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Mobile Consolidation Is Unavoidable

Despite its absolute success in providing competition to the telecoms market, infrastructure-based competition in the mobile market is now also reaching its final stages.

We have been predicting this for some time; we did so in order to highlight the need to change to different business models in the industry—models with more emphasis on infrastructure-sharing and competition based on new innovative services rather than on utility offerings—this with the aim of seeing the industry develop its own initiatives towards this transition instead of waiting for the regulator to step in.

However, as is nearly always the case in the telecoms industry, changes seldom come from within the conservative telecoms industry. They are either forced upon them by the regulator and/or by new players entering the market. In relation to the latter, a classic example was the arrival of smartphones, with their capability of over-the-top services (OTT) that were developed in order to bypass the mobile operators.

The mobile network operators (MNOs) keep on talking about their success in delivering competition in the telecoms market, but it is clear that in nearly all of the developed telecoms markets there is no longer room for much more than two infrastructure-based operators. In such a duopoly, the smaller MNOs simply get squeezed in a market where revenues are not growing anymore. Vodafone in Australia is an example of this—it has lost more than a million customers, and Telstra has been the main beneficiary of the battle, making that fixed and mobile telco even more dominant. However, it was good to see that Vodafone has indicated that it will fight back.

However, the MNOs description of themselves as ‘the providers of competition’ is no longer valid, as can be seen by the reaction of the national regulators. The FCC in the USA recently sent out clear messages about what it sees as the bad behaviour of operators in this country.

FCC chairman Tom Wheeler recently described this in an interesting way: ‘the operators always ask the regulators: the only thing we need from you is a fair advantage’.

EU Commissioner Neelie Kroes recently used words along these lines: The industry always complains about the regulatory burden but they hardly ever undertake any voluntary action to avoid regulatory intervention.

So no wonder the history of the industry is littered with episodes of regulatory change—it fails to address the monopolistic, duopolistic or oligopolistic market situation itself.

In relation to mobile concentration we now also see regulators stepping in more forcefully—no doubt because of their previous experiences with the industry, often resulting in ‘gaming’ the regulator. Since the halt of the natural growth in many developed mobile markets competition is concentrating on poaching customers away from other players. This is nearly always done through price competition, and that in its turn has put pressure on costs, inevitably leading to mergers and market concentration.

In response to requests for mergers in the mobile market in, for example, Ireland, Austria and Germany, regulators are forcing extra conditions on companies that are asking for permission to merge.

These include:

  • Make significant spectrum available to MVNOs—on a wholesale cost basis—at regulated prices
  • Make significant spectrum available for national roaming
  • Discounts based on volume
  • Specified and detailed roaming facilities
  • Regulated co-location
  • Divestiture of tower infrastructure
  • Allowing up to 16 MVNOs (Austria)

Given these tough conditions (a clear indication that the industry is again failing to respond to market developments) one would question the interest of operators to merge under such conditions.

The reason for current mobile operators agreeing in principle to these tough conditions, and starting the negotiation process, is that they hope that growth in mobile data will create new market revenues. We question the logic of this as, in the end, customers are only prepared to pay a certain amount for a basic access package, and furthermore technology and competition are pushing those utility costs down.

The regulatory conditions also reflect the trend in growth of mobile data, as regulators want to make sure that newcomers will be able to develop the good quality IP services—including VoIP—that are seen as essential to success in this market. In previous situations regulators were able to create good pricing conditions, but they failed to address other conditions such as, for example, quality of service, effective wholesale capacity requirements, administrative procedures, etc.

If the European regulations are pushed through and accepted by the MNOs, the key beneficiaries of these regulations clearly will be the MVNOs, and not the merging MNOs. The MVNO market has been struggling for decades, with the network operators never making their facilities available under conditions that would enable a thriving MVNO business to develop. There are many instances of this around the world but the situation in New Zealand is a classic example, with MVNOs being gamed for over a decade by Vodafone and Telecom, overseen by an impotent regulator.

The key for all the players, however, is not to follow the time-honoured telecom tradition of offering ‘me too’ products at lower prices. This will only further undermine the potential of the industry to develop new products and services that will deliver extra revenues. For new ideas they should look towards the OTT players rather than the telco players. At the same time it will be interesting to see whether some of the OTT players will be interested in these new MVNO opportunities and start investing in such operations.

Having said this, I’d predict that the new MVNOs will largely concentrate on voice and data services, and on VoIP in particular. The market is more than ready for low cost mobile calls—which are a low hanging telco opportunity—and most handsets in the developed markets will be able to offer user-friendly VoIP services. At the same time the proposed merger conditions will allow the MVNOs to provide a good quality service.

We have predicted, at a high level, that these developments would occur, but we also know that implementation and widespread use of these services will take time; and, in the end, if ‘me too’ is all that comes out of these regulatory initiatives the network operators will eventually match these (price) offerings and we will end up with the same price spiral that we have seen over and over again.

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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