One of the first lessons that
every economics student is taught is “supply and demand” – the fundamental
economic principle that price goes up with increased demand. Yet we are witnessing the opposite to these
age old principles in the mobile business.
Despite phenomenal demand for mobility services, the mobile operators
that provide these services are engaged in a fierce price war.
Faster, sleeker, and more
powerful mobile devices, running countless of applications have transformed
businesses and our personal lives. The
insatiable demand for mobile devices and new bandwidth-hungry applications is
generating enormous amounts of mobile data. The Cisco Visual Networking Index™
(Cisco VNI™) predicts that these trends will cause global mobile data traffic
to increase 11-fold from 2013 to 2018, surpassing 15 exabytes per month by
2018. Operators continue to invest in
leading technologies like LTE, purchase more spectrum, and race to deploy ever
more network infrastructure to meet this huge demand.
In spite of this phenomenal growth
and insatiable consumer demand, many MNOs are struggling to profit from this
mobile gold rush. Mobile operators are watching as their average revenue per
customer (ARPU) flattens or declines. Despite increasing customer appetite for
mobile data, minutes of use in their cash-cow voice business are falling off
sharply, and usage of text messaging is peaking. In fact, Ovum predicts that
2018 will mark the first year of revenue contraction in the history of the
global mobile market. Following four years of less than 1 percent growth
between 2012 and 2017, revenues will decline by 1 percent in 2018, ending the
year $7.8 billion lower than in 2017.
When other industries, such as
the automobiles, hotels, or airlines, face healthy customer demand, they build
out more capacity, raise or maintain prices and sell more products, reaping
greater profits. However, the mobile
industry doesn’t seem to be like other industries? This “Mobile Paradox” - huge growth and
customer demand, yet significant business and market challenges for MNOs to
make money - seems to be unique to the mobile industry.
Yet given this grim outlook we
are witnessing very aggressive price wars in the US, and other markets. In the US, T-Mobile has significantly
disrupted the market by slashing prices, dropping device subsidizes which had
tied consumers to their carrier, and most recently, introduced “rollover data” –
allowing subscribers to rollover their unused data allocation to the next
month. All of the American operators
have been forced to follow T-Mobile’s lead or watch their customers walk out
the door.
What gives?
In seeking to understand this
paradox and the current price wars, we need to consider three critical
characteristics of the industry:
- High Fixed Cost Business – Operators spend billions of dollars to acquire spectrum and deploy far-reaching sophisticated networks to service a large base of subscribers. Once they have built this expensive asset every new customer that they add contributes significant revenue at a very low marginal cost. Operators have every incentive to add new customers and to keep the ones that they have to profit from these huge economies of scale. Most markets are now saturated, with mobile penetration rates of 80 percent and higher. So, it becomes a zero-sum battle with competitors to steal customers. While a somewhat blunt instrument with huge long-term profitability implications, T-Mobile has clearly demonstrated that slashing prices is an effective means to fight this battle.
- Substitutes and Alternatives – While it lacks many of the quality, coverage and features of cellular mobile, Wi-Fi has quickly become an important means to connect devices to the Internet without wires. Aside from smartphones, most of the important and fast growing mobile devices, such as tablets, eReaders and laptops, are exclusively Wi-Fi enabled. In fact, smartphones, which we tend to think of as synonymous with the mobile industry, are increasingly accessing Wi-Fi for Internet connectivity. Our research shows that smartphone users actually connect to the Internet through Wi-Fi over one-half of the time, versus accessing the mobile network. The Cisco VNI™ study confirms that Wi-Fi will account for 56 percent of all IP traffic in 2017, versus 12 percent from mobile.
- Value Migration – Mobile operators once controlled all of the value that was created on their networks. Whether that was voice, messaging or the early media services that they offered (e.g., music, games, ringtones) through their exclusive “walled garden” platforms. Much of this business is now being lost to substitute over-the-top (OTT) services and to major shifts in usage behaviors. Mobile consumers would rather pay for these OTT services or be subjected to advertising from the likes of Google, Facebook, YouTube, and the App Store, than pay more to mobile operators.
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