The mobile data challenge - Economist Intelligence Unit [PDF]

The mobile data challenge A report from the Economist Intelligence Unit Sponsored by InnoPath

The mobile data challenge

Contents

1

Preface

2

Introduction

3

A focus on content and applications

5

Efficiency is paramount

7

Keeping the customer satisfied

9

Conclusion

10

Appendix: Survey results

11

© Economist Intelligence Unit Limited 2010


Preface

The mobile data challenge is an Economist Intelligence Unit research paper, sponsored by InnoPath. The Economist Intelligence Unit’s editorial team executed the survey and wrote the report. The findings and views expressed in the report do not necessarily reflect the views of the sponsor. Iain Morris was the author of the report and Katherine Dorr Abreu was the editor. Mike Kenny was responsible for layout and design. Our thanks go to all survey respondents for their time and insight. February 2010

2



Introduction

S

ceptics have long doubted whether mobile data services can deliver big, new profits for service providers. There is no question that revenue from global mobile telecommunications is expanding, thanks to the adoption of mobile data services worldwide. Yet many providers are still unsure whether data services will help them to increase profits significantly. In the absence of fresh thinking, service providers are focusing on cutting costs. But this is unlikely to be sufficient to maintain profits, let alone increase profit margins. In a survey of mobile-phone operators conducted by the Economist Intelligence Unit and sponsored by InnoPath, only a minority (44%) of respondents say that growth in revenue from mobile data services will make up for a decline in their company’s revenue from voice services over the next five years. Twenty-four percent expect data services merely to offset a decline in their mainstream voice business, while another 25% say overall revenue will decline despite the rapid growth of data services. Increasing revenue from these services is hard enough. Actually boosting profits from data services will entail major changes by mobile-phone operators in areas such as content and application development, pricing strategy and network development. It is also likely to require further improvements in efficiency, identification of new revenue sources and an even sharper focus on the customer. Data* spurs mobile revenue growth worldwide Global mobile telecoms services revenues (US$bn) 800

Data

Data as % of total

Voice

40

Data as % of total

700

35

600

30

500

25

400

20

300

15

200

10

100

5

0

2005

2006

2007

2008

2009e

2010e

2011e

2012e

2013e

2014e

0

* Data revenue includes messaging. e Estimate. Data source: Pyramid Research.

3



Who took the survey? A total of 197 executives in the mobile communications industry took part in the survey. They are based worldwide: 30% in the Asia-Pacific region, 28% in North America, 26% in Western Europe, and the remaining 16% in Latin America, the Middle East and Africa, and Eastern Europe. They represent a wide range of company size: 30% are in companies with annual revenue of US$500m or less, 14% with revenue of US$500m to US$1bn, 18% from US$1bn to US$5bn, and 38% with revenue of US$5bn or more. Their companies offer a wide variety of product lines, both consumer and business, wireless and wireline. The panel is very senior: 43% hold C-suite or equivalent positions, another 24% are senior vice-presidents, directors or heads of business units, and the remaining 33% are other managers. Respondents carry out a range of functional roles, including marketing and sales (41%), strategy and development (37%), and general management (27%). All companies offer wireless services, but provide other services as well Which of the following product lines does your organisation offer? (% respondents)

Wireless data 88

Wireless voice 85

Business internet (T1, T2, etc) 63

Voice over IP (VoIP) 57

Landline telephony 52

Residential internet (eg, dial-up, ISDN, cable modem) 48

In-home entertainment (TV, movies, etc) 30 Source: Economist Intelligence Unit survey, December 2009.

4



A focus on content and applications

P

erhaps the biggest transformation facing mobile operators relates to the development of content and software applications for phone users. Some 47% of survey respondents say this is an area on which they will focus their efforts in the next five years. Meeting the threat of commoditisation with revenue-generating content and apps Over the next five years, in which areas do you think your company will focus its efforts? Select up to three. My organisation will focus on: (% respondents)

Improving operational efficiency 49

Developing revenue-generating content and applications to avoid over-reliance on traffic revenue 47

Reducing churn by addressing customer satisfaction 43

Investing in next-generation networks such as WiMAX and LTE 39

Partnering with developers to expand our application/content offerings 35 Source: Economist Intelligence Unit survey, December 2009.

But it will be tough to make money from content and applications. Inconsistencies in the survey findings suggest that operators’ strategies in this area are in their infancy. Most mobile-phone operators are investing heavily in next-generation networks rather than developing and selling mobile-phone applications. Fully 60% of respondents say their companies are building next-generation networks—third- or fourth-generation (3G or 4G) systems—mostly to meet customer demand for new services. Mobile TV and gaming require 4G networks for optimal operation, yet these services rank low in the survey as potential revenue drivers over the next five years. Simple web browsing, e-mail and messaging, and social media (such as Twitter) are the services most likely to spur revenue growth in this period, according to the survey. But these services are already in widespread use, and typically available for free (apart from the connection fee). Furthermore, they can be delivered to customers quite satisfactorily using 3G networks, which have already been deployed by most operators in developed countries. How, then, will next-generation networks benefit operators? Respondents seem to think that the 5



development of enhanced browsing, messaging and social media services will enable them to sell advertisements and thus generate profits. More than 60% of respondents say that advertising will become an important source of revenue in the next five years. Operators must also decide how to deal with the challenge of firms such as Google and Apple in the development of content and applications. Forty percent of survey respondents say competition from such “non-traditional rivals” is a significant problem facing operators. In the past, operators tried countering this threat by preventing customers from visiting certain third-party sites—creating a “walled garden”. But with few compelling services of their own, operators alienated their customers. Some 72% of respondents agree that operators adopting an open-network policy will be more successful than those that do not. Only 32% say that legislation supporting the principle of “net neutrality” (which could outlaw the walled garden) would hamper their ability to invest in advanced networks. The risk is that an open-network policy leaves operators with an even weaker presence in the content and applications market than they currently claim. For all their eagerness to offer more content and applications, few respondents show an interest in setting up online applications stores (so-called app stores). Despite the recent high-profile opening of stores by two operators, Vodafone and France Telecom, some two-thirds of respondents with a strategy in this area prefer to partner with app store developers such as Apple rather than go it alone. Twentythree percent of all respondents say they have no app store strategy. The apparent lack of enthusiasm could leave operators sidelined in the content and applications market and missing out on a revenue opportunity. Operators with an app store plan prefer to partner Choose the statement that most closely reflects your company’s plans with regard to app stores. (% of respondents who said their companies have plans regarding app stores)

My organisation prefers to partner with third-party app store developers

69

My organisation prefers to develop its own app store

31

Source: Economist Intelligence Unit survey, December 2009.

6



Efficiency is paramount

O

perators responding to the survey are more confident when it comes to improvements in efficiency. Faced with difficulties in generating increased revenue and with the need for some costly investments, 49% of respondents say they plan to focus on boosting operational efficiency over the next five years. Building next-generation networks is the best way for operators to do so, according to 34% of respondents. Next-generation networks considered the key to operational efficiency As mobile data services grow, which do you consider the best means of improving operating efficiency? (% respondents)

Invest in next-generation networks 34

Share networks with rivals 19

Automate customer-facing activities 15

Outsource network management to manufacturers 9

Restructure back-office operations (IT, accounting, etc) 9

Outsource IT to services companies 7 Source: Economist Intelligence Unit survey, December 2009.

Next-generation networks might help operators to expand their margins by providing new capacity for high-bandwidth services. Operators are offering flat-rate tariffs, which allow customers unlimited usage of data services. This has prompted a surge in mobile data traffic, exerting a heavy burden on existing 3G networks. More efficient 4G infrastructure can ease the strain. Some 37% of survey respondents believe that flat-rate pricing is the most likely way to ensure profitability, probably because consumers have tended to be wary about signing contracts based on perusage pricing. US-based AT&T has experienced heavy demand on its network from Apple’s iPhone, but the carrier has so far resisted the introduction of per-usage pricing because it fears that such a move would deter customers.

7



In recent interviews, however, senior AT&T executives have expressed doubts that flat-rate tariffs are sustainable. In our survey, some 59% of respondents think per-usage pricing is more likely to ensure the profitability of mobile data services. Firms can charge per megabyte consumed, impose a megabyte ceiling on usage or introduce tiered pricing, whereby customers are given a specific allocation of megabytes per month for a flat fee (paying more for a bigger allocation). Usage-based pricing can help ensure profitability In your opinion, which pricing model is most likely to ensure profitability in mobile internet? (% respondents)

Usage based (59) Tiered data pricing (33) Capped flat rates (18) Per-usage pricing (8) Unlimited flat rate (37) Other (4)


For all the interest in building next-generation networks, the high cost of new infrastructure is a serious concern. Investments in 3G were largely responsible for the 28.5% increase in annual spending by China’s operators in 2009, for example. Iliad, France’s newly licensed 3G operator, reckons that it will have to spend €1bn on network construction over the next 18 months—roughly equivalent to its revenue in the first half of 2009. Forty-five percent of respondents say cost is one of the most pressing problems that operators face over the next five years. This will put further pressure on operators to find ways to cut costs. Ending the subsidies on expensive handsets, for example, would help to restore margins, but this seems unlikely. Fifty-nine percent of respondents say that the policy has helped them to attract and retain customers who generate higher service revenue.

8



Keeping the customer satisfied

O

ne way of lowering costs would be to focus on retaining customers. Some 66% of respondents say they already do this, while 43% say reducing “churn”—the customer turnover rate—is one of their focus areas for the next five years. Automating customer-related activities can also help to reduce costs, according to 15% of respondents. Companies are focusing on customer retention to safeguard profitability Do you agree or disagree with the following statement? My company is focusing on customer retention as a primary means of safeguarding the bottom line. (% respondents)

Agree 66

Disagree 12


Despite the emphasis on customer retention, however, respondents say that reducing the rate of turnover comes low on the list of priorities. This probably reflects their self-confidence: 71% say they outperform their peers with regard to customer perception of products and services, and 60% say they do better than their competitors in terms of customer service. Only 20% say they underperform their peers with regard to churn. Operators are confident of their competitive positioning Compared with your competitors, how well does your organisation perform with respect to the following criteria? (% respondents) Outperform

About the same

Underperform

Customer perception of products and services 65

23

12

Prices 49

38

13

Innovative products and services 61

29

10

Service reliability 71

22

7

Network reach 62

24

13

Quality of network 71

22

7

Customer service 60

28

12

Churn (customer turnover rate) 51

0 9

20

40

29

60

20


80

100



Conclusion

D

espite the doubts about the profit potential of data services, operators are transforming themselves into data-service providers to compensate for a continual decline in their voice revenue. They are investing in next-generation networks both to meet customer demand for new applications and content and to improve their efficiency in delivering these services. Yet the survey suggests that operators can further improve their performance.

l If operators want to be more than just “dumb pipes”, they need to come up with a clear strategy for the development of new revenue-generating content and mobile applications. Given the growing importance of app stores, it is surprising that 23% of respondents have no strategy in this area. Moreover, the data services in which respondents expressed most interest are already in widespread use, and typically generate nothing in revenue apart from connection fees. l Improving operational efficiency, cited by 49% of survey respondents as a central focus over the next five years, cannot come about solely as a result of investments in next-generation networks. Given the cost and time needed to build them, operators will have to develop other ways to enhance efficiency, such as sharing of networks or automation of processes. l Keeping customers is less costly than attracting new ones, and so reducing the churn rate by improving customer satisfaction must be a part of any efficiency-enhancing strategy.

10


Appendix Survey results

Mobile data

Appendix: Survey results Percentages may not add to 100% due to rounding or the ability of respondents to choose multiple responses.

Which of the following product lines does your organisation offer? Select all that apply.

In your opinion, what will be the impact of mobile data on your organisation’s revenues in the next five years?

(% respondents)

(% respondents)

Wireless data

Mobile data revenue will drive new topline growth 88

Wireless voice 85

44

Mobile data revenue will compensate for stagnating voice markets and keep revenues stable 24

Business internet (T1, T2, etc)

While growth of mobile data revenue will be impressive, it will not be sufficient to prevent a decline in revenue as voice markets stagnate

63

Voice over IP (VoIP)

25

57

Don’t know/Not applicable

Landline telephony

8

52

Residential internet (eg, dial-up, ISDN, cable modem) 48

In-home entertainment (TV, movies, etc) 30

Other 14

Compared with your competitors, how well does your organisation perform with respect to the following criteria? For each criteria, rate on a scale of 1 to 5, where 1=Significantly outperform and 5=Significantly underperform. (% respondents) 1 Significantly outperform

2

3

4

5 Significantly underperform

Don’t know

Margins 18

39

25

11

3

5

Customer perception of products and services 17

47

22

10

2 2

11

3 1

Prices 15

33

38

Innovative products and services 25

35

28

7

3 2

Service reliability 26

44

22

6 1 2

Network reach 30

29

23

11 2

4

5 2

5

9

41

5

5

Quality of network 30

37

21

Customer service 24

36

27

Churn (eg, customer turnover rate) 14

0 11

35

20

40

28

60

14

80

100

Economist Intelligence Unit 2010


Mobile data

Do you agree or disagree with the following statements? For each statement, rate on a scale of 1 to 5, where 1=Strongly agree and 5=Strongly disagree. (% respondents) 1 Strongly agree

2

3

4

5 Strongly disagree

Don’t know

Advertising will be an important source of revenue for mobile service providers in the next five years 30

30

22

12

4 2

App stores, such as Vodafone 360 or Apple's iPhone app store, will be an important source of revenue for mobile service providers in the next five years 26

30

23

13

3

5

Smartphones that use an open-source operating system, such as Google Android or LiMo, will become more popular than devices using proprietary software, such as the Apple iPhone or RIM Blackberry 22

33

24

13

6

3

The practice of subsidising expensive devices erodes profitability in the short term but will ultimately pay off by helping retain customers who generate higher service revenues 18

40

22

11

7 2

My company is focusing on customer retention as a primary means of safeguarding the bottom line 32

35

19

9

4

3

Third-party VoIP providers will be less of a competitive threat to operators once next-generation networks are deployed 17

29

24

16

6

7

Operators that adopt an open network approach that allows users to access all Web content and services are most likely to be successful in the future 30

42

16

8 2 2

Legislation supporting the principle of “net neutrality” will hamper my organisation's ability to invest in its network

0

15

20

17

40

60

14 80

36

10 100

8

In the next five years, what do you think will be the most pressing problems faced by mobile operators in the country in which you reside? Select up to three.

Which services will be the most important drivers of revenues in mobile telecoms services in the next five years? Select up to three.

(% respondents)

(% respondents) Web browsing

The cost of deploying state-of-the art networks

49

45

Competition from non-traditional service providers such as Skype and Google

Email and messaging 47

40

Social media

The commoditisation of telecoms services

42

37

Competition from traditional service providers

Business applications 34

28

Slowing demand growth as a result of market saturation

Location-based and mapping services 28

28

The need to provide seamless service across several technology platforms

Mobile TV 26

26

The impact of government policy and regulation

Legacy or traditional voice services 18

26

Uncertainty about which technologies will prevail (such as WiMAX, LTE [Long term Evolution] or others) 22

Music 15

VoIP

Customer churn

13 19

Gaming

A shortage of qualified workers 12

12

Other

Other 2


4

Don’t know/Not applicable 1

1

12



Mobile data

Over the next five years, in which areas do you think your company will focus its efforts? My organisation will focus on: Select up to three.

In your opinion, which pricing model is most likely to ensure profitability in mobile internet? (% respondents)

(% respondents) Unlimited flat rate Improving operational efficiency

36 49

Developing revenue-generating content and applications to avoid over-reliance on traffic revenues

Tiered data pricing (tariffs are stepped up according to data usage during a month) 32

Capped flat rates (customers are limited to a set volume of data each month)

47

Reducing churn by addressing customer satisfaction

18

43

Per-usage pricing

Investing in next-generation networks such as WiMAX and LTE

8

39

Other

Partnering with developers to expand our application/content offerings

4

35


Moving into new geographic markets

2

23

Boosting traffic revenues 22

Offering advertising to generate revenue

Choose the statement that most closely reflects your company’s plans with regard to app stores.

12

Securing the best possible handset lineup

(% respondents)

9

Other My organisation prefers to partner with third-party app store developers, like Apple and Google, than develop its own app store.

2


45

2

My organisation prefers to develop its own app store, like Vodafone 360, than partner with third-party app store developers, like Apple and Google. 20

As mobile data services grow, which do you consider the best means of improving operating efficiency? (% respondents)

My organisation has no plans regarding app stores. 23


Invest in next-generation networks 34

Share networks with rivals 19

Automate customer-facing activities 15

Outsource network management to manufacturers 9

Restructure back-office operations (IT, accounting, etc) 9

Outsource IT to services companies 7

In your opinion, what are the two main reasons for investing in next-generation networks? Select up to two. (% respondents) Drive topline growth by serving customer demand for new services 59

Improve profitability 40

Ease capacity constraints 39

Other

Build market share

2

Don't know/Not applicable 5

24

Reduce customer churn 16

Other 3


13



Mobile data

In which country are you personally located?

Which of the following best describes your job title?

(% respondents)

(% respondents) Board member

United States of America

5

26

CEO/President/Managing director

India

17

13

CFO/Treasurer/Comptroller

United Kingdom

2

6

CIO/Technology director

Malaysia

7

4

Other C-level executive

Brazil, Finland, Singapore, Spain, Australia, Nigeria, Pakistan, Sweden

13

3

SVP/VP/Director

Canada, Germany, Bangladesh, Denmark, Ireland

16

2

Head of business unit

Czech Republic, Italy, Luxembourg, Mauritius, Mexico, Portugal, South Africa, Switzerland, Argentina, Austria, Bolivia, Cyprus, Egypt, Estonia, Ghana, Greece, Hong Kong, Indonesia, Malta, Netherlands, New Zealand, Oman, Philippines, Qatar, Romania, Slovakia, Sri Lanka, Thailand, Ukraine, United Arab Emirates, Uzbekistan, Venezuela

8

Head of department 10

Manager

1

18

Other 5

In which region are you personally based? (% respondents) Asia-Pacific 30

North America 28

What are your main functional roles? Please choose no more than three functions. (% respondents) Marketing and sales

Western Europe

41

26

Strategy and business development

Latin America

37

7

General management

Middle East and Africa

27

6

Operations and production

Eastern Europe

17

3

Customer service 14

IT 13

What are your organisation’s global annual revenues in US dollars?

Finance

(% respondents)

R&D

12 12

Information and research $500m or less

7

30

$500m to $1bn 14 $1bn to $5bn

18

$5bn to $10bn

13

$10bn or more

24

Human resources 4

Supply-chain management 2

Procurement 2

Legal 1

Risk 1

Other 6

14


Cover image: Shutterstock

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