In the first of a two-part article examining how operators can manage the next phase in their development, Keith Dyer analyses how operators got to their current position, and outlines the dilemma they are in. In the next part of the article, industry thinkers themselves give their views on where the industry should go from here
The mobile industry has arrived, quietly, unwontedly, eyes wide shut, at a tipping point. Many mobile operators don't know where to go next, and the predicament is entirely of their own making. They will tell you different, but the problems are self-inflicted.
The questions are, what is the problem, how did they get there, and how are they going to get out of it?
PART ONE – THE SET UP
Let's look at what a mobile operator actually is, at how it makes its money. Operators buy customers by giving them expensive phones for free, or at little cost. They then make back this cost of acquisition by charging monthly fees over a set contract term. After a certain period, although there are ongoing customer management costs, an operator starts to make money on a customer.
The prepay model alters this slightly. Operators give the phones to users at slightly higher prices, and then charge customers a set amount per call. This model carries less certainty of income, but the subsidy of the equipment is lower.
For a long time, this model worked. It still works, just about. Operators provide calls at a margin, and attract additional customers by tinkering with deals and offers designed to attract certain types of user. Orange even went so far as to tell its customers that it was going to label them as a type of animal, and give them a package to fit. Virgin has just decided to call its potential users Addicts. Personalisation? Not so much.
That is the reality, but if you asked most mobile operators if this summed up their businesses, they would reject it utterly as way too reductive. The mobile data channel, they would say, gives users the potential to access a wide variety of different services, which add value to their subscription and utility to users.
Further, mobile operators are brands with the potential to be trusted providers of a range of value added services, from music downloads to payments. Mobile operators are mobile media companies, delighting their customers with a range of targeted services – from video to messaging.
So what happened? Two things.
First – competition. MVNOs and other operators began to offer ever greater bundles of voice and text, in some markets giving away huge volumes of minutes and texts before they could start making money. So the game became about volume. Customer acquisition, net adds, became key. Build the customer base, and then build the revenues, went the thinking.
Secondly – massive numbers of DSL and cable broadband lines happened. Consumer expectation of the online, internet experience changed. Mobile, used to being the cool kid in the classroom, was suddenly sitting at the front in thick spectacles and braces, eating on its own in the lunch hall. Mobile operators, though, had a plan to get with the popular crowd again. Play the cool kids at their own game. 3G. HSPA. HSPA+. True Mobile Broadband would enable operators to offer users a host of services – and the users would pay a small amount per month, or per transaction, for each of these services, and the operators would grow the monthly revenues per user incrementally. ARPU became the goal. So they built the 3G and the HSPA networks, and they filled up their mobile websites with content, and games, and promises of mobile email, and video. And the users hated it. The users knew it was nothing like broadband, it was nothing like the experience of browsing the web, of finding and using services that made sense to you. Of interacting with other users and providers.
There was a tiered hierarchy of content. Users got a look at web-like, and web-lite, content. On-device portals highlighted chosen services – Yahoo!, or Google, or EBay. Then the operators' own web portals hosted in-house services as well as third party applications and content. And then, thirdly, users could even enter a url in an address bar and browse off-portal, or off-deck.
And still, people didn't like it. They didn't like that they didn't always know how much it would cost them. They didn't like that they couldn't take their current email account and get access to it from their mobile. They didn't like having to stick to the content offered, or suffer a truly wild experience in the "proper internet". And the 3G networks, those glistening, wide open roads to the future, remained empty.
PART TWO – THE STING
So mobile operators had a choice to make. And some of them started to think that it would make sense to get people using data services, even if they weren't paying for them according to their level of use. Instead, they would pay a flat fee, much as they do for their home broadband, or for their other mobile services, and for that they would be allowed to go online whenever they liked. And find whatever they liked.
Operators even went to some effort to make the off-deck experience not so terrible.
They invested in faster and wider networks. They invested in content adaptation, device recognition, traffic prioritization and shaping. They invested in local caching and in data compression, in improved customer service support and user set-up. They did all this to protect their brand, and to provide users with a better experience.
And, slowly, the users liked it. Driven at first by external devices such as PC Cards and then USB dongles, then by a range of innovative handsets, users began to get it. Slowly at first, and then quickly, data usage grew.
The operators now had fuller networks, higher data usage, and cool handsets, but were they making any more money per customer? Not really. They are running to stand still.
Ovum states that even in mature markets such as Western Europe, the slowest growing region between 2008 and 2014, user growth in laptop access over the next five years is set to reach 747%, and 918% in handset access.
Yet, worryingly, Ovum says, "the growth of usage may be hard to justify at a business case level, as revenues will not rise at anything like the same level."
"Several operators have touted the idea of plugging the ARPU decline with value added services, yet we are yet to see anything sufficiently compelling in either the laptop or handset space.
"Evidence from other broadband markets suggests that banking on such revenue to make business cases fly can be extremely dangerous."
Suddenly, there is the dreadful realisation that operators stand on the cusp of ceding control of the profitable services on their network.
Worse than this, the networks were filling up with traffic, meaning that if operators wanted to keep users happy, they were going to have to invest in even more infrastructure.
Even worse, although cost-efficiency is vital, one of the few differentiators outside of services is on network quality, perhaps offering class of service and prioritisation to customers. And that requires further investment in the tools to enable it.
So the linear model looks broken, unless you want to settle down as a low growth utility. What, they are asking themselves, are they going to do next?