Fixed-line revival

The convenience and cultural integration of the mobile phone in mature markets and the pre-eminence of GSM networks in less mature ones, has encouraged users to increasingly favour voice calls via a mobile device rather than through the PSTN network. Christopher Reynolds delves deeper into what fixed-to-mobile substitution means for operators in the MENA region.

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By  Christopher Reynolds Published  February 1, 2007

The possibility of replacing fixed-line voice communications with mobile technology appeared more like a pipe dream in the early nineties, when industry players largely focused on developing fixed wireless solutions, that is to say, PSTN solutions based on wireless technology. However, with around 2.5 billion mobile subscribers worldwide, the substitution of landlines in favour of mobile communications, particularly voice, is certainly growing, and is driven by numerous factors.

Due to increased competition and more efficient networks, and, in particular, the take off of 3G, the cost of making mobile calls has decreased and Milan Sallaba, director and office head of Mercer Consulting, believes mobile tariffs are set for a further decline - faster than fixed - in the years to come.

"Falling equipment prices, intensifying competition among mobile operators, as well as the capacity increase brought on by 3G networks, is expected to further drive mobile prices down and users may start to feel that they can afford more calls over more convenient mobile handsets," says Sallaba.

Linked to this is sustained macro economic growth. For instance, in the Middle East and Africa, the environment for the development of fixed-to-mobile substitution (FMS) continues to develop, as gross domestic product growth allows more money to be spent on telecommunications. However, the perceived or real cost of a mobile call compared to a fixed call may equally act as an obstacle for quickly expanding FMS, now often supported by the advent of fixed VoIP.

Another aspect encouraging the FMS trend, according to Sallaba, is the personal nature of the device supporting the increased ‘individualism' of our society.

"The mobile handset today plays a central role in many people's daily life and centres around flexible lifestyles and maximising convenience. In a modern household, each family member may very well have one mobile phone, but there is seldom more than one fixed line. Personal calls are increasingly made to mobile phones, in order to ensure that the intended individual is reached," says Sallaba.

Akshay Lamba, senior consultant at KPMG, sees the primary motivator behind the spread of FMS as the strong desire of telcos to switch traffic onto their newer and less depreciated networks.

"The amount of money that has gone into GSM networks is increasing. How do you as a telecoms company recover that money quickly? You do that by increasing the traffic on your network, so that is where fixed-line substitution comes in when you try and look at your customer base and say at what point in time what services can I offer that will encourage people to use the mobile network more than the landline network," says Lamba.

Sallaba also highlights the flexibility and functionality afforded by a mobile handset, as well as the growing quality of mobile voice calls, as strong factors driving the trend toward mobile usage. Fixed telephony has an inferior position on both voice and non-voice services, the latter having increased user focus on the mobile handset. Even simple applications such as an address book have increased the reliance on the mobile to the extent that the fixed line in many situations is viewed as not fulfilling basic needs, and the popularity of other services, such as SMS and MMS, further promote and support FMS.

The quality of mobile voice transmission has been greatly enhanced since the mid-1990s in mature markets and has become less of a factor for users when given the option to make a call over a fixed or mobile line. However, in less developed markets such as those in the MENA region, a lack of network coverage still frequently results in a low quality service and therefore is still a concern for voice users.

"The quality of mobile calls is typically perceived to be lower than fixed calls. Coverage remains an important issue in many markets, including MEA. Insufficient network coverage does result in lower voice quality, which has a direct negative effect on fixed-to-mobile substitution development," says Sallaba.

In markets with well-developed fixed and mobile networks, where consumers have a real choice, there is a trend for traffic to shift from fixed to mobile networks. This trend is driven by changes in user attitudes and preferences. Countries in the MEA generally have less developed fixed-line infrastructure than, for instance, Western European markets, and the economics and the possible speed of rolling out mobile networks simply is more attractive than additional fixed-network rollout.

"In the UAE for example, the fixed and mobile networks are almost as old as each other. If you look at Europe or the US the fixed lines are far older than the mobile. So the basic idea is to pull traffic toward the mobile network in order to be able to generate higher revenues," says Lamba.

Hence, in the MENA region a large proportion of voice traffic growth is carried over mobile networks instead of fixed networks, making mobile networks the key means of communication rather than a substitute for fixed-line communications. Users often do not have a real choice between fixed and mobile but are driven to use cellular technologies for all their calls out of necessity. In the MEA, many new users are ‘mobile only', and the households they live in will no longer necessarily have a fixed line.

In markets with saturated mobile penetration, FMS offers opportunities to grow or stabilise voice ARPU. "Fixed-mobile substitution generally provides opportunities for mobile operators whilst it threatens those of fixed-line providers, in case they fail to adapt. Fixed-mobile convergence is typically viewed as an attempt by mainly fixed / integrated carriers to slow the overall trend to fixed-mobile substitution," says Sallaba.

"Incumbent operators that have a dominant position in both fixed and mobile business (for example, Etisalat, Qtel, and Omantel), may defend market share for their fixed-line business and hence ignore promotion of fixed-mobile substitution, thereby leaving the market open for smaller players that could conceivably target the fixed line market segments to build share on the back of fixed-mobile substitution," he adds.

In the US, packages with different amounts of mobile minutes that can be shared within a user group (such as a family) are being promoted. This has proven to be a successful tool in attracting voice minutes to mobile networks, according to Sallaba. Also, friends and family packages or general ‘on-net' tariffs for mobile networks are being exploited and provide discount plans intended to increase usage of mobile services.

Mobile telephony is booming in the MEA region and all markets in the region are experiencing FMS to some degree. However, those markets that either have a very high penetration of SIM cards and those that have or are in the process of establishing a competitive mobile environment are the ones most likely to be most affected by FMS.

High SIM-card penetration points to a large proportion of the population who are using mobile networks for their voice calls, and several mobile players in one given market will likely be forced to be more innovative and aggressive in attracting users and volume to further fuel their growth.

"Look at the MENA, you generally have a very healthy penetration and in countries such as the UAE, Bahrain and Kuwait. In terms of competitive landscape, additional countries to be considered in this context would be Egypt and Saudi, which are both preparing for third mobile entrants, albeit not on the same timescale," says Sallaba.

Fixed only operators in mature markets are working hard to close the gap with mobile's convenience and handset functionality while emphasising their advantages in price and quality. They build on the fact that broadband internet usage is closely tied to the fixed line, and they market the fixed line as a home institution.

A combination of low-cost line rental, broadband internet access, TV and video on demand services strongly differentiate from mobile-only services in the home and many users would be unwilling to remove their fixed lines if this meant losing their broadband internet services.

A recent study by information technology and telecommunications advisory firm IDC revealed that the Saudi Arabian fixed-line voice market shrank by 4% to US$2 billion in 2005 and is likely to contract on average by 7.6% annually over the next five years. However, due to the low cost of fixed-line calls in comparison to mobile and the momentum gathering behind VoIP, the growth of mobile telephony has not stemmed the growth in fixed-line connections, which are set to rise 5% by the end of 2006.

"The new lines are a reminder of the under-penetrated nature of the Saudi telephony market but also of the rising demand for internet access," says Mohsen Malaki, research and consulting director, IDC CEMA.

However, fixed-line operators will never be able to reverse FMS according to Malaki; though opening up to voice over broadband and the transfer to next generation networks is the smartest approach for operators to take, in order to lower PSTN cost and offer users value added services over the fixed line.

"You need to try to lower your overall operational cost, so that you can actually provide lower prices to PSTN customers who have been tempted to switch to mobile or VoIP and to do that you need lower cost, which means to be able to lower operational expenses, and a big chunk of that can be done by transferring to next generation networks," says Malaki.

In response to the technological changes affecting the Saudi Arabian market, the government is expected to continue pursuing its telecommunications liberalisation process. A new licence is likely to be issued in Saudi in the first half of 2007 and the telecoms regulator is likely to open the market to voice over broadband, further spurring competition and opportunities for both the incumbent and the new operator. There have also been unconfirmed rumours suggesting Telecom Egypt will also play a part in the fixed-line tender process.

Eight international players are lined up to bid for Saudi's third GSM licence, including Orascom Telecom, MTC, Oger Telecom, MTN and Singapore operator SingTel. Industry insiders speculate the mobile licence could fetch up to SR15 billion (US$4 billion).

Sallaba adds that along with migrating to NGN networks, to offer innovative services that can provide incentives for users to maintain a fixed line, cornered incumbents can employ other tactics such as reducing fixed-line rental models to further help slow FMS.

"Belgacom has been quite successful in slowing FMS by implementing these tactics. Finally, the promotion of broadband access can complement erosion, but most likely not make up for it in the region as fixed line penetration is too low," says Sallaba.

“In the UAE the fixed and mobile networks are almost as old as each other. If you look at Europe or the US the fixed lines are far older than the mobile. So the basic idea is to pull traffic toward the mobile network in order to be able to generate higher revenues”

“In a modern household, each family member may very well have one mobile phone, but there is seldom more than one fixed line. Personal calls are increasingly made to mobile phones, in order to ensure that the intended individual is reached”

“The best way for operators to slow down fixed-mobile substitution is through offering innovative services that reduce the propensity to cancel the fixed line subscription”

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