The end of geography and roaming in telecoms

Today most people are familiar with services such as Skype. Effectively a location independent mobile service, with Skype it does not matter where people call from nor does it matter where the called party is located. Geography has become irrelevant. By the end of Q4 2012, it was anticipated that roughly 50 per cent of international call traffic is likely to have taken place via Skype and similar services rather than traditional carrier traffic.

More and more people are installing Skype on their handsets or using Facetime on their iPhone, and they are getting used to the fact that calling from their mobile phones doesn’t necessarily have to involve the mobile operator. What’s more they also get video telephony. Increasingly people use WiFi on their smartphones, both at home, at work and in public places. The introduction of WPA2 as well as SIM based authentication which allows automatic connection to a WiFi network without signing in makes it easy for users to route their traffic via WiFi and opt out of traditional telephony.  Operators such as Rebtel in Sweden and Republic Wireless in the USA focus on this opportunity – these mobile operators that use WiFi offload “push” their customers to make calls using Skype like services.

The trend away from making standard mobile voice calls is accelerating with the adoption of LTE. For example, in contrast to older versions of the iPhone, the new iPhone with Apple’s iOS 6 upgraded FaceTime from a WiFi only feature to a cellular feature. AT&T Wireless was the first to allow customers to use FaceTime over LTE if they signed up to their new shared data tariff plan.

During 2013 we will see the start of a fundamental reshaping of mobile telecoms service offerings driven by new services based on the IP Multimedia Subsystem (IMS), the evolution of mobile wholesale as well as regulatory trends. Some operators may go all the way and break the link between the mobile telephone numbers and geography. After all it seems somewhat archaic that in a world where distance does not matter, mobile operator tariffs are still based on location and distance. Location is not an issue with Skype or FaceTime and this is one of the reasons for the success of these OTT operators.

Some operators have already introduced services based on IMS, for example in Canada the Rogers One Number service allows the seamless switching between a smartphone and computer. It allows mobile operators to leverage the proliferation of free WiFi connectivity to in effect extend their network coverage world-wide.  This allows mobile operators to fight back against OTT services such as Skype, WhatsApp and FaceTime by in effect becoming themselves an “OTT over WiFi” player.

There are also traditional mobile services that allow users to avoid roaming charges and thus take at least one aspect of geography out of equation that already exists for voice (Truphone, WoldSIM and other) and data (roamline.com, in collaboration with KPN). The business model is built on exploiting the difference between lower wholesale prices paid by MVNOs versus high inter-operator roaming tariffs by offering customer SIMs with multiple numbers in different countries.

The opportunity to take geography out of mobile pricing is not limited to roaming. For example, Turk Telecom launched a service in Germany and Belgium aimed at the Turkish ethnic segment in these countries. Customers are charged exactly the same amount to call numbers in Belgium or Turkey. Turkcell could add the ability to recharge linked accounts (a Turkish person working in Belgium can recharge the prepaid SIM of relatives in Turkey) and make small mobile payments across borders. Smart, of the Philippines is already going down this route, targeting the Filipino diaspora segment around the world.

As a result of these trends in international call pricing as well as roaming, Geography may soon become irrelevant.

Written by Stefan Zehle, CEO, Coleago Consulting

Do we need telephone numbers?

Already most communications that take place over telecoms networks do not involve telephone numbers. Email and other internet based communications increasingly dominate business and consumer communications. Fixed network voice calls are moving to mobile and Skype like services. By some estimates the last fixed line phone will be retired in 2025. Even if the decline of fixed phones and with it fixed telephone numbers is not that fast, clearly the writing is on the wall.

Meantime in the mobile world, telephone numbers are growing fast. However, sending messages to mobile numbers and calling mobile numbers has started to go out of fashion. Messaging services such as WhatsApp are replacing SMS and increasingly people use Skype on their handsets. Of course Skype also sells telephone numbers, but most Skype users don’t bother to buy one.

The trend away from making standard mobile voice calls is accelerating with the adoption of LTE. For example, in contrast to older versions of the iPhone, the new iPhone with Apple’s iOS 6 upgraded FaceTime from a WiFi only feature to a cellular feature. AT&T Wireless was the first to allow customers to use FaceTime over LTE if they signed up to their new shared data tariff plan. The key aspect about the new tariff plan is that in terms of pricing it is data centric, with voice playing minor role. Most mobile operators still base their tariff plans on a minute bundle with data added to that, but this will change rapidly as LTE becomes commonplace.

If telephone numbers become obsolete this poses challenges not just for operators but also regulators. The world of telephony is organised around telephone numbers and there is an element of sovereignty in country codes and national numbering plans. If telephone numbers become obsolete, governments have surrendered this sovereignty to the internet. This is a frightening prospect to some governments.

Many aspects of telecoms regulation are number focussed. If people no longer need telephone numbers, national regulatory agencies effectively lose control over telecommunications within their borders as well as internationally. The spat at the December 2012 ITU meeting in Dubai over regulating the internet is only the opening skirmish in what is likely to turn into a major battle.

The way in which the obsolescence of telephone numbers will impact will differ between markets. Some emerging market countries still have not fully re-balanced fixed network tariffs, e.g. Tunisia, Algeria, Kuwait to name a few I am familiar with. Subsidising the cost of the line rental from long distance calls will no longer be possible. For example, in the case of Tunisia the fixed line rental retail price would have to increase by a factor of four to cover costs. Such price increases are politically unacceptable and hence it seems tempting to look for money elsewhere, e.g. from Google, Skype (Microsoft), and perhaps even from the most valuable company on the planet, Apple.

The transition will not be problem- free for developed markets. Already regulators fret over the issue of calls to emergency services. On its website Skype clearly states “Skype is not a replacement for your telephone and can’t be used for emergency calling”.

On the plus side, if telephone numbers become irrelevant, operators and regulators will not have to worry anymore about fixed and mobile number portability.

Written by Stefan Zehle, CEO, Coleago Consulting

How Nokia hopes the new Lumia will light up Asia

The launch of the latest Nokia Lumia smartphones could revive Nokia’s presence across Asia and China in particular, but will they come quickly enough? Both the Lumia 710 and 800 Windows phones are scheduled to be available in Hong Kong, Taiwan, Singapore and India before the end of 2011, and Nokia will no doubt be working hard to avoid the delays which plagued the launch of too many previous models. However, China will have to wait until “the first half of 2012” before it sees the much-admired fruits of Nokia’s partnership with Microsoft. In the meantime it seems likely that “unofficial” supplies could filter across to the mainland, which may help to sustain interest until the official launch, although only China Unicom’s network is compatible with the 3G technology currently used in these Lumia models.

It could be down to the diverse 3G standards used by China’s three mobile operators: W-CDMA (the technology used most widely throughout the world) is deployed by China Unicom, CDMA2000 (less widely used, but most notably in North America) is deployed by China Telecom and TD-SCDMA (a standard developed in and currently limited to China) is used by the largest operator, China Mobile. Back in August Colin Giles, Global Head of Sales at Nokia, and formerly Director of Marketing for Asia Pacific and Senior Vice President for Greater China, announced that Nokia will be launching TD-SCDMA compatible Windows Phone 7 handsets in China. So it seems likely the delay is to allow Nokia time to engineer versions of the Lumia phones which can operate on the CDMA2000 and TD-SCDMA standards, allowing Nokia to launch its new smartphones with all three of China’s mobile operators.

With Nokia struggling to maintain its market position in Asia and across the world, clearly an earlier launch in China would have been preferable. However, this strategy does give Nokia one potential advantage against the iPhone: Apple doesn’t have a TD-SCDMA version either and it looks unlikely it ever will. That hasn’t stopped China Mobile from selling the iPhone through a network of partners, acquiring around 10 million iPhone users so far. The iPhone can use China Mobile’s 2.5G network for voice calls and text messaging, but users are limited to wifi for high speed data services. To promote this growth in high value customers, China Mobile is offering rebates in the form of gift cards to customers who buy an iPhone through one of its partners and sign up to a 2g voice and wifi package. In an increasingly competitive market, this “subsidy” is unlikely to be an attractive long term solution for the operator to retain high value customers, and it’s not a good solution for customers who want to use their apps wherever they go. However, many customers prefer these limitations to the unreliable coverage of Apple’s official iPhone partner, China Unicom (although the operator is now working hard to improve its service). So if Nokia is able to offer versions of the Lumia smartphones that work on the 3G network of China’s largest operator, China Mobile, that could be a win-win for both Nokia and the operator. Nokia has been building TD-SCDMA feature phones for several years, so it has the expertise to solve the hardware problems. Hopefully its close relationship with Microsoft will ensure a smooth integration of these radios with the Windows software as well. Once again though, timing is critical: 2012 sees the end of Apple’s exclusive 3-year deal with China Unicom and is also likely to see the launch of the iPhone 5, which just might support the 4G technology (TD-LTE) that China Mobile is currently building, although recent reports suggest that Apple and China Mobile have failed to agree a deal, as the operator wants a cut of Apple’s app revenues as well. So Nokia needs to exploit this opportunity quickly whilst also lining up its 4G Windows Mobile phones for the next round in the battle. And that means also pushing Microsoft for better 4G LTE support in the Windows Phone 7 operating system.

And what of the other major competitor in Nokia’s smartphone war, Android? Nokia is being squeezed on all sides here, from both lower cost local brand phones and huge global players like Samsung and HTC. With Android smartphones available for as little as 1,000 Yuan (around USD160) in China, it seems likely the cheapest Lumia model will come in at around twice that price. However both Microsoft and Nokia expect that cost to fall as cheaper and more powerful processing chipsets and cheap WVGA (typically 800 x 480) screens reduce the cost of a phone capable of supporting the complexity and power of Windows Phone 7. Add to that Nokia’s excellence in hardware engineering and phone design, and the relatively straightforward integration of Windows Phone 7 with the Windows desktop which is particularly prevalent across Asia, and Nokia may be in with a chance of arresting its recent steep decline in the smartphone sector. These new Windows phones could do particularly well with customers who have yet to make the jump to a smartphone (ie they don’t already have an investment in apps, loyalty and learning how to use a particular smartphone OS effectively). Our guess is that Nokia is hoping the Chinese market for these premium smartphone products won’t accelerate too quickly, leaving it behind.

Written by Robert Filkins, Managing Consultant, Coleago Consulting

Google to buy Motorola

Today’s announcement that Google is to buy Motorola Mobility is an interesting development in the Smartphone operating system fight for market share. Earlier this year we had the announcement of the alliance between Nokia and Microsoft. Will the next step be the acquisition of Nokia by Microsoft? This is no longer a fanciful idea.

Stefan Zehle, CEO Coleago Consulting

Greece sets a new record for spectrum auction reserve prices

Graham Friend, MD Coleago Consulting’s warning about high reserve prices for spectrum auctions “Rising reserve prices in mobile spectrum auctions are a cause for concern for all, June 28, 2011” was timely indeed. Greece has pushed reserve prices for spectrum to a new high, effectively setting these based on prices paid in other auctions, i.e. benchmarking, but without applying a discount. The reserve price for the renewal of 900MHZ spectrum amounts to €0.41 / MHz / pop. By comparison the German spectrum auction in May 2010 had reserve prices of less than 0.01€ / MHz / pop.

The fact that high prices for spectrum trade off short term cash against long term benefits is well documented. Arguments in favour of a wider consideration of value, rather than licence revenues alone, have been made by Hazlett and Munoz (“What Really Matters in Spectrum Allocation Design”, 2010) amongst others. They note: “In short, to maximise consumer welfare, spectrum allocation should avoid being distracted by side issues like government licence revenues.”

However, Operators could choose not to bid. The example of the French 3G allocation in 2001 springs to mind. At the time, the legal framework for auction did not exist in France. Hence the government fixed the price at a high level, based on the amounts that were paid for 3G licences in the UK and Germany. SFR and France Telecom bought a 3G licence – Bouygues Telecom refused. This put the government into an awkward spot, because it wanted to preserve at least three operators in France. The episode ended with a climb-down by the Government, which substantially reduced the price of the 3G spectrum licence. Bouygues successfully played a game of chicken with the Government and the Government blinked first. The situation is not as clean cut in Greece, because not all operators’ licences expire at the same time, but perhaps there is scope for “bidder’s strike”.

Stefan Zehle, CEO Coleago Consulting

Theory versus practice in the global versus local operator debate

When the Financial Times reported in January that CEO Vittorio Colao was facing pressure from some shareholders to break-up the global operator it prompted other mobile groups to re-examine the global versus local debate. Some theories suggest that value should be generated by global scale but the reality is that many of the theoretical benefits are not achieved in reality. As is so often the case, realising the benefits of global scale is down to effective execution.

In theory, operators with international scale should achieve significant purchasing economies. In practice, some national operators have managed to get more advantageous equipment pricing and terms than their parent. As a result, some local operators have opted out of the group purchasing process altogether. In the case of securing content deals content owners, in theory, are attracted by distribution partners who can provide the widest distribution or eyeballs for their content. In practice the industry has not embraced exclusive content deals and those that did, such as 3 in the UK, rapidly rejected them. There is also probably little content that is truly global in its appeal and that customers are prepared to pay for. However, global players in general probably do have a stronger bargaining position with some suppliers, particularly equipment vendors.

International operators make great play of their ability to leverage learning and experience across their operations. In practise, cumbersome group structures often fail to disseminate the learning effectively and may actually stifle local innovation and slow down decision making. For large groups with a mix of developed and developing markets the learning from developed, increasingly data centric markets is of less relevance for voice centric developing markets. Indeed operators in Africa and other developing markets are sometimes confronted with re-charges for group services that are of little relevance or benefit. Indeed local operations should have a better understanding of their customers and competitors than those sitting centrally. Whilst the benefits of technological innovation can be replicated across markets the same is not necessarily true of propositions and tariff structures.

In theory, it should not be necessary to have a large international footprint to create attractive roaming offers (e.g. in the airline industry, the Star Alliance was an early example of how marketing benefits of sharing Airmiles’ eligibility could offset the smaller scale of individual airline operators). In practice however, Vodafone was the first to launch successful ‘passport’ type products in Europe. Of course, Vodafone customers travelling to the US are unable to use Verizon’s CDMA network and so a uniform technology footprint is a prerequisite for realising global roaming benefits. A “roam like home” proposition can be very compelling and is much easier to implement with a global footprint due to billing and accounting issues. The ability to steer roaming customers onto your own network can also deliver significant commercial benefits. In practice a global footprint may well attract higher spending business customers who roam although the benefits will diminish as roaming rates are regulated downwards.

In maturing markets consolidation can often be expected as economies of scale are much easier to achieve at the local rather than global level. Prior to consolidation taking place profits and cash flow can come under significant pressure due to high levels of competition. To act as consolidator an operator will need access to cash to either make acquisitions or to ride out the storm. A global parent with a strong balance sheet can provide a major advantage in mature markets. However the sheer size of a global parent may mean that opportunities in smaller, local markets are missed if the benefits of a consolidation play represent only a rounding error in the parent’s consolidated accounts. Smaller markets may find themselves a long way down the parent’s priority list.

Global players in theory can also benefit from portfolio effects where the “cash cows” in the mature markets can finance the growth of “problem children” and maintain “stars” elsewhere in the portfolio. In theory, capital markets should be able to provide this funding, but, as recent events have shown, capital markets are often far from perfect. The strategic implications of the Boston Consulting Group Matrix for business unit portfolio management may hold true to some extent. However, operators are often reluctant or slow to ruthlessly dispose of underperforming “dogs” which weakens the benefits of a portfolio approach adopted by global players.

A global brand, in theory, should be stronger than a local one when it comes to technology based services. In practice, T-Mobile was less successful in achieving global brand equity compared to say, for example, Vodafone. However, in some markets customers have a great deal of loyalty to local brands. When Vodafone re-branded J-Phone in Japan the customer base deserted in droves. A global player can gain very significant brand synergies through successful sponsorship campaigns such as F1 motor racing or the world cup. When executed successfully a global brand can deliver global brand synergies.

In short, it all comes down to execution. Global scale is not in itself a guarantor of net synergies, however if well managed, a global company can extract significant strategic benefits. With the increasing complexity of the technological landscape in particular, having leverage with equipment and device manufacturers is key to ensuring they get what they need. Smaller operators are more likely to simply get what they are given.