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Europe’s Mobile Operators Running Dumb Pipes for Revenue

In most of Europe, mobile network operators (MNOs) have largely completed their 3G network roll outs. During the last year or two their focus has been on upgrading these networks with new technologies, including femtocell and, importantly, HSPA. Following trials expected to be held during 2010, LTE will soon be sufficiently advanced for commercial launches. This will provide significant opportunities for Europe’s market for convergent services, adding a new platform for delivering a range of media.

In conjunction with improved networks is the increasing sophistication of mobile devices. Smartphones are perceived by operators as a means to raise the profitability of mobile telephony, increase data use and provide a reason for increasing handset prices. Although the subsidies which have fuelled the sector’s growth during the last two years may be reconsidered or abolished as the global economic downturn deepens, overall the smartphone sector remains buoyant: in 2008 the number of smartphones sold globally increased 14%, considerably faster that the handset market as a whole, while in 2009 it may still grow by about 8%. In addition to smartphones, dongles provide Internet access to a wide range of laptops and netbooks. As a result, mobile broadband has become one of the fastest growth areas in the telecoms sector.

Yet there has always been a time lag between the launch of these devices and consumer preparedness to explore the plethora of applications which can be run on them. Not all of these applications have gained traction—mobile TV being an obvious candidate—but other perhaps less frivolous applications (mobile payment services and banking, for example) are likely to become very popular, both in developed and developing markets. At least MNOs have begun to address some of the major constraints to consumer use of high-end mobile data services: high pricing models and lack of transparency (charging by volume of data used, and so leading to ‘bill shock’). Consequently, flat-rate plans and multi-gigabyte per month offers have become standard.

Having developed fast mobile networks, MNOs have increasingly become network caretakers. The loss of control in this process is the necessary drawback to sharing revenue with content providers. In late 2007 a number of MNOs in key markets (O2 in the UK, T-Mobile in Germany and Orange in France) differentiated themselves from competitors by securing exclusive deals with Apple, becoming the sole provider of the iPhone. Never mind that Apple demanded as much as 40% of revenue from the calls and data handled by the devices. During 2008 TeliaSonera was given iPhone rights in its Scandinavian and Baltic markets, while Vodafone secured rights to ten markets. Apple subsequently dropped exclusive arrangements with operators, while introducing a 3G model as well. The keenness of mobile operators to be part of the revenue sharing bandwagon can be seen in a legal wrangle in France: citing competition considerations following objections by Bouygues Telecom, in September 2008 the competition authority (Conseil de la concurrence) ended Orange’s exclusive iPhone deal, thus enabling other operators to enter into commercial arrangements with Apple to sell the handset.

There are now a number of very successful applications stores available to consumers: Apple’s App Store, RIM’s BlackBerry App World (due for launch in the US, UK and Canada later this month), Google’s Android Market, Palm’s Software Store and Nokia’s Ovi Store. A new contender will be Microsoft’s Windows Marketplace for Mobile: the company will take 30% of revenues from application sales and will allow developers to set their own prices (RIM takes 20% of generated revenue, Palm 50%).

T-Mobile is a showcase for how MNOs are becoming network caretakers, providing the dumb pipe for clever developers to sell their applications. The company’s conventional revenue streams are suffering: voice revenue has been affected by competition driving down prices, as well as from regulated mobile termination rates and roaming charges. Impending data roaming caps will further lower revenue. The operator’s salvation has come from mobile broadband: during 2008 its data traffic tripled while its Web’n'Walk subscriber base grew 53% to 5.9 million. Its exclusive selling rights for the iPhone has been a boon since the average iPhone data usage is up to 30 times higher than on other phones, at more than 100MB per month. In February this year T-Mobile also introduced the Android-based G1 in the German market, having previously launched the handset in the UK. T-Mobile’s latest collaboration, with Nokia, will see it integrate mobile content and Internet services through Web’n'Walk’s widget platform and Nokia’s Ovi Store.

This development is being mirrored across the region. As well as helping to shore up falling ARPU it provides to consumers services which operators on their own do not have the ability or know-how to develop themselves.

By Paul Budde, Managing Director of Paul Budde Communication

Paul is also a contributor of the Paul Budde Communication blog located here.

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