Making the most of the cash cow

Transcription

1 Sven Bolthausen and Marco Schindel on Revenues, getting more out of voice Making the most of the cash cow As more developed markets reach saturation levels of 100 percent or more, the limited growth that will occur will only come from adding new subscribers. As a consequence, the focus must shift to stimulating greater use through the existing subscriber base. This applies not only to mobile data services but the existing cash cow, mobile voice services. MUCH HAS BEEN written about the importance of mobile voice as the dominant source of operator revenue. In Western Europe a typical, highly saturated market in terms of subscriber penetration mobile voice still accounts for more than 80 percent of total revenue (including subscription fees). Strategy Analytics expects voice revenue to decline by 1 2 percent per annum in 2006 and 2007, accelerating to 3 4 percent between 2008 and 2010, as the realities of price decreases and growing expenditure on data puts pressure on overall voice spending. Enlarging the Western European picture to the overall voice market, including fixed networks, analysts forecast a promising future for the mobile voice segment despite the overall stagnating market (see figure right). With mobile voice increasingly whittling away the fixed network dominance in voice, despite significant increases in voice-over-ip () traffic, in 2010 mobile revenues are expected to account for 57 percent of total revenue from voice, up from today s 51 percent, and for 36 percent of total minutes compared to 28 percent in Looking closer at mobile voice patterns in selected markets, it becomes immediately evident that there are enormous regional differences. Whereas Germany and Poland are at the low end of the scale in regards to usage, with only 70 minutes of use (MoU) per month per subscriber incoming and outgoing, mobile traffic in the us is far above the rest of the world with an average of 600 MoU per subscriber per month, in and out. There are a number of reasons behind this: pricing, cultural habits, convenience aspects, perception of voice quality, terminal functionality and usability, and, to a lesser extent, health concerns. The main driver for the incredible development in mobile usage in the us has been the introduction of fair and transparent pricing. This move started with one simple price rate for all calls, and has been elaborated by all you can eat bucket plans of 1000 or more minute bundles for mobile usage month by month. Summarizing the high-level markets, it can be seen that focusing solely on mobile voice can lead to growth in saturated markets. There are three main drivers of potential voice revenue growth: fixedmobile substitution, voice service delivery efficiency or Call Completion; and basic pricing of mobile services. Replacing fixed with mobile In Western European markets, activities related to fixed-to-mobile substitution (fms) have been evident since the beginning of this century. The limited or delayed acceptance of mobile data services (such as portals) has led to higher competition in the mobile voice market. Entry barriers have been lowered by technological developments such as and sip, and multiple players including mobile 16 Ericsson Business Review C260814_EricssonBusRev_0106.indd

2 stats JOHN LABBE/GETTY Voice market call minutes Voice market spending Minutes (billion) 1, EUR (billion) % 0% 10% 28% 72% 36% 10% 54% 28% 72% 36% 54% Western European voice market The mobile share is expected to grow to more than 57 percent of total revenues and 36 percent of total minutes in Ericsson Business Review C260814_EricssonBusRev_0106.indd

3 Making the most of the cash cow threat or opportunity? Voice-over-ip () is a technology driven by the internet industry and has been treated very carefully so far by Eurostats ARPU in $ Japan USA Belgium UK France Canada Finland Greece Israel Italy New Zealand Germany Korea Portugal Sweden South Africa Poland Mexico Egypt Malaysia Venezuela Argentina Russia Colombia China India Brazil MoU Usage and ARPU status of different countries. operators, fixed operators, internet service providers (isps) and mobile virtual network operators (mvnos), are competing within the mobile voice arena. As a result of this competition, there is significant pressure on arpu and prices. This raises the questions: what is needed to succeed in the mobile voice business, what strategic options are available and how will they attract end users? One possible answer is fms a key to regain voice revenues and compensate losses. A consumer study conducted by Ericsson in Germany, Austria and Switzerland has identified the main barriers for fms to become reality: reasonable pricing, sufficient indoor coverage (at home) and voice quality. More than 68 percent of calls are made at home. When taking into consideration mobile calls originating from other indoor locations, the indoor traffic proportion of total calls is even higher. We shall therefore take another look at the need for indoor coverage. The critical success factors in leveraging fms in regards to indoor coverage differ for businesses and consumers segments. Indoor concepts for corporate enterprises require turnkey in-building solutions with specific business case calculations, product technology and installation service support. This approach has been successfully delivered many times worldwide. Indoor concepts for consumers are different and cannot be considered in isolation. They have a broad strategic impact and require careful evaluation of multiple options. Home coverage can be provided by 2g/3g, WiFi or other means, whereas the backhaul might be 3g, dsl or WiMAX. operators tend to prefer 3g or Unlicensed Access (uma) compliant solutions that make it easier for operators to keep control over the household whereas new entrants might prefer dsl or WiMAX. In the mid-term the key success factor from an operator perspective will be access convergence, which means nearly seamless mobility at home. Solutions for access convergence are already available. Better sound Almost every Western European consumer has experienced the high sound quality of fixed-line phones, so this has become the accepted benchmark. Therefore, for mobile voice to be competitive with fixed voice the sound quality needs to improve. The 3gpp amr-wb codec has the potential to improve voice quality by addressing several traditional problem areas. These positive effects have been verified by end-user trials with delegates from mobile operators and end users. Operators were impressed by the sound quality available with amr-wb and confirm that voice quality could become a major factor in fms success. End users appreciate the higher quality, becoming more loyal to the operator, increasing their usage (for example call duration) and especially among elderly people spend more. An indication of the business potential of enhanced voice quality can be derived from the correlation between speech quality, the duration and the annoyance level of a call (source: Consumer Call quality survey, 2005). Taking this indication for granted, it would mean that far more traffic would be generated by end users, which would likely have a positive impact on total spending. 18 Ericsson Business Review C260814_EricssonBusRev_0106.indd

4 model Subscriber Preferences Behavior Budget Quality Portfolio Capabilities Network Different aspects of service delivery efficiency. pean mobile operators because of the risk of cannibalizing mobile voice revenues. On the other hand, shows that fms and convergence is happening, so mobile operators that remain reluctant could become victims of their markets. For mobile operators to succeed with, they must maintain control over their core network switching and charging functions. The leverage either to prohibit or promote is data pricing. The platform to provide this is ims. The final role of is not yet known. But as long as operators are aware of their assets, the threats from supporting services with cross-cannibalizing their voice business seem much smaller than those of losing voice revenue to alternative networks, such as WiFi. This makes a real opportunity for mobile operators even without the added growth potential of bundling. Optimizing the factory A complementary growth perspective for operators can be made accessible with service delivery efficiency. The question about overall efficiency or the end-toend performance is difficult to answer, but the key issues to consider are: Is the operator s network performing well enough and is it capable of translating each usage attempt, for example, call attempt, into a successful and billable call? Are the different customer segments behaving in a well-known and predictable way that helps to facilitate completion of call attempts? How well are existing network capabilities aligned to customer behavior and what activities are needed to have a harmonized network/customer system? When examining the efficiency of the operator s factory, it is crucial to find out the different reasons why call attempts cannot be turned into revenue. As long as the voice service is considered as a single end-to-end service it will be impossible to identify all areas where revenue leakage occurs. Apart from the operator perspective, there is also the end-users understanding of efficiency, which is predominantly defined by terms such as convenience, failures and perceived quality. The main question is to what extent a call or usage attempt can establish successful communication between two individuals. Please pick up the phone A proven approach to address and improve operator service-delivery efficiency is Ericsson s Call Completion Strategy Program. It comprises a quality and performance-based approach with an end-toend scope. Any analysis and evaluation is based on an end-to-end voice model (below) in order to facilitate tangibility and to understand where and why voice traffic and revenue is being lost. It is common knowledge, based on measurements and market research, that percent of all call attempts are not completed to the full satisfaction of consumers. This figure gives an idea of the level of efficiency and shows that there is a need for improvement. But how can improvement be achieved? Normally, improvement must start with understanding the problem and prioritizing the key areas. model Coverage Dialing Service Reachability Busy Answer Retainability A generic voice call model with segmentation into user-related components Ericsson Business Review C260814_EricssonBusRev_0106.indd

5 Making the most of the cash cow stats Dial error 1% Service unavailable 1% Bad coverage 2% Not reachable 6% Busy 6% No answer 16% Successful calls 67% Dropped calls 1% Call success ratio Call success ratio from consumer perspective. Lost traffic is not necessarily lost revenue, as end-user behavior such as re-attempting an unsuccessful call can reduce the lost revenue potential significantly. Reference projects have shown that total addressable revenue potential is between 3 to 8 percent of ARPU. The analysis phase is performed to understand and qualify the efficiency problem and create a common language for an operator to handle the challenge. An operator-specific voice model is derived from the generic model to make voice services concrete and potential revenue leakages visible. Moreover, a business potential calculation for call completion immediately highlights the areas where most traffic and revenue is lost (above). Key performance indicators (kpis) are analyzed and compared to an optimal call-completion-specific set of indicators. Based on the analysis results, a solid strategy can be determined to face the call completion challenges in the short and long term. The strategy normally consists of a set of prioritized activities that might be technical solutions and/or enhancements, non-technical solutions, for instance marketing and promotion, or a mixture of both. The criteria to prioritize activities for the strategy are various, out of these the most important are: Traffic/revenue potential (including the business case) Time to market Complexity technical or businesswise (such as processes) Cannibalization (effects with existing services, such as voic ) The complexity of implementing such a strategy should not be underestimated. Normally pan-organizational competencies have to be included; that is analysts, pricing experts, product marketing, technical experts, and the target-oriented process needs to be aligned. In alignment with the implementation process of certain activities it is necessary to track progress. The objective is to measure and understand changing traffic patterns and user behavior in relation to the voice model. For that purpose the call completion program uses previously defined performance indicators (figure 10). These top-level kpis measure end-toend performance and justify investment in prioritized activities. Lower level kpis can be used to disclose further revenue/ traffic leakages to be addressed within another step of the improvement process. Pricing for mobile voice Pricing is vital for the success of any mobile operator, especially in a situation when mobile telephony has turned into a commodity and the level of competition has intensified. As a matter of fact, price is the category where customers are the least satisfied. Market research shows that subscribers consistently quote price as the most important factor for selecting a mobile operator (also referring to the terminal price). Accordingly, mobile operators have to take the spending readiness and price sensitivity being expressed by the price elasticity of their customers into consideration when creating a pricing strategy. Too often firms find themselves competing purely on price. This scenario can result in a race to the bottom that ruins profits and margins and may result in 20 Ericsson Business Review C260814_EricssonBusRev_0106.indd

6 the kind of cut-throat competition seen in other industries. Therefore addressing the price perception of customers should be seen as a possible first step. As an example, one operator surveyed its customers to find out what they thought they were paying per mobile voice minute. Nearly two-thirds of respondents thought they were, or would be, paying twice or even three times as much as they actually did per minute of mobile call. Consequently, many tend to use the fixed network for longer calls. One way out of this pricing dilemma is to simplify the tariff jungle and create cost transparency. This approach has been proven by no-frills mvno Simyo and traditional mobile operator Base, in Germany (subsidiary of E-Plus), increasing mobile usage significantly after launching a very simple one-rate fee. Searching for innovation generally, not just in terms of new services but also in terms of tariff models that have been successful in other markets, can be recommended. As mentioned before, consumers react differently to different prices in different markets, but coming up with a new price model may create a competitive advantage for early moving operators. Bucket prices for example have been successfully implemented by T- in Germany through its Relax tariff plan following its affiliate company tmo in the us. The other side of the equation is operator costs the production cost of voice minutes for different call scenarios. To estimate costs, different call scenarios have to be taken into consideration along with potential regulatory activities. In combination with knowledge of segment-specific price sensitivity and call-specific cost contribution, a flexible financial modeling or simulation tool can help to balance margins and improve overall profitability. The knowledge of the respective price elasticity of the consumer segments addressed enables operators to set the optimal price for the different services offered and maximize their profit. This underlines that pricing is one of the most important drivers for additional mobile voice usage. Conclusion In mature markets, competition is fierce and mobile operators must continuously seek new ways to offer value to customers while securing and expanding revenue streams. This article has revealed that there is still a lot of market potential that offers considerable business opportunities in the area of mobile voice for mobile operators. A subscriber-centric approach is key to understand customer demand, behavior and price elasticity. In addition to deeper subscriber knowledge operators also have to understand their own capabilities and efficiency the efficiency of their organization and network(s) to produce and deliver mobile voice minutes. The concepts mentioned have been proven to retain operators own customers, to acquire valuable new customers from competitors and, above all, to encourage customers to increase their mobile phone usage directly or indirectly. As a result of complexity, it requires some effort, experience and quite a lot of discipline to implement and follow holistic growth strategies, but in the end it will pay off in terms of improved revenue and margins. the authors Sven Bolthausen (left) is head of Ericsson Advisory Services in Germany and coordinates advisory business within Market Unit Northern Europe. The services comprise business consulting, network and technology consulting, TEMS, and education activities. Major involvements have been as Managing Principal within Business Consulting in the area of mobile voice growth activities, and strategy and business modeling for operators, service providers, enterprises and media companies. Marco Schindel is Associate Principal within Ericsson Business Consulting Germany and key expert in the area of mobile voice growth. He has also been involved in various customer projects as lead consultant with a focus on financial modeling and strategic development for operators and service providers worldwide. Ericsson Business Review C260814_EricssonBusRev_0106.indd