UK first battleground for European convergence
The UK is shaping up to be a key battleground as the major operators start to put their convergence theories into practise.
As Vodafone casts around for a way to add broadband access to its mixture of services, the wired-wireless incumbents have put the elements of the quadruple play in place already and are now taking their first steps towards unified service bundles.
Orange has thrown down the gauntlet by offering free fixed broadband to customers who spend a certain amount on its mobile services – making the long anticipated shift to free broadband a reality, and one to which the other operators will have to respond. Orange is also the common brand now adopted by its parent France Telecom for all its quad play (and enterprise) services including broadband access, ISP services, IPTV, VoIP and mobile.
With other France Telecom brands such as Wanadoo, Equant, Etrali and eventually MaLigne IPTV now disappeared, this is only the start of the real shift – towards genuinely converged bundles of services (not to mention the gargantuan effort of combining sales and service organisations, websites and helpdesks).
The Orange free broadband offer extends significantly the principle laid down by T-Mobile – that cellular revenue and customer retention can be driven by offering another service at low cost, even if it is lossmaking to the operator (in T-Mobile's case, this was the Wi-Fi hotspot subscription). Some smaller operators are already taking the same approach, notably Carphone Warehouse (also in the UK), and the other majors are likely to copy – leaving those cellcos with no broadband network at a severe disadvantage.
Vodafone is the best example, and all the mobile-only providers, and the larger MVNOs, will have to consider how to obtain broadband partners, or offer an alternative way to lure and retain customers. Free mobile minutes, in return for watching adverts on the cellphone, is one of the most promising options, building on the internet model, and this has already been introduced by Virgin Mobile USA and hinted at by Vodafone.
Many of these more innovative approaches to offering free services are being driven by the MVNOs, which do not have the same capex and opex considerations as the network owners.
For instance, Xero Mobile has attracted considerable attention in the US with its soon-to-be launched advertising-based service. It plans to give away up to 5m handsets, mainly to college students, and then subsidise their bills by pushing adverts to those phones.
Now, Xero is looking to franchise this model to operators in other countries, claiming it "owns and has licenses for the technology, IP and expertise necessary to deploy this model in multiple countries".
For those with broadband to offer, however, the pressure to move to converged bundles has been stepped up by Orange's move. This is the first blow in the long awaited confrontation between France Telecom, Deutsche Telekom, Telecom Italia, British Telecom and to a lesser extent Telefonica, which is likely to change the telecoms landscape and take in all the new Europeans to the east. It is a war that is based on using a quadruple play where unbundling of the local loop and broadband wholesaling legislation across all of Europe has made it possible for ISPs to enter other broadband markets.
The UK convergence fight
This is a fight that's been brewing for some time and although Orange's rebranding has most impact in its native France, the opening shots are fired in the UK, fairly and squarely at British Telecom.
Orange UK has announced its free 8Mbps line to mobile monthly contract customers who spend more than £30 ($56). Orange has also launched new VoIP services including one called Anytime, which offers free evening and weekend calls to UK landlines and has free calls to Orange mobiles for just £6 ($11) a month.
Eventually, Orange will bring in a "One Phone" offering, a dual-mode handset that hands off between the broadband and cellular networks using Wi-Fi, taking on BT Fusion; and it has promised to merge address books across mobile and broadband telephony.
Orange has also said that it will launch music, gaming, communication and security services in the near future, but we would expect even more from the company, and an onslaught in hybrid IPTV services will be launched right across Europe.
In the UK, British Telecom is widely thought to have nowhere to go. It is a wireline operator that has no mobile infrastructure of its own, and is fighting shy of offering full IPTV, because of the strength of satellite TV supplier BSkyB and terrestrial digital TV in the UK. This means that when Orange attacks both wireline revenue by including mobile bundles, and offers a hybrid DVB-T/VoD-over-IP strategy, it will be able to steal customers.
Granted, neither Telecom Italia nor Deutsche Telekom has a footprint in UK broadband lines, but that could be easily acquired as there are at least seven independent unbundler operations, the biggest of which, Easynet, has already been acquired by Sky, and the next Bulldog, already acquired by Cable and Wireless, but thought to be up for sale again. And the German incumbent, of course, has T-Mobile UK to spearhead the branding of such an exercise.
Meanwhile, once Virgin Mobile has been acquired in the UK by NTL, it will form a digital cable based quadruple play, and it too can to mobile customers in the same way as Orange.
UK IPTV service HomeChoice is up for grabs, having placed itself on the market some months ago. This is an exceptional IPTV service, complete with internet access and VoIP, but not access to mobile bundling. So this might be another way into the UK for a BT rival.
Acquisition of BT?
But there's a better acquisition to be made. Deutsche Telekom could move to buy British Telecom itself. Many think that this is only a matter of time and price and that the price will only go down as BT spends aggressively on its switch to an entirely IP-based network, and as it loses market share to encroaching VoIP services.
The excellent Europe wide enterprise services that BT has could be floated off, and DT might end up with a cut-price acquisition, at the same time bypassing the effort of competing in the market against BT, and adding a full quad play to T-Mobile.
Other operators have their eyes on the UK as a testing ground for their converged bundles. In Spain the virulently strong Telefonica, bolstered by South American mobile and broadband revenues, is likely to yield little joy to anyone trying to enter its market in a quadruple play. It has IPTV growing at breakneck pace, huge broadband market share and it is the second largest mobile carrier in the world. Telefonica might be the next company to begin quadruple play bundling of its own in and outside its core territory, and a natural target would be the UK, because it owns local mobile operator O2.
The UK, then, highlights the two key challenges for large operators in Europe – for companies with just one network, how to achieve a quad play; and for wired/wireless majors, how to remain competitive in the converged world by taking on an increasingly internationalised set of rivals, while ensuring that bundling sustains profitability as well as market share.
Making profit from convergence
This may be harder than it looks. Bundling's positive impact on customer acquisition and retention is clear - one operator can control all of a user's activity in voice, video and broadband access, boosting its share of that user’s spend even if the customer is actually spending less than on discrete services. This lower total bill and the increased buy-in to a single provider also encourages loyalty (or customer apathy), and the convenience and predictability of a single bill is a significant lure.
The risk is far higher when it comes to margins. The triple play, when delivered over a single efficient IP network, can achieve significant opex economies that offer latitude for price cutting without too much pain for profits, but when the fourth arm of mobility is introduced, operators need to support (or partner with) at least two networks, and possibly more as some introduce broadband wireless to the equation too.
A recent report by Exane BNP Paribas and Arthur D Little warned that bundling and fixed/mobile convergence will have a "severe impact" on major operators' margins in the coming year, especially as users throw out fixed lines, and make heavier use of Wi-Fi at the expense of cellular.
The report is also sceptical that consumers will pay the premium rates for new services that would be required to compensate for the lower spending on basic functions like voice.
The report forecasts average revenue growth in the European telecom services market of just 3.1 per cent in mobile and 1.3 per cent in fixed, almost one percentage point slower than last year (with the main growth decline in mobile, which rose by 8 per cent a year in 2002-2005).
Copyright © 2006, Wireless Watch
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