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Western European mobile operators must take action in the face of a deteriorating retail revenue outlook

William Hare Senior Analyst, Research

Mobile operators need to make bold strategic moves to maintain profitability in the face of the prevailing decline in their traditional core markets.

Western Europe forecast

Revenue continued to decline sharply in the mobile market in Western Europe (WE) during the first half of 2013. We have recently updated our core forecasts for this region, and have fine-tuned the projections fully to take into account the factors that caused this decline. This Comment presents an overview of our new results, and the reasons they have been revised from the previous set.

Mobile retail revenue deteriorated sharply during the first half of 2013

Mobile retail revenue in WE declined by 5% in the first half of 2013, from EUR58.7 billion to EUR55.7 billion year-on-year. This is the worst first-half performance for some time – revenue actually grew year-on-year in the first half of both 2012 and 2011. Of the 16 countries in the region, 13 experienced a decline in performance relative to the second half of 2012, with a worsening in year-on-year growth rates over the past half-year. Greece continued to perform extremely badly, with revenue shrinking by 15% year-on-year, and revenue in the core markets of France and Italy both declined by 9%. Even Germany's mobile market performed poorly, growing by only 2% (compared with 6% in the second half of 2012). Denmark, Ireland and Spain were the only exceptions to the general trend (see Figure 1).

Figure 1: Year-on-year change in mobile retail revenue, by country, Western Europe, 1H 2011–1H 2013 [Source: Analysys Mason, 2014]

Figure 1: Year-on-year change in mobile retail revenue, by country, Western Europe, 1H 2011–1H 2013 [Source: Analysys Mason, 2014]

This acute downturn in revenue is largely attributable to a decline in mobile voice and messaging revenue. Heightened competition in some markets, such as France and Sweden, has put further pressure on mobile pricing. For example, in France, fourth entrant Free launched 4G services in December 2013 at no additional cost for subscribers to its EUR19.99 package, prompting a similar move from rival Bouygues Telecom. Not to be outdone, Free then extended its deal to subscribers on its low-cost EUR2.00 package.

The increased threat from over-the-top (OTT) applications is leading operators to offer ever-more generous allowances of minutes and messages in their tariff bundles, and adoption of unlimited packages is becoming widespread. The Netherlands is a useful benchmark for OTT messaging take-up in Western Europe, and showed the strongest decline in messaging revenue in the first half of 2013 – by 39% year-on-year. In Finland, where smartphone take-up has reached 69% of active handset SIMs and 4G services are well established, voice revenue fell by 20% year-on-year – the largest decline in WE. These are already familiar developments in WE, but the pace of decline has been particularly fast in some markets.

Growing availability and take-up of quadruple-play bundles is also putting pressure on mobile revenue. Quadruple-play tariffs are an effective means of defending market share by reducing churn and gaining incremental revenue from established subscribers (for example, by selling mobile services into the fixed subscriber base). However, the discounts that are applied to such tariffs can undermine revenue – particularly for mobile services. Take-up of quadruple-play bundles has been strong in markets such as France and Spain, where Telefónica's offering, Movistar Fusión, gained 2.6 million subscribers in its first year of operation.

The mobile broadband market (that is, USB modems and connected tablets) also underperformed in the first half of 2013. The number of connections in WE fell from 38.0 million at the end of 2012 to 37.4 million at the end of the first half of 2013. The increase in the number of connected tablets was insufficient to compensate for the continued decline in the USB modem market, driven by substitution by smartphones, tablets, public Wi-Fi and tethering.

We have lowered our mobile revenue forecasts to reflect the first half of 2013 results

We had taken all of these factors into account in our previous forecast for WE, but their impact on revenue was even stronger than we anticipated. We have therefore lowered our forecasts for the region's mobile market. Mobile retail revenue for the region will decline at a CAGR of –2.4%, compared with –1.7% in the previous forecast, to reach EUR102 billion in 2018, compared with EUR107 billion previously.

The largest change in percentage terms is for messaging revenue, which will fall at a CAGR of –12.9% to EUR7.72 billion in 2018, compared with EUR9.39 billion previously. Voice revenue will be 7% lower in 2018 than in our previous projection, at EUR44.6 billion. Mobile broadband subscriptions will decline overall in 2013 (driven by a 15% drop in the number of USB modems), before returning to growth, driven by the tablet market. The number of mobile broadband connections will reach 42.5 million in 2018, compared with 44.1 million previously. This will have an impact on revenue as well: mobile broadband revenue will decline to EUR7.23 billion in 2018, versus EUR7.63 billion in our previous forecast.

One positive effect of the faster decline in legacy services is an improvement in our forecast for mobile handset data, which has increased from a CAGR of 10.9% to 11.4%, resulting in revenue of EUR38.4 billion in 2018, which is 4% higher than previously. However, this increase is insufficient to compensate for the decreases in other services.

Figure 2 illustrates our new and old forecasts for mobile retail revenue in WE.

Figure 2: Mobile retail revenue by service type and previous forecast for mobile retail revenue, Western Europe, 2010–2018 [Source: Analysys Mason, 2014]

Figure 2: Mobile retail revenue by service type and previous forecast for mobile retail revenue, Western Europe, 2010–2018 [Source: Analysys Mason, 2014]

Operators can counter these trends by reducing costs and seeking additional revenue streams

Mobile operators have two primary methods of responding to these trends: reducing costs and finding alternative sources of growth. Several providers are looking to network sharing as a means of cutting costs – particularly when faced with the substantial cost of deploying LTE. For example, the UK's four network operators have all signed network sharing deals: Telefónica UK (O2) and Vodafone have pooled their access infrastructure, while still maintaining separate core networks and spectrum holdings; and EE and Hutchison 3G UK Limited (3) have a similar arrangement.

Device sales are an important source of additional revenue for operators. Devices are accounting for an ever-larger share of retail expenditure, thanks to a combination of the increasing availability of more-expensive smartphones and tablets, and the falling unit price of services. Operators can exploit this trend both by expanding their retail presence in order to capture a larger share of the market, and by offering device-leasing plans, which will appeal to customers who wish to spread the substantial upfront cost of a smartphone over a longer period.