Close Connections

Karim Sabbagh recommends an 'integrated services' business model for mobile network operators seeking to fully develop the market in mobile data.

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By  Richard Agnew Published  July 4, 2004

|~|mtc5.gif|~||~|All signs indicate that mobile data —sounds, pictures, video, and text transmitted through wireless networks — constitutes the biggest new business opportunity for the wireless telecoms industry since its inception. A burgeoning population of consumers of all ages around the world fancies possessing a single mobile device for communication, organisation, and entertainment. In addition, for many wireless telecoms operators worldwide, mobile data isn’t just a new market opportunit — it’s a survival kit. Operators are in a difficult spot — the network connection they control is rapidly becoming a commodity, as markets are liberalised globally and in the Middle East and revenue growth from traditional voice and text services is slowing. Compound annual growth in spending on voice services from 2002 to 2007 will be just 4%. Thus, mobile operators that spent billions of dollars to build 3G networks are under great pressure to introduce multimedia data services to generate revenues fast, so they can pay off and capitalise on their broadband investments. In the Middle East, most investments are still going into 2G and 2.5G infrastructure, with growth still expected in these services. However, the region is in a unique position to start educating mobile phone users about multimedia services using currently deployed infrastructure, prior to investing in future generation networks. The phenomenal success of SMS-based services for TV votes and infotainment downloading is a cost-effective way for operators to educate the masses prior to stepping up to the next wave of applications that require higher capabilities than those that exist on networks today. But for mobile operators looking to make the shift from voice to data services, success will come only by substantially changing their business models. Booz Allen Hamilton believes that a new ‘integrated services’ business model — one that encourages productive partnering and more varied approaches to value creation — is the most promising option for the wireless industry. Operators won’t simply provide a connection to the network, rather, they will position themselves to directly influence and profit from every aspect of the wireless experience — reliable connections, clear reception, attractive and easy-to-use phones, useful applications, good customer service, and more. To do this effectively, operators will need to interact more closely with handset makers, content owners, software vendors, and application developers. Beyond Connectivity Although the worldwide growth in the mobile data marketplace has been little short of breathtaking, operators continue to apply the same connectivity-only model that the first generation of U.S. and European cable and internet service providers (ISPs) deployed in the 1980s and 1990s. In 2002, spending on mobile data services in Europe, the U.S., and Asia reached US$32 billion. From 2002 to 2007, mobile data service spending will grow at a compound annual rate of 24%, reaching US$92 billion in 2007, according to Booz Allen Hamilton projections. In the Middle East, mobile data revenues were estimated at US$471 million and are expected to grow as revenues from traditional voice services shrink due to increasing competition and market liberalisation. Growth will be driven in the Middle East by the increasing deployment of enabling infrastructure. Almost all Gulf and Middle East operators have introduced GPRS and have WAP capabilities. MMS is available in most Gulf countries with a planned introduction in the remaining ones within a couple of years. Even though voice transmission remains by far the largest part of the wireless business, we anticipate that in Europe sending messages, getting news, playing games and lotteries, watching sports, and sharing photos and video clips will be the top revenue growth generators in mobile products and services for the mass market within three years, with the U.S. following a similar trajectory. This also is the case for the Middle East, judging by the level of interest that is being given to such services and the increasing number of portals emerging in the region. Mobile operators can continue to capture only the basic value from the network connection as they add multimedia services, but their ability to grow revenues and profits will be highly constrained. The connectivity-only value proposition keeps them embroiled in brutal competition on pricing and network quality. Additionally, with this model, operators will always remain one step removed from the customer experience. Following extensive research and discussions with scores of executives at leading companies, Booz Allen Hamilton has identified two primary ways in which mobile operators can change their business models. The first option is to adopt a low-cost, low-risk, lower-growth connectivity model with the objective of increasing user traffic and the volume of data transmitted over the company’s wireless network. The second option is to use the higher-cost, higher-risk, but higher-value-added integrated service model, which aims to capture more value from the different types of content carried over the network. Refocusing Relationships The connectivity model may be viable for some small mobile service companies with limited financial resources and high-speed network capacity that can compete on price, rather than on the breadth and quality of their services. But this approach won’t work for the major carriers, especially those that have already made significant 3G investments. To earn the required return on their investments in high-speed networks, these operators can’t afford to cede to other players any of the potential revenue streams they can earn from content transmitted through their networks. For the majors, the integrated service model makes more sense. Under it, mobile operators will get involved in — and extract revenue and profit from — all the critical points in the value chain that affect the user experience. Mobile operators may play multiple roles in packaging, promoting, and selling content, subscriptions, and services offered by third-party content companies. These partnerships are crucial to the mobile operator’s ability to expand revenue streams, grow market share, and capture more value from the customer relationship. With the growth of mobile data services, the arm’s length relationship between mobile operators and their device suppliers needs to end. Applying the integrated strategy, carriers will concentrate on enhancing the handset’s service environment — the device’s interface and its underlying software platforms, which are critical to creating devices and applications that are easy to use, reliable, and secure. From simple co-branding, some mobile carriers have moved into exclusive distribution agreements with manufacturers to sell a specific handset model, with features designed to support the carrier’s multimedia service. Such design collaboration and marketing partnerships with mobile operators are especially attractive to device manufacturers because they help the manufacturers sell a larger number of tailored, higher-priced, higher-margin multifunction handsets. Phone manufacturers could even design entire service environments for specific mobile operators and offer them as pre-configured integrated solutions. Collaboration with content partners is another critical strategy in the integrated model. Mobile operators can reward content providers through revenue sharing that gives each partner a portion of the price charged for each download of content. Mobile operators can make themselves more attractive to content partners by embedding digital rights-management systems in their service environments. Booz Allen Hamilton interviews in Europe and the United States show that strong copyright protection is especially appealing to music companies, which are seeking to reduce the erosion of content value by peer-to-peer file-sharing services. Pricing Model The integrated services approach changes the pricing model, too. Charging for services on the basis of the volume of data transmitted is a strategy that mobile operators copied from the early internet services companies. But Booz Allen Hamilton research shows there is no correlation between volume usage and a customer’s perception of value. When we asked 700 users of consumer mobile telephone services in five major European markets in the fall of 2002 which payment methods would be most acceptable to them, 69% said they preferred the value-based pricing model, wherein they pay a price per download of content (1 euro per song, for example). Only 14% said they preferred to pay according to the volume of data transmitted. Not only is value-based pricing more acceptable to users, it is better for the business. Our analysis shows that volume-based pricing would actually decrease revenue for the popular photo, short-text, and instant message services, and would inhibit usage of music downloads, games, internet browsing, and video telephony. Furthermore, at the prevailing volume-based rate charged by European mobile operators in February 2003, downloading a one-megabyte music track would have cost EU10, but a standard text message would have cost only EU0.0001. According to our research, the optimal price would have been closer to EU1 per download for a song and EU0.2 for a short text message. In the Middle East and Gulf region, MMS services are priced by transaction with a volume cap to protect network capacity. The price per download varies between US$0.12 and US$0.60 with download limits varying between 30 and 100 Kbits/s. In order to increase the chances for MMS, value-based pricing should be introduced. This kind of pricing has been observed in some SMS-based services where users are charged differently for different types of downloads. An example of such a pricing scheme is Abwab, the SMS-based services of Saudi Telecom’s Aljawal. This is a menu-based service from which users can download ring tones, business news, prayer times, jokes, quizzes, and other types of content using the SMS infrastructure. MMS will enable the download of larger files with enhanced quality of content, therefore commanding higher prices. Emerging Lessons The year 2003 proved a watershed for the mobile data market. Consumer demand for and the supply of mobile data products and services increased noticeably, especially in Europe and the United States. Nevertheless, plain old-fashioned voice service remains the mainstay of the wireless business, and it will continue to be for the next several years. Indeed, in 2003, spending on voice services was US$292 billion in Europe, Asia, and the United States — more than seven times as much as the US$41 billion spent on mobile data service. By 2007, annual spending on data services in these regions will reach US$92 billion. This is still not close to the nearly US$339 billion projected to be spent on voice services. The picture is similar in the Middle East and Gulf region. Voice is still the dominant revenue source at 92% of total revenues in 2003, declining to 85% in 2007. The reduction in voice revenues as a percentage of the total is due to price reductions as well as a slight increase in data services revenues. In the Gulf States, data service revenues exceeded US$470 million in 2003 out of US$7.8 billion in mobile revenues. In the past, the wireless industry has been hurt because many players were not winners in their relationships with others in the value chain. This is changing as demand for wireless products and services grows and companies discover that collaboration is the best way to accelerate innovation, increase profits for individual companies, and enrich the overall market. Content and application developers, handset manufacturers, and telecom operators are competing to capture the highest value in the mobile multimedia environment. Collaboration will allow them to do so by leveraging their key competencies. In the Middle East, interaction between television and messaging has been successful through recent experiences with reality TV shows. Ring tone downloads are also providing music producers and distributors with a good revenue source. Future Television, LBC, and Rotana have all made use of mobile as a feedback channel for their content. In the near future, technology changes will enable better quality interaction and the possible download of short video clips. By collaborating with other players, operators will be better positioned to benefit fully from the future that is coming. That future, for the wireless industry, is multimedia data services. Karim Sabbagh is vice president of Booz Allen Hamilton, the strategic management and technology consulting firm. ||**||

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