A report from the Economist Intelligence Unit Sponsored by InnoPath
Contents Preface Introduction 3 A focus on content and applications 5 Efficiency is paramount 7 Keeping the customer satisfied 9 Conclusion 10 Appendix: Survey results 11 1 Economist Intelligence Unit Limited 010
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 010 Economist Intelligence Unit Limited 010
Introduction Sceptics 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 5% 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) 800 700 600 500 400 300 00 100 Data Voice Data as % of total Data as % of total 40 35 30 5 0 15 10 5 0 0 005 006 007 008 009 e 010 e 011 e 01 e 013 e 014 e * Data revenue includes messaging. e Estimate. Data source: Pyramid Research. 3 Economist Intelligence Unit Limited 010
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, 8% in North America, 6% 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 4% 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 (7%). All companies offer wireless services, but provide other services as well Which of the following product lines does your organisation offer? Wireless data Wireless voice Business internet (T1, T, etc) Voice over IP (VoIP) Landline telephony Residential internet (eg, dial-up, ISDN, cable modem) In-home entertainment (TV, movies, etc) 30 48 5 88 85 63 57 Source: Economist Intelligence Unit survey, December 009. 4 Economist Intelligence Unit Limited 010
A focus on content and applications Perhaps 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: Improving operational efficiency Developing revenue-generating content and applications to avoid over-reliance on traffic revenue Reducing churn by addressing customer satisfaction Investing in next-generation networks such as WiMAX and LTE Partnering with developers to expand our application/content offerings 39 43 47 49 35 Source: Economist Intelligence Unit survey, December 009. 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 Economist Intelligence Unit Limited 010
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 7% of respondents agree that operators adopting an open-network policy will be more successful than those that do not. Only 3% 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 My organisation prefers to develop its own app store 69 31 Source: Economist Intelligence Unit survey, December 009. 6 Economist Intelligence Unit Limited 010
Efficiency is paramount Operators 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? Invest in next-generation networks Share networks with rivals Automate customer-facing activities Outsource network management to manufacturers 9 Restructure back-office operations (IT, accounting, etc) 9 Outsource IT to services companies 7 15 19 34 Source: Economist Intelligence Unit survey, December 009. 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 Economist Intelligence Unit Limited 010
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? Usage based (59) Tiered data pricing (33) Capped flat rates (18) Per-usage pricing (8) Unlimited flat rate (37) (4) Source: Economist Intelligence Unit survey, December 009. 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 8.5% increase in annual spending by China s operators in 009, 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 009. 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 Economist Intelligence Unit Limited 010
Keeping the customer satisfied One 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. Agree Disagree 1 66 Source: Economist Intelligence Unit survey, December 009. 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 0% say they underperform their peers with regard to churn. 9 Operators are confident of their competitive positioning Compared with your competitors, how well does your organisation perform with respect to the following criteria? Outperform About the same Underperform Customer perception of products and services Prices Innovative products and services Service reliability Network reach Quality of network Customer service Churn (customer turnover rate) 65 3 1 49 38 13 61 9 10 71 7 6 4 13 71 7 60 8 1 51 9 0 Source: Economist Intelligence Unit survey, December 009. 0 0 40 60 80 100 Economist Intelligence Unit Limited 010
Conclusion Despite 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. 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 3% 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. 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. 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 Economist Intelligence Unit Limited 010
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? Wireless data Wireless voice Business internet (T1, T, etc) 63 Voice over IP (VoIP) 57 Landline telephony 5 Residential internet (eg, dial-up, ISDN, cable modem) 48 In-home entertainment (TV, movies, etc) 30 14 85 88 Mobile data revenue will drive new topline growth Mobile data revenue will compensate for stagnating voice markets and keep revenues stable 4 While growth of mobile data revenue will be impressive, it will not be sufficient to prevent a decline in revenue as voice markets stagnate 5 Don t know/not applicable 8 44 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. 1 Significantly outperform 3 4 5 Significantly underperform Don t know Margins 18 39 5 11 3 5 Customer perception of products and services 17 47 10 Prices 15 33 38 11 3 1 Innovative products and services 5 35 8 7 3 Service reliability 6 44 6 1 Network reach 30 9 3 11 4 Quality of network 30 37 1 5 5 Customer service 4 36 7 9 4 1 Churn (eg, customer turnover rate) 14 35 8 14 5 5 0 0 40 60 80 100 11 Economist Intelligence Unit 010
Appendix Survey results 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. 1 Strongly agree 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 1 4 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 6 30 3 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 33 4 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 11 7 My company is focusing on customer retention as a primary means of safeguarding the bottom line 3 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 9 4 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 4 16 8 Legislation supporting the principle of net neutrality will hamper my organisation's ability to invest in its network 15 17 36 14 8 0 0 40 60 80 100 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. The cost of deploying state-of-the art networks 45 Competition from non-traditional service providers such as Skype and Google 40 The commoditisation of telecoms services 37 Competition from traditional service providers 8 Slowing demand growth as a result of market saturation 8 The need to provide seamless service across several technology platforms 6 The impact of government policy and regulation 6 Uncertainty about which technologies will prevail (such as WiMAX, LTE [Long term Evolution] or others) Customer churn 19 A shortage of qualified workers 1 Don t know/not applicable 1 Web browsing Email and messaging Social media Business applications Location-based and mapping services 8 Mobile TV 6 Legacy or traditional voice services 18 Music 15 VoIP 13 Gaming 1 4 Don t know/not applicable 1 34 4 47 49 1 Economist Intelligence Unit 010
Appendix Survey results 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. Improving operational efficiency 49 Developing revenue-generating content and applications to avoid over-reliance on traffic revenues 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 Moving into new geographic markets 3 Boosting traffic revenues Offering advertising to generate revenue 1 Securing the best possible handset lineup 9 Don t know/not applicable As mobile data services grow, which do you consider the best means of improving operating efficiency? Invest in next-generation networks 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 Don't know/not applicable 5 34 In your opinion, which pricing model is most likely to ensure profitability in mobile internet? Unlimited flat rate Tiered data pricing (tariffs are stepped up according to data usage during a month) 3 Capped flat rates (customers are limited to a set volume of data each month) 18 Per-usage pricing 8 4 Don t know/not applicable Choose the statement that most closely reflects your company s plans with regard to app stores. My organisation prefers to partner with third-party app store developers, like Apple and Google, than develop its own app store. 45 My organisation prefers to develop its own app store, like Vodafone 360, than partner with third-party app store developers, like Apple and Google. 0 My organisation has no plans regarding app stores. 3 Don t know/not applicable 11 In your opinion, what are the two main reasons for investing in next-generation networks? Select up to two. Drive topline growth by serving customer demand for new services Improve profitability Ease capacity constraints Build market share 4 Reduce customer churn 16 3 Don t know/not applicable 3 39 40 36 59 13 Economist Intelligence Unit 010
Appendix Survey results Mobile data In which country are you personally located? Which of the following best describes your job title? United States of America India 13 United Kingdom 6 Malaysia 4 Brazil, Finland, Singapore, Spain, Australia, Nigeria, Pakistan, Sweden 3 Canada, Germany, Bangladesh, Denmark, Ireland 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 1 6 Board member 5 CEO/President/Managing director CFO/Treasurer/Comptroller CIO/Technology director 7 C-level executive SVP/VP/Director Head of business unit Head of department Manager 5 8 10 13 16 17 18 In which region are you personally based? Asia-Pacific North America Western Europe Latin America 7 Middle East and Africa 6 Eastern Europe 3 What are your organisation s global annual revenues in US dollars? 6 8 $500m or less $500m to $1bn $1bn to $5bn $5bn to $10bn $10bn or more 30 30 14 18 13 4 What are your main functional roles? Please choose no more than three functions. Marketing and sales Strategy and business development General management Operations and production 17 Customer service 14 IT 13 Finance 1 R&D 1 Information and research 7 Human resources 4 Supply-chain management Procurement Legal 1 Risk 1 6 7 37 41 14 Economist Intelligence Unit 010
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