The Mobile Data Challenge (by Economist Intelligence)

The mobile data challenge
A report from the Economist Intelligence Unit
Sponsored by InnoPath


Contents

Preface 2
Introduction 3
A focus on content and applications 5
Efﬁciency is paramount 7
Keeping the customer satisﬁed 9
Conclusion 10
Appendix: Survey results 11

1 © Economist Intelligence Unit Limited 2010


Preface

The mobile data challenge is an Economist Intelligence Unit research paper, sponsored by InnoPath. The
Economist Intelligence Unit’s editorial team executed the survey and wrote the report. The ﬁndings and
views expressed in the report do not necessarily reﬂect the views of the sponsor.
Iain Morris was the author of the report and Katherine Dorr Abreu was the editor. Mike Kenny was
responsible for layout and design. Our thanks go to all survey respondents for their time and insight.

February 2010



Introduction

S ceptics have long doubted whether mobile data services can deliver big, new profits for service
providers. There is no question that revenue from global mobile telecommunications is expanding,
thanks to the adoption of mobile data services worldwide. Yet many providers are still unsure whether
data services will help them to increase profits significantly. In the absence of fresh thinking, service
providers are focusing on cutting costs. But this is unlikely to be sufficient to maintain profits, let alone
increase profit margins.
In a survey of mobile-phone operators conducted by the Economist Intelligence Unit and sponsored by
InnoPath, only a minority (44%) of respondents say that growth in revenue from mobile data services will
make up for a decline in their company’s revenue from voice services over the next five years. Twenty-four
percent expect data services merely to offset a decline in their mainstream voice business, while another
25% say overall revenue will decline despite the rapid growth of data services.
Increasing revenue from these services is hard enough. Actually boosting profits from data services will
entail major changes by mobile-phone operators in areas such as content and application development,
pricing strategy and network development. It is also likely to require further improvements in efficiency,
identification of new revenue sources and an even sharper focus on the customer.

Data* spurs mobile revenue growth worldwide
Global mobile telecoms
services revenues Data as %
(US$bn) of total
800 40
Data Voice Data as % of total
700 35

600 30

500 25

400 20

300 15

200 10

100 5

0 0
2005 2006 2007 2008 2009e 2010e 2011e 2012e 2013e 2014e
* Data revenue includes messaging. e Estimate. Data source: Pyramid Research.



Who took the survey?

A total of 197 executives in the mobile communications industry took part in the survey. They are based
worldwide: 30% in the Asia-Paciﬁc region, 28% in North America, 26% in Western Europe, and the remaining 16%
in Latin America, the Middle East and Africa, and Eastern Europe.
They represent a wide range of company size: 30% are in companies with annual revenue of US$500m or less,
14% with revenue of US$500m to US$1bn, 18% from US$1bn to US$5bn, and 38% with revenue of US$5bn or
more. Their companies offer a wide variety of product lines, both consumer and business, wireless and wireline.
The panel is very senior: 43% hold C-suite or equivalent positions, another 24% are senior vice-presidents,
directors or heads of business units, and the remaining 33% are other managers. Respondents carry out a
range of functional roles, including marketing and sales (41%), strategy and development (37%), and general
management (27%).

All companies offer wireless services, but provide other services as well
Which of the following product lines does your organisation offer?
(% respondents)

Wireless data
88
Wireless voice
85
Business internet (T1, T2, etc)
63
Voice over IP (VoIP)
57
Landline telephony
52
Residential internet (eg, dial-up, ISDN, cable modem)
48
In-home entertainment (TV, movies, etc)
30
Source: Economist Intelligence Unit survey, December 2009.



A focus on content and applications

P erhaps the biggest transformation facing mobile operators relates to the development of content and
software applications for phone users. Some 47% of survey respondents say this is an area on which
they will focus their efforts in the next five years.

Meeting the threat of commoditisation with revenue-generating content and apps
Over the next five years, in which areas do you think your company will focus its efforts? Select up to
three. My organisation will focus on:
(% respondents)

Improving operational efficiency
49
Developing revenue-generating content and applications to avoid over-reliance on traffic revenue
47
Reducing churn by addressing customer satisfaction
43
Investing in next-generation networks such as WiMAX and LTE
39
Partnering with developers to expand our application/content offerings
35

But it will be tough to make money from content and applications. Inconsistencies in the survey
findings suggest that operators’ strategies in this area are in their infancy.
Most mobile-phone operators are investing heavily in next-generation networks rather than
developing and selling mobile-phone applications. Fully 60% of respondents say their companies are
building next-generation networks—third- or fourth-generation (3G or 4G) systems—mostly to meet
customer demand for new services. Mobile TV and gaming require 4G networks for optimal operation, yet
these services rank low in the survey as potential revenue drivers over the next five years. Simple web
browsing, e-mail and messaging, and social media (such as Twitter) are the services most likely to spur
revenue growth in this period, according to the survey. But these services are already in widespread use,
and typically available for free (apart from the connection fee). Furthermore, they can be delivered to
customers quite satisfactorily using 3G networks, which have already been deployed by most operators in
developed countries.
How, then, will next-generation networks benefit operators? Respondents seem to think that the



development of enhanced browsing, messaging and social media services will enable them to sell
advertisements and thus generate profits. More than 60% of respondents say that advertising will become
an important source of revenue in the next five years.
Operators must also decide how to deal with the challenge of firms such as Google and Apple in the
development of content and applications. Forty percent of survey respondents say competition from such
“non-traditional rivals” is a significant problem facing operators. In the past, operators tried countering
this threat by preventing customers from visiting certain third-party sites—creating a “walled garden”.
But with few compelling services of their own, operators alienated their customers.
Some 72% of respondents agree that operators adopting an open-network policy will be more
successful than those that do not. Only 32% say that legislation supporting the principle of “net
neutrality” (which could outlaw the walled garden) would hamper their ability to invest in advanced
networks. The risk is that an open-network policy leaves operators with an even weaker presence in the
content and applications market than they currently claim.
For all their eagerness to offer more content and applications, few respondents show an interest in
setting up online applications stores (so-called app stores). Despite the recent high-profile opening of
stores by two operators, Vodafone and France Telecom, some two-thirds of respondents with a strategy
in this area prefer to partner with app store developers such as Apple rather than go it alone. Twenty-
three percent of all respondents say they have no app store strategy. The apparent lack of enthusiasm
could leave operators sidelined in the content and applications market and missing out on a revenue
opportunity.

Operators with an app store plan prefer to partner
Choose the statement that most closely reflects your company’s plans with regard to app stores.
(% of respondents who said their companies have plans regarding app stores)

My organisation prefers to partner with third-party app store developers 69

My organisation prefers to develop its own app store 31




Efficiency is paramount

O perators responding to the survey are more confident when it comes to improvements in efficiency.
Faced with difficulties in generating increased revenue and with the need for some costly
investments, 49% of respondents say they plan to focus on boosting operational efficiency over the next
five years. Building next-generation networks is the best way for operators to do so, according to 34% of
respondents.

Next-generation networks considered the key to operational efficiency
As mobile data services grow, which do you consider the best means of improving operating efficiency?
(% respondents)

Invest in next-generation networks
34
Share networks with rivals
19
Automate customer-facing activities
15
Outsource network management to manufacturers
9
Restructure back-office operations (IT, accounting, etc)
9
Outsource IT to services companies
7

Next-generation networks might help operators to expand their margins by providing new capacity for
high-bandwidth services. Operators are offering flat-rate tariffs, which allow customers unlimited usage
of data services. This has prompted a surge in mobile data traffic, exerting a heavy burden on existing 3G
networks. More efficient 4G infrastructure can ease the strain.
Some 37% of survey respondents believe that flat-rate pricing is the most likely way to ensure
profitability, probably because consumers have tended to be wary about signing contracts based on per-
usage pricing. US-based AT&T has experienced heavy demand on its network from Apple’s iPhone, but the
carrier has so far resisted the introduction of per-usage pricing because it fears that such a move would
deter customers.



In recent interviews, however, senior AT&T executives have expressed doubts that flat-rate tariffs are
sustainable. In our survey, some 59% of respondents think per-usage pricing is more likely to ensure the
profitability of mobile data services. Firms can charge per megabyte consumed, impose a megabyte ceiling
on usage or introduce tiered pricing, whereby customers are given a specific allocation of megabytes per
month for a flat fee (paying more for a bigger allocation).

Usage-based pricing can help ensure profitability
In your opinion, which pricing model is most likely to ensure profitability in mobile internet?
(% respondents)

Usage based (59)
Tiered data pricing (33)
Capped flat rates (18)
Per-usage pricing (8)
Unlimited flat rate (37)
Other (4)


For all the interest in building next-generation networks, the high cost of new infrastructure is a
serious concern. Investments in 3G were largely responsible for the 28.5% increase in annual spending
by China’s operators in 2009, for example. Iliad, France’s newly licensed 3G operator, reckons that it will
have to spend €1bn on network construction over the next 18 months—roughly equivalent to its revenue
in the first half of 2009.
Forty-five percent of respondents say cost is one of the most pressing problems that operators face
over the next five years. This will put further pressure on operators to find ways to cut costs. Ending the
subsidies on expensive handsets, for example, would help to restore margins, but this seems unlikely.
Fifty-nine percent of respondents say that the policy has helped them to attract and retain customers who
generate higher service revenue.



Keeping the customer satisfied

O ne way of lowering costs would be to focus on retaining customers. Some 66% of respondents say
they already do this, while 43% say reducing “churn”—the customer turnover rate—is one of their
focus areas for the next five years. Automating customer-related activities can also help to reduce costs,
according to 15% of respondents.

Companies are focusing on customer retention to safeguard profitability
Do you agree or disagree with the following statement? My company is focusing on customer retention as a primary
means of safeguarding the bottom line.
(% respondents)

Agree
66
Disagree
12

Despite the emphasis on customer retention, however, respondents say that reducing the rate of
turnover comes low on the list of priorities. This probably reflects their self-confidence: 71% say they
outperform their peers with regard to customer perception of products and services, and 60% say they do
better than their competitors in terms of customer service. Only 20% say they underperform their peers
with regard to churn.

Operators are confident of their competitive positioning
Compared with your competitors, how well does your organisation perform with respect to the following criteria?
(% respondents)
Outperform About the same Underperform
Customer perception of products and services
65 23 12
Prices
49 38 13
Innovative products and services
61 29 10
Service reliability
71 22 7
Network reach
62 24 13
Quality of network
71 22 7
Customer service
60 28 12
Churn (customer turnover rate)
51 29 20
0 20 40 60 80 100


Conclusion

D espite the doubts about the profit potential of data services, operators are transforming themselves
into data-service providers to compensate for a continual decline in their voice revenue. They are
investing in next-generation networks both to meet customer demand for new applications and content
and to improve their efficiency in delivering these services. Yet the survey suggests that operators can
further improve their performance.

l If operators want to be more than just “dumb pipes”, they need to come up with a clear strategy for
the development of new revenue-generating content and mobile applications. Given the growing
importance of app stores, it is surprising that 23% of respondents have no strategy in this area.
Moreover, the data services in which respondents expressed most interest are already in widespread
use, and typically generate nothing in revenue apart from connection fees.

l Improving operational efficiency, cited by 49% of survey respondents as a central focus over the next
five years, cannot come about solely as a result of investments in next-generation networks. Given the
cost and time needed to build them, operators will have to develop other ways to enhance efficiency,
such as sharing of networks or automation of processes.

l Keeping customers is less costly than attracting new ones, and so reducing the churn rate by
improving customer satisfaction must be a part of any efficiency-enhancing strategy.


Appendix Mobile data
Survey results

Appendix: Survey results
Percentages may not add to 100% due to rounding or the ability of respondents to choose multiple responses.

Which of the following product lines does your organisation In your opinion, what will be the impact of mobile data on
offer? Select all that apply. your organisation’s revenues in the next five years?
(% respondents) (% respondents)

Wireless data Mobile data revenue will drive new topline growth
88 44
Wireless voice Mobile data revenue will compensate for stagnating
85 voice markets and keep revenues stable
Business internet (T1, T2, etc) 24
63 While growth of mobile data revenue will be impressive, it will not be
Voice over IP (VoIP) sufficient to prevent a decline in revenue as voice markets stagnate
57 25
Landline telephony Don’t know/Not applicable
52 8
Residential internet (eg, dial-up, ISDN, cable modem)
48
In-home entertainment (TV, movies, etc)
30
Other
14

Compared with your competitors, how well does your organisation perform with respect to the following criteria?
For each criteria, rate on a scale of 1 to 5, where 1=Significantly outperform and 5=Significantly underperform.
(% respondents)
1 Signiﬁcantly outperform 2 3 4 5 Signiﬁcantly underperform Don’t know
Margins
18 39 25 11 3 5
Customer perception of products and services
17 47 22 10 2 2
Prices
15 33 38 11 3 1
Innovative products and services
25 35 28 7 3 2
Service reliability
26 44 22 6 1 2
Network reach
30 29 23 11 2 4
Quality of network
30 37 21 5 2 5
Customer service
24 36 27 9 41
Churn (eg, customer turnover rate)
14 35 28 14 5 5

0 20 40 60 80 100

11 Economist Intelligence Unit 2010

Survey results

Do you agree or disagree with the following statements?
For each statement, rate on a scale of 1 to 5, where 1=Strongly agree and 5=Strongly disagree.
(% respondents)
1 Strongly agree 2 3 4 5 Strongly disagree Don’t know

Advertising will be an important source of revenue for mobile service providers in the next five years
30 30 22 12 4 2
App stores, such as Vodafone 360 or Apple's iPhone app store, will be an important source of revenue for mobile service providers in the next five years
26 30 23 13 3 5
Smartphones that use an open-source operating system, such as Google Android or LiMo, will become
more popular than devices using proprietary software, such as the Apple iPhone or RIM Blackberry
22 33 24 13 6 3
The practice of subsidising expensive devices erodes profitability in the short term but will ultimately
pay off by helping retain customers who generate higher service revenues
18 40 22 11 7 2
My company is focusing on customer retention as a primary means of safeguarding the bottom line
32 35 19 9 4 3
Third-party VoIP providers will be less of a competitive threat to operators once next-generation networks are deployed
17 29 24 16 6 7
Operators that adopt an open network approach that allows users to access all Web content and services are most likely to be successful in the future
30 42 16 8 2 2
Legislation supporting the principle of “net neutrality” will hamper my organisation's ability to invest in its network
0 15
20 17
40 60 36
80
14 8
100
10

In the next five years, what do you think will be the most Which services will be the most important drivers of revenues
pressing problems faced by mobile operators in the country in in mobile telecoms services in the next five years?
which you reside? Select up to three. Select up to three.

The cost of deploying state-of-the art networks Web browsing
45 49
Competition from non-traditional service providers such as Skype and Google Email and messaging
40 47
The commoditisation of telecoms services Social media
37 42
Competition from traditional service providers Business applications
28 34
Slowing demand growth as a result of market saturation Location-based and mapping services
28 28
The need to provide seamless service across several technology platforms Mobile TV
26 26
The impact of government policy and regulation Legacy or traditional voice services
26 18
Uncertainty about which technologies will prevail Music
(such as WiMAX, LTE [Long term Evolution] or others) 15
22 VoIP
Customer churn 13
19 Gaming
A shortage of qualified workers 12
12 Other
Other 4
2 Don’t know/Not applicable
Don’t know/Not applicable 1
1


Survey results

Over the next five years, in which areas do you think your In your opinion, which pricing model is most likely to ensure
company will focus its efforts? My organisation will focus on: profitability in mobile internet?
Select up to three. (% respondents)
(% respondents)
Unlimited ﬂat rate
Improving operational efficiency 36
49 Tiered data pricing
Developing revenue-generating content and applications (tariffs are stepped up according to data usage during a month)
to avoid over-reliance on traffic revenues 32
47 Capped ﬂat rates
Reducing churn by addressing customer satisfaction (customers are limited to a set volume of data each month)
43 18
Investing in next-generation networks such as WiMAX and LTE Per-usage pricing
39 8
Partnering with developers to expand our application/content offerings Other
35 4
Moving into new geographic markets Don’t know/Not applicable
23 2
Boosting traffic revenues
22
Offering advertising to generate revenue
12 Choose the statement that most closely reflects your
Securing the best possible handset lineup company’s plans with regard to app stores.
9 (% respondents)
Other
2 My organisation prefers to partner with third-party app store developers,
Don’t know/Not applicable like Apple and Google, than develop its own app store.
2 45
My organisation prefers to develop its own app store, like Vodafone 360,
than partner with third-party app store developers, like Apple and Google.
20

As mobile data services grow, which do you consider the best My organisation has no plans regarding app stores.
23
means of improving operating efficiency?
(% respondents) Don’t know/Not applicable
11

Invest in next-generation networks
34
Share networks with rivals
19 In your opinion, what are the two main reasons for investing
Automate customer-facing activities in next-generation networks? Select up to two.
15 (% respondents)
Outsource network management to manufacturers
9 Drive topline growth by serving customer demand for new services
59
Restructure back-office operations (IT, accounting, etc)
9 Improve profitability
40
Outsource IT to services companies
7 Ease capacity constraints
39
Other
2 Build market share
24
Don't know/Not applicable
5 Reduce customer churn
16
Other
3
Don’t know/Not applicable
3


Survey results

In which country are you personally located? Which of the following best describes your job title?

United States of America Board member
26 5
India CEO/President/Managing director
13 17
United Kingdom CFO/Treasurer/Comptroller
6 2
Malaysia CIO/Technology director
4 7
Brazil, Finland, Singapore, Spain, Australia, Nigeria, Pakistan, Sweden Other C-level executive
3 13
Canada, Germany, Bangladesh, Denmark, Ireland SVP/VP/Director
2 16
Czech Republic, Italy, Luxembourg, Mauritius, Mexico, Portugal, Head of business unit
South Africa, Switzerland, Argentina, Austria, Bolivia, Cyprus, Egypt, 8
Estonia, Ghana, Greece, Hong Kong, Indonesia, Malta, Netherlands, Head of department
New Zealand, Oman, Philippines, Qatar, Romania, Slovakia, Sri Lanka, 10
Thailand, Ukraine, United Arab Emirates, Uzbekistan, Venezuela
Manager
1
18
Other
5

In which region are you personally based?
(% respondents)
What are your main functional roles?
Asia-Pacific Please choose no more than three functions.
30
(% respondents)
North America
28
Marketing and sales
Western Europe 41
26
Strategy and business development
Latin America 37
7
General management
Middle East and Africa 27
6
Operations and production
Eastern Europe 17
3
Customer service
14
IT
13
What are your organisation’s global annual revenues Finance
in US dollars? 12
(% respondents) R&D
12
Information and research
$500m or less 30 7
Human resources
$500m to $1bn 14
4
$1bn to $5bn 18 Supply-chain management
2
$5bn to $10bn 13
Procurement
$10bn or more 24 2
Legal
1
Risk
1
Other
6


Whilst every effort has been taken to verify the accuracy
Cover image: Shutterstock

of this information, neither The Economist Intelligence
Unit Ltd. nor the sponsors of this report can accept any
responsibility or liability for reliance by any person on
this white paper or any of the information, opinions or
conclusions set out in the white paper.

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