For those that have been part of the telecommunications industry over the last 20 years it has been a wonderful ride. Extraordinary growth in fixed-line telecommunications from 1998-2001, as the internet developed, was followed by the explosion in mobile from 2002-2009.
Since 2009, things have been rather different in most markets. Indeed, as the figure below shows, aggregate annual growth from the sixty-eight operators in our group has fallen from over 5% in 2011 to a steady 2-3% from 2013 onwards with no signs of a strong rebound on the horizon.
Aggregate revenue and growth rate for the sixty-eight players, 2009-2016
Source: Company accounts; STL Partners analysis
Some regional differences but growth is slowing for operators everywhere
Operators in Europe and other mature slow-growth markets have focused on building operations in faster growth regions – Telenor, Vodafone, Telefonica, Deutsche Telekom, Orange and others have all expanded into ‘developing’ markets. The problem is that these developing markets have matured fast from a telecommunications perspective and, although operators hope that growing wealth will translate into higher telecommunications spend, there is little evidence that this is happening in a meaningful way – see the figure below. It seems that, once low ARPUs have been established in a developing market, intense competition makes raising prices difficult even if mobile broadband demand is rising fast.
Revenue split and growth rates by region, 2009-2016
Source: Company accounts; STL Partners analysis
It is worth noting that the figure above reflects where operators are headquartered so, for example, Europe (at a steady -2% growth rate over the period) contains the revenues generated in other markets by the multi-national operators mentioned above. This is true in other markets too. So, for example, Asia-Pacific would include the revenues from Sprint as it is owned by Softbank which is headquartered in Japan.
Nevertheless, because well over 80% of revenues generated in each region are from operators headquartered there, STL Partners is confident that these regional splits and growth rates are relatively accurate and show that all regions have slowed substantially and are now operating in the -2% to 5% per year growth range.
As mobile markets become increasingly competitive, telcos are looking at mobile content plays as a way to differentiate their offerings. The mobile content proposition is finally coming into its own, as the spread of 4G networks means high bandwidth demand uses such as video streaming are becoming a reality.
But mobile operators have traditionally offered very little in the way of content. So how should they approach a content play, and more importantly how can they use content to grow mobile ARPU to replace dwindling revenues as voice and SMS declines?
Mobile content plays are currently perhaps more of a ‘holding’ strategy, offering telcos the opportunity to cement customer loyalty and cut churn. However, it is a low-cost option for telcos seeking a low-risk differentiator in mature markets.
Differentiation in a mature market – the UK
Competition is strong in the UK mobile market, with four major players and a wide range of MVNOs, meaning some level of differentiation is essential. Former market leader Vodafone has fallen to a distant third place behind key rival Telefónica’s O2, and EE, the result of the merger of Orange and T-Mobile’s UK units. EE has based its marketing drive on its network coverage and reliability, as it holds a disproportionately large share of the UK’s mobile spectrum following the merger of the two legacy networks.
The desire to consolidate is now growing in the market, beginning with the formation of EE, which was subsequently acquired by fixed-line giant BT, creating a powerful new player in the multiplay sector.
Vodafone UK’s third-party content play
Vodafone in the UK has recently developed a third-party services strategy, offering free subscriptions to Now TV, Spotify, or Sky Sports Mobile App on contracts with over 10 GB data allowances.
Vodafone’s data volumes have seen strong growth in the past few years, reflecting a Europe-wide trend as smartphone penetration climbs and data becomes cheaper. This has been key in stabilising and even stimulating growth in Vodafone’s UK mobile ARPU in the past few years:
Vodafone UK data use and total mobile ARPU, 2011-2016
However, there is serious doubt as to whether this stability is sustainable, as prices fall and competition continues to increase. Total monthly mobile ARPU in the UK is in decline, falling 1.9% per year on average between 2012 and 2015.
Content plays can stabilise market share, but the growth argument is weak
As prices in the UK stay low and ARPU shows little sign of sustained growth, there remains some serious doubt in the longer-term effectiveness of Vodafone’s content strategy. The telco’s third-party play will attract a small number of new customers and may cut churn, but will not necessarily translate data use into ARPU growth – particularly as the revenue stream is split with Sky and Spotify.
Vodafone UK has already fallen behind its two key rivals O2 and EE, and the OTT strategy is not a strong enough differentiator to allow Vodafone to achieve the growth it needs to seriously challenge the market leaders. This, coupled with the disruptive influence of 3 UK and a growing quad-play sector, puts Vodafone in a precarious position in a highly competitive market.
Sky chooses not to leverage its exclusive content
UK satellite TV giant Sky has launched its own MVNO offering discounts to its triple-play customers. Sky in the UK has grown to be the second-largest triple-play operator on the back of a strong exclusive sport offering. However, the operator’s recently-launched MVNO rather bafflingly failed to offer customers any of this sport content, choosing instead a “safe” offering of discounts for existing fixed subscribers.
Sky’s strategy copies that of UK cable operator Virgin Media, which has grown a respectable mobile subscriber base of some 3 million. However, the vast majority of these will be quad-play subscribers who take Virgin Media’s fixed voice, broadband and TV offerings. Virgin has been happy to slowly build this mobile subscriber base as way to boost total ARPU, but shows little ambition for disrupting the “big four” players beyond its existing fixed customer base.
Virgin’s decision not to develop a mobile content play makes sense as it owns hardly any sport rights or exclusive video content. However, Sky’s decision to follow this strategy makes less sense. Sky’s brand is already synonymous with exclusive sport content, so it would seem to make sense to base a mobile content play upon this. Sky has yet to release any data on the success of its mobile offering, but we do not expect to see any eye-catching growth.
Virgin owner Liberty Global has signed partnerships with Vodafone elsewhere in Europe, and a tie-up in the UK has been touted (see our previous blog post, Time for Vodafone to revisit a Virgin Media deal?) But any such deal with a rival of Sky would certainly end Vodafone’s Sky Sports offering, without bringing Vodafone anything in the way of content to replace this.
- Global Internet Trends
- Online Advertising
- Interactive Games
- China Internet
- India Internet
- Global Public/Private Internet Companies
- Macro Thoughts
- Closing Thoughts
And the slides.
Fixed and mobile operator China Telecom broke ground today on its new cloud computing datacentre in China’s Guizhou Province in the southwest. When completed, the new facility will be one of the largest in the world.
In July this year the telco signed a framework agreement with the local government in a bid to build out the new cloud computing facility. The China Telecom Cloud Computing Guizhou Information Park will cover an area of approximately 33.3 hectares (330,000 m2) and is located near the provincial capital of Guiyang.
The project is expected to cost a total of 7bn yuan ($1.14bn USD). An initial investment of 4bn yuan will cover the first phase of the project, which is expected to include the build out of eight datacentres, one power generation centre, and two support centres.
Idea Cellular Ltd. agreed to merge Vodafone Plc’s Indian unit with itself to create the country’s largest mobile services operator in a competitive market disrupted by Mukesh Ambani-led Reliance Jio Infocomm Ltd.’s free services.
Vodafone will hold 45.1 percent of the merged entity, while Idea Cellular’s promoter, Kumar Mangalam Birla-led Aditya Birla Group, will hold 26 percent, according to a filing to stock exchanges.
Both Vodafone and Idea Cellular brands will continue, Vodafone Group Chief Executive Officer Vittorio Colao said in a press conference.
The combined entity will have a revenue market share of 41 percent, ahead of Bharti Airtel Ltd. (33 percent), and an annual revenue of over Rs 81,500 crore, according to data compiled by BloombergQuint.