THE COMMERCIAL CASE FOR FIXED MOBILE CONVERGENCE: THE SHORT AND LONG VIEW

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1 RESEARCH STRATEGY REPORT THE COMMERCIAL CASE FOR FIXED MOBILE CONVERGENCE: THE SHORT AND LONG VIEW RUPERT WOOD and STEPHEN WILSON analysysmason.com

2 About this report This report offers a high-level view, based on evidence, of the impact of one of today s most significant trends in the telecoms industry that of fixed mobile convergence. The report looks at why fixed mobile convergence is happening (for example, as a result of commercial imperatives driven by peak revenue in the mobile market) and assesses the immediate impacts. It looks at the short- to medium-term revenue and profitability impact of retail bundling by focusing on developments in some of the early-mover countries. It contrasts this with countries where inmarket mobile network operator (MNO) consolidation has occurred, and with the performance of consolidated MNOs. It also assesses the outlook for, and various obstacles to, fixed mobile convergence in non-european regions. It assesses the long-term potential for cost savings and performance leadership through a more closely integrated network, and explores the pivotal position that fibre access plays in future converged networks. It is based on several sources: Analysys Mason s research, forecasts, databases and surveys interviews with operators and vendors. KEY QUESTIONS ANSWERED IN THIS REPORT What is convergence, apart from bundling? Do converged services actually make operators any more money if the services help to gain market share, do they also deflate the whole market? What is the evidence that consumers actually want these services? What are the factors that lead mobile operators to directly invest in fibre? Are mobile-only operators viable in developed markets in the long term? To what extent will convergence as a trend spread to emerging markets? WHO SHOULD READ THIS REPORT Operator strategy teams that want an outline of the key issues with an informed top-level view of value. Strategy and product/marketing teams within operators that operate in middle-income markets where the mobile market is approaching peak revenue. 2

3 CONTENTS EXECUTIVE SUMMARY THE RATIONALE FOR CONVERGENCE FUTURE BUNDLING TRENDS AND RETAIL SUCCESS FUTURE NETWORK TRENDS APPENDIX: CASE STUDIES ABOUT THE AUTHORS AND ANALYSYS MASON 3

4 Executive summary The success of convergence strategies is not guaranteed, and the evidence from recent bundling strategies is inconclusive. Longer-term network convergence should solidify the commercial case. Figure 1: The main aims of retail and network convergence FIXED BROADBAND MOBILE The trend towards fixed mobile convergence, propelled by consolidation, is shifting from Europe to many other regions. The aims are clear, but the evidence of success is patchy. Fixed mobile convergence has largely been a response to the dwindling opportunities for growth in mobile revenue or profit. Mobile has historically thrived on substitution, yet broadband substitution appears more elusive than ever. These weaknesses have also led to in-market mobile consolidation, and in some cases to opportunistic acquisitions of MNOs by fixed and cable players. The immediate aim of converged players is to invest in margin and marketing synergies to create a stronger platform for service leadership and hence renewed retail growth. Initial evidence suggests that despite an accelerated revenue decline caused by discounting, the trends are looking more positive. Some of this improvement is enabled by consolidation (both mobile mobile and fixed mobile), whereas the benefits of cross-platform service evolution are more elusive. Ultimately, ownership of fixed and mobile should enable operators to allocate resources efficiently, and deliver cost and service leadership. The signs are that operators are beginning to see how this will work to their advantage. Retail service convergence Reduce CAC Marginalise disruptors Increase pricing power Service leadership Enable first-mover advantage Invest in margin Reduce churn, increase share Cross-platform content Marginalise mobile-only End-to-end network convergence Rationalise resources Wi-Fi 3GPP integration Rebalance value of spectrum Re-use fibre resources Change cost base of wholesale Cost and performance leadership Encroach on adjacent industries Source: Analysys Mason 4

5 Mobile revenue The commercial case for fixed mobile convergence: the short and long view Operators that are considering convergence see fixed-plus-mobile services as the best way to combat the erosion of mobile revenue Operators that are considering convergence know they first have to take a hit on revenue and margin, and will face many unknowns. Peak mobile appears to have been reached in many advanced markets, particularly for consumer services, and the pattern is starting to emerge in some middle-income markets too. Despite strong growth in the volume of mobile data traffic, end users show little appetite for increasing their spending. Fixed broadband continues to be important to end-users because it represents the cheapest way to deliver their rapidly rising overall data needs. Bundling hitherto separate fixed broadband and mobile services, sometimes as the result of fixed mobile operator consolidation, is one way forward. In the first years, this will result almost inevitably in a decline in mobile and overall revenue, leading to a decline in margin, as operators seek to lock in customers. However, it is expected that this will increase market share, enable crossplatform upsell opportunities, and enable operators to raise prices. Ultimately, fixed and mobile revenue and margin growth will, proponents reckon, converge in an upward trajectory. The main alternative is in-market mobile consolidation, which runs the risk of not being permitted by regulators. Even if it is, and greater pricing discipline is achieved, a further risk is that it simply buys the mobile operator a couple of years of respite from further erosion as converged bundles gain in popularity and mobile remains a supplement to fixed, not an alternative. Figure 2: Revenue outlook for possible responses to peak mobile : fixed mobile convergence and in-market mobile consolidation Peak mobile Invest in margin and reduce churn Base Mobile consolidation Price discipline and improved margin Increase market share Time Raise prices and cross-platform upsell? Current mobileonly model is unsustainable Underlying mobile-only problem returns? Fixed mobile convergence Source: Analysys Mason 5

6 This report aims to provide a top-level view of the critical short- and longterm commercial issues in fixed mobile convergence Convergence is about more than bundling. It has the potential to shape and transform the operator business. The first section of this report examines the immediate rationale for fixed mobile convergence and consolidation: why it has happened in Europe the hurdles that have to be overcome for it to occur outside Western Europe what are the external demand drivers, and how much success can be measured so far. The second section: examines the trends in retail bundling and the near-term chances of success assesses development of commercial trends (revenue, market share, churn and EBITDA) in the early adopter markets looks at to what extent integrated operators can exert pricing power, and at how far upselling can be linked to price rises contrasts the commercial reality of markets where a high level of fixed mobile convergence is already evident with markets where inmarket mobile consolidation has taken place, and examines the financials of consolidated MNOs. The third section looks at the longer-term network cost and performance implications of fixed mobile convergence: the ways fixed and mobile networks can support and complement each other (offloading, onloading, customer-base building) and lead to commercial advantage over non-converged players the ways in which dense fibre access will become the glue that holds together end-to-end delivery not only of fixed-mobile consumer services, but also future wireless services with densified RANs, TV delivery and enterprise services. 6

7 Recommendations 1 Operators need to time the switch in emphasis from customer land-grab to upselling and price rises. Discounting will be necessary to create a basis for future growth, and changes to pricing structure, such as a greater emphasis on SIM-only plans, can dilute this effect. However, operators need to consider first, how to upsell, and second, how and when to put up prices without increasing churn. Adding value to the bundle at the time prices are raised combines the two; in an economic environment that is becoming less harsh, users will be inclined to take additional services or supersize mobile data-plans rather than to pocket a discount. 2 Mobile operators in middle-income economies need to plan strategically for a role in fixed-line services. A mobile-only strategy leads to chronic under-supply of capacity, and misses the opportunity to monetise demand for 100GB+ per month connections. It will lead to a continuous round of costly capacity boosts, but with very little opportunity to increase revenue. MNOs need to break down bottlenecks to next-generation access, they need to find ways to build up fixed-like usage behaviour (through for example fixed LTE) and they need to make sure that potential customers make the link between mobile devices and fixed connections, and demonstrate the value. 3 Integrated operators need to focus on an ideal convergence goal, not on the assets they already possess. Fibre-based access networks confer significant first-mover and cost advantage for densified, virtualised wireless networks and for 5G. Operators must think of fibre not just as fixed broadband (FTTH), but as a strategic asset that plays a key role in almost every aspect of telecoms service delivery. For established operators some of the effects of convergence will be uncomfortable, but continuing to operate non-converged networks (not only mobile-only, but separate enterprise connectivity and separate broadcast networks) will be increasingly costly and archaic. 7

8 CONTENTS EXECUTIVE SUMMARY THE RATIONALE FOR CONVERGENCE FUTURE BUNDLING TRENDS AND RETAIL SUCCESS FUTURE NETWORK TRENDS APPENDIX: CASE STUDIES ABOUT THE AUTHORS AND ANALYSYS MASON 33

9 About the authors Rupert Wood (Research Director) is the lead analyst for our Fixed Networks and Wireless Networks research programmes, and his research focuses on next-generation networks and convergence. Rupert regularly contributes to the international press on a wide range of telecoms subjects and has been quoted by The Times, The Economist, Business Week, Telecommunications Online and Kommersant. Rupert has a PhD from the University of Cambridge, where he was a Lecturer before joining Analysys Mason. Stephen Wilson (Principal Analyst) contributes research to our Fixed Networks and Wireless Networks research programmes. He joined Analysys Mason as a Senior Analyst in November 2012, having previously worked for Informa Telecoms & Media. Stephen has more than 5 years of experience of covering the telecoms industry and specialises in analysing fixed broadband access technologies and strategies, as well as developments in European telecoms markets across fixed and mobile sectors. He has produced reports on DSL acceleration technologies as well as regular updates on European markets, notably in Central and Eastern Europe. Stephen is a graduate in Politics, Philosophy and Economics from St Catherine's College, Oxford University. 34

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