DMR Article: From King to King Maker - Mobile service strategies for the telecom operators

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From King to King Maker

Mobile service strategies for the telecom operators

Published in "Think!", DMR 04/2010

Online:http://www.detecon-dmr.com/en/article/from-king-to-king-maker_2010

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Dr. Wolfgang Knospe

Joseph Noronha

Facebook could very well turn out to be the next global communications

powerhouse! This new reality stares right in the face of the mobile

operators. Having offered their own communication services with voice

still as cash cow, the kings of the mobile networks have mainly adopted

countermeasures to protect their profitable business model. However,

with protectionism under pressure, smart service strategies are required

in order to secure a viable business in the future.

After investing heavily in the deployment of mobile broadband networks,

operators had to wait almost 6 years to experience an uptake in data traffic

and as a consequence, the beginning of the long awaited transition from a

voice to a data centric business. Surprisingly, it was not any of the killer

applications hyped in the early days of the first 3G networks that stimulated

data demand, but devices like the “iPhone”. By building up an entire

ecosystem around a user friendly product, Apple allowed subscribers to

access mobile internet services like never before. The success of thesmartphone was backed by the introduction of mobile flat-rates “all you can

eat” plans that promised a wallet-friendly browsing experience. More

importantly, users were even able to customize their smartphone by installing

3rd party application programs – so-called “apps” – which led to a richer, more

engaging experience.

Unfortunately, operator hopes of a similar manifold increase in revenues did

not materialize. They were simply caught on the wrong foot to deal with an

exponential increase in data traffic which has now forced them to invest

heavily into large capacity expansion efforts.

Published in "Think!", DMR 04/2010 1



In addition, rather than stick to the operator portal, users simply transferred

their fixed internet browsing habits to the mobile world. The internet majors

led the way, creating apps, web sites and content around the handset

capabilities. Mobile internet usage continues to increase even today, and in2009 accounted for almost 30% of all mobile data service revenues worldwide

(Mobile Internet 2.0 – New Strategies for Monetizing the Mobile Web”; Jamie

Moss; Informa 2010 ). In a majority of these cases the operator’s role was in

simply providing the basic data services through which these 3rd party

applications could be delivered.

Some of the popular internet applications provided services that overlapped

with operator offerings and now appear to threaten the mobile operator.

Skype is the most prominent example offering “free” calls within the Skype

community piggybacking on the operator’s public IP service. Operators have

typically adopted a defensive position and reactions have ranged from a

complete ban of such applications from mobile devices to charging a premium

to allow the service. In taking such a position the operators are seeking to

protect voice as one of the few revenue streams where they still regain a

modicum of control.

Licenses for public IP services are typically based on the prerequisites of

net-neutrality, in that operators can only charge subscribers for access,

however are not allowed to discriminate between services which use the

network as a transmission medium. Given this notion, it would be only a

matter of time until regulatory authorities worldwide force mobile operators inthe name of net neutrality to open their networks to any internet application

without differentiation. This is being contested at present, and the outcome

either way will have a significant impact on how we perceive the future of the

industry.

What operators could do

Given the current situation, what are potential options for a mobile operator

that help to secure as much revenue and customer base as possible?

Operators naturally could react in three different ways.The first and a

commonly chosen option is a defensive position restricting the use of certain

applications which compete with its own offerings either by completely

banning or charging a premium for such applications. As discussed earlier in

general this may not be in compliance with current or future regulation and

could also negatively impact the public image.

The second would be a ‘do nothing’ approach, the operator could simply

resign himself and open his network to all 3rd party applications. While the

allowance of such services (e.g Skype) on the network may impact the

revenue in a negative way, churn might be reduced and users motivated to




subscribe to a data tariff. In this case the operator would focus on becoming a

pure-play infrastructure provider, and rather than end services, he would

emphasize 3rd party service delivery at the lowest cost, with service quality

under his control as long as he does not violate the net neutrality paradigm.This is inherently risky in a competitive market especially if multiple players

adopt a similar approach and raises the possibility of driving prices down to

unsustainable levels, leading to lack of interest in further investment due to

poor or negative returns. In multiplayer markets this would possibly lead to

consolidation of infrastructure providers.

A third approach would be an offensive position with the operator deploying

his own applications as a direct competitor to the 3rd party applications. This

would allow the operator to almost keep full control over his network usage

and even would expand his communication service footprint to geographically

non-covered areas since this communication applications may be used in any

network. However, he would be in direct competition with well-known and

accepted applications – the potential to win this battle would need to be

assessed in detail.

Finally, the operator could partner with 3rd parties, fully integrate their

services, and allow their free usage on his network with any data plan. This is

a fairly untested model where the different parties to the agreement bring

together complementary strengths. It does not provide a winner take all

advantage, but seeks to provide a benefit to all members of the arrangement.

While the operator would benefit from the 3rd party applications as a measureof differentiation and attract their user base to become subscribers, the

application providers could utilize the operator’s infrastructure such as

international gateways and interconnection capabilities to increase the

attractiveness of their own services.

What operators currently do

Analyzing the strategies in place it is clear that many operators prefer a

defensive strategy in order to protect their revenue base. A classic case is the

approach AT&T adopted towards Skype and Google Voice apps being

available on the iPhone. The Skype app was enabled, but like similar other

communication applications was restricted to usage of AT&T’s WiFi hotspots

rather than its 3G network. In the latter case, the Google Voice app was

initially pulled out of the Apple Appstore with finger-pointing towards AT&T as

the ultimate gatekeeper of Apps, especially those which threatened its own

offerings. Google responded by approaching the FCC in addition to launching

a browser based application to circumvent the issue. In both these cases,

such limitations were ultimately lifted with AT&T allowing 3rd party

communication services on its 3G network but serves as a reference of a

failed proposition.




Within Europe, there has been a bifurcation of approaches, with smaller

operators embracing 3rd party communication service providers while larger

pan-European entities adopting a tougher, more uncompromising stance. In

2009 a survey of 27 (Informa Reports, July 2009; ‘‘Mobile VoIP’s Europeanimpact limited for now”; Gareth Willmer )operators in major European markets

found that 19 did not allow mobile-VoIP in their main mobile broadband tariffs,

with others restricted its usage. An example of the former was 3 in UK which

partnered with Skype to allow unlimited Skype-to-Skype calls and instant

messaging without additional data charges for all customers in possession of

selected 3 Skype enabled handsets. This was an attempt to lure more

subscribers (both existing and new) to sign up to its data plans. Within a few

months of launch 3 had sold over 500,000 of these handsets which carried a

premium over its other handsets. Of this number 79% were new subscribers

and had a margin which was 20% better than 3’s average customer.

On the other hand larger operators such as T-Mobile in Germany that

allowed mobile-VoIP charged an additional amount beginning at €9.95

depending upon the contract which behaved as a barrier for adoption. Orange

also launched a similar plan in April 2010, charging users €15.00 on a

monthly basis with data usage deducted from their monthly data allowance.

However, in both cases the opening up has been purely for end-to-end VoIP

services with a small number of handsets available with this capability –

without inclusion of VoIP to mobile termination as part of the plan. It is clear

here that while the smaller operators sought a collaboration as a means of

increasing attractivity of the service, the larger operators clearly considered ita threat.

The limited efforts on the part of the operators to offer alternative

communication services have not led to a significant level of uptake – at least

not at levels which threaten to upset their current revenue streams. This can

be attributed to a few characteristics. The primary reason is the fact that

operators would like to stretch the returns on their existing infrastructure for as

long as possible hence devote less attention and resources towards

promoting such enhanced 3rd party communication services. From the user

perspective the additional costs in terms of a surcharge as well as a mobile

termination fee does not yield to large savings. In addition the user interface

has remained sub-par since many services are offered on a standalone basis.

The absence of integration with existing services such as address book, voice

mail etc. has led to a poor user experience on the whole. Hence many would

be consumers have stayed away from migrating to these services. For

external parties offering communication services the challenge remains to be

able to develop an application which offers the same capabilities across an

ecosystem made up of devices with different hardware and software

configurations. The absence of a common platform to develop which can be

ported across devices results in the need to tailor each application to a




particular handset and repeat the exercise for the next device. Add to the fact

that regular software upgrades are the norm makes maintaining applications a

time and resource consuming effort. This is very visible in the fact that Apple

has managed to retain a large sub-section of the developer base due to itssingle offering. Developing superior applications across an entire ecosystem

of devices with different capabilities remains a daunting challenge.

In the middle of the standoff between most operators and 3rd party

communication service providers, it is worthwhile considering the newly

formed partnership between Verizon and Skype. A competitive response to

AT&T’s move to open up VoIP over its 3G network it serves as an interesting

backdrop to potential future directions in the industry.

In this arrangement a specially designed Skype client is included on several

models of Blackberry as well as Android handsets. It allows for free

Skype-to-Skype voice calling worldwide (both inbound and outbound) as well

as International Skype-out calling. The domestic calling minutes come from

the customers’ voice plan. Instant messaging worldwide with chat and

presence information is also included. The important aspect here is that the

application will be deeply integrated in the device. Hence rather than being

promoted as a substitute, it is leveraged as an enhanced component to the

existing service portfolio. The voice traffic is carried over Verizon’s voice

channel (circuit switched) thus providing a level of QoS while presence

information, messaging and signalling traffic is carried out the data channel

(packet switched). The integration of address books, and optimization toconserve battery life all point to the level of integration on the handset.

Currently no video calling, SMS or file transfer services are allowed; this may

be a temporary move on Verizon’s part while it gauges the take rate and

usage, and can determine if its network will be able to handle the

corresponding increase in data traffic.

This arrangement, even with its current level of restrictions points to a well

developed symbiotic relationship between two major players. Verizon receives

a percentage of Skype-out revenues, similar to the Skype-affiliates program of

up to 25% of revenues while Skype receives software licensing revenue on

the sales of these Skype-integrated handsets and voice/data plans which

include Skype. The enhanced user experience will woo customers to Verizon.

It has the potential to add customers to Skypes user base, whereas Verizon

customers can call over 500 million existing Skype accounts worldwide for

free. Skype-out may cannibalize Verizon’s international calling revenue but

serves as an attractive platform to drive users to its (higher priced) data plan,

who would eventually use other data services as well.

What operators should do




Considering the different options which are available, and examining the

outcome of different attempts within a fast moving industry one can come up

with a few hypotheses on what strategies an operator could incorporate.

In the short to medium term it would be prudent to adopt a pseudo-defensive

strategy to extract as much revenue as possible from his sunk costs in circuit

switched technologies. Here the operator would need to be aware that this

would only last as long as hybrid scenarios (IP to Circuited Switched traffic)

are still viable business cases. Since there is a still a long way towards

seamless roaming at no additional cost and elimination of termination tariffs,

operators should maximize this revenue stream.

Simultaneously, it would be essential for the operator to develop partnerships

with 3rd party communication service providers. The partnership should be

geared towards a deep integration of services with an emphasis of providing

the user with a rich user experience, both in terms of usability as well as in

terms of quality. The relationship should extend beyond just technology

considerations to include joint marketing efforts to ensure a high level of user

acceptance. Revenues would increase through increased adoption of higher

priced data plans, while the operator would be able to retire his legacy

equipment at an earlier date, reducing costs associated in maintaining a

separate 3G voice network. The use of data intensive complementary




services such as video calling and file-transfer could further increase data

consumption and depending on the tariff enivornment may push revenues

even higher. For hybrid cases, the operator could lease some of his assets

including gateways to external parties deriving additional revenue.

At the onset, it would be prudent for the operator to limit the number of

partnerships to manage complexity, but as the capabilities evolve he could

position himself as a hub for different communication service applications. In

this way, irrespective of which end client the customer preferred, he would still

be able to use communication services leveraging the operator platform. As

we evolve to a pure IP world in an ecosystem of several different (and many a

time incompatible) players, this is very much a possibility.

In the long haul, if the operator wants to keep as much control as possible

this would simply imply that the operator would shift his role in the ecosystem

– from being king, to being the king maker.

Dr. Wolfgang Knospe

Dr Wolfgang Knospe is in charge of the division Radio Access and Transport

of the Competence Practice Communication Technology. He has acquired

broad experience in this field during his years of activities for globally and

regionally active mobile network operators. His core competencies cover the

strategic, technical, and commercial assessment of classical and modernmobile networks with a focus on dimensioning and network architecture. His

current specialty is the creation of a cross-technology tool for the efficient

planning of core parameters and of roll-out strategies in relation to business

case calculations.

Joseph Noronha

Joseph Noronha is a Senior Consultant at Detecon Inc. (USA) and is a

member of the Global Competence Team Radio Access within the

Competence Practice Communication Technology. He graduated with a

Masters in Electrical Engineering from Virginia Tech (U.S.A) and has been

actively involved in the mobile communication industry for the past five years.

His focus areas at Detecon include broadband wireless access technologies,

Next Generation Access and Backhaul network architectures along with

Unified Communication platforms and services. In this capacity he has

actively engaged in strategy and technology projects in USA, Latin America,

Europe, Africa and the Middle-East.


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DMR Article: From King to King Maker - Mobile service strategies for the telecom operators