Operator’s Dilemma (And Opportunity): The 4th Wave
A Mobile Future Forward Paper
In 2012, the global mobile industry revenue will hit $1.5 trillion. This revenue has tripled in the last 10 years. Mobile operator’s revenue reached a new milestone at the end of 2011. The total global mobile operator revenue exceeded $1 trillion for the first time. The operator profits have more than doubled in the last 10 years. The trifecta of fast broadband networks, well-designed mobile computing devices, and the insatiable supply of content, applications, and services has unleashed consumer demand for more like never before. If we look at the history of the mobile industry, the first generation was primarily focused on voice and this era persisted for a good 10-15 years before 2G messaging and very basic data services were introduced. A decade later, data services started to become more interesting as 3G networks enabled faster access speeds and new applications. When Apple released iPhone in 2007, followed by Google’s Android in 2008, the industry was turned on its head. While the implications were apparent at the time, the far-reaching impact of these new devices on how people work and live is still unraveling.
The changing face of the industry also impacted the business models, the revenue streams, and the value chain power structure. For much of the last three decades, voice has dominated the revenue streams for almost all operators. However, in 2013, voice revenues will fall below the 60% threshold globally. The drop in voice revenues has been compensated by the rise of messaging revenues and the data revenues. However, some nations and operators have started to experience declines in messaging revenues. The access revenue stream is still very much a growth story and is rising fast for almost all the operators.
We studied the revenue growth patterns for 65 leading operators in 30 major global markets to understand when the revenue in certain segments rise, stagnate and fall. The underlying data yields some interesting and consistent patterns that are instructive on how things might shape up over the course of the next decade.
The sigmoid or the S-curve growth has been well understood and applied to various disciplines. To understand the various revenue growth curves, we segmented the operator revenues by voice, messaging, and access and correlated them with subscription growth. In a majority of the cases, as the subscriber penetration approaches 70-90% band in a given segment, the Net-Revenue starts to hit its peak, stagnates for a bit and declines. The amount of time the revenue curve stays in the stagnation phase depends on the market competitive dynamics and usage profile of the subscribers in a given country.
The first revenue curve of voice is already in decline for majority of the developed markets like the US, Japan, and Western Europe. The second revenue curve of messaging is on the decline in some nations like the Philippines, Netherlands, Taiwan, Spain, and Italy while approaching saturation in countries such as the UK, France, and the US. Both these curves are on the rise in developing countries, which are still in the subscriber growth phase. The third revenue curve of access is in the growth mode around the world for all nations; however, the margin pressure on this revenue base is the strongest of the three as the operators rush to meet the growing data demand that is doubling every year in most major markets. We are likely to see the growth continue for the next 3-4 years before this curve also starts approaching its peak. At this stage, all three revenue curves will be in decline. This means that the net revenue for some of the operators and for some nations will start to go down, in some cases precipitously. This will happen to operators around the world at different time intervals, unless the fourth revenue curve starts to take shape in the near term to help cushion the decline.
The growth of revenue in this fourth curve will be critical. For some operators, a weak fourth curve will be fatal. They won’t be able to arrest the fall in the overall net revenue and investor pressure will force them to consolidate or learn to live with lower margins or go out of business.
As such, it is important to understand the importance of the fourth curve and formulate strategies that extend the lifetime of the previous three curves such that net revenues and net profitability stay healthy over the course of this decade. The most interesting dynamics of this fourth curve is that other racers are not only the fellow operators but some new well-funded service and application providers. They are using new gear, are not constrained by the same rules, can change gears at will, and are ruthless in their execution. All this renders the traditional telecom organizational structure and the way of life - obsolete.
Based on the strategy chosen, the operators will likely fall into three major buckets: access only, enabler, and digital lifestyle solution providers. The operator might play all three roles depending on the vertical in a given country. However, without playing a significant role in the latter two categories, operator revenues over the long haul will start to resemble those of utilities – billions of dollars in revenue but the margins might shrink to 8-12% from the current 30-40%.
The next 2-5 years will be critical for operators worldwide. The strategies they pursue and the investments they make will define their future existence for the coming decade. Operators who are investing heavily in the 4th curve have a good shot at seeing the end of the decade but a good many will succumb to the powers of the growth curves, leading to consolidation in almost all markets or they will gradually morph from operators to utility providers. Many will be caught unawares by the shifting sands of revenue and their inability to mutate to compete effectively in the IP world.
Operator’s dilemma – The 4th wave analyzes the four mobile revenue curves in detail and discusses the strategies needed to increase the net revenue and the investment areas that can lead to new revenue and healthier margins for operators around the world.
Your feedback is always welcome.
We will be discussing a number of issues raised in this paper in our annual mobile executive thought-leadership summit - Mobile Future Forward on Sept 10th in Seattle. Confirmed speakers include: Abhi Ingle, VP, Advanced Solutions, AT&T; Antonio Benjamin, Global CTO, Citi; Biju Nair, EVP and Chief Strategy Officer, Synchronoss; Bobby Morrison – President, Verizon; Carlos Domingo, President and CEO, Telefonica R&D; Dan Deeney, Partner, New Venture Partners; Dave Whalen, VP/GM, Intel; Ed Cantwell, SVP, West Wireless Health Institute; Erik Ekudden, Head of Strategy, Ericsson; Erik Moreno, EVP, Fox; Frank Meehan, Executive, Horizons Ventures; Glenn Lurie, President, AT&T Mobility; Hank Skorny, VP/GM, Intel; Houk Reed, VP, Tekelec; Jana Messerschmidt, VP, Twitter; Jeff Smith, CTO, Numerex; Kevin Packingham, SVP – Product Innovation, Samsung; Marianne Marck, VP – Engineering, Starbucks; Mark Anderson, CEO, Future in Review; Mark Young, VP – Mobile and Connected Devices, NBC Universal; Michael Bayle, SVP and GM, ESPN Mobile; Mike Woodward, President - Americas, HTC; Mung Ki Woo, Head of Mobile, Mastercard Worldwide; Neville Ray, Chief Network Officer, T-Mobile; Oke Okaro, Global Head of Mobile, Bloomberg; Renee James, SVP, Software and Services Group, Intel; Stephen Bye, CTO, Sprint; Stephen David, former CIO, Proctor & Gamble; Steve Elfman, President, Sprint; Tim Chang, Partner, Mayfield; Wim Sweldens, President, Alcatel-Lucent Wireless.
We will be keeping a close eye on the trends in the wireless data sector in our blog, twitter feeds, future research reports, and articles. The next US Wireless Data Market update will be released in Aug 2012. The next Global Wireless Data Market update will be issued in Sept 2012.
Disclaimer: Some of the companies mentioned in this paper are our clients.