Research Notes

It is happening now Europe, could it happen in South America too?

-Judge for yourself!
Cross Europe, customers are experiencing the price of voice and SMS is falling drastically. In the Nordic countries the price for voice and SMS has fallen between 30 and 60% during the last 24 months. In a country like Denmark, despite prices have been reduced in the last 3 years, Mou & ARPU have increased dramatically.

What makes Denmark & Europe different from South America?

Tough competition between too many players
Tough national & EU regulation/de-regulation
Many countries, many with small populations
One technology, GSM
Consolidation takes place on National and Regional level

South America
Healthy competition between few players
National “Duo poles”
Limited National & Regional regulation
Mixture of technologies, GSM, TDMA & CDMA
Consolidation almost completed

The hard competition between the players in Europe is one of the key drivers of Discount mobile telephony. You have several operators on each European market with their own network capacity. Besides the operators, you will also find 1-3 service providers in each market competing for the customers usually having an agreement using 1 or 2 of the operator’s networks.

The deregulation carried out by the national governments and EU, started this entry of multiple operators and service providers in each country. These Operators are posting millions upon millions into churning customers from the other operators, by offering handsets at prices below Retail price. The success, and the stock price, of these Operators are often tightly linked to the churn and quarterly acquisition of new customers, total customer mass as well as MOU. And by having one technology and also allowing porting of numbers, it is easy for a customer to switch operator/service provider.

By this you get the breeding ground for mobile discount operators. An operator in such a market with spare capacity can sell capacity, easily due to the fact that GSM networks and handsets use SIM cards that are easily taken out of the handset.

In Latin America, due to the fact that 3 mobile technologies (GSM, TDMA & CDMA), which are not compatible, and the consolidation of, the opening for discount operators are limited.

You cannot switch to another operator on your CDMA handset, and neither from one technology to another i.e. CDMA to GSM. Besides this, the Mobile penetration in Latin America allows for two digit natural growth percentages for the operators, a thing most European operators can only dream about. But as CDMA/TDMA does not use SIM cards, it is not easy to copy this business model here as Discount MVNOs only “sell” SIM cards.

In countries like Chile and Brazil with high GSM penetrations, there is undoubtedly a market for web based service providers, even though the Internet penetration and availability of credit cards are low. The web based service providers only need in the region of 150-200.000 customers to become profitable

Today Danish mobile consumers have some of the lowest prices on mobile minutes and SMS messages, in Europe.

5 years after the UMTS auction disaster hit the European operators and a whole sector thought the market was finally turning, a new financial disaster has struck right in the centre of the mobile market.

One of discount mobile telephony’s main features is that the customer’s registers and pay for their mobile accounts online. Add to this that the pricing tariffs are extremely simple and do not contain any subscription, but only very low prices on “voice” minutes and SMS messages.

The Discount Mobile Service Providers are letting customers service themselves online and thereby making them able to run very small, tight, cost-efficient organisations that let them make a profit even with their ultra-low mobile telephony prices! This is worth mentioning, as the traditional Mobile Operators and Service Providers have a hard time making profit.

Today the number one selling point on the Danish Mobile market is simply the price, and most mobile operators have passively chosen to copy and thereby follow the discount service providers’ concept – instead of taking up the fight.

The reality for the Danish consumers is:
-The price of a mobile minute has in only 6 months dropped from 0.17 Euro to 0.09 Euro
-The price of an SMS has fallen from 0.07 Euro to 0.03 Euro
-The price of a subscription has fallen from 6.7 Euro to 0 Euro

Today Danes can choose between no less than ten different “Discount Mobile” Service Providers, in a country of 5.5 million people, with a mobile penetration of 92% – Eight of these Service Providers have launched within the last 12 months! To say that the Danish Discount Mobile providers have revolutionized the Danish mobile market is simply an understatement and the competition they have created on the market has financially hurt both the established mobile operators and service providers.

The Discount Mobile Service Providers (MVNO’s) possess 23% of voice-traffic in Denmark, and close to 30% of the SMS/TXT traffic.

Prepaid customers are the first to switch to the new discount players and together with the enormous price reductions seen in Denmark this will have consequences for both the mobile operators and their employees.

But it doesn’t even end there, in 1H 2003, the Danish discount mobile service provider Telmore received 42.9% of all the number porting requests in those six months – that really shows that the established mobile operators’ customers will churn to a discount provider if they can port their existing mobile number with them – customers simply want cheap, easy to understand tariffs on basic mobile services.

So now the established mobile operators are loosing market shares, not just because their customers are switching to discount providers, but also because many new first-time mobile customers prefer to start up with a discount providers offering. Up to now, discount mobile telephony has very much been a Danish phenomenon, but there is no doubt that most of the Western European mobile operators will have to start looking at their strategies in the near future, as the discount mobile service providers come marching through their territories.

The results are very apparent. Money is pouring out of the operators’ cash boxes and the large revenue from subscriptions will most probably disappear over time.
TDC who is the largest operator in Denmark with 46% of market share, experienced voice/minute growth of 19% in 2003, and at the same time they experienced 22% decline in ARPU.

Some weeks ago TeliaSonera published their latest numbers, and the trend from Denmark has spread to Norway, Sweden and Finland, with more countries to follow in the next 6 months.

Operators who have to build and maintain networks, could deny or stop selling minutes to the discount companies, but heavy competition, and the stock markets demand for growth, has made it difficult for them to resist the temptation to sell bulk minutes to fill up capacity

That discount mobile telephony has become such a huge success is very much due to that customers are not billed a monthly invoice and on top of that the prices for a “voice” minute and SMS message are much lower than the tariffs the traditional mobile providers have offered so far with a subscription based package. In return for this very cheap mobile telephony, the customer has to service himself by both registering and topping-up his account online.

And actually this picture is not an unknown one.

The competition between airlines has for some time now been fierce, with the established national airlines having difficulty making any kind of profit that can give a return on the billions this industry craves in investments. The recent travel recession has lead to lay-offs and forced airlines to reorganize. There has been plenty to see to over the past few years. As if that wasn’t enough, competition has increased after the low-cost airlines have launched. Even though these new players have totally dumped the price of an airline ticket – they are actually making a profit. So now the message back to the captain must be that the customers are enjoying their flights elsewhere – and may not return to the established airlines again.

The large established airlines are also moving towards offering cheaper solutions – or starting their own discount companies, offering consumers low airfares. When the discount companies have taken a large enough chunk out of the market, the established companies introduce their own discount offerings. In the airline industry we have see British Airways do this (Go) and SAS (Snowflake).

Both industries have fierce competition as a distinctive characteristic and the already established players are having difficulty making money. Even so, the discount companies in both industries are making money.

Both the discount airlines and the Discount Mobile service providers have aimed at keeping their overheads at a minimum by using the Internet as their primary sales and distribution channel. The vast majority of the discount companies’ customers book and pay online. In 2002 16% of all airline bookings in the USA were made online and the figure for 2003 is expected to be 25%. In 2003 SAS sold 5.1% of all their tickets online, triple the number from the previous year. Efficiency gains from using the Internet have shown that the low-cost airline carriers save the travel agents commissions and in the same way, the Discount Mobile service providers cut costs by not having dealer networks.
More information “The Moment Of Truth” – A Portrait Of The Discount Mobile Service Providers Success

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