• Key points:
  • Mobile internet revenue growth could stabilise operators’ revenues from late 2010 fuelled by accelerating smartphone and mobile broadband markets
  • Operators need to encourage a more balanced smartphone market to ease the pressure on margins
  • Despite expected huge traffic growth, CAPEX should remain under control in the mid-term thanks to HSPA+ technologies and traffic offload to fixed-line networks

The mobile telecom industry has recently entered a major area of uncertainty regarding its future performance. Operators have been squeezed in recent quarters by a dual challenge: a sharp decline in revenues due to the economic downturn combined with a surge in mobile data traffic suggesting a negative outlook for future CAPEX.
‘Mobile internet: blessing or curse?’ is the ninth edition of the annual Arthur D. Little – Exane BNP Paribas telecom report, which this year asks: can mobile telecom return to growth? At what cost? And what should operators do to benefit from the mobile data explosion?
The report was prepared based on in-depth interviews with 87 executives from the telecoms/media/technology sector operating across 12 countries, and backed with proprietary research & analysis. Its main conclusion is that mobile operators’ revenues could stabilize from late 2010 thanks to the accelerated take-up of new data services, driven in particular by the increased market penetration of smartphones. However, pushing smartphone adoption will lead to further pressure on telcos’ margins due to the necessary subsidization of new devices.
Additionally, the study assesses the impact of the expected explosion of data traffic and concludes that extensions of current technologies will be sufficient to absorb this surge until 2013. The report also forecasts that operators’ CAPEX should remain under control in the mid-term.
Growth in mobile data can stabilize telecom operators’ top-lines
In 2009, mobile data growth did not offset the decline in voice revenues - the European mobile industry witnessed a decline of -2% in total revenue, with a strong decline in voice only partially offset by growth in mobile data revenues.
The fast decline in voice was due to the economic downturn combined with structural issues such as competition pressure and MTR regulation. Voice revenues will continue to decline beyond the current recession.
However, the report predicts that overall industry revenues will stabilize thanks to the accelerated growth of mobile data (forecast at +25% yearly and generating a revenue lift of EUR4.5/month per capita in 2015 versus EUR1 today).
Didier Levy, Director at Arthur D. Little, comments: “About 80% of interviewees believe that voice revenues will continue to drop in the next years. However, a stabilization of total mobile revenue is highly likely considering the current pace of smartphone and mobile broadband growth in Europe.”
Higher competition in smartphone market required to ease pressure on operators’ margins
The study analyses the pressure on operators’ EBITDA margins due to the increasing subsidization of smartphones, and concludes that this investment will create value in the mid-term.
Subsidies are required to lift smartphone penetration to 60% by 2015, but will in turn enable the selling of more data plans, and thus increase revenues.  To improve margins, operators need to stimulate competition in smartphones and push alternatives to the iPhone such as Android-based handsets as well as cheaper Asian-made smartphones.
Appstores: key for uptake, not for operator’s revenues
Appstores have become a prominent feature of the mobile internet, creating an increasingly crowded value chain. The report forecasts that the European mobile application market will be EUR4bn by 2012 i.e. only 3% of total mobile operators revenues. In effect, most mobile applications downloaded by smartphone users are free.
The report concludes that operators should adopt the position of smart pipe provider, where most of their revenues will be derived from selling data plans as well as some value-added features such as billing and authentication.
Franck Herbaux, Director at Arthur D. Little, notes: “To manage the risk of dis-intermediation by media players, telcos are launching their own appstores where they can leverage exclusive content deals and local partnerships.”
Mobile broadband increasingly positioned as a complement to fixed
Interviews across European markets have shown several common trends in the mobile broadband market segment e.g. dongles used to connect laptops on the go.
The report concludes that in only a few markets such as Austria and Sweden will mobile broadband be positioned as a replacement of ADSL and cable. In most other countries, to protect profitability, operators will market dongles as a complement designed for infrequent use through prepaid plans or segmented youth or mobile only offers.
Morsi Berguiga, Principal in Arthur D. Little’s Paris office, comments: “We have found that laptop and netbook subsidies could represent up to 40% of a customer’s lifetime value in some markets, which is unsustainable. Therefore, we expect subsidized laptops to represent only 15% of mobile broadband connections in the future.”
Despite huge traffic growth, CAPEX will remain under control in the mid-term
Operators will face an explosion in mobile data traffic - predicted to grow by a factor of x32 between 2009 and 2015 – driven by the growing penetration of mobile internet (smartphones) and mobile broadband (dongles, embedded laptops).
The authors have modeled the investment implications of several mobile data technologies: current 3G (HSPA), evolution of the current technology (HSPA+) and 4G (LTE Long Term Evolution).
They conclude that, unless mobile data usage accelerates even more than they forecast, upgrades to HSPA+ technologies complemented with traffic offload solutions (through WiFi and femtocells) will be sufficient to handle mobile data expansion. In most countries, operators will not need to invest strongly in new mobile networks before 2013 and their average CAPEX/sales will grow to only 12% by 2015e, from 10% today.
Antoine Pradayrol, Equity Analyst in charge of the European telecom operators sector at Exane BNP Paribas, highlights: “This is overall good news for the financial profile of telecom operators in Europe – in particular compared to the negative expectations of many investors. We also expect more network sharing, which will progressively allow challengers to compete head-to-head with larger telcos in mobile data”.