The pricing strategies that operators have used to help them through the economic downturn look set to hinder any rebound in revenue. Strategies such as margin-for-loyalty trade-offs, margin-for-volume trade-offs and SIM-only contracts have fundamentally altered consumers’ perception of value and pricing. In consequence, price premiums will be harder to maintain and additional spend on new services will be more difficult to harvest.
The shift towards flatter, unmetered pricing is a long-established phenomenon, and has been driven by several concurrent factors.
- Technology has pushed operators towards flatter cost structures and, as a result, towards flatter retail prices, as the additional cost of a minute or a megabyte, or even of a piece of content, becomes smaller.
- The value-based pricing model, pioneered in telecoms services by the French altnet Iliad, has been seen to work as a way to drive up market share and maintain ARPUs at a particular level. This model works effectively as a means of increasing market share in an expanding niche in the overall market (such as in the growth in retail consumer broadband that took place in the earlier part of the last decade), but it is not a model that can easily encourage growth when applied across the board. To some extent, users want to save on what economists refer to as the ‘mental transaction costs’ associated with metered pricing, and can often switch to value-based flat-rate pricing even if they could save money with more traditional tariffing schemes. Flat-rate pricing has become an increasingly common feature of inexpensive and frequently purchased goods and services in other retail areas.
- The recession has been another driver of the push towards flat rate. People are more financially insecure, but those still in employment do not necessarily have less money in their pockets; a common response to this is to seek more value for a given level of expenditure. This accounts for the steeper rise in the proportion of mobile users taking out some form of contract over the period of the recession. Again, this is a phenomenon that has been observable across many areas of retail, especially in supermarket retailing.
These trends have had the effect of reducing the perceived value of the minute of conversation, the megabyte or the piece of content. In fact, they have almost eliminated the consciousness of the value of a minute or a piece of content; this has been replaced by a perception of the value of ‘voice’ or ‘content’ or even, more damagingly as multi-service bundling becomes more prevalent, of a ‘telecoms subscription’.
So as Western economies pull out of the recession, we are unlikely to see a quick rebound in revenue. In the third quarter of 2009, most major European economies experienced renewed, albeit rather slow, economic growth. However, the telecoms service revenue of the 16 largest operators in Europe underwent a further slide (see Figure 1).
Figure 1: Revenue growth of the 16 largest European telecoms operators,
1Q 2008–3Q 2009 [Source: Analysys Mason, 2010]
This trend affects some sectors of the market more than others. For the time being, mobile broadband (using a USB modem or datacard, excluding use of the handset as a modem) is mostly a new component of the market; subscriptions to this are largely independent of other types of subscription, so some appreciable continued growth can be expected in this area. However, for mobile Internet, charges are chiefly part of an overall handset-based package; growth over and above the decline in the value of mobile voice will be much harder to sustain for mobile Internet because mobile handset subscriptions are subject to these increasingly rigid perceptions of levels of spend.
Analysys Research forecasts show that the effect of the recession is a one-off decline in revenue, approximating to 4.4% loss of earnings in 2009, and that the knock-on effects will be a continued, albeit much slower, decline in retail spend (on these services at least) for the next five years (see Figure 2).
Figure 2: Retail telecoms service revenue in Western Europe, by service type, 2008–2014 [Source: Analysys Mason, 2010]