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Mobile: The Major Battleground

Interesting developments in the USA, Australia and New Zealand are giving some insight into the future direction of the mobile industry.

In May BuddeComm reported proposed merger between AT&T and T-Mobile as a major threat to competition in the USA.

This was viewed as a very obvious issue, and that under normal circumstances such a deal would be rejected by the FCC.

But circumstances are no longer normal and the telcos have become all-powerful in the way they want policies and regulations to be made and implemented in the USA. It was therefore heartening to see that the Department of Justice (DoJ) had the courage to stand up and indicate that it will sue the company if it proceeds with the merger.

In the end it will be interesting to see if the dysfunctional Congress becomes involved one way or another, and intervenes on behalf of AT&T;to overrule the DoJ. With Congress on holiday all this may not be finally played out for some weeks.

T-Mobile has been unable to keep up competitively with AT&T;and Sprint, and the German mother company indicated that it did not intend to invest further, and that it wanted to get out. So what this move from the DoJ means is that T-Mobile will now have to act very quickly to avoid a rapid decrease of its value.

There are other possible buyers but, in general terms, to secure their future they would need to develop a different approach and a different business model, rather than enter into head-on competition with the other two. The company has a robust network and so it could move into the mobile broadband market offering competitive access to its users. The company has a strong position in the younger markets and these are among the heaviest broadband users. It could also become a true wholesale operator and try to attract companies such as Google (Android) and Apple to its infrastructure to exploit new applications.

As we have seen in the past, the telcos are unable to really move into the value-added market—be it smartphones, m-payments, NFC applications or whatever. Jumping the S-curve in order to move to the next level of mobile broadband opportunities could indeed be a smart move. (In many countries already more than 50% of traffic over the mobile networks is now broadband-related.)

Add to this the observation that smartphone vendors such as Apple and the Android group are going to develop phones that are no longer linked to one operator, and we see that further massive changes are on the way.

Developments in Australia and New Zealand are rather different but equally the result will be new mobile market dynamics.

Here we see a structural separation of the incumbent telcos Telstra and Telecom New Zealand. Both players also have a strong presence in the mobile market; however their mobile operations are not affected by the structural separation.

With an already declining fixed voice market, plus the loss of the monopolistic advantage of the fixed networks, it is envisaged that these players will fairly quickly try to transfer their voice traffic from their fixed to their mobile networks. This in itself will create a whole new set of market dynamics. In Australia there is an issue that such a move could undermine the development of the national FttH network—particularly if Telstra were to use its market power to promote its mobile network as an alternative to FttH.

Telstra has indicated that it will not do this, but it is nevertheless an issue.

In New Zealand the worry is that Telecom will now aggressively move further into mobile, and with its geographic monopoly through its on-net pricing it could make life very difficult for the new kid on the block, 2Degrees. That company sees this vertical monopoly on the mobile network as an undermining of competition. The regulator has agreed in principle that this is a potential threat, but so far has not reacted.

The handset subsidies, especially in relation to the smartphones, are seen as a tool that Telecom can use to further increase the vertical tie-up in this market.

Telecom’s main rival, Vodafone, has an even stronger geographic monopoly in the rest of the country (most importantly in and around Auckland) and enjoys one of the highest ARPUs in the western world.

For the operators and their shareholders it is, in the end, all about EBITDA market share—how to improve the profitability of your ARPU—and creating these geographic monopolies are a way of doing that.

It is when these seismic changes are taking place that it is possible to get a glimpse behind the scenes, and this gives analysts such as us the opportunity to consider in which direction these markets will be moving.

One thing is certain—the traditional mobile communications business models are rapidly becoming out-of-date and unless the mobile operators change their models others, such as the new competitors or the regulators, will start doing it for them.

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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