The Western European mobile industry is about to enter a difficult period. Increased competition, especially from MVNOs in the prepaid sector, coupled with a worsening economic climate, present a gloomy scenario for MNOs. Furthermore, while some commentators exaggerate the extent to which the Western European mobile market has already become saturated, MNOs will find it difficult to halt the decline in ARPU.
We expect voice ARPU to fall by almost 20% during the next five years (as shown in Figure 1), due to a mixture of competitive and regulatory pressures, so the often-asked question is: which services will be able to make up the shortfall? In some countries at least, it seems that operators are starting to find a credible answer: mobile broadband. However, this is only a partial solution. In fact, it seems unlikely that the sum of all value-added services will counteract the decline in voice ARPU entirely.
Figure 1: Subscriber and ARPU trends in Western Europe, 2005–2013 [Source: Analysys Mason, 2008]
The biggest change in absolute terms during the next five years will be the decline in voice ARPU, while the main driving forces behind improving ARPU will be mobile Internet services and ‘infotainment’ services (encompassing mobile services such as games, music, TV, adult content, gambling and social networking). These three areas should be priorities for MNOs in their attempts to keep the decline in ARPU as low as possible.
Halting the decline in voice spend is the biggest challenge facing MNOs in Western Europe today. Regulatory changes will lead to part of the decline in voice revenue, but competition is also playing an important role in bringing down prices. Recently, some large MNOs, such as Vodafone and Telefónica, have been trying to move away from intense price competition by raising prices in the UK and Spain respectively.
Competition from MVNOs remains strong, and MNOs’ attempts to increase prices may be futile, at least in the prepaid sector. Analysys Mason’s Telecoms Market Matrix shows that competition from the MVNO sector has led to an 8.8% decline in the price of the average mobile voice minute in Western Europe during 2007, and that this has been accompanied by only a 5% increase in minutes of use. In this difficult situation, MNOs might be consoled by the fact that the lower mobile premium will encourage fixed-to-mobile substitution, particularly in the current economic conditions. If household budgets come under pressure and householders have to decide between reducing mobile minutes or removing a fixed line, a lower mobile premium will work to the advantage of MNOs. The dramatic decline in the mobile premium since 2004 is shown in Figure 2.
Figure 2: Declining mobile premium in selected Western European markets, 1Q 2004–1Q 2008 [Source: Analysys Mason Telecoms Market Matrix, 2008]
When it comes to filling the gap left by declining voice ARPU, MNOs have tried plenty of different options over the years. One such option is mobile broadband, which has taken off in some countries, and is starting to realise its potential. In the next few years, a significant share of the revenue potential from mobile Internet services will be from handsets, rather than other devices. Improved handset functionality will contribute to the growth of both mobile Internet and infotainment services. The successful implementation of these services will rely on three main changes, which MNOs must ensure occur as rapidly as possible:
- High-speed data connectivity. The deployment and improved performance of HSPA networks will enhance the end-user experience, leading to increased satisfaction and higher repeated use of services. As well as providing a better browsing experience for mobile Internet subscribers, high-speed data connectivity will improve media streaming and downloading.
- Improved device functionality. Recent launches of devices such as the iPhone are a timely reminder of the importance of device functionality in driving service adoption. Consumers must have handsets that are capable of delivering a positive user experience if services such as Web browsing, and music and video streaming are to be successful.
- Getting pricing right. MNOs have introduced flat-rate data plans, which have acted as a catalyst for the adoption of mobile Internet services, and similar pricing is also in place for other services such as mobile TV. Because many infotainment services are available via a mobile Internet connection, these flat-rate tariffs will drive the right subscriber segments to the point of purchase for infotainment services.