
(2.5)
(3.5)
1.2
(1.4)
1.9
0.5
(1.4)
Average
4.4
(3.4)
(8.8)
(4.0)
0.8
(4.8)
0.2
91
2.4
99
(4.6)
96
0.9
Dilution effect by new customers, 2010 vs 2004
Average on existing customers
Germany is the country where voice revenue should grow the fastest in the next few
years: mobiles have captured only 25% of total voice traffic vs around 40% in other
large European markets. Several operators we talked to in Germany expect mobile
usage growth to accelerate from 2005.
48
Mobile Operators
The threat: an inevitable decline in unit prices
For European mobile operators, the decline of unit prices (price per minute, price per
Mbyte) appears unavoidable. Several factors are coming together to push prices down:
pressure from public opinion and governments, fixed line VoDSL, fixed-mobile
convergence products such as BluePhone and, further down the road, possibly mobile
VoIP and « deflationary » technologies such as MBWA.
We do not expect the break to be sudden; operators should have time to adapt to these
emerging trends, their goal being to maintain volume/price elasticity above one.
Greater external pressure
Over the last few quarters, pressure on mobile carriers has been building. Whereas
regulators had historically been the principal source of such pressure, heat is now also
coming from consumer groups, who are increasingly attacking what they consider
operators’ excessive profitability. In many instances, governments have acknowledged
that these charges have merit.
Our discussions confirmed this pressure:
–
Belgium, France: real public pressure on voice prices;
Spain: intense pressure from consumer associations, the regulator and the
government on prices. Operators could be forced to adopt per-second billing;
–
Germany: expect a growing number of rules protecting consumers (improved billing
and transparency, etc.), which would require significant investments from operators.
–
Chart 22: More acts by consumer groups
2000
2001
Complaints on quality of processes
2002
2003
2004
Questions on operators’ business models
France, UFC Que Choisir
SMS prices, protection of
young consumers
Abusive clauses in operator
contracts
France
Network coverage
Italy, Intesaconsumatori
UK
Price of TV voting SMS
Cost of calls
Per second billing
Transparence regarding
roaming costs
Orange’s off-net calls
excessively high
Germany, VZBV
Cost of overtaxed numbers
France, CLCV
Per second billing
“Mobile strike” against prices
Spain
UK
Health hazard
SMS spaming
Germany, VZBV
Spain
Three operators agree on
SMS prices
UK, European Commission
Number portability
Off-net calls excessively high
Germany, VZBV
Belgique, Ecolo
Resiliation clauses
SMS prices
49
Belgium, PS
Protection of young
consumers (MyMo)
Mobile Operators
However, the tools to carry out the most “aggressive acts” vs. mobile operators are not
in the hands of associations or governments, but are rather controlled by regulators,
and they are well known.
Pressure will continue on mobile call termination rates, but the markets are well
aware of this. The table below shows the declines already approved by regulators,
which are built into our models. In cases where no visibility exists, our forecasts are
based on declines of 7-10% pa depending on the country. Nearly all mobile operators’
termination tariffs are or will be regulated, i.e. most operators will be considered
dominant in the market of call termination on their own network. For these operators,
regulation stipulates that termination tariffs must be equal to costs: our 2010 forecasts
point to an average termination tariff of EUR0.07 per minute. The impact of a potentially
stronger decline must not be overestimated: the contribution of mobile termination to
operators’ revenue is constantly falling (already under 25% in 2004); furthermore, lower
prices would be partly offset by higher volumes.
–
There should be rising pressure on operators to open networks to MVNOs (see last
year’s report), but in the countries where there are no MVNOs already, we do not
expect draconian rulings from regulators. This is notably the case in France and Spain,
where regulators now favour commercial negotiations; moreover, these regulators have
shown that they are more favourable to infrastructure-based competition.
–
1
Table 16: Declining mobile call termination rates as announced by regulators (euro cents)
Country
Operator
2003
2004
2005
2006
2007
2003/02
2004/03
2005/04
2006/05
2007/06
Orange
SFR
Bouygues Telecom
17.1
17.1
20.5
14.9
14.9
17.9
12.5
12.5
14.8
9.5
9.5
11.2
7.8
7.8
9.0
(15%)
(15%)
(15%)
(12%)
(12%)
(13%)
(16%)
(16%)
(17%)
(24%)
(24%)
(24%)
(18%)
(18%)
(20%)
Netherlands
KPN
Vodafone
DCS 1800 operators
18.9
18.9
21.3
15.3
15.3
17.3
12.8
12.8
14.5
11.0
11.0
12.4
10.2
10.2
11.5
(1%)
(1%)
-
(19%)
(19%)
(19%)
(16%)
(16%)
(16%)
(14%)
(14%)
(15%)
(7%)
(7%)
(7%)
UK (in pence)
mmO2
Vodafone
Orange
T(Mobil)
8.0
8.0
9.5
9.5
7.2
7.2
8.4
8.4
5.6
5.6
6.3
6.3
5.1
5.1
5.7
5.7
4.8
4.8
5.3
5.3
(45%)
(43%)
(42%)
(42%)
(10%)
(10%)
(11%)
(11%)
(22%)
(22%)
(25%)
(25%)
(9%)
(9%)
(9%)
(9%)
(7%)
(7%)
(7%)
(7%)
Italy
TIM
Vodafone
15.0
17.9
14.8
17.7
13.5
16.1
12.5
14.7
11.6
13.7
(12%)
2%
(1%)
(1%)
(9%)
(9%)
(7%)
(9%)
(7%)
(7%)
Germany
T(Mobil)
Vodafone
E(Plus)
mmO2
15.4
14.3
17.9
17.9
14.2
13.2
16.5
16.5
11.8
11.0
13.7
13.7
10.8
10.2
12.7
12.7
10.0
9.5
11.8
11.8
0%
0%
0%
0%
(8%)
(8%)
(8%)
(8%)
(17%)
(17%)
(17%)
(17%)
(8%)
(7%)
(7%)
(7%)
(8%)
(7%)
(7%)
(7%)
Spain
TEM
Vodafone
Amena
17.2
17.2
21.6
15.8
15.8
18.6
13.9
14.1
15.7
12.9
13.2
14.1
12.0
12.2
12.7
(18%)
(28%)
-
(8%)
(8%)
(14%)
(12%)
(11%)
(16%)
(7%)
(7%)
(10%)
(7%)
(7%)
(10%)
Portugal
TMN
France
2
24.4
18.5
16.6
12.9
11.0
-
(24%)
(10%)
(23%)
(15%)
Sweden (SEK cent) TeliaSonera
Tele2
Vodafone
82
90
90
80
80
86
69
69
69
61
61
61
51
51
51
-
(2%)
(11%)
(4%)
(14%)
(14%)
(20%)
(12%)
(12%)
(12%)
(16%)
(16%)
(16%)
Norway (NOK cent)
68
91
63
91
60
75
57
66
55
61
-
(7%)
0%
(5%)
(18%)
(5%)
(12%)
(4%)
(8%)
15.1
13.6
11.4
10.0
9.1
-
(10%)
(16%)
(12%)
(10%)
Telenor
Netcom
Average
1
The grey boxes correspond to our estimates for years on which regulators have not yet made a decision.
2
The ART has not announced rates for 2007 but did reaffirm its goal of lowering them by 50% in 2005-07.
Major pressure on corporate voice prices
Our talks with operators revealed a convergent message regarding the corporate voice
market: competitive fires have been stoked in this segment, with per minute price
declines of up to 30% upon renewal of certain large corporate contracts. This was
underlined by many operators we spoke to in Belgium, Austria, the Netherlands, as well
as France and Spain.
50
Mobile Operators
This trend contributes to the erosion of average prices per minute on the broader
mobile market. Assuming that the biggest companies represent 3% of the market in
value terms (20% of the corporate market, which accounts for 15% of the total market),
and that prices on this segment fall an average of 30% every three years, the impact on
the average price per minute of the whole market works out to -0.3% pa.
This is relatively insignificant when viewed against the erosion seen in prices per
minute, down around 6% pa on average. Moreover, despite unremitting pressure on
prices, revenue generated by the corporate segment is still growing, chiefly thanks to
increasing penetration of mobiles in the workforce (as we noted in last year’s study).
This tough competitive backdrop has a very different impact depending on the operator:
traditionally, the corporate segment has been a citadel for incumbents. Today, under
siege by Vodafone’s subsidiaries and by challengers, incumbents have been defending
market share in volume by aggressively cutting prices. For them, prices and market
share trends are thus both heading down. At the same time, number two players,
including a certain number of Vodafone subsidiaries, are capturing market share.
This was confirmed, for example, by Vodafone Italy, during Vodafone’s Investor Day at
the end of September 2004: in 2003/04, its revenue in this segment climbed 21% to
nearly EUR1.1bn, or nearly 15% of the operator’s service revenue. Concurrently, the
number of its corporate SIMs grew 8% y-o-y (to 1.3m, i.e. 6.5% of Vodafone Italy’s
lines), underscoring the improved mix of its corporate clients, and hence its market
share gains versus TIM on the best corporate clients in Italy.
We calculate that an operator with 35% of the global market winning 5% market share
in the corporate segment over three years (rising from, for example, 30% to 35%),
would see its revenue climb at least 1% faster than the average of the mobile market in
the country where it operates during the three years (assuming that ARPU on the
corporate market is twice as high as the market average).
VoIP and fixed-mobile convergence: wireline strikes back
On the fixed-line market, competition in ADSL, which has been facilitated by the
development of unbundling, has led to an exponential increase of voice over IP offers
(VoIP). Several alternative carriers have used VoIP integration in their ADSL fixed-rate
packages as an effective marketing tool. This is the case in France (Iliad, Cegetel, neuf
telecom, etc.), the Netherlands (Versatel, but also cable operators such as UPC), the
UK (Wanadoo, etc.) and Spain (Wanadoo, etc.).
In the markets where competition is the most cut-throat, the market share gains of
alternative Internet service providers have prompted incumbents to riposte with their
own VoIP and/or unlimited voice offers: in France, Wanadoo has a EUR10 VoIP offer
(for the first year; it rises to EUR20 in year two) and France Telecom has launched
several unlimited fixed-rate packages, as did BT in the UK.
In all these cases, the price per incremental minute to the national fixed-line network is
now zero on wireline. The impact on consumers could be substantial, reinforcing the
traditional view that voice over mobile is far more expensive than voice over fixed line –
a perception that mobile operators had striven to erase.
Yet at this point, as we have shown, mobile traffic continues to increase. We believe
that mobile operators will not be impacted in the short term by fixed line VoIP offers, as
these will take time to make significant inroads. The main VoIP driver is unbundling. As
seen in the chart below, the penetration of unbundling on average in the five large
European countries will remain below 4% at end-2005e, and we expect only 12%
penetration in 2010.
51
Mobile Operators
Chart 23: Unbundling penetration in the five largest European markets
14%
12%
10%
8%
6%
4%
2%
0%
2003
2004e
2005e
2006e
2007e
2008e
2009e
2010e
A new type of offer, more threatening for mobile operators, is also an offshoot of ADSL.
These are fixed-mobile convergence offers, such as BT’s BluePhone project in the UK,
in which a dual-mode mobile handset connects to the mobile network when the
customer is travelling, and to BT’s fixed-line network (via WiFi and ADSL) when
customers are at home—and theoretically also when they are at the office, or in the
coverage area for any of BT’s WiFi hotspots.
This concept is more dangerous than simple fixed-line VoIP (described above) as:
it integrates in a single handset the practicality of a mobile service (personal
handset, easy to carry, etc.) and advantageous fixed-rate billing—where possible. It is
thus in theory very attractive for customers;
–
it re-routes mobile traffic to the fixed-line network, potentially for all of the calls
made from a fixed location corresponding to a WiFi hotspot. According to the operators,
nearly half of all mobile traffic originates from fixed locations that could be covered by
WiFi hotspots. Cannibalisation of mobile traffic is thus a real risk, as well as pressure
on mobile voice prices.
–
However, this is a technically complex product, requiring:
a handset featuring several technologies (GSM/GPRS/UMTS/WiFi), only two
models of which are in working order: a Motorola and an NEC (N900iL from DoCoMo).
As is the case for every additional layer of complexity, the first handsets are bigger,
heavier, heat up more, have a weaker battery and cost more;
–
“intimate” interconnection between the mobile and the fixed-line network to ensure
seamless handover between the two networks, i.e. continuity of communication when
the customer leaves the region covered by a WiFi hotspot to enter a region covered
solely by the mobile network, and vice versa.
–
NTT DoCoMo announced an offer of this type for companies and BT wants to launch
the BluePhone in the spring of 2005. Belgian mobile operators interviewed have not
ruled out that fixed-line operators could seek to develop such an offer.
52
Mobile Operators
The technological complexity aside, these fixed-mobile convergence products do not
look to be a threat in the short term:
fixed-line operators which belong to a group which also has a mobile arm should
not move too quickly. This is the situation for all of the incumbents except BT and for
the biggest alternative carriers (Cegetel/SFR in France, Arcor/Vodafone in Germany,
Wind in Italy, Auna/Amena in Spain);
–
fixed-line operators with no mobile arm cannot offer fixed-mobile convergence
products without partnering with a mobile operator, i.e. signing an MVNO agreement
(as BT did with Vodafone UK). In countries where MVNOs are not (or not very)
developed (France, Germany, Italy and Spain), the ability of a fixed-line operator to
rapidly sign an agreement with a mobile operator to launch such a service appears low,
given the risk for mobile operators. One option would be to strike partnerships limited to
selected market segments, in particular corporates (e.g. rumours on neuf telecom and
Bouygues Telecom in France).
–
More broadly, mobile operators are the main distributors of mobile handsets. They
decide which handsets they will subsidise and thus which will sell in large numbers.
They can thus forestall the arrival of mobile handsets with technological features that
would make it possible to bypass their network.
Finally, mobile operators can respond to this threat by offering ever larger voice
packages with a lower price per minute (see pages 56-61). The countries where this
practice is common, notably France, are less at risk.
MBWA: one more step on the road to lower costs
For several quarters, announcements of new technologies, such as WiMax, which aim
to offer very high bandwidth mobile services, have been multiplying (see pages 22-27
for more details).
These technologies have several points in common: higher bandwidth than the existing
technologies (up to several dozen Mbit/s versus several Mbit/s at best with HSDPA or
HSUPA, the most advanced versions of UMTS), full IP integration, and the prospect of
much lower costs.
These new technologies will help push unit prices down (price per minute, price per
Mbyte), although we do not expect a real break. The table below shows that, within
GSM/GPRS/UMTS technology family, the cost per Mbyte is divided by six from GPRS
to UMTS, and by a factor of 3-4 from UMTS to HSDPA or HSUPA. The MBWA
technologies will thus probably go even further.
Table 17: Estimated cost per Mbyte permitted by the different technologies
USD
Cost of delivering 1 Mbyte
GPRS
EDGE
WCDMA
(UMTS)
HSDPA
WiFi*
DSL*
0.42
0.14
0.07
0.02
< 0.01
0.01
* WiFi and DSL are given as a rough guide but are non-mobile technologies and hence not really comparable.
Source: Motorola cited by “3G Mobile”
We do not expect MBWA to trigger a complete break with existing technologies, for two
reasons. First, the savings it will generate will only apply to part of the mobile operators’
capex:
–
only in densely populated regions, not for all of the coverage area,
–
and only on technical equipment, not on sites and construction work.
53
Mobile Operators
We estimate the proportion of capex impacted (technical equipment in densely
populated regions) at a maximum of 25% of mobile operators’ fixed assets, assuming
densely populated regions represent a little less than half of the technical equipment,
which themselves represent just over half of an operator’s fixed assets (see table below
for the Mobistar example).
Table 18: Weight of different types of assets in Mobistar’s balance sheet
EUR ’000
2002
2003
2002 (%)
2003 (%)
Intangible ex. licences & GW
Tangible
o.w. buildings and land
o.w. technical
o.w. furniture and vehicles
o.w. others
0
781,147
240,937
431,551
90,122
18,537
7,719
891,482
274,363
498,542
97,781
20,796
0.0
100.0
30.8
55.2
11.5
2.4
0.9
99.1
30.5
55.4
10.9
2.3
Total excl. licences & GW
781,147
899,201
100.0
100.0
Second, this capex decline will not be accompanied by a proportional shrinkage of
opex. The latter include costs not related to the network, especially subscriber
management (CRM, etc.) and commercial costs (e.g. acquisition and retention costs).
The following table gives a very simplified calculation of the potential unit cost trend
and illustrates that, while the total decline in unit costs (opex+capex) is around 20%
with 3G, it is only 10% to 15% between 3G and MBWA, owing to the gradual reduction
of access costs as a percentage of total costs.
Our simplified assumptions are below:
technical capex divided by eight in densely populated regions, between 2G and 3G,
and between 3G and MBWA;
–
technical capex reduced by one third in non densely populated regions with MBWA,
but not with 3G;
–
a reduction of opex excluding SARC, in line with capex. This is an aggressive
assumption since part of the opex is not linked to the network;
–
–
stability of SARC.
Table 19: Decline in unit costs: 3G vs 2G and MBWA vs 3G
Euro cents/min
2G
3G
0.90
0.75
1.35
3.00
0.11
0.75
1.35
2.21
0.01
0.50
1.35
1.86
(88)
0
0
(26)
(88)
(34)
0
(16)
9.00
3.00
15.00
6.64
3.00
11.85
5.58
3.00
10.44
(26)
0
(21)
(16)
0
(12)
Technical capex in densely populated regions
Technical capex in non densely populated regions
Non technical capex
Total capex
Opex excluding SARC
SARC
Total cash cost
MBWA 3G vs 2G (%) MBWA vs 3G (%)
Wireless VoIP: not as easy as it looks
Voice over IP is developing in fixed lines as a by-product of broadband Internet. The
arrival of mobile data - and hence IP - could harbour the same risk on mobiles.
Skype, Internet telephony software developed by the company which created Kazaa,
can be installed both on a PC connected to the Internet, as well as on a connected
PDA. The PDA can then be used like a telephone permitting « free » voice
communications via Internet.
54
Mobile Operators
Short-term roadblocks… Several short-mid term factors will block the arrival of mobile
VoIP:
customers’ equipment in VoIP capable mobile devices and services will take time to
develop. To make Skype or any other mobile VoIP application function on a mobile
device, users need to have a high-speed broadband Internet connection: good
GPRS/EDGE and, if possible, UMTS. They also require a handset on which VolP
applications can be installed. At present, this is the case only for the PDA or
Smartphones with Internet access and Windows Mobile, which are sold in small
quantities owing to their high cost. Operators control handset sales through subsidies,
which allows them to slow the sales of a handset which would make it too easy to
install software like Skype;
–
in the short-term, operators are confident that they will be able to manage the
quality of the IP broadband service on their networks, ensuring that the VoIP quality is
insufficient (e.g. deterioration of the bandwidth to cut off conversations in VoIP);
–
finally, several operators have developed billing schemes for data traffic which
make VoIP unattractive compared with classic voice services. For example, they
surcharge off-net data traffic, that is IP traffic not destined for their mobile multimedia
portal. And yet, VoIP will necessarily correspond to off-net traffic, since the mobile
operator will not install a VoIP platform on its own portal. However, wielding this arm
promises to be difficult in the long term. Mobile operators are not regulated with respect
to data traffic and can thus apply different billing levels to services within their ‘walled
garden’ and to traffic to other services, including to the broader Internet. But we see a
strong likelihood that regulators will prohibit this practice, in keeping with the nondiscrimination obligation imposed on dominant fixed-line and mobile operators in the
voice area.
–
… and long-term protections. We are confident that mobile operators will be able to
control the evolution of mobile VoIP for two reasons: first, as in wireline, access to VoIP
requires payment of a fixed-rate data package, which will not be free; second, unlike
wireline, the high price of mobile call termination will hinder capacity to make attractive
VoIP offers.
First, the high price of data packages is at least partial compensation for the risk of losing
voice revenue. Average voice expenditure (ABPU) in Europe is now EUR15-20 per
month. Data packages on UMTS begin at EUR25 per month (packages with no duration
limit and at least 50 Mbytes of data traffic included; at least EUR70 per month for 500
Mbytes, see table 31). The risk is therefore that voice revenue will be partially replaced by
data revenue, but there is no risk that total service revenue will vanish entirely.
In wireline, given the ARPU involved (ADSL packages of EUR20-40 per month
depending on the country, versus a local and national average of EUR10-15), the gradual
take-up of ADSL will have an overall positive impact on operators’ ARPU, despite its
negative effect on voice rates via VoIP.
The example of NTT DoCoMo’s data rates in Japan is also instructive: DoCoMo launched
an unlimited data package at the aggressive price of JPY3,900 per month. However, the
operator made sure that, to benefit, the customer must pay at least JPY6,700 per month
for voice services, which means that customers who subscribe to its unlimited data offer
have a minimal bill of JPY10,600 (well above its average ARPU of JPY7,300). This
removes any incentive to use VoIP applications. Several European operators interviewed
indicated that they did not plan to develop data only offers, but rather include data in large
voice packages.
55
Mobile Operators
Second, VoIP communications will continue to be hurt by mobile call termination tariffs.
To route calls to the telephone of the person being called, the VoIP operator must pay the
interconnection (or termination) to the network to which the subscriber being called is
connected.
Yet the retail rates offered by mobile operators are often lower than their own termination
rates (see table below). In these conditions, an alternative operator, even one offering
VoIP, who will have to pay these mobile termination tariffs for all calls to mobiles, will not
be able to offer more attractive tariffs than those of the operators themselves. Mobile
termination can rarely be avoided, a situation that will not change. The only case in which
it could be avoided is communications remaining in data/IP format from end to end, i.e.
communications intended for someone who has a VoIP application on his/her mobile
handset.
Table 20: Comparison of mobile termination rates and mobile retail tariffs – sample of operators (EUR
before VAT)
Country
Operator
Mobile termination rate 2005
Average price in 200 min.
2G bundles
Incremental tariffs in 2G
and 3G bundles
Special
offers
France
Orange
SFR
Bouygues Telecom
0.13
0.13
0.15
0.20
0.21
0.16
0.13
0.11
0.11
free
0.05
free
Netherlands
KPN
Vodafone
Telfort
0.13
0.13
0.15
0.16
0.14
0.13
0.10
0.10
0.10
-
UK
mmO2
Vodafone
Orange
T-Mobil
0.08
0.08
0.09
0.09
0.21
0.21
0.24
0.19
0.07
0.06
0.11
0.10
0.09
0.04
Germany
T-Mobil
Vodafone
E-Plus
0.12
0.11
0.14
0.25
0.20
0.20
0.25
0.15
0.15
0.004
0.004
0.004
0.14
0.14
0.16
0.12
0.14
0.14
0.15
0.18
0.12
0.09
0.12
0.12
0.03
Spain
TEM
Vodafone
Amena
Average (different scopes)
The answer: proactive tariffs
In order to seize the voice traffic growth opportunity and to contend with ongoing
pressure in per minute prices, operators have a key tool: pricing, which we view both as
an offensive and a defensive instrument.
We believe that operators should proactively cut unit voice prices in order to favour
fixed-mobile substitution and move customers’ focus away from the cost of mobiles.
The objective is to generate elasticity above one.
In last year’s report, we discussed the move towards ever-larger packages, with
incremental tariffs approaching fixed tariffs or even zero in the case of unlimited
packages. Below, we look at recent 2G and 3G offer developments.
Growth potential is not exhausted
The growth of the mobile market is not circumscribed by Europeans’ ability to pay or by
available time. Telecom outlays as a percentage of household spending is between 2%
and 3% depending on the European country. Moreover, despite their recent growth,
telecoms have captured only a modest share of the growth in household spending; for
example, in France, between 1997 and 2003, they represented 5% of spending growth
versus approximately 8% for leisure.
56
Mobile Operators
Chart 24: Share of telecoms in household spending in four countries
16%
14%
12%
10%
8%
6%
4%
2%
0%
France
UK
Telecoms, 1999
Germany
Telecoms, 2003
Spain
Leisure, 1999
Leisure, 2003
Scope for further volume growth remains high: an average of 62% of total voice traffic
is still carried over fixed lines, and the figure is over 50% in all European countries with rare exceptions such as Austria.
Growth in wireless continued in 2004 at the expense of fixed-line, as we projected in
our report last year. In 2004, the mobile networks captured 38% of voice traffic on
average in Europe, versus 35% in 2003. Most of the operators we have spoken with
believe that the fixed-mobile substitution trend will continue.
Chart 25: Fixed-mobile substitution in the five largest European mobile markets
Mobile minutes per inhabitant per month
120
110
2005e
100
2004e
90
2003
80
2002
70
2001
60
2000
50
40
140
150
160
170
Fixed minutes per inhabitant per month
57
180
190
Mobile Operators
ARPU vs. price per minute: theory and practice
The chart below shows that the countries where price per minute is the lowest are also
those where ARPU is the highest, with the difference in volume more than offsetting the
difference in price per minute. This illustrates that it is possible to raise ARPU via
cleverly marketed cuts in price per minute.
Chart 26: Voice ARPU vs price per minute in various countries, Europe and USA
50
Voice ARPU (EUR/month)
45
40
35
30
25
20
2
R = 0.7537
15
0.05
0.10
0.15
0.20
Price per minute
0.25
0.30
0.35
Nevertheless, comparisons between countries do not allow for price/volume elasticity
conclusions within the same market.
In fact, we believe that this elasticity can be above or below one, depending on the way
the operator markets its offerings.
At this stage, certain operators interviewed are relatively disappointed by elasticity. The
chart below demonstrates the difficulty in generating elasticity above one. It shows that
within a sample of eight European operators, minutes of use (MOU) per subscriber
rises 6-8% pa, whereas the average price per minute also drops 6-8% pa.
Chart 27: Y-o-y change in voice ARPU, price per minute and MOUs*
12%
8%
4%
0%
-4%
-8%
-12%
Q3 02 Q4 02 Q1 03 Q2 03 Q3 03 Q4 03 Q1 04 Q2 04 Q3 04
MOU
Voice ARPU
Average price per minute
*Sample of operators: Orange France, Bouygues Telecom, mmO2 UK, Vodafone UK, Orange UK, E-Plus, TIM
Italy, TEM Spain.
58
Mobile Operators
However, these general trends integrate numerous effects, including ARPU dilution by
newly acquired customers. Restating for this dilution effect, our calculations show that
the voice bill per existing user grew by around 3% in 2004 - confirming our positive
stance.
To arrive at this conclusion, we have split the evolution of ARPU in 2004 into four large
factors: two factors are positive, i.e. ARPU growth thanks to data services and growth
in voice ABPU, and two are negative: the decline in call termination revenue and the
ARPU dilution effect from new customers.
Assuming that the new customers “acquired” in 2004 (i.e. 9% of customers) have
ARPU that is 30-50% lower than average, we estimate ARPU dilution by new
customers at 3-4%.
As a result, underlying ARPU growth from existing subscribers stands at 2-4%,
i.e. around EUR1/month. This can be broken down into EUR0.6/month growth on data,
a loss of EUR0.3/month on call termination revenue (lower prices, higher volumes) and
another roughly EUR0.5/month, i.e. +3%, on voice ABPU growth from existing
customers, driven by growth in minutes of use.
The sensitivity of this result, depending on the assumption of ARPU dilution by new
subscribers, is as follows: +3% on voice ABPU assuming ARPU for new subscribers is
40% lower than average, but zero assuming a 20% difference and +6% assuming a
60% difference.
Table 21: Underlying voice ABPU growth
2003
Subscribers
Existing subscribers
New subscribers
Total revenues
Revenues / customer
New customer ARPU difference (%)
New customer ARPU
New customer revenues
Existing customers revenues
Implied ARPU on existing customers
Total
o.w. incoming voice
o.w. outgoing voice and data
o.w. data
o.w. outgoing voice
Change y-o-y (%)
Total revenues
Existing customer ARPU
o.w. incoming voice
o.w. outgoing voice and data
o.w. data
o.w. outgoing voice
2004 – scenarios on new customer ARPU
256,155
279,209
256,155
23,054
279,209
256,155
23,054
279,209
256,155
23,054
279,209
256,155
23,054
279,209
256,155
23,054
279,209
256,155
23,054
279,209
256,155
23,054
86,201
28.0
93,406
27.9
(10)
25.2
6,982
86,423
93,406
27.9
(20)
22.4
6,206
87,199
93,406
27.9
(30)
19.6
5,431
87,975
93,406
27.9
(40)
16.8
4,655
88,751
93,406
27.9
(50)
14.0
3,879
89,527
93,406
27.9
(60)
11.2
3,103
90,302
93,406
27.9
(70)
8.4
2,327
91,078
28.0
7.0
21.0
3.6
17.4
28.1
6.7
21.4
4.2
17.2
28.4
6.7
21.6
4.2
17.4
28.6
6.7
21.9
4.2
17.7
28.9
6.7
22.1
4.2
17.9
29.1
6.7
22.4
4.2
18.2
29.4
6.7
22.6
4.2
18.4
29.6
6.7
22.9
4.2
18.7
8.4
0.3
(4.0)
1.7
16.6
(1.4)
8.4
1.2
(4.0)
2.9
16.6
0.0
8.4
2.1
(4.0)
4.1
16.6
1.5
8.4
3.0
(4.0)
5.3
16.6
2.9
8.4
3.9
(4.0)
6.5
16.6
4.4
8.4
4.8
(4.0)
7.7
16.6
5.8
8.4
5.7
(4.0)
8.9
16.6
7.3
We are therefore convinced that greater-than-one elasticity is possible, but believe that
it requires specific marketing techniques. Moreover, it is in the interest of operators to
increase mobile usage to better prepare for the voice over IP offensive on wireline and,
ultimately, on mobiles. To be successful, a marketing drive must:
focus on “a lot more time for just a little more money”, not on the fact that the price
per minute is lower;
–
focus the push on customers with small packages to make them feel like migrating
to bigger packages, not on customers with the biggest packages, who could discover
that the new offers optimise their bills.
–
59
Mobile Operators
2G offers: trend towards large packages confirmed
The table below has been updated from our 2004 report. It presents a range of
European tariffs for 100 minute packages (package 1), and 200 minute packages
(package 2); it also presents an incremental tariff, i.e. the tariff for additional minutes
included in package 2 compared with package 1.
The packages that existed in early 2004 have changed very little. In particular, average
tariffs per minute are practically unchanged: EUR0.25 incl. VAT/min. for 100 minute
packages (EUR0.26 last year), EUR0.18 for 200 minute packages (EUR0.18 last year)
and an incremental tariff of EUR0.11 incl. VAT/min. between the two series of
packages. Furthermore:
in Germany, T-Mobile and Vodafone introduced new packages (T-Mobile’s Relax),
and operators expect the trend to continue with the arrival of 3G. In 2005, some expect
packages including unlimited on-net traffic to be launched. Initial feedback from
operators is positive, i.e. ARPU up EUR5 per month for 1.5m customers at Vodafone
and ARPU up an estimated EUR4 per month for around 1m customers at T-Mobile (in
September 2004 vs 650k customers at end-June 2004);
–
in France, the leaders (Orange and SFR) increased the number of unlimited
packages and unlimited at off-peak period packages, and Bouygues Telecom
introduced daytime unlimited packages;
–
in Spain, promotions increased (e.g. pay for 30 minutes and talk for an hour,
thereby stimulating usage while keeping the bill unchanged). Unlike France, customers
do not like minimum consumption commitments and unlimited packages are not
expected anytime soon. The main usage growth driver is prepaid to post-paid
migration.
–
Table 22: Sample of 2G packages – average and marginal prices
Packages of 100-200 min.
Package 1
No. minutes
Price + VAT
Package 2
Average price per minute + VAT
No. minutes
Price + VAT
Package 1
Package 2
Incremental
price per
minute + VAT
Orange France (1)
Orange France (2)
SFR
Bouygues Telecom
Orange UK
Vodafone UK
T-Mobile UK
O2 UK
TEM Spain
Vodafone Spain
Amena Spain
T-Mobile Germany
Vodafone Germany
E-Plus (Germany)
mmO2 Germany
KPN NL
Vodafone NL
T-Mobile NL
Telfort
TeleRing Austria
150
90
68
120
75
100
100
100
200
167
100
100
100
100
100
120
100
75
100
90
33.0
33.0
20.0
26.0
27.1
25.7
27.1
35.7
30.0
25.0
18.0
25.0
25.0
25.0
25.0
25.0
18.5
16.5
15.0
25.0
210
180
135
240
150
200
200
200
286
286
200
200
200
200
250
240
200
225
200
180
41.0
43.0
28.0
39.0
35.7
42.9
37.1
42.9
40.0
40.0
30.0
50.0
40.0
40.0
45.0
37.5
28.5
29.5
25.0
33.0
0.22
0.37
0.30
0.22
0.36
0.26
0.27
0.36
0.15
0.15
0.18
0.25
0.25
0.25
0.25
0.21
0.19
0.22
0.15
0.28
0.20
0.24
0.21
0.16
0.24
0.21
0.19
0.21
0.14
0.14
0.15
0.25
0.20
0.20
0.18
0.16
0.14
0.13
0.13
0.18
0.133
0.111
0.119
0.108
0.114
0.171
0.100
0.071
0.117
0.126
0.120
0.250
0.150
0.150
0.133
0.104
0.100
0.087
0.100
0.089
Average 2G
108
25.0
209
37.4
0.25
0.18
0.115
Note: for the packages that include free minutes during off-peak periods, we add these minutes to the length in the package, divided by 2 for ‘evening
and weekends’ and divided by 4 for ‘evening or weekends’.
60
Mobile Operators
3G offers: along the lines of “a lot more for a little more”
The introduction of 3G was accompanied by the launch of new packages (see table
below), which, although too early to draw clear conclusions, have moved in the
direction we expected:
more upmarket offers overall, which corresponds to the operators’ decision to focus
on the high end of the market first. Depending on the country, entry-level 3G packages
offer two to four times more minutes than the 2G packages above;
–
lower per minute tariffs, ranging between -10% and -50% depending on the country.
This is particularly the case for marginal tariffs, i.e. the incremental cost of minutes
between two packages;
–
Orange France innovated with relatively expensive packages, but also followed the
fixed-mobile substitution logic, as its packages aim at migrating traffic from fixed to
mobiles for lengthy calls. These packages include unlimited free calls to all fixed lines
and other Orange France customers after the first three minutes. The average length of
a call on a mobile is two minutes, compared with five for a fixed call.
–
Table 23: Sample of 3G packages – average and incremental prices
3G tariffs
Package 1
No. minutes
Price + VAT
Package 2
No. minutes
Price + VAT
Average price per minute + VAT
Incremental
Package 1
Package 2 price per minute
+ VAT
Orange France (1)
Orange France (2)
SFR
Orange UK
Vodafone UK
H3G UK
Vodafone Germany
Vodafone Spain
180
180
225
250
500
500
100
357
45.0
55.0
46.0
42.9
57.1
35.7
30.0
50.0
300
300
300
402
1,000
750
200
909
60.0
75.0
54.0
71.4
85.7
50.0
45.0
100.0
0.25
0.31
0.20
0.17
0.11
0.07
0.30
0.14
0.20
0.25
0.18
0.18
0.09
0.07
0.23
0.11
0.125
0.167
0.107
0.188
0.057
0.057
0.150
0.091
Average
287
45.2
520
67.6
0.19
0.18
0.116
Details make the difference
We expect the recently-observed trend to continue, with more and more bundled tariffs
including large volumes of certain types of calls, specifically:
those in direct competition with wireline, i.e. calls in the evening, on weekends and
lengthy calls;
–
and particularly those whose production cost is the lowest, i.e. on-net calls and calls
to fixed lines.
–
The table below provides examples of highly competitive incremental per minute tariffs
offered to customers.
Table 24: Examples of aggressive mobile offers
Country
Operator
Offer
Description
France
Orange
Bavards
One whole evening (21h-0h)
One whole week-end
Orange
3G
3G
3rd minute and beyond free
Unlimited free eve & WE
SFR
Super perso 12h
Avantage Etudiants
9h eve & WE + 3h 7/7
Double hours free towards fixed line and on-net (eve & WE)
UK
T-Mobile
O2
Free Time
O2 Leisure Time all
750 minutes eve & WE
500 minutes eve &WE
Germany
T-Mobile
Weekend
Freetime
1,000 minutes WE
1,000 minutes eve
5.0
7.5
Vodafone
HappyWochenende
HappyAbend
1,000 minutes WE
1,000 minutes eve
5.0
7.5
E-Plus
Time&More
1,000 minutes WE
5.0
O2
Week-End Pack
1,000 minutes WE
5.0
61
Monthly price
(EUR incl. VAT)
3.0
10.0
All 3G bundles
99.0
44.0
Selected bundles
22.9
35.7
Mobile Operators
Will 2005 be the year growth takes off in Germany?
Countries are developing at their own pace in terms of fixed-mobile substitution. As
shown in the chart below, Germany is very late in mobile traffic: mobile penetration is
below average and traffic per subscriber is low.
Concerning the potential counter-attack by fixed-line operators, we believe that two
factors will aggravate this risk:
strong VoIP penetration, especially in France, Belgium and the Netherlands today,
and potentially in the UK and Spain tomorrow. Over the next two years, we believe the
risk is limited in Germany, Italy and Portugal;
–
high unit mobile prices in certain countries, such as Germany and Spain, as well as
countries very oriented towards prepaid, such as Italy, Spain and Portugal. The
customers in these countries have a better idea of the per minute price of mobile calls
and can more easily compare them with the price of fixed calls.
–
We believe that the country most likely to see fixed-mobile substitution slow down is
Spain, as a lot of customers are prepaid, per minute tariffs are higher than average and
the potential for rapid development of VoIP on fixed line in 2005 is high.
Conversely, mobile operators in Germany have nothing to fear: VoIP will take a long
time to develop on fixed-line and the potential for mobile usage growth is high.
We identified the growth potential of the German mobile market over a year ago, but at
this stage, traffic growth has been disappointing. On our estimates, mobile traffic was
up 10% in 2004 vs 2003, which is lower than other countries, which are more advanced
(growth around or above 12% in 2004 in Italy, Spain, the UK and France).
For the first time, the German operators we interviewed were very optimistic regarding
voice traffic growth in 2005: the double-digit growth in minutes of use per customer
(MOU), as expected by certain operators interviewed, is very different from the current
trend, i.e. stable MOU on average in 2004.
We note that Vodafone is much more prudent regarding German market growth in
2005 in its official communication (“below average” growth is expected, with “average”
meaning “high single digit”).
Chart 28: Fixed-mobile substitution (share of mobile traffic in total voice traffic) –
wide geographic disparities
60%
50%
40%
30%
20%
10%
0%
France
2000
Spain
2001
62
Germany
2002
UK
2003
Italy
2004e
2005e
Mobile Operators
Residential mobile data: in search of a model
We forecast a EUR7.2bn increase in revenue generated by residential mobile data
services between 2004 and 2010, i.e. a growth rate of 8% pa or ARPU growth of
EUR0.45 pa. Our mass-market data ARPU estimate comes to EUR7.3/month in 2010e
versus EUR4.5 currently (on the 15-65 year old residential market, excluding content
revenue).
On average, data ARPU now comprises 90% SMS and 10% other data services. The
challenge in the coming years is to have 3G adopted by customers in order to generate
additional revenue, while managing the changeover from SMS to email and instant
messaging. Our forecasts correspond to:
an increase in the number of active users of new mobile data services, from a few
percentage points today to 35% in 2010, with data revenue per active customer of
EUR13 in 2010 (not much more than the EUR10 figure currently observed among
active users). This corresponds to new services data ARPU of EUR4.6/month in 2010
on the scope of all residential customers aged 15-65 (excluding content), versus
EUR0.4/month today, and a revenue increase of EUR11.0bn on these services;
–
a corresponding decline in the number of SMS users, with ARPU per active SMS
user of EUR4.2 in 2010, i.e. blended SMS ARPU down from EUR4.0 today to EUR2.7
in 2010 (on the scope of residential customers aged 15-65). This implies EUR3.9bn in
SMS revenue substituted by new forms of person-to-person messaging services.
–
Chart 29: Residential data ARPU forecast* on existing customers (EUR/month)
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
2004e
2005e
2006e
SMS
2007e
2008e
2009e
2010e
New data
*Excluding content revenue.
While 3G was officially launched by a number of operators, including Vodafone,
Orange France and Orange UK, we do not expect it to be adopted rapidly by the mass
market. We believe that only around 20% of European mobile subscribers will have
migrated to a 3G offer by the end of 2006. The operators’ marketing effort is
understandably focused on those few market segments likely to embrace new services.
63
Mobile Operators
While the market’s growth potential is significant, operators are cautious owing to
substantial uncertainty surrounding the “winning model” for residential mobile data.
In new mobile multimedia services, mobile operators are competing with new
“specialist” players on their own turf: Yahoo!, AOL, Microsoft, television stations, movie
and music heavyweights, games companies, and even Apple’s iTunes. These
specialist players have one thing in common: putting all of their marketing power
behind a clearly identified service, often associated with a device. Conversely, the
operators are trying to push many services simultaneously, all operating through one
device (the mobile handset), without much visibility or legitimacy among the customers.
Pricing is one of the key questions. The different operators have made different choices
at this stage, which does not facilitate market expansion. We do not believe that the
best pricing system is pay-per-use, as charged by Vodafone, but rather the package
access model chosen by Orange and i-mode. The main advantages include
consistency with the operators’ catch-all approach, the ability to offer attractive bundles,
and the certainty of a monthly expense. With packages, operators could propose more
attractive music downloading offers and better protect SMS revenue. Finally,
experience shows that unlimited packages can also create value.
3G: off to a slow start
3G services were launched by the major operators on the corporate market in early
2004 and are now being released on the mass market by a large number of operators:
Hutchison, particularly in the UK, Italy, Sweden, Denmark and Austria, Vodafone in 12
European countries, Orange France and Orange UK, T-Mobile, mmO2 in Germany,
Amena in Spain and Wind in Italy.
However, many operators have not yet launched 3G: Orange Switzerland in Q2 05,
Orange Netherlands in 2006, mmO2 UK in 2005, and Bouygues Telecom in France,
which plans to wait for HSDPA in 2006.
Handsets are now available, and in 2005 the product range will be extensive and
affordable on the mass market:
Hutchison 3G has, in Europe, a number of Motorola, NEC, and LG handsets, and
one Nokia handset;
–
Vodafone’s major European subsidiaries launched Samsung, Motorola, Sony
Ericsson and Nokia handsets;
–
Orange launched, in France and the UK, handsets from Sanyo, Samsung, LG,
Motorola, Sony Ericsson, and Nokia.
–
These current dual-mode 2G/3G handsets have similar features to the 2G handsets in
terms of ergonomics but still generally suffer from a weak battery. The cost remains
high for the operators, whose subsidies determine the selling price for the customer:
free handsets in the UK, prices starting at EUR199 in France.
64
Mobile Operators
Chart 30: 3G launch situation in Europe
Belgium
Proximus
Mobistar
Base
UK
Orange UK
Vodafone
T-mobile UK
H3G
Eire
O2
Vodafone
H3G
3G Launch
H2 2005
H2 2005
H2 2005
3G Launch
July 2004
February 2004
February 2004
March 2003
Sweden
Telia
Tele2
Vodafone
H3G
Denmark
H3G
3G Launch
October 2003
Finland
TeliaSonera
December 2003
July 2004
October 2003
December 2004
November 2004
Spain
TEM
Vodafone
February 2004
February 2004
Portugal
TMN
Vodafone
Optimus
April 2004
May 2004
June 2004
3G Launch
December 2003
NL
KPN
Vodafone
3G Launch
France
Orange FR
SFR
3G Launch
March 2004
June 2004
November 2004
May 2003
3G Launch
3G Launch
3G Launch
July 2004
June 2004
Germany
T-Mobile
Vodafone
E-Plus (KPN)
mmO2
April 2004
February 2004
June 2004
April 2004
Austria
MobilCom
T-Mobile
H3G
April 2004
December 2003
May 2003
3G Launch
3G Launch
3G Launch
Switzerland
Swisscom Mobile
3G Launch
December 2004
Italy
TIM
Vodafone
Wind
H3G
3G Launch
November 2004
November 2004
November 2004
March 2003
Source: Arthur D Little
Penetration to remain limited: around 20% of the base at year-end 2006e
The impact of 3G should be low throughout 2005 and probably into 2006 in terms of
both the contribution to ARPU and the increase in subscriber acquisition and retention
costs.
The targets announced by the operators themselves are unambitious: Vodafone is
targeting 5% of its European subscribers in March 2006, and Orange around 10% of its
subscribers in France and the UK at the end of 2006. Figures are expected to be very
low at end-2004, except at Hutchison 3G: for example, Orange has 18,000 3G
subscribers.
Table 25: Some operators’ targets in terms of penetration of 3G handsets
3G customers (000)
March 2006
Vodafone Europe
Orange France*
Orange UK
Year-end 2006
5,000
2,000
1,750
% of total base
Vodafone Europe
Orange France
Orange UK
5
9
13
* Orange France is targeting 2 million broadband mobile customers, which could include UMTS and EDGE.
The chart and table below contain details on our expectations:
assuming that 15% of handsets sold in 2005 will be 3G handsets, we expect around
8% of subscribers to be equipped at the end of 2005;
–
65
Mobile Operators
assuming that one-third of handsets sold in 2006 will be 3G handsets, this
penetration rate is expected to be 20% at the end of 2006. This rate is high compared
to Orange and Vodafone’s targets. But we believe that operators’ targets are
intentionally very cautious and that 3G handset penetration will accelerate in 2006. In
addition, our data include Hutchison 3G subscribers (12m customers estimated,
i.e. 15% of European 3G customers at the end of 2006e);
–
–
the penetration rate of 3G should surpass 50% in 2008.
Chart 31: 3G handset penetration rate around 20% at the end of 2006
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2003
2004e
2005e
2006e
2007e
3G handsets/total sold
2008e
2009e
2010e
% 3G subscribers
Table 26: 3G handset penetration rate
Europe 16*
2003
2004e
2005e
2006e
2007e
2008e
2009e
2010e
Total subscribers
Average subscribers
338,032
324,830
363,441
350,737
377,438
370,440
384,693
381,065
390,521
387,607
395,359
392,940
399,470
397,415
402,751
401,111
Net additions
Churn
Gross additions
Renewals
Total handsets sold
Change in handset sales (%)
26,403
67,826
94,229
27,671
121,900
18
25,410
71,780
97,190
47,810
145,000
19
13,996
74,409
88,405
61,123
149,528
3
7,255
76,595
83,851
68,592
152,442
2
5,828
77,350
83,179
71,707
154,886
2
4,838
78,165
83,003
74,659
157,662
2
4,111
78,833
82,944
76,304
159,248
1
3,281
79,533
82,814
78,217
161,031
1
8.1
20.9
29.0
8.5
37.5
7.2
20.5
27.7
13.6
41.3
3.8
20.1
23.9
16.5
40.4
1.9
20.1
22.0
18.0
40.0
1.5
20.0
21.5
18.5
40.0
1.2
19.9
21.1
19.0
40.1
1.0
19.8
20.9
19.2
40.1
0.8
19.8
20.6
19.5
40.1
0
0
121,900
5
6,525
0
138,475
15
22,429
0
127,099
33
50,306
3,263
102,136
50
77,443
14,477
77,443
70
110,363
36,368
47,298
79
125,806
63,874
33,442
80
128,824
93,903
32,206
0
0.0
0.0
6,525
1.8
1.8
28,954
7.7
5.9
75,998
19.8
12.1
138,964
35.6
15.8
212,959
53.9
18.3
274,890
68.8
14.9
309,812
76.9
8.1
% of average subscribers
Net additions
Churn
Gross additions
Renewals
Total handsets sold
3G handsets/total sold (%)
3G handsets sold
o.w. churn and renewals
2G handsets sold
3G subscribers
% of 3G subscribers
% adoption of 3G y-o-y
* Europe of 15 plus Switzerland.
66
Mobile Operators
On the residential market, operators are targeting the high-end of the market and/or
certain well-identified segments (e.g. urban 25-35 year olds for Vodafone), from now
through Christmas 2005 at least. This segmented approach is appropriate. Experience
shows that, in countries where operators quickly equipped the entire population with
handsets (i.e. Japan and South Korea), the use of 3G services remains dominated by
customers below the age of 30 (see chart below). As such, it does not make sense for
operators to subsidise 3G handsets for customers outside this segment.
Chart 32: EV-DO data revenue breakdown by age bracket at KTF in 2003 (Korean
operator)
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
10's
20's
30's
40's
>50
This segmented approach is consistent with our forecast of a relatively low penetration
rate (35%e) by these services in 2010 alongside strong ARPU (EUR13 excluding
content), as opposed to forecasts which would imply a mass-market penetration
(e.g. 80% penetration and lower ARPU).
Caution in the face of major challenges and new
competitors
Despite 3G’s ability to increase the mobile download speed, which enables many new
applications (see table below), the operators with whom we spoke remain very cautious
on the use of mobile multimedia by residential customers.
Table 27: Transfer time, by technology
Technology
GSM
GPRS
EDGE
UMTS
Average speed
estimated
10 kb/s
40 kb/s
100 kb/s
250 kb/s
Viewing a 1 Kbyte Send an email with a
web page 50 Kbytes attachment
1s
Instantaneous
Instantaneous
Instantaneous
40 s
10 s
4s
2s
67
Downloading a
100 Kbytes photo
1 min 20
20 s
8s
3s
Downloading a
Downloading a
1 Mbytes song 5 Mbytes video clip
12 min
3 min
1 min 30
30 s
more than 1 hour
15 min
7 min
3 min
Mobile Operators
A number of German, Belgian, and Swiss operators that we met noted that the use of
new data services has been disappointing, although the penetration rate by new
handsets has been satisfactory. Vodafone, in its official communication, refuses to
commit to a quantifiable positive impact of 3G on ARPU. According to some operators,
the development of broadband over wireline (with much faster than expected download
speeds in some countries like Belgium and France) limits the potential of mobile 3G,
which will remain markedly slower. Finally, video-telephony is not considered to be a
killer application. Some operators see it as a “nice to have” service – not a “must-have”
– that will quickly become a commodity, with prices not much higher than those for
voice. This probably explains why Orange and Vodafone’s 3G offers include video for
the price of voice during the promotional phase.
This caution arises from the many challenges and the difficulty to discern a winning
model.
To begin with, the stakes are many and significant: mass-market data service revenue
now accounts for 15% of total revenue and derives mainly from SMS. By 2010, we expect
new applications for the residential market to produce nearly EUR12bn in revenue in the
five major countries in Europe, excluding content revenue. The key will be to encourage
new uses, ensure regular revenue growth, and manage the base of existing SMS
revenue.
An important hurdle is the customers’ perception of the high price of mobile multimedia.
For this reason, operators want to be aggressive on prices. At the same time, however,
they must maximise the value of the new markets and not cannibalise revenue from
existing services.
Bandwidth needs differ widely depending on the application, from SMS to video
streaming. The table below shows that, between an SMS and video streaming, the
implicit price billed by operators for one megabyte varies from one to 180. In other words,
if all applications were priced uniformly at EUR1 per megabyte, the price of SMSs would
drop by 99% and the price of streaming video would jump by 82%. Operators are thus
strongly compelled to bill the different applications at different prices per megabyte.
Table 28: Differentiating the price per megabyte
EUR
SMS
MMS
Voice
Streaming
Unit price Equivalent per Mb
0.10
0.40
0.20
0.65
100.0
13.3
2.0
0.6
Price if a uniform EUR1/Mb Difference with the unit price (%)
0.001
0.03
0.10
1.18
(99)
(93)
(50)
82
In addition, with the arrival of new mobile multimedia applications, mobile operators are
no longer alone in having expertise or in wanting a piece of the pie. New players
include major Internet service providers (Yahoo!, AOL, Microsoft, etc.), media
(television stations, etc.), movie and music heavyweights, game developers (Sony,
Microsoft, etc.), and various others (e.g. Apple with iTunes/iPod). These players’
business models often differ greatly from those of the mobile operators, leading to the
difficulty of breaking up value, which will not necessarily be to the advantage of
operators.
68
Mobile Operators
From the customers’ perspective, the products offered by “specialists” are often much
clearer:
a unique service, often in conjunction with a particular device on which they focus
all of their marketing firepower: iPod for Apple (which is also preparing a mobile
handset in partnership with Motorola), game consoles, DVD players, the Blackberry
(mobile email), etc. The goal of the big Internet service providers like Yahoo! and AOL
is to extend their range of services (especially in email and instant messaging) to
mobiles;
–
the operators have sought at this stage to offer all these services and to integrate
everything in one piece of equipment, i.e. the mobile. Their marketing effort is spread
out over many services, diluting the message received by consumers. The operators
are primarily perceived as person-to-person communication specialists (P2P: voice,
SMS) and access specialists (providing a conduit to access the Internet).
–
Pricing will play a key role in determining the success of mobile multimedia (see below).
Several operators will also have to change the way in which they market mobile
multimedia services (see page 74).
Pricing: a defining decision
Pricing methods can be divided into two major groups: pay-per-use and package
pricing (which includes the special case of the unlimited package). Moreover, traffic and
content can be bundled into one price or billed separately.
The community of operators is currently divided on the pricing model to choose for
mobile data. Vodafone, for example, chose pricing per use, while Orange prefers
packages. Some operators, e.g. in Austria, have launched unlimited or quasi-unlimited
packages competing with ADSL tariffs.
This dichotomy contains the inherent risk of a downward levelling. Further out, we
believe that more advantages lie in package pricing than in pricing per use. Two
examples include downloading music and SMS revenue protection.
Selling services and content on a per use basis, grouping traffic and content.
This pricing system is used for Vodafone live!: one price for each service used. This
means one price to download a ring tone, one price to access a service for one day,
etc. This choice represents continuity with pricing of SMS and of the early content
services such as downloading ring tones, logos, etc.
The main advantages of this pricing system are:
–
no commitment by the customer and strict spending control;
prices per use for each type of content include both the cost of the content and the
cost of traffic. The price of traffic is thus not laid out, and the operator is able to value
traffic upward or downward by service (see table 28).
–
69
Mobile Operators
The main disadvantages of this pricing system are difficulty in creating habits for
entertainment services; the low transparency of pricing: each service and each type of
content potentially has a different price. The operator cannot market these services and
types of content simply, especially compared to specialist product offerings
(e.g. iTunes) and it is difficult to sustain this model in the medium term. To access a
service on the operator’s portal, the traffic price is included in the price of the service
and can vary sharply from one service to the next. Conversely, to access a service
outside the portal, i.e. off-net, the traffic will be billed as such by the operator (e.g. price
per megabyte or per hour). Independent service providers would like to use off-net
access to compete with the operator’s services: for example, e-mail through the Yahoo!
Mobile portal, which would be billed per megabyte or by the hour, competing with the
mobile operator’s SMS, Instant messaging or MMS services, which would be billed per
use. As such, it is uncertain whether per use billing is sustainable.
Selling access through packages including only traffic: Under this pricing system,
customers are charged a monthly amount for a given use, measured in volume or
hours. This choice represents continuity with mobile voice pricing and corresponds to
the well-known ADSL access packages on fixed line. Orange has opted for this pricing
system as well as Bouygues Telecom with i-mode.
The main advantages of this model are 1) the ability to develop a range of packages,
with a sharply digressive unit price for larger users; 2) securing a given ARPU level and
the ability to offer certain content free of charge – for customers subscribing to a
package – allowing the operator to create an attractive proposal, and more generally, to
bundle services that the customers already consume (e.g. voice, SMS) with new
services that they do not yet know how to value (MMS, email, video access, access to
content, etc.) in order to encourage their use; 3) packages deliver on the promise that
operators alone can make: everything can be accessed from the mobile handset; and
4) packages can include all access traffic, on-net and off-net.
The following disadvantages can, in our view, be sharply minimised:
customers must be convinced to commit to a minimum monthly expense assuming
regular usage, for services for which they do not know yet how much they are willing to
pay. The answer to this difficulty lies in bundling new services with services that the
customer knows how to value. Orange managed to convince 2.3m customers to
subscribe to its data packages, even though the customers’ use is low (1.3m customers
in France and 1.0m in the UK);
–
the inability, in the case of packages that would include many applications ranging
from email to data access, to differentiate the price per megabyte for the different
applications. Certain operators also highlight the risk related to separating traffic and
services, which could commoditise traffic. We believe that the key for the operator is
not so much the price per megabyte, but the absolute level of customer spending
(ARPU).
–
We believe that mobile operators can offer data access that would compete with ADSL
in certain market segments. In certain countries, a mass market data card offering at
about EUR30 per month might allow mobile operators to capture part of the ADSL
market.
Music: could package pricing allow mobile operators to compete with
iTunes?
Some operators strongly highlight music downloading as a key 3G application
(e.g. SFR and Vodafone’s recent launches), but under current conditions, we are very
cautious on the potential of these offerings.
70
Mobile Operators
For the time being, Vodafone’s subsidiaries bill for music downloading on a per-use basis, at
EUR1.99 per track (incl. VAT) for SFR (EUR1.50 in the 10-track package) and EUR1.50 for
Vodafone Spain. These prices are well above the “market norm”, i.e. free downloading over
the Internet (illegal) or paying download services on Internet, which aligned their tariffs with
the market leader, Apple’s iTunes/iPod service (USD0.99 per track).
These benchmark prices are difficult to beat for mobile operators’ pay-per-use tariffs.
The cost price of a download, factoring in the network, the content acquisition as well
as the other costs, is at least EUR1.60, implying a theoretical minimum retail price of
EUR1.90 (incl. VAT). For this calculation, we assumed a network cost per megabyte of
EUR0.30 in UMTS, i.e. EUR0.30 to download a 3-minute fragment of music (1 Mb).
The cost of the content is EUR0.80-1.10 on our estimates. Finally other costs represent
EUR0.50-0.70 per download on our estimates, including editing the music content for
mobile, customer service and digital rights management.
Conversely, an operator offering a mobile data access package similar to an ADSL
package could offer a much more competitive proposal for music, for instance, a mobile
data access package for EUR15 TTC per month plus EUR1 per song.
Such a package could pay for a maximum of 15 music tracks per month (based on
the same assumptions as those below). This package could be used not only for music,
but also a wide range of other applications, like email and ADSL fixed line packages;
–
The per-song price would pay for the cost of the content, in line with the existing
price for paid services in fixed line.
–
SMS: package pricing would better protect existing revenue
We are not worried about the operators’ ability to maintain messaging revenue despite
the expected drop in SMS prices and the risk of cannibalisation by e-mail or Instant
messaging. Currently, SMS monthly ARPU is EUR4.0. The prices of SMSs are going to
decline, and volumes will be gradually and partially replaced by new modes of
communication (email, Instant messaging, etc.). We expect the following trend to
emerge:
some customers will migrate to new modes of communication: we estimate that
35% of residential customers will have mobile Internet access in 2010, with average
revenue per active customer of EUR13 per month, which will include their usage of
P2P communication services (email, IM, etc.). We believe that half of the value of this
package in 2010 will stem from person-to-person communications on average;
–
the others will continue to use SMS: we expect SMS ARPU for these customers of
EUR4.2/month, roughly stable vs. the 2004 level, resulting from 1) the ongoing rise in
the number of users and the usage per person, 2) the price cuts, and 3) the migration
of some of the heaviest users to the “mobile Internet” mode.
–
In all, if we attribute 50% of the value of residential data packages to P2P
communications in 2010, the contribution of person-to-person communication services
comes out to EUR5.0 per month in 2010.
Our confidence is based on two primary factors:
the very gradual nature of the penetration of new handsets for Instant Messaging
and e-mail will avoid any abrupt movement;
–
the operators’ ability to gradually substitute SMS revenue by data access packages.
Operators have already begun to encourage the heaviest SMS users to opt for SMS
packages (e.g. O2 UK’s “bolt-on” SMS package: 400 SMSs for GBP11.99 per month;
Orange France’s packages, etc.); the certainty of revenue from the most intense users
is key, because they are the customers most likely to abandon SMS for e-mail or
Instant Messaging.
–
71
Mobile Operators
Chart 33: Messaging ARPU forecast (EUR/month)
6.0
5.0
4.0
3.0
2.0
1.0
0.0
2004e
2005e
2006e
2007e
2008e
SMS
2009e
2010e
Other
Unlimited packages: risks and opportunities
The unlimited pricing model represents the extreme end of the range of pricing options,
and is often seen in a very negative light. Operators are divided on the question:
in Spain, Switzerland, and Germany, operators are at this stage opposed to the
unlimited package. They prefer limited packages, even increasingly large packages
with decreasing prices per megabyte;
–
conversely, in Austria competition among mobile operators has led to the launching
of offers able to compete with ADSL: unlimited package at EUR29 per month.
Moreover, unlimited packages have been tested in Japan and Korea as well as by
Orange (Orange Sans Limite) and fixed-line ADSL providers.
–
The unlimited package does pose some risks, such as capping revenue and saturating
the network, leading to potential customer dissatisfaction and/or the need to invest
more than planned to expand network capacity, as is currently the case in Japan.
However, we do not believe the situation in Europe is comparable to Japan, because
data services are much less developed. Besides, there are a number of ways to limit
these risks: “fake unlimited” packages, like some ADSL offers, that fulfil the “unlimited
promise” for all “normal” customers but at the same time cap the usage of the heaviest
users.
The main advantage of the unlimited package is the clarity of the message sent to the
customer, along with the ability to make the unlimited aspect attractive to a target
clientele that outnumbers the heaviest users. This type of package has often turned out
to be more profitable than expected once the operator has been able to attract more
customers than just the critical core of heaviest users: see the examples of movies and
ADSL below.
Japan: a negative experience for a number of reasons
With the rollout of their 3G offerings, Japanese mobile operators launched unlimited
packages for mobile data. This was triggered by KDDI, the number two player, which
benefits from a unique technology (CDMA EV-DO), followed by NTT DoCoMo and now
Vodafone KK. These packages have been very successful: 1.3m subscribers won by
DoCoMo at the end of August 2004 and 2m targeted for the end of March 2005, driving
the adoption of 3G.
72
Mobile Operators
But the overall effect at this stage has been negative: data ARPU has contracted (see
Chart 34 below) and 3G networks have started to saturate, especially DoCoMo’s, in
Tokyo’s densest areas, forcing operators to increase capex (see the Exane BNP
Paribas study: “Tokyo visits: implications for European mobiles and Vodafone in
Japan”, 30 September 2004).
Chart 34: Data ARPU of Japanese mobile operators (JPY/month)
2 400
2 200
2 000
1 800
1 600
1 400
1 200
1 000
800
600
Q1 02 Q2 02 Q3 02 Q4 02 Q1 03 Q2 03 Q3 03 Q4 03 Q1 04 Q2 04 Q3 04
J-Phone
NTT DoCoMo
KDDI
Total
We believe that this phenomenon is specific to Japan and does not accurately predict
the effect that an unlimited offer would have in Europe, mainly because Japanese
mobile customers are heavy data users, both for e-mail and access to content. As a
result, many customers were attracted in just a few months by an unlimited data offer.
The market would respond much more slowly in Europe.
Movies and ADSL: two positive examples
Unlimited movie passes launched in the Paris region in France by several movie
theatre chains are an interesting example. The passes have generated additional
revenue, as more than 450k cards have been sold for a population of movie addicts
estimated at 150k. Unlimited high-speed ADSL Internet offers are another positive
example: they have generated new Internet uses and gradually won over low-ARPU
narrow-band subscribers.
The key lesson of unlimited movie passes and unlimited ADSL is that the profile of
65-80% of these customers mirrors the market’s average consumption, which includes
15-25% occasional users who pay much more for the unlimited offer than what they
would pay for limited offers that would suit them better. In addition, only 20-35% of
customers are heavy users that cause the operator to “lose” (see chart below).
73
Mobile Operators
Chart 35: Typology of “unlimited access” customers
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Unlimited cinema
Unlimited mobile
data
Assiduous
Unlimited ADSL
Regular
Occasional
The table below illustrates a possible business case of an unlimited mobile data access
package and shows that the revenue lost due to heavy users – assuming they account
for 25% of subscribers to the offer – is more than offset by the revenue gained on small
customers.
Table 29: The economics of an unlimited mobile data access offer
Customer Consumption before
breakdown
the unlimited offer
(%)
(Mb/month)
Heavy users
Regular users
Occasional users
Total / average
Price/Mb before
unlimited offer
Standard data
expense
(EUR/month)
Consumption with
Price of Invoice delta
the unlimited offer unlimited offer (EUR/month)
(Mb/month) (EUR/month)
25
50
25
100
40
16
0.3
0.6
1.0
30.0
24.0
16.0
200
80
32
25.0
25.0
25.0
(5.0)
1.0
9.0
100
49
0.5
23.5
98
25.0
1.5
Marketing usage instead of equipment
Operators are starting to understand the need to change the way they market mobile
multimedia offers. Historically, they had adopted a marketing model focused on selling
mobile handsets, so as to push penetration. This has led the sector to focus on getting
handsets into retail shops at attractive retail prices, via aggressive subsidies paid by
operators (e.g. in France, the UK and Germany). Operators communicated primarily on
the price and on the handset, and less on usage (voice or data).
This equipment marketing has strongly benefited handset manufacturers and was well
suited to sell a simple product, i.e. mobile voice. The usage of mobile voice was
naturally driven up due to the rise in penetration rates and the fixed-mobile substitution
trend. The shift to mobile multimedia means that operators need to change
progressively their marketing model towards those used in the entertainment world.
74
Mobile Operators
Mobile multimedia is a complex product, with multiple services (as many services as
potential suppliers). It is new (usage is different from the fixed-line Internet). Usage
must be stimulated regularly through promotion campaigns. As shown in the chart
below, this can be considered an entertainment product more than a leisure utility,
under which SMS and mobile voice are qualified.
Chart 36: Mobile multimedia service categories
Usage recurrence
Daily
SMS
Newspapers
Weekly
Video
Gaming
Monthly and up
Mobile
voice
TV
Fixed
voice
Entertainment
Mobile
gaming
Movie
theatre
Mobile
Video
Leisure utilities
MMS
DVD rental
MP3
download
Internet
Mobile
Infotainment
Mobile
Music
CD purchase
Exhibitions /
Concerts
Planned
Conscious
Impulsive
Usage opportunity
The marketing expenses of the entertainment industry (movies, video games, music,
etc.) often represent 20%-30% of revenue. These expenses are focused on the most
promising products (blockbusters, mass-market licences) and are not spread-out over
all products / artists in the catalogue. Entertainment marketing costs are very high
proportionately compared with what mobile operators are used to spending.
Our interviews with service providers (AGI, Haiku, Universal Mobile, Citivox) and
operators (in particular, feedback from Vodafone subsidiaries on the launch of live!)
have confirmed that the market will only take off if marketing is ongoing. Marketing
spend is spread too wide over the entire range of services to generate successful
usage. The experience in logo and ring tone downloads shows that a regular
stimulation of the client base is necessary to avoid a rapid decline of revenue.
The results of operators which have focused their marketing efforts on equipping their
customers with multimedia handsets and who have launched a very rich but not very
segmented service offering are generally poor:
in terms of equipment: the clients with the highest multimedia revenue potential,
i.e. the youngest, are generally under-equipped, while the 35+ years old are
over-equipped in multimedia handsets;
–
and in terms of usage of multimedia services: the lack of focus in the recruitment of
mobile multimedia clients leads to a very low proportion of regular users (around 5%).
–
75
Mobile Operators
Some operators have adopted an alternate marketing model, which relies on:
1) pushing a limited number of services focused on specific market segments (gamers,
students, etc.) and 2) putting content partners in charge of the stimulation of the client
base (management of the product line-up, promotions, games, events, etc.). Those
operators have chosen a "shopping mall" model. The operator acts like a general store
for mobile content, and gets a commission of around 15% on each sale. The service
provider (and not the operator) is in charge of marketing its services.
The interviews we conducted with mobile operators and content providers confirm that
the “shopping mall” operators have achieved a better commercial performance than
“executive producers”. Looking at a specific mobile multimedia service offered by two
different national mobile operators, some service providers experience a 30-50% rise in
the number of active users (at least once a month) and in usage of the service for
operators which have adopted a “shopping mall” approach, i.e. with efforts focused on
a limited number of services and customer segments, leaving content providers in
charge of the operational marketing. Operators will have to learn to delegate most
entertainment services and focus on marketing two or three services at most.
76
Mobile Operators
Corporate data: a big niche
We value the market opportunity of corporate data services at about EUR4.6bn in 2010
in the five largest countries of Europe. This would be equivalent to just 5% of the
mobile market in those five countries, but would account for more than 20% of sector
revenue growth from now until 2010.
The corporate data market has two major components: 1) mobile services for
employees, including remote PC access via data-cards and Blackberry-type email; and
2) machine-to-machine applications.
Datacards, WiFi and Blackberry: EUR2.4bn in 2010e
According to our estimates, Europe currently has about 600K customers equipped with
3G datacards and Blackberry, or less than 0.2% of total mobile subscribers, with ARPU
estimated at about EUR50 monthly - based on an estimated average of 3G data-card
customers (ARPU of about EUR70) and Blackberry customers. On a full-year basis this
means revenue below EUR500m, hence a blended ARPU contribution under
EUR0.2/month.
For 2010, we assume 25% penetration of the 10% of subscribers that are corporate
customers, hence a total of 5.8m users and an ARPU of EUR35, which would mean
EUR2.4bn in total revenue in 2010e (again, in Europe’s five largest countries), or a
contribution a little over 2% of 2010e sector revenue and about EUR0.9/month in
blended ARPU.
2004 was the year that both data-cards (with UMTS-GPRS-WiFi cards) and Blackberry
took off:
In May 2003, Vodafone had only 50K data-card customers in all of its subsidiaries;
in June 2004, according to our estimates, only 2% of corporate subscribers in all of
Vodafone’s European subsidiaries had data-cards – and probably less than 1% of
corporate customers for all operators combined;
–
In early 2004, there were only a million Blackberrys in service worldwide, including
fewer than 200K in Europe, or fewer than 1% of corporate subscribers in Europe.
–
For 2005, we expect these applications to begin making a significant contribution to
mobile operator revenue.
Blackberry: a million users at end-2005e
By late 2004, Research In Motion’s (RIM) Blackberry was being marketed by almost all
major European carriers. The table below shows the rise in Blackberry’s potential
customers in 2004, reaching 200m by year end, according to our estimates.
Worldwide, RIM’s Blackberry sales surpassed 1 million early this year, and the installed
base expanded by 317K in the last quarterly figures reported, to 1.657m at end-August
2004. RIM does not provide details on the number of Blackberrys in Europe, but 16% of
its revenue for FY03/04 (ending in February 2004) came from outside the USA and
Canada, i.e. mostly Europe (there is no Blackberry in Japan).
77
Mobile Operators
Table 30: Operators marketing Blackberry in 2004
Dates
Operators launching Blackberry in
the period
End-2003
mmO2
T-Mobile
64
May 2004
Orange UK
Vodafone Sweden, Ireland
82
Sept. 2004
Dec. 2004
Total subscribers of operators
marketing Blackberry (millions)
Vodafone UK, Germany, Italy, etc
Orange France
KPN Mobile NL
Mobistar
KPN E-Plus, Base
183
200
Little other information is available from carriers: 50K Blackberry for mmO2 as of
end-March 2004 (vs 23K at end-March 2003) and 272K for T-Mobile in Europe and the
USA as of end-June 2004 (vs 129K at end-June 2003).
We therefore estimate the number of installed Blackberrys in Europe at about 400K as
of end-2004e, vs 150K at end-2003.
Based on these figures and an estimated ARPU of EUR20 per month, the Blackberry’s
impact on the blended ARPU of carriers concerned would come to about EUR0.05 as
of end-2004 (or between 1% and 1.5% of total data ARPU for these operators).
By the end of 2005, we expect around 1 million Blackberry users in Europe, with a
contribution to average ARPU of EUR0.10, or about 2% of total data ARPU.
However, Blackberry sales may encounter a major stumbling block. RIM is currently
involved in a lawsuit regarding the use of a patent. As a result, Blackberry could be
banned from the US and even European markets.
Data-cards and WiFi: around 2% of corporate revenue in 2004e
Almost all operators have brought out data-cards giving PC-equipped customers
mobile access to Internet, Intranets and e-mail, as well as any of the company’s
mobile-accessible applications.
Most cards now include all the standards available: GPRS, UMTS and WiFi. This is
notably the case for Vodafone, T-Mobile, mmO2 Germany, etc.
Access tariffs are presented as subscription packages by volume (depending on the
number of Mbytes), by length of time (by hour) or as unlimited offers.
The table below shows that one Mbyte is generally billed between EUR0.1 and EUR0.6
(excluding tax) depending on countries and the size of the bundles, and the hour is
billed between EUR1 and EUR5. The price of packages including unlimited usage in
terms of time and at least 500 Mbyte of traffic per month is between EUR70 and
EUR100 per month.
Operators have provided little information regarding the number of customers equipped
with data-cards and related revenue. Vodafone said that it had 50K data-cards in May
2003 and said in November 2004 that it had sold more than 100K 3G connect cards in
13 countries, i.e. around 0.10% of customers in those countries. Vodafone Italy, in
particular, stated that its number of data-card customers had risen from 10K at
end-June 2003 to 30K at end-June 2004. This represents 0.14% of Vodafone Italy’s
total subscribers and 2.3% of its corporate subscribers at end-June 2004.
78
Mobile Operators
Assuming ARPU of EUR70 for these products, their contribution stands at around
EUR0.10 per month on diluted ARPU, i.e. a little over 2% of corporate revenue and
0.03% of total service revenue.
Table 31: Analysis of a sample of 3G corporate offerings
Country
Operator Plan name
France
SFR
Orange
UK
Germany
Mbytes Hours
Mobile Connect Card 3G
Business Everywhere
Vodafone Mobile Connect Card 3G
T-Mobile
3G
T-Mobile
DataConnect
E-Plus
UMTS
EUR / EUR / incremental
min.
Mbyte
0.167
0.104
0.083
0.076
0.073
0.042
0.063
0.063
0.063
5
10
20
30.0
50.0
70.0
0.100
0.083
0.058
0.067
0.033
5
75
450
1,000
15.3
30.7
69.1
115.0
3.07
0.41
0.15
0.11
0.219
0.103
0.083
91.3
0.09
10
50
150
500
2
10
30
8.6
30.2
60.4
94.8
0.86
0.60
0.40
0.19
0.072
0.050
0.034
50
150
500
10
30
100
30.0
60.0
95.0
0.60
0.40
0.19
0.050
0.033
0.016
8.5
25.0
50.0
0.85
0.50
0.33
2
10
30
100
8.6
25.8
51.7
86.2
0.86
0.52
0.34
0.17
0.071
0.043
0.029
0.014
10
45.0
0.75
0.075
15.0
25.0
35.0
50.0
1.00
0.50
0.47
0.40
Vodafone Connect Card
60
Spain
Vodafone Connect Card
15
50
75
125
0.54
0.30
0.10
0.045
0.025
0.30
0.10
0.025
0.008
0.41
0.25
10
50
150
500
Italy
EUR / incremental
minute
20.0
25.0
40.0
55.0
70.0
10
50
150
Online Time / Volume
EUR /
Mbyte
2
4
8
12
16
1,000
Vodafone Vodafone-Time / Volume
O2
500
500
500
500
500
Monthly fee
(EUR ex VAT)
0.43
0.26
0.10
0.036
0.022
0.008
0.29
0.40
0.30
Machine-to-machine: EUR2.2bn
Mobile machine-to-machine applications have barely got off the ground. By 2010, we
forecast revenue of around EUR2.2bn in the five large European countries, based on a
forecast of 60 million SIM cards, with each generating EUR3/month in ARPU.
The estimated 60 million SIM cards corresponds to a third of the 180m objects that
could be equipped in the five large European countries. We calculate this figure based
on an analysis of France, which gives 36.5 million objects that can be equipped (to be
compared with a population slightly over 60 million inhabitants) — see table below. The
main contributors expected include vehicles (passenger cars, cars used by
professionals, trucks, etc. for a total of 16m or nearly half of the vehicles taken into
account), meters (water, electricity, etc. for 12m or 30% of the total number of meters),
alarms, etc.
The factors underpinning our ARPU estimate of EUR3 are as follows:
For vehicles, ARPU can be estimated by comparison with the life-time of the vehicle
and its total cost: over 10 years, ARPU of EUR3 per month represents EUR360,
i.e. about 1% of the purchase price of the vehicle;
–
79
Mobile Operators
For fixed machines, notably meters and alarm systems, ARPU can be compared to
the savings versus a fixed line, which would cost about EUR13 excl. VAT per month in
Europe;
–
In general, the operator will bill an amount that compares to a monthly management
charge per installed SIM card, rather than base it on the usage generated by the SIM
card on the network, which will be very low.
–
Table 32: Potential market of communicating objects in France
Objects
Number of
objects (000)
Long-term
penetration (%)
Long-term communicating
objects (000)
42.0
34.8
28.1
6.4
5.7
5.0
4.1
4.0
1.2
0.9
4.4
30
8
42
63
16
18
8
30
30
30
31
12.6
2.8
11.8
4.0
0.9
0.9
0.3
1.2
0.4
0.3
1.4
Water/gas/electricity meters
White goods
Passenger cars
Professional vehicles
Set-top boxes
Lighting
Gameboy
Alarm systems and home automation
Photocopiers
Motorcycles
Other
TOTAL
136.5
80
36.6
Mobile Operators
New segments: low ARPU but solid margins
Last year’s note focused on operators’ capacity to develop existing customer voice
traffic by migrating them from prepaid to post-paid and then to bigger and bigger
subscription packages. We still believe in this growth potential (see pages 47-62), but
think that operators will also invest in penetrating new segments of the population,
which do not yet have mobile phones, mainly children (under 15) and elderly people
(over 65).
We value additional revenue potential in these segments at slightly over EUR4.9bn out
to 2010, which represents 25% of the growth expected over the next six years. This
corresponds to the acquisition of 22m customers in the under 15 and over 65 age
ranges, in the five large European countries.
Low ARPU does not necessarily mean narrow margins: by strongly differentiating their
service, we believe that operators will be able to incur lower costs on low ARPU
offerings (adapted acquisition costs and customer services, lower variable traffic costs).
Untapped growth potential in children and over 65s
Average mobile phone penetration in the total population of the five largest European
countries was 85% at end-2003. Nevertheless, there are major disparities. Last year,
we analysed the catch up potential in certain regions. There are also disparities by age
range. The segments in which penetration is lowest include:
children: under 35% penetration in Europe’s five biggest countries among those
under 15 and less than 20% among those under 10. The under 15 age range on
average represents 15-20% of the population in these countries;
–
the elderly: less than 50% penetration among those over 65 and less than 20%
among those over 70. The over 65s also account for 15-20% of the population.
–
Raising the penetration rate among children and the elderly to 60% and 75%,
respectively, by 2010 would add another 13 million and 9 million subscribers,
respectively. This represents two-thirds of the subscriber growth that we forecast for
2004-10e (33 million additional subscribers, i.e. 1.9% pa over the period). We estimate
that ARPU on customers under 10 and over 65 could reach EUR15/month—over half
of the ARPU for these customers is guaranteed by incoming calls—and that of
customers 10-14 years old could exceed EUR20/month vs roughly EUR30 for other
subscribers. Our forecast of EUR4.9bn in additional revenue is based on the
assumption of EUR15 in ARPU for all customers under 15 and over 65.
Several of the operators we interviewed, notably in the countries with the highest
penetration rates, identified children and elderly people as essential drivers in boosting
the number of SIM cards (excluding machine-to-machine). The 5-14 year old segment
has the highest medium-term growth potential: while 11-14 year old penetration
exceeds 60% in Belgium, it stands at about 30% in France. Very few children under 10
have mobile phones (10% in the UK, 5% in Belgium, etc.).
Mobile phone adoption by children can be stimulated: for pre-adolescents by the need
to keep in touch with friends, and for the youngest, by parents’ need to be in touch with
their child. Specially-adapted products for the youngest are still rare, but some have
made their appearance. Hence the “MyMO” in Belgium, a handset designed for
children from four to ten with only three buttons and five pre-recorded numbers. The
handset’s slogan is “my parents’ first mobile phone”.
81
Mobile Operators
The over-65 segment also has huge catch-up potential. As we noted last year, the
ageing of the population will naturally boost penetration of the over-65 age group.
People in this age range do not necessarily feel the need for a mobile phone, but
operators can stimulate this need thanks to offerings that focus on two key
characteristics: easy access and low usage.
Chart 37: Subscriber growth in the five largest European mobile markets (m)
350
300
250
200
150
100
50
0
2003
2004e
2005e
15-65
2006e
2007e
2008e
<15
2009e
2010e
65+
Operators also try to develop their clientele within families:
Mobistar Family offer in Belgium, launched in August 2002: one subscription, one
bill for the entire family and calling time split between two or three users. The monthly
cost is EUR67;
–
Vodafone “ZweitKarte” offer in Germany: the main subscription includes an
additional SIM card without a telephone, and one bill for the two subscriptions. There
are no fixed subscription costs but a minimum of EUR6 per month for 20 minutes. This
offer has been very successful. In November 2004, Vodafone cited the offer as the
main reason for ARPU dilution in Germany over the past months. SFR markets this
offer in France under the name “SFR accès”;
–
BT Mobile offer in the UK: this includes specific conditions making it possible to
include the mobile minutes of each member of the family on a single bill;
–
A German operator we interviewed believes that 2005 will be the year that offers
like “Family VPN” will be launched, i.e. offers identical to those made to companies
where calls between family members can be made via short numbers at special tariffs,
or even free-of-charge like T-Mobile USA.
–
Low cost offers lead to positive free cash flow
Operators have the leeway to establish low cost offers making it possible to generate
significant free cash flow on individual customers with low ARPU.
Big operators, notably the leaders, could be tempted to put off the development of low
cost offerings because of marketing issues, i.e. the concern that their existing offers will
be cannibalised by cheaper offers, and that the new offers will spoil the brand’s image.
Nevertheless, a certain number of operators are expected to move in this direction,
taking both offensive (developing new market segments) and defensive stances. In
fact, a certain number of MVNOs have rushed into the no frills segment or expect to do
so, such as Telmore in Denmark and Tele2.
82
Mobile Operators
The main areas in which savings can be generated are the following:
Acquisition costs: if a SIM card is sold with no handset subsidy, acquisition costs
can be cut by roughly EUR100 (except in countries where there is no subsidy,
e.g. Belgium and Italy). Moreover, for specific, community-orientated offerings, it is
possible to use inexpensive alternative distribution networks, such as newspaper
stands as in the case of Bouygues Telecom’s Universal Music Mobile offer. mmO2 has
taken this approach to its extreme with its MVNOs Tesco in the UK and Tchibo in
Germany. These two partners focus on customers with lower ARPU than the operator
itself, with acquisition costs below the market average, thanks to their distribution
networks;
–
Network opex: less consumption by the customer means lower interconnection
expenses and less network capacity consumption;
–
Customer relationship costs: customer services can be adapted, with more limited
access (low priority, forwarding to self-care web sites) or paying access (as is already
the case for hotlines of Internet service providers).
–
Assuming SAC 50% below average and opex 15% below average, a customer can
generate positive FCF as from ARPU of EUR18 per month. This corresponds to a
monthly expense of EUR9 per customer per month and an equivalent amount from call
termination revenue.
Certain operators interviewed have a set position on this point. They believe that there
is no “minimum ARPU” for customers that can be added to the customer base and that
it is possible to adapt a business plan to all types of ARPU by adjusting related costs,
notably acquisition and retention costs. We were given the example of an offer
developed with a bank which generates only EUR8 in monthly ARPU, but is profitable
thanks to very low marketing costs.
Chart 38: Free cash flow pa and per customer, according to ARPU and assuming a reduced cost base
FCF (EUR pa and per customer)
200
Monthly ARPU
Minimum
breakeven
EUR18
150
100
FCF margin: 39%
FCF margin: 27%
50
FCF margin: 9%
0
EUR5
EUR10
EUR15
EUR20
-50
-100
-150
• Model 50% termination/50%
incoming: EUR9 of ABPU
• Model 30% termination/70%
incoming: EUR5.5 of ABPU
* OpFCF breakeven: positive FCF/customer from year one, excluding lifetime value.
83
EUR25
Monthly ARPU
EUR30
EUR35
Arthur D. Little presentation
Founded in 1886 in Boston by a pioneer chemist and MIT professor, Arthur D. Little
was the world’s first professional management consulting firm. Ever since its creation, it
has proved able to evolve and adapt with a constant focus on answering our clients’
needs and challenges and creating true partnerships with business leaders.
Together with its partners Altran Technologies and Cambridge Consultants Ltd. The
firm has over 17.000 professionals at your disposal in more than 30 offices world-wide.
Arthur D. Little’s global leadership in management consulting is embodied both by its
size and global presence, and by its innovation methodology, demonstrated by
numerous standard-setting publications.
Arthur D. Little completes over 2000 projects every year serving the world’s leading
companies. This rate of activity has enabled Arthur D. Little to gain strong experience
and a well established know-how which is highly valued by our clients.
The pioneer spirit of its founder is still a strong feature of Arthur D. Little today. Arthur
D. Little people bring curiosity, creativity, integrity and analytical rigor to every job,
which means fast and dramatic performance improvements. Our constant objective is
to create value for our clients, placing innovation at the heart of our recommendations
and fostering the use of new technologies and next generation processes.
Arthur D. Little teams work both with major multinational groups and smaller
growth-driven companies (in the Biotech industry for instance). The firm has conducted
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by our client’s loyalty: approximately 70% of our worldwide revenue is generated by
projects for companies that have been our clients for over three years.
With more than 500 professionals, the TIME practice (Telecommunications,
Information, Media and Electronics) has unrivalled expertise in strategic and
technological assistance of leading telecom players. Arthur D. Little helps major
telecom operators, government agencies and equipment suppliers in the completion of
their most sensitive projects. The practice has gained a true and precise knowledge of
the sector and of its main players.
During the last few months, Arthur D. Little has assisted several major mobile telecom
operators in the world in defining next generation mobile data offers and services.
For further information consult the Arthur D. Little website at www.adl.com.
84
Exane in a nutshell
Exane was founded in 1990. It is the number one French broker and among the top
European independents. The company specialises in research and broking both in
equities under the trade name of Exane BNP Paribas and equity derivatives under the
name of Exane. An asset management subsidiary, Exane SAM, was created in 2001.
Exane works primarily with institutional clients world-wide (pension funds, fund
managers for banks and insurers, and hedge funds) and markets its derivatives
products to a broader pool of clients comprising private asset managers and
investment advisors.
Exane’s expertise in research, sales and execution allows it to provide clients with
value-added service.
Exane BNP Paribas’s equity research team covers nearly 400 European companies,
200 of which are French.
Our research regularly wins coveted financial awards. Exane BNP Paribas was voted
the best research team and best in French stocks at the Grands Prix de l’Analyse
Financière, organised by the French business journal Agefi in December 2004. We
were also voted best French research team by Institutional Investor and came in
second in the Extel poll.
In April 2004, Exane and BNP Paribas concluded a three-part agreement:
operational: BNP Paribas granted Exane sole control over equity broking in Europe.
This business is carried out under the trade name Exane BNP Paribas.
–
shareholding: BNP Paribas took a 40% stake in Verner Investissements, a finance
company made up of Exane’s top managers and experts. This stake is expected to
climb to 50%, although the partners will retain 60% of the voting rights and hence
control.
–
financial: BNP Paribas has contributed financial assets and balance sheet support,
which will underpin the expansion of Exane’s business lines.
–
Exane’s 750-strong workforce operates from offices in Paris, London, Frankfurt,
Geneva, Milan, New York, Singapore and Zurich.
For further information, log on to our web site at www.exane.com
85
Commitment of Transparency on Potential Conflicts of
Interest
Exane is independent of BNP Paribas (BNPP) and the agreement between the two companies is
structured to guarantee the independence of Exane's research, published under the brandname « Exane
BNP Paribas ». Nevertheless, to respect a principle of transparency, we separately identify potential
conflicts of interest with BNPP regarding the company/(ies) covered by this research document.
Exane
Questions
Answers
1. Investment banking
Pursuant to NASD Rule 2711(h) (2) (A) (ii) :
- Has Exane managed or co-managed in the past 12 months a public offering of securities for
the subject company/ies?
- Has Exane received compensation for investment banking services from the subject
company/ies in the past 12 months or expects to receive or intends to seek compensation for
investment banking services from the subject company/ies in the next 3 months?
NO
NO
Pursuant to Clause 3-5-12 of the General Regulations and clause 5 of the Decision n° 200201 of the French Conseil des Marchés Financiers:
- Has Exane been acting for the subject company/ies either as lead-manager or member of
an underwriting or selling group for a primary market issue, or as advisor or sponsor for a
tender offer in the past 12 months?
NO
2. Corporate links
Pursuant to NASD Rule 2711(h) (3):
- Does the research analyst principally responsible for the preparation of this report or a
member of his/her household serve as an officer, director or advisory board member of the
subject company/ies.
NO
3. Analyst's personal interest
Pursuant to NASD Rule 2711(h) (1) (A):
- Does the research analyst principally responsible for the preparation of this report own a
financial interest in the subject company/ies?
NO
4. Significant equity stake
Pursuant to NASD Rule 2711(h) (1) (B):
- Does Exane own 1% or more of any class of common equity securities of the subject
company/ies as of the end of the month immediately preceding the date of publication of the
research report or the end of the second most recent month if the publication date is less than
10 calendar days after the end of the most recent month?
Pursuant to General Decision n° 2002-01, clause 5 of the French Conseil des Marchés
Financiers:
- Does Exane own a stable shareholding in the subject company, above the legal threshold
defined in article L 233-7 of the French Commercial Code?
NO
NO
5. Disclosure to Company
Pursuant to General Decision n°2002-01 clauses 5 and 7 of the French Conseil des Marchés
Financiers:
- Has this report been presented to the subject company/ies prior to its distribution?
NO
6. Additional material conflicts
Pursuant to NASD Rule 2711(h) (1) (C):
- Is Exane aware of any additional material conflicts of interest with regard to the distribution
of the research?
NO
Source: Exane
BNP Paribas
Bouygues
As of 31/12/2004 BNPP owns 1.7% of BOUYGUES
BT Group
As of 31/12/2004 BNPP owns 2.1% of BT GROUP PLC
Telefonica
As of 31/12/2004 BNPP owns 1.6% of Telefonica SA
France Telecom
BNP acted as joint bookrunner for the accelerated placement of France Telecom shares and for the issue of Oceane. (09/2004)
Wanadoo
Advisor of France Telecom in the tender offer by FT to acquire all of the outstanding shares in Wanadoo (03/2004)
Advisor of France Telecom for the squeeze out (OPRO) of Wanadoo (06/2004-07/2004)
Eircom
Co-manager for the IPO (03/2004)
Pages Jaunes
Joint bookrunner and joint global coordinator for the IPO (06/2004)
Source: BNP Paribas
86
This research is produced by Exane S.A. and/or its affiliates ("Exane") on behalf of itself and is solely for the private information of the recipients.
Exane is not soliciting an action based upon it, and under no circumstances is it to be used or considered as an offer to sell, or a solicitation of
any offer to buy.
All information contained in this research report has been compiled from sources believed to be reliable. However, no representation or warranty,
express or implied, is made with respect to the completeness or accuracy of its contents, and it is not to be relied upon as such. Opinions
contained in this research report represent Exane's current opinions on the date of the report only.
While Exane endeavours to update its research reports from time to time, there may be legal and/or other reasons why Exane cannot do so and,
accordingly, Exane disclaims any obligation to do so. Recipients should be aware that Exane, any shareholder or affiliate of Exane, and any of
their officers, directors or employees (or members of their households) may (a) have a position in, or be interested in, transactions in any
securities directly or indirectly the subject of this report ; (b) have received in the past 12 months or seek in the next 3 months compensation for
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(d) have managed or co-managed in the past 12 months a public offering of securities for the subject company/ies, (e) have been acting for the
subject company/ies either as lead-manager or member of an underwriting or selling group for a primary market issue, or as advisor or sponsor
for a tender offer in the past 12 months, (f) have additional material conflict of interests, (g) have corporate links or have a financial interest with
the subject company/ies. Recipients should be aware that Exane, any shareholder or affiliate of Exane, may make a market in the securities
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This report is provided solely for the information of professional investors who are expected to make their own investment decisions without
undue reliance on this report and Exane accepts no liability whatsoever for any direct or consequential loss arising from any use of this report or
its contents.
This report may not be reproduced, distributed or published by any recipient for any purpose. Any United States person wishing to obtain further
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report in the United States and, subject to the above, accepts responsibility for its contents. This research report is approved by Exane Ltd,
regulated by the FSA, in connection with its distribution in the United Kingdom.
BNP PARIBAS has acquired an interest in VERNER INVESTISSEMENTS the parent company of EXANE. VERNER INVESTISSEMENTS is
controlled by the management of EXANE. BNP PARIBAS’s voting rights as a share holder of VERNER INVESTISSEMENTS will be limited to
40% of overall voting rights of VERNER INVESTISSEMENTS.
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Mobile Operators - Arthur D. Little

Transcription

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