From King to King Maker

Mobile service strategies for the telecom operators

Published in "Think!", DMR 04/2010 Online: http://www.detecon-dmr.com/en/article/from-king-to-king-maker_2010 _12_16 Dr. Wolfgang Knospe Joseph Noronha Facebook could very well turn out to be the next global communications powerhouse! This new reality stares right in the face of the mobile operators. Having offered their own communication services with voice still as cash cow, the kings of the mobile networks have mainly adopted countermeasures to protect their profitable business model. However, with protectionism under pressure, smart service strategies are required in order to secure a viable business in the future.

After investing heavily in the deployment of mobile broadband networks, operators had to wait almost 6 years to experience an uptake in data traffic and as a consequence, the beginning of the long awaited transition from a voice to a data centric business. Surprisingly, it was not any of the killer applications hyped in the early days of the first 3G networks that stimulated data demand, but devices like the iPhone. By building up an entire ecosystem around a user friendly product, Apple allowed subscribers to access mobile internet services like never before. The success of the smartphone was backed by the introduction of mobile flat-rates all you can eat plans that promised a wallet-friendly browsing experience. More importantly, users were even able to customize their smartphone by installing 3rd party application programs so-called apps which led to a richer, more engaging experience. Unfortunately, operator hopes of a similar manifold increase in revenues did not materialize. They were simply caught on the wrong foot to deal with an exponential increase in data traffic which has now forced them to invest heavily into large capacity expansion efforts.

Published in "Think!", DMR 04/2010

In addition, rather than stick to the operator portal, users simply transferred their fixed internet browsing habits to the mobile world. The internet majors led the way, creating apps, web sites and content around the handset capabilities. Mobile internet usage continues to increase even today, and in 2009 accounted for almost 30% of all mobile data service revenues worldwide (Mobile Internet 2.0 New Strategies for Monetizing the Mobile Web; Jamie Moss; Informa 2010). In a majority of these cases the operators role was in simply providing the basic data services through which these 3rd party applications could be delivered. Some of the popular internet applications provided services that overlapped with operator offerings and now appear to threaten the mobile operator. Skype is the most prominent example offering free calls within the Skype community piggybacking on the operators public IP service. Operators have typically adopted a defensive position and reactions have ranged from a complete ban of such applications from mobile devices to charging a premium to allow the service. In taking such a position the operators are seeking to protect voice as one of the few revenue streams where they still regain a modicum of control. Licenses for public IP services are typically based on the prerequisites of net-neutrality, in that operators can only charge subscribers for access, however are not allowed to discriminate between services which use the network as a transmission medium. Given this notion, it would be only a matter of time until regulatory authorities worldwide force mobile operators in the name of net neutrality to open their networks to any internet application without differentiation. This is being contested at present, and the outcome either way will have a significant impact on how we perceive the future of the industry. What operators could do Given the current situation, what are potential options for a mobile operator that help to secure as much revenue and customer base as possible? Operators naturally could react in three different ways. The first and a commonly chosen option is a defensive position restricting the use of certain applications which compete with its own offerings either by completely banning or charging a premium for such applications. As discussed earlier in general this may not be in compliance with current or future regulation and could also negatively impact the public image. The second would be a do nothing approach, the operator could simply resign himself and open his network to all 3rd party applications. While the allowance of such services (e.g Skype) on the network may impact the revenue in a negative way, churn might be reduced and users motivated to

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subscribe to a data tariff. In this case the operator would focus on becoming a pure-play infrastructure provider, and rather than end services, he would emphasize 3rd party service delivery at the lowest cost, with service quality under his control as long as he does not violate the net neutrality paradigm. This is inherently risky in a competitive market especially if multiple players adopt a similar approach and raises the possibility of driving prices down to unsustainable levels, leading to lack of interest in further investment due to poor or negative returns. In multiplayer markets this would possibly lead to consolidation of infrastructure providers. A third approach would be an offensive position with the operator deploying his own applications as a direct competitor to the 3rd party applications. This would allow the operator to almost keep full control over his network usage and even would expand his communication service footprint to geographically non-covered areas since this communication applications may be used in any network. However, he would be in direct competition with well-known and accepted applications the potential to win this battle would need to be assessed in detail. Finally, the operator could partner with 3rd parties, fully integrate their services, and allow their free usage on his network with any data plan. This is a fairly untested model where the different parties to the agreement bring together complementary strengths. It does not provide a winner take all advantage, but seeks to provide a benefit to all members of the arrangement. While the operator would benefit from the 3rd party applications as a measure of differentiation and attract their user base to become subscribers, the application providers could utilize the operators infrastructure such as international gateways and interconnection capabilities to increase the attractiveness of their own services. What operators currently do Analyzing the strategies in place it is clear that many operators prefer a defensive strategy in order to protect their revenue base. A classic case is the approach AT&T adopted towards Skype and Google Voice apps being available on the iPhone. The Skype app was enabled, but like similar other communication applications was restricted to usage of AT&Ts WiFi hotspots rather than its 3G network. In the latter case, the Google Voice app was initially pulled out of the Apple Appstore with finger-pointing towards AT&T as the ultimate gatekeeper of Apps, especially those which threatened its own offerings. Google responded by approaching the FCC in addition to launching a browser based application to circumvent the issue. In both these cases, such limitations were ultimately lifted with AT&T allowing 3rd party communication services on its 3G network but serves as a reference of a failed proposition.

Published in "Think!", DMR 04/2010

Within Europe, there has been a bifurcation of approaches, with smaller operators embracing 3rd party communication service providers while larger pan-European entities adopting a tougher, more uncompromising stance. In 2009 a survey of 27 (Informa Reports, July 2009; Mobile VoIPs European impact limited for now; Gareth Willmer) operators in major European markets found that 19 did not allow mobile-VoIP in their main mobile broadband tariffs, with others restricted its usage. An example of the former was 3 in UK which partnered with Skype to allow unlimited Skype-to-Skype calls and instant messaging without additional data charges for all customers in possession of selected 3 Skype enabled handsets. This was an attempt to lure more subscribers (both existing and new) to sign up to its data plans. Within a few months of launch 3 had sold over 500,000 of these handsets which carried a premium over its other handsets. Of this number 79% were new subscribers and had a margin which was 20% better than 3s average customer. On the other hand larger operators such as T-Mobile in Germany that allowed mobile-VoIP charged an additional amount beginning at €9.95 depending upon the contract which behaved as a barrier for adoption. Orange also launched a similar plan in April 2010, charging users €15.00 on a monthly basis with data usage deducted from their monthly data allowance. However, in both cases the opening up has been purely for end-to-end VoIP services with a small number of handsets available with this capability without inclusion of VoIP to mobile termination as part of the plan. It is clear here that while the smaller operators sought a collaboration as a means of increasing attractivity of the service, the larger operators clearly considered it a threat. The limited efforts on the part of the operators to offer alternative communication services have not led to a significant level of uptake at least not at levels which threaten to upset their current revenue streams. This can be attributed to a few characteristics. The primary reason is the fact that operators would like to stretch the returns on their existing infrastructure for as long as possible hence devote less attention and resources towards promoting such enhanced 3rd party communication services. From the user perspective the additional costs in terms of a surcharge as well as a mobile termination fee does not yield to large savings. In addition the user interface has remained sub-par since many services are offered on a standalone basis. The absence of integration with existing services such as address book, voice mail etc. has led to a poor user experience on the whole. Hence many would be consumers have stayed away from migrating to these services. For external parties offering communication services the challenge remains to be able to develop an application which offers the same capabilities across an ecosystem made up of devices with different hardware and software configurations. The absence of a common platform to develop which can be ported across devices results in the need to tailor each application to a

Published in "Think!", DMR 04/2010

particular handset and repeat the exercise for the next device. Add to the fact that regular software upgrades are the norm makes maintaining applications a time and resource consuming effort. This is very visible in the fact that Apple has managed to retain a large sub-section of the developer base due to its single offering. Developing superior applications across an entire ecosystem of devices with different capabilities remains a daunting challenge. In the middle of the standoff between most operators and 3rd party communication service providers, it is worthwhile considering the newly formed partnership between Verizon and Skype. A competitive response to AT&Ts move to open up VoIP over its 3G network it serves as an interesting backdrop to potential future directions in the industry. In this arrangement a specially designed Skype client is included on several models of Blackberry as well as Android handsets. It allows for free Skype-to-Skype voice calling worldwide (both inbound and outbound) as well as International Skype-out calling. The domestic calling minutes come from the customers voice plan. Instant messaging worldwide with chat and presence information is also included. The important aspect here is that the application will be deeply integrated in the device. Hence rather than being promoted as a substitute, it is leveraged as an enhanced component to the existing service portfolio. The voice traffic is carried over Verizons voice channel (circuit switched) thus providing a level of QoS while presence information, messaging and signalling traffic is carried out the data channel (packet switched). The integration of address books, and optimization to conserve battery life all point to the level of integration on the handset. Currently no video calling, SMS or file transfer services are allowed; this may be a temporary move on Verizons part while it gauges the take rate and usage, and can determine if its network will be able to handle the corresponding increase in data traffic. This arrangement, even with its current level of restrictions points to a well developed symbiotic relationship between two major players. Verizon receives a percentage of Skype-out revenues, similar to the Skype-affiliates program of up to 25% of revenues while Skype receives software licensing revenue on the sales of these Skype-integrated handsets and voice/data plans which include Skype. The enhanced user experience will woo customers to Verizon. It has the potential to add customers to Skypes user base, whereas Verizon customers can call over 500 million existing Skype accounts worldwide for free. Skype-out may cannibalize Verizons international calling revenue but serves as an attractive platform to drive users to its (higher priced) data plan, who would eventually use other data services as well. What operators should do

Published in "Think!", DMR 04/2010

Considering the different options which are available, and examining the outcome of different attempts within a fast moving industry one can come up with a few hypotheses on what strategies an operator could incorporate. In the short to medium term it would be prudent to adopt a pseudo-defensive strategy to extract as much revenue as possible from his sunk costs in circuit switched technologies. Here the operator would need to be aware that this would only last as long as hybrid scenarios (IP to Circuited Switched traffic) are still viable business cases. Since there is a still a long way towards seamless roaming at no additional cost and elimination of termination tariffs, operators should maximize this revenue stream.

Simultaneously, it would be essential for the operator to develop partnerships with 3rd party communication service providers. The partnership should be geared towards a deep integration of services with an emphasis of providing the user with a rich user experience, both in terms of usability as well as in terms of quality. The relationship should extend beyond just technology considerations to include joint marketing efforts to ensure a high level of user acceptance. Revenues would increase through increased adoption of higher priced data plans, while the operator would be able to retire his legacy equipment at an earlier date, reducing costs associated in maintaining a separate 3G voice network. The use of data intensive complementary

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services such as video calling and file-transfer could further increase data consumption and depending on the tariff enivornment may push revenues even higher. For hybrid cases, the operator could lease some of his assets including gateways to external parties deriving additional revenue. At the onset, it would be prudent for the operator to limit the number of partnerships to manage complexity, but as the capabilities evolve he could position himself as a hub for different communication service applications. In this way, irrespective of which end client the customer preferred, he would still be able to use communication services leveraging the operator platform. As we evolve to a pure IP world in an ecosystem of several different (and many a time incompatible) players, this is very much a possibility. In the long haul, if the operator wants to keep as much control as possible this would simply imply that the operator would shift his role in the ecosystem from being king, to being the king maker.

Dr. Wolfgang Knospe Dr Wolfgang Knospe is in charge of the division Radio Access and Transport of the Competence Practice Communication Technology. He has acquired broad experience in this field during his years of activities for globally and regionally active mobile network operators. His core competencies cover the strategic, technical, and commercial assessment of classical and modern mobile networks with a focus on dimensioning and network architecture. His current specialty is the creation of a cross-technology tool for the efficient planning of core parameters and of roll-out strategies in relation to business case calculations. Joseph Noronha Joseph Noronha is a Senior Consultant at Detecon Inc. (USA) and is a member of the Global Competence Team Radio Access within the Competence Practice Communication Technology. He graduated with a Masters in Electrical Engineering from Virginia Tech (U.S.A) and has been actively involved in the mobile communication industry for the past five years. His focus areas at Detecon include broadband wireless access technologies, Next Generation Access and Backhaul network architectures along with Unified Communication platforms and services. In this capacity he has actively engaged in strategy and technology projects in USA, Latin America, Europe, Africa and the Middle-East.

Published in "Think!", DMR 04/2010