Research Notes

Declining profit margins on basic mobile services

Mobile operators will be forced to launch a number of initiatives to compensate for falling voice and SMS prices – and experience shows that it can be done.

The mobile value chain is in the middle of a paradigm shift that will result in all the market players having to redefine their position and tasks in the value chain. This will especially hit the mobile operators that will be forced to break away from their traditional way of thinking. And there is no avoiding this – operators are already experiencing continuously decreasing profit margins on sales of voice minutes and SMS messages.

The market for mobile telephony has gone through an almost unfathomable change over the past 5-10 years and the total investments in new mobile technologies and services are no less than staggering. But despite all this, the end-users mobile usage still mostly consists of voice minutes and SMS messages. Despite that these are the technologically simplest mobile services, they are still generating typically around 85-95% of the mobile operators total revenue. This is therefore especially frustrating for the mobile operators, as the market price – and profit margin – on specifically these services is constantly decreasing significantly.

One of the reasons why voice minutes and SMS messages are dropping so sharply in price is due to the mobile market experiencing an increasing competition among an increasing number of different mobile telephony providers. The technological development and a more lenient regulation have meant that the entry barriers for new mobile providers have become much more manageable compared to previously. Launching oneself as a MVNO/Service Provider can be achieved with relatively little financing and the daily operation of a new Service Provider can be handled by an organisation with between 5-20 employees. If a MVNO/Service Provider also chooses to use the Internet as their only marketing and distribution channel, that MVNO/Service Provider can easily make a sensible financial return on a customer base of just 125.000 customers – even when offering their customers very low prices on voice and SMS services. So that is exactly what they are doing big-time – offering discount mobile telephony. And experiences from different countries show that the mobile users love it!

Many mobile operators have already been hit hard by the price pressure from competing MVNOs and Service Providers, as these new companies – just like underdogs – came rushing out from the corner of the boxing ring and threw a barrage of hard punches with low voice and SMS prices. The mobile operators were caught off guard and the punches hit home every time.

But only a few operators will have to close shop because of this massive competition from the MVNOs and Service Providers – even though Orange in Denmark had to leave the Danish boxing ring with a serious financial cut over their eye! One thing that is slowing the operators in tackling the competition from the MVNOs and Service Providers is their large heavy organisations, that both can be expensive and inflexible. As long as mobile operators are not able to lower their cost levels at the same speed as they are lowering their prices, they will experience a decrease in profit margins on the sales of each individual voice minute and SMS message.

A number of conditions can help save the mobile operators in both the short and long-term. In the short-term the operators have received help from simple financial market forces – the price elasticity on mobile services has meant that the falling prices have led to a higher mobile usage. Thereby the falling prices have given a higher MoU (Minutes of Use) and an increase in SMS messages. In countries like Denmark and Sweden there are a number of examples of operators that have experienced a growth in MoU of 20-30% per year – a growth that many other operators dream of having.

In the longer term, operators will have to play a very active role in the current paradigm shift if they want to strengthen their competitive situation in the future mobile value chain. The mobile operators will especially have to focus on their internal business structure and the revenue share agreements they enter into with external partners.

An optimisation of the internal business structure is necessary as operators realise that the strongest mobile operator will be the one that can produce a voice minute and SMS message at the lowest cost. Also we cannot emphasise enough on just how much operators will have to think in new and wise ways when defining the revenue share agreements they will be using for future deals with external partners. It will be these revenue sharing agreements that will make the operators be able to:

-enter into agreements regarding outsourcing of e.g. operations of mobile networks
-enter into agreements with MVNOs and Service Providers regarding wholesale
-enter into agreements with content providers for attractive VAS services

The paradigm shift in the mobile value chain cannot be stopped. This is especially due to that the significantly falling profit margins on voice minutes and SMS messages is not the only comprehensive trend that is influencing today’s mobile market.

Strand Consult has identified a total of 10 Mega-trends that are all analysed in depth in a new report  “Mega trends in the mobile industry – a question of life and death” (300+ pages). Due to these 10 Mega-trends, the market for mobile telephony is facing an upheaval in the whole value chain, which will lead to the launching of new business procedures and revenue sharing models. The report analyses the effect that the 10 Mega-trends will have on handset manufacturers, content providers, mobile operators and dealers and the report puts forward suggestions on which considerations and initiatives each market player must examine to prepare themselves for the effect that the 10 Mega-trends will have on the mobile market.
Mega trends in the mobile industry

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