Research Notes

Newton’s ”Third Law Of Motion” in a mobile perspective

– Mobile Operators react by focusing on minimising CAPEX
“For every action, there is an equal and opposite reaction”. Maybe one shouldn’t compare Newton’s Third Law of Motion and the current paradigm shift in the mobile value chain, but on the other hand there is no doubt that an action in one part of the mobile value chain is certainly resulting in a reaction in another part of the value chain, which again results in new actions, that again results in new reactions, that again..…!

There is no doubt that the mobile value chain is in the middle of a significant process of change that is completely changing the way that the different players in the value chain will do business with each other in the future. That this is a paradigm shift is especially due to that one change in how to do business seems to launch another and effect someone else – and it will take some time before the mobile industry has found a more permanent set of rules for the mobile game.

One of the significant trends among the many different changes that are currently appearing in the mobile industry is that mobile operators are increasingly focusing on minimising their CAPEX (Capital Expenditure). This focus on minimising CAPEX is especially a reaction from the mobile operators to increasing competition from Service Providers and MVNOs, which has led to a decrease in profit margins per sold voice minute and SMS message. Mobile operators have been forced to adapt and optimise their organisations and business models to this new reality. This restructuring process has led to many operators increasingly focusing on for example: outsourcing, micro-segmentation, sub-branding, new revenue sharing models, minimising OPEX – and as previously mentioned, minimising CAPEX.

In their efforts to minimise CAPEX, the mobile operators will strive to minimise the capital they bind in material assets like for example infrastructure. This is a break with their traditional way of doing business, as investing in and operating their own mobile infrastructure has up to now been regarded as one of the mobile operators’ major core competencies. In this connection, some operators – if it becomes legal – will try to minimise CAPEX by entering into agreements with each other about operating shared mobile networks. In many cases this will lead to a much better utilisation of the network capacity compared to today, where mobile operators typically each build and operate their own network infrastructure. Network infrastructure suppliers can hardly look forward to a future where mobile operators in this way try to “consolidate” to achieve savings on network investments!

The operator’s efforts to achieve a competitive edge in the new mobile value chain, by using outsourcing to minimise OPEX and CAPEX, can thereby lead to a new definition of what mobile operators define as being their core competencies – and owning their own mobile network will most probably move outside that definition.

It is very likely that the mobile operators will redefine their core competencies to only consist of the following four assets: their mobile licence, their billing system, their customer base and their brand. This development will have an enormous influence on companies that up to now have supplied mobile infrastructure, as they have traditionally had the mobile operators as the most important customers for mobile infrastructure, services platforms etc. However many mobile infrastructure suppliers are currently stating that they are extremely optimistic about the future market development. The infrastructure suppliers’ expectations of growth have to be questioned, as the effect of the mobile value chain’s paradigm shift will – certainly for a period of time – dampen any distinct economical upswing in the mobile market. Therefore, just like the mobile operators, the infrastructure suppliers will also have to examine their business models and evaluate whether their current expectations are in fact realistic.

Another area that mobile operators will try to outsource to minimise CAPEX is the purchase and operation of service platforms. For exactly the same reasons the mobile operators will increasingly demand that service platforms are not purchased with a traditional up-front investment, but rather put at their disposal by the platform suppliers, based on revenue sharing agreements. In this way the platform suppliers will also be forced to react to the changes the operators set in motion.

As previously mentioned, the operators’ focus on decreasing their CAPEX is just one of many significant trends that are moving the mobile industry in a new direction. 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.

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