Mobile broadband: operator challenges

Mobile Internet is bringing a new revolution in technology. All players involved in the telecommunications, media and technology industry in general are maneuvering to capture the opportunities offered by this new reality.

To "monetize" this opportunity, still in its first infancy, operators are adapting their value proposition to the market.

We are witnessing strategic alliances and partnerships with manufacturers, service developers or applications and content, as well as increased efforts to better understand the needs of customers, establish collaborations to meet demand, and customize prices to match the actual use of services.
Mobile operators, which are beginning to find that many of their world markets are saturated, face this challenge as a new opportunity for further growth.

This document describes the current situation with broadband, analyzes the trends and scenarios for development at major players in their effort to adapt to this new environment, and finally focuses on the challenges operators need to address in order to lead the industry in this new technology cycle.
The use of mobile Internet is a reality already with us. Despite its short history, it is growing faster than "Desktop Internet" did.

By 2001 the big operators had already seen the opportunities that mobile broadband would bring about and, through tough auctions, they competed for licenses that would allow them to operate under 3G. Their expectations, however, could not be met. The market was not yet ready for this new cycle in technology. Terminals were not sufficiently advanced, content and applications were not suitable. In short, it was still early for the Internet era and its business model.

The final impetus towards mobile broadband came from Apple when this company introduced the iPhone in 2007, transforming the way the Internet is accessed from mobile devices.

As with the Internet’s arrival in homes some time ago now, this new concept is not just a new service offered by operators to customers, but represents a new cycle that will likely transform how communications work, how news and entertainment is distributed, how goods and services are purchased, all controlled through a terminal we carry in our pockets at all times.

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What are the levers driving this growth?  

Technology

According to a report published by Morgan Stanley in December 2009, global 3G penetration will reach 20% of the world population in 2010 and an estimated 43% by 2014. By region, it is estimated that by the end of 2010, 3G penetration will have reached 96% in Japan, 46% in the US and 54% Europe.

Applications / Services / Content

Perhaps the key to the convergence of technology and terminals has been how these services have evolved. Mobile consumers are adopting new web applications at the fastest pace ever in history. The possibility for 24x7 access to social networks, news and online radios, Google searches, video and VoiP calls is increasing the amount of time users are connected to the Internet through their terminals.

Terminals

The hitherto known as smartphones have provided the impetus for improving user experience in relation to the Internet and its applications. Customers are continuously online with these devices, whose high processing capacity is equivalent to that of computers 8 years ago, and are always connected to the Internet via 3G or Wi-Fi. The market share for these terminals is 52% in Japan and 25% and 23% in the US and Europe respectively. And smartphones are not the only devices keeping the mobile Internet scene alive. Both eBooks and notebooks with network connectivity are also proliferating at high speed.

Regulators

Mobile broadband development cannot be described without mentioning the role of regulators. To encourage the market, they will need to take a stance on the following:

• Access to the spectrum required for the provision of services.
• Assignment of licenses at reasonable prices.
• Promoting and encouraging the sharing of existing networks.
• Setting coverage obligations for the provision of services.
• Development of policies to promote innovation and new services/applications.

These levers are developed by different players in the Mobile Internet value chain (content providers, operators, manufacturers and users), each adding value to the chain.

What is the value chain for the process?

Although all players are taking positions in the value chain, attempting to cover the entire chain individually does not seem possible, therefore the way forward must be to establish win-win partnerships and agreements between the different market players.

In this regard, the following scenarios have been identified based on a general value chain:

Terminals

Without any doubt, the gradual popularization of intelligent terminals (smartphones, tablets ...) will be the determining factor in the redesign of the current providers map.
The "user experience" this new generation of terminals provides, which is a result of their combined operating systems, the terminal hardware itself, and the capabilities they are able to offer thanks to the emerging content industry, are consolidating users as true economic actors that generate both direct revenue (from sales) and indirect revenue  (from advertising).
In this context, manufacturers will be moving forward in three directions:

• Achieving the winning hardware/operating system combination that will allow them to capture the maximum number of users and persuade the maximum number of content providers to become part of their value proposition.
• Gradually "democratizing" the cost of "smart terminals" to cover the maximum potential market not yet served due to the barrier currently represented by the price of these terminals.
• Approaching the business generated by the rest of the range (medium/low terminals) with a strategy of increasingly tight prices where economies of scope and production costs will play a fundamental role as the primary key success factor.

Service providers - Operators

The entry of new competitors with the capacity to "skip" the operator in the provision of services/content to the end customer is causing operators to undergo a transformation process so as not to end up as a pure commodity function. Having access to the two portions of the market that are seen as the essential part of this business (direct sales from customer use/ downloads, and advertising revenue).
Under this new paradigm, operators have a major advantage they can leverage and deploy on an individual basis or through partnerships with other players: they are the network owners, and as such they are responsible for providing broadband connectivity, with virtually universal coverage and direct contact with their customers.

Aspects such as billing systems, which allow companies to bill customers for the purchase of any content, services or third-party applications; the ability to apply intelligent models to network use (i.e. M2M); or the possibility of evolving towards network services with differentiated quality –which would require overcoming the debate on network neutrality, make it possible to look at new scenarios for increasing business.

However, it will also be necessary to address cost efficiency policies to be able to withstand both the expected rates of return of a business that will need significant levels of investment to support the skills required by the new demand, and a reduction in profitability due to a significant increase in competition levels.

Infrastructure provider

The current situation and expected trends seem to confirm the hypothesis that the new Asian suppliers will become market leaders in mobile telecommunications equipment, supported by their competitive advantage in costs, access to greater economies of scale and progressive parity in quality levels offered at extremely competitive prices.

Against this backdrop, traditional providers should continue to work on the redefinition of business models, investing in innovation and maintaining technological leadership, as well as on the verticalization of their value proposition (specialized care, provision of outsourcing services for the maintenance and operation of operator networks, etc.).

Production of content and applications

This is undoubtedly the key element for developing mobile broadband in the right direction. At present content and applications have managed to eliminate the "totally free" use of the Internet, and have transformed the users of terminals into true economic actors that generate direct revenue from sales and indirect revenue from advertising.

Over the next few years, content and applications will be giving usefulness to the arsenal of technology currently available to users, largely underused due to the incipient status of the offer available to date, designed (even "invented") for the mobile channel.

As content and applications gradually mature, it seems clear that users will expand their use of mobile in terms of both quantity (time dedicated per day) and quality (range of use: entertainment, information, work, research, communication, etc.).

In this context, the potential for innovation attached to the new possibilities offered by the currently available technology (i.e. transmission speeds, geolocation possibilities...) offers a glimpse into the huge growth potential made possible by the high business turnover – from sales and advertising, expected for the coming years (which will undoubtedly become the most significant portion of the turnover generated by mobile broadband during this period).

What are the key issues faced by Operators in this situation?

Mobile Broadband is becoming the new growth driver in the information society, supported by business volumes above two digits (from sales and advertising) expected for the next five years. However, most of these revenues will come from added value in the use of mobile broadband (not from access to it). Currently, this added value is mainly being offered by other players in the value chain.
In order for operators to be able to gain a share of this market, they will need to:

• Manage to capture channel "use", i.e. have "customer browsing time associated with their brand".
• Manage to effectively monetize this “use”, both through direct sales to customers themselves, and by making the most of that "browsing time" through selling advertising to companies.
   

For more information, click here to access the full document in pdf (only available in Spanish).