Research Notes

Paradigm shift in the German Mobile industry

It started in Scandinavia, spread to Benelux and now is happening big-time in Germany – the mobile industry is facing its largest paradigm shift ever!
At Strand Consult we have spent the last three years describing the events that started in the MVNO sector in Denmark the other Nordic countries and how they have spread throughout Europe. We never doubted that Scandinavia would be a role model for the other markets and have simply been waiting for one of the larger mobile markets to experience what we already have seen on the much smaller markets. During the past five months we have watched with excitement at what has been happening in Germany and how the different market players have reacted. The developments that started five months ago when E-Plus launched Simyo and their new service provider strategy have been extremely exciting and a lot has happened that has most probably surprised a lot of people and made them wonder what was happening behind the scenes.

Let us first take a look at the German mobile market as it was just five months ago and what it was like being an operator on that market. There were two major players and two smaller players with their own networks and then there were four large service providers with together around 20 million customers. If you looked at the market from the customer’s point of view, it was a market with cheap phones, high mobile prices and an extremely low mobile usage. One could say that in Germany the sales of mobile phones was a success and the sales of mobile telephony a large fiasco – on the other hand every time the operators sold one voice minute they got a high price for it.

From a financial viewpoint, Germany was a market where it took a very long time from an operator buying a customer, until that customer reach the point where the acquisition costs had been covered – I would go so far as to say that a great number of the customers purchased by different players on the German mobile market never became profitable. One could say that the German mobile operators have focused more on selling cheap mobile phones than selling mobile traffic in their networks.

Five months ago, E-Plus changed their strategy with the launch of their no-frill discount concept Simyo and with an aggressive service provider/MVNOs strategy, E-Plus have moved focus away from selling expensive phones at cheap prices, to instead selling traffic in their network and they have moved focus away from customers who want cheap mobile phones to customers who want cheap mobile telephony – two different customer segments; the price sensitive and the heavy users.

What E-Plus is doing is that they have chosen a two tier strategy; focusing on changing their business case and on changing the way that mobile telephony is sold in Germany.

The first part of their plan is a “SIM-only” strategy. In its simplicity, this is a concept where the customer already has a mobile telephone, receives a new SIM card and enjoys cheap prices on traditional voice and SMS traffic. Using this strategy, E-Plus have already acquired over 400.000 customers, that all have entered into their customer base without any subsidisation for mobile phones or Simyo having to pay retail commissions. In effect one could say that the customer’s Simyo have received are profitable after only one to two months, instead of the usual 12 to 18 months. We strongly believe that the competition in Germany will intensify over the next 12 months and will again result in the industry experiencing a higher churn as competition increases. The only way that an operator can compensate this turn of events, is by focusing on reducing their SAC, so that the period from acquiring a customer, to that customer becoming profitable shortens.

The second part of the E-Plus service provider/MVNOs strategy they launched five months ago, changed the market in Germany. At that time there were four operators and four large service providers, but since then the number of players on the German market has changed significantly. Five months ago customers could choose between eight mobile offerings, that figure has increased to between 18 and 20 today and within the next six to eight months we expect that figure to increase even further to between 40 to 60 different mobile offerings! It is no secret that a great many of these new players have chosen E-Plus as their partner – one could say that E-Plus believes that a wide distribution setup via service providers and MVNOs is a method to increase their number of customers and at the same time decrease E-Plus’s acquisition costs.

One could be tempted to ask whether E-Plus is simply a new trend, a new way of doing things – or whether there are operators on the other markets that are doing the same thing with huge success? Our answer is – YES – this is a success model that operators like Tele2 in Sweden, TDC in Denmark, and Telfort in Holland have already been successful with!

These are the facts:

TDC have reduced their sales and acquisition costs, decreased their prices per minute, increase their market share and improved their profitability – and that their MOU at the same time increased by 19% in 2003,22% in 2004 and will increase by 24% in 2005 is simply music in an operators ears. The facts are that this is the market that Orange chose to leave in Denmark because of the combination of Telmore’s and TDC’s strategy, Orange found it more lucrative to close shop and sell their customer base to their competitor TeliaSonera rather than continue in Denmark.

In Sweden, Tele2 have reduced their acquisition costs significantly, in the first half-year of 2005 the handset sales in Sweden decreased by over 20% and MOU in their network increased by 31% and all this in a market where Tele2 have used their “SIM only” concept “Knock Out” to push the market. TeliaSonera and Vodafone in Sweden had only a MOU growth in the same period of 14% and 5% respectively – and it is no secret that Vodafone thereafter chose to leave the Swedish market – just another fact.

In Holland, O2 chose to sell their business to their management and some local venture players. An aggressive service provider/MVNOs strategy brought Telfort’s sales and acquisition costs down, their customer base up and just three years later Telfort were sold for 1.1 billion euro to KPN. One could ask oneself why did O2 choose to leave Holland and why only sell their business for 25 million Euro?  Very relevant questions when looking at the results their management achieved in the following three years.

The conclusion is very simple, the strategy E-Plus is using in Germany is no new strategy; it is a proven strategy that a number of operators have already used with great success. The strategy is simple, reduce your acquisition costs, use those reduced acquisition costs to reduce the price per minute on voice traffic and ensure that you reduce the time from when you acquire a customer, to when that customer becomes profitable, which all leads to an increase in lower minute prices that increases traffic in the operators network. Market players like TDC, Tele2 and Telfort have already shown that this is a successful path to choose for customers, partners and especially shareholders.

How will the other players in Germany react – we believe we have a very qualified answer that is simply the following:

Vodafone will focus on heavy users and corporate customers. They will subsidise expensive postpaid contracts and will move focus from the prepaid market and go for the high spending customers. We believe that if Vodafone was an airline company they would focus on business class and those customers that are willing to pay a premium price to fly Vodafone.

T-Mobil will have a wide focus – they will have offers for everyone. The size of their customer base means that they cannot allow themselves to take sides. We believe that T-Mobil will be somewhat aggressive in a number of areas and that they will focus on the larger service providers/MVNOs and the new players on this market that they have faith in. Easymobile is a good example of this.

O2 has a dilemma, they have been aggressive but they are suffering due to the fact that their customers in parts of Germany are roaming on T-mobil’s network. In practice this roaming problem means that they can offer aggressive prices on their own network, but not when the customers are roaming. We believe they will have a selective strategy, but they face large challenges as to which role they will have on the service providers/MVNOs market. These players will feel that the solution they are getting from O2 might be cheap, but network-wise is the fourth best solution.

E-Plus have chosen a totally different approach to this market. It is as if Stan Miller who is head of E-Plus believes that what he is doing is the right thing. If you look at TDC, Tele2 and Telfort, it is the right thing and if you put it in relation to what he did with Base in Belgium, it is just a repeat of a success that he is now doing on a larger market and with a equivalently larger business case. We believe it will be a success, the question is whether the stock market will understand what is going on – whether they believe that mobile telephony is about selling cheap mobile phones, or whether it is about selling minutes, SMS’s and creating traffic in the networks that the operators have invested in.

So how do we believe this will affect the German market within the next 12 to 24 months?

Subsidisation of prepaid handsets will disappear in the near future.

Dealers’ commissions will decrease on low-end contracts and stabilise or decrease a little on high-end contracts.

Handset sales will decrease in the short and medium-term until customers have gotten used to the new handset subsidisation strategies.

MOU will increase within the next 6 to 12 months and explode within the next 12 to 24 months.

The number of players on the market will increase significantly within the next 12 months.

In the longer term we will see a consolidation between the service providers and MVNOs.

We believe that all operators in Germany will have to re-assess their strategies and focus on reducing their OPEX and speed up their investments in the 3G.

To summarise, all this is a development that we have already seen in Denmark, Sweden and partly in Norway, Belgium and Holland. The winners are the consumers and those operators that understand how to adapt to this new market situation. We believe that Germany will very quickly develop in the way the other markets already have. So even though this is not unique, it is still very exciting as it is happening on one of the largest mobile markets in Europe.

The future will show whether we our predictions above are correct – however looking back at our many earlier predictions – we are usually spot-on! 

The Moment Of Truth – A Portrait Of The Discount Mobile Service Providers Success

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