Analysys Mason organises regular TMT events with the financial communities in London, Singapore and the Middle East.
One such event (the London City Briefing) took place in London earlier in 2011 and was attended by around 60 senior executives working for investment banks, private equity firms and telecoms operators. The topic for discussion was "The Future of Broadband in Europe: implications for investment and industry consolidation", and Analysys Mason's presentations were well received by the attendees. Below we summarise some of the key issues discussed at the event.
The combination of dramatic traffic growth and slow revenue growth is putting pressure on mobile operators' cashflows. As a result, operators will have to optimise their network costs if they are to generate a return from mobile broadband.
Traffic growth
Worldwide wireless traffic is expected to exhibit a 48% CAGR from 2010 to 2015, as a result of growth in the number of mobile connections (in emerging markets) and rising average wireless traffic per connection (in developed markets). In developed markets traffic per connection is expected to rise from 81MB/month in 2010 to 523MB/month in 2015.
It is important to point out, however, that there are two totally distinct waves of mobile data traffic: mobile broadband traffic on large-screen devices (PCs, tablets) and mobile Internet traffic on small-screen devices (mobile handsets). Slower growth in one type of mobile data traffic offsets the strength in the other: average consumption per mobile broadband subscriber is generally flat or in decline while mobile handset data consumption is growing fast (although still a small share of total mobile data). As a result, overall traffic growth in Western Europe is likely to be lower in 2011 than in the past, due to two effects:
- the broadly flat traffic profile of the large-screen 'mobile broadband' market
- the offloading of a large proportion of small-screen 'mobile Internet' traffic onto fixed networks: although iPhones and other advanced smartphones can generate GBytes of data traffic, the larger share of the data is in reality carried as fixed-network traffic in many European markets
Revenue growth
If operators continue to use the flat-rate pricing model, revenue per megabyte is expected to decline: we predict revenue of less than USD5 per GB by 2015 in both developed and emerging markets.
However, revenue and price per GByte for handset data packages is currently many times higher than that for mobile broadband. Therefore, if operators can increase the proportion of small-screen data consumption this will improve profitability, at least in the short term. Indeed, there are early signs of this happening in some markets, and some operators have even seen modest growth in revenue per GByte. However, because the price premium for small-screen traffic is in decline and likely cannot be sustained forever, this approach is likely to provide only a short-term solution.
Implications for investment
In this context, mobile network investment needs to adapt to the changing distribution of traffic.
- To be profitable, mobile network upgrades must be focused and flexible and not network-wide, requiring networks that can serve a higher proportion of central business districts (predominantly small-screen handsets) and a lower proportion of residential areas (large-screen devices).
- To generate sustainable cashflows, mobile operators will have to reduce network costs by using several techniques at their disposal. For example, upgrading to HSPA+, buying spectrum and deploying LTE from 2013 are likely to be key elements of network management.
- Premature network-wide upgrades to LTE would result in excess capacity and, in turn, lead to value erosion and put pressure on mobile-only business models, as the oversupply of capacity would lower the floor to which mobile data pricing could fall.
Analysys Mason organises City briefing events regularly during the year. If you are interested in attending any of these events or would like to discuss the content of this article in more detail please contact Marco Cordoni, Partner, at marco.cordoni@analysysmason.com.