Mobile Operators: Too Many to Make Money

It was widely reported that Google (GOOG) stole the show at the 2010 Mobile World Congress in February. Google's mighty Internet presence loomed over the mobile-operator community as either an oppressor or an opportunity—depending on whether or not you were a operator. But while the Google brand name—like those of Apple (AAPL) and its iPhone and iPad—guarantees headlines, we should step back and look at the state of the operator community in the light of its own evolution. Is the threat from Internet-based services really the issue?

In both developed and emerging markets, operators are suffering flat or declining revenues as markets become saturated and subscribers expect ever-lower prices. Mobile communications have become a commodity. New services are subsidized or given away to ensure loyalty. Those brave enough to charge a premium are undercut by rival operators bidding for their customers.

We see revenues and margin pressure across the board, with no shortage of customers. China has just passed 500 million subscribers, and India reported 12.5 million new sign-ons in December 2009 alone, according to the Cellular Operators Assn. of India. The key European markets, already saturated with GSM service, could see mobile-broadband subscribers rise from 22 million at the end of last year to more than 43 million in 2011, predicts researcher CCS Insight.

As we compare this subscriber growth with falling revenues, it appears that the real issue for the operator community isn't competition from the Internet world, but overcrowding by low-spending customers. There may be billions of subscribers, but they are simply not using—and paying for—enough services to support every operator. The EU's approval of the proposed merger between Orange (FTE) and T-Mobile (DT) in the U.K., one of the most competitive mobile markets in the world, may be the start of a trend. Also in the U.K., Vodafone (VOD) has announced job cuts as part of a £1 billion ($1.5 billion) cost-cutting program. We are already seeing consolidation in the infrastructure and handset markets; the time is now ripe, if not overdue, for operators to follow suit.

How many operators per nation?

Mobile operators are in a way victims of their own success. They have built an enormous global industry that is arguably the biggest technology success story in recent decades. It certainly has enjoyed the fastest growth.

The first 100 years of telecommunications taught us that having one operator per country does not encourage innovation, quality, and affordable services for the users. The markets opened up with the advent of mobile communications. Initially we saw two, then three, then four—even up to nine operators per country in the most extreme cases, such as when the Hong Kong regulator felt like playing the market economy in 1996. Regulators have been so excited (and greedy) that the question of how many operators a country could support was never properly analyzed. In fairness, it's still a young market: Barely 30 years on, we still don't know the right number.

Generally, those operators built from the original PTTs are doing well, as are the second operators. In most markets, the laggards are the third, fourth, and further that received licenses in the late '90s. When licenses were issued, it was expected that the wireless Web would be an enormous revenue opportunity for operators. The market for mobile banking, advertising, payments, machine-to-machine, and so on would quickly develop and drive revenues and margins up to astronomical levels.

Customers love those innovative apps

Ten years later we recognize that the formula is a bit more complicated. It took time to develop networks and devices that were suitable for handling Internet services. We've witnessed again and again that it is cumbersome for a community with more than 600 operators to agree on the timing and specifications of new services. So when Google CEO Eric Schmidt tells the mobile operators that "it's not our objective to steal your minutes," he probably means it. Still, it's almost impossible for him to avoid doing that. His company never needs to reach consensus with 600 others before launching a compelling, new service—including voice—on mobile operators' networks.

There is no looking back. Customers love that they can find affordable or "free" new services and applications every day in the Internet's innovation factory. Regulators love it, too, because it serves the market well.

But the regulators must help this unavoidable development make sense for operators as well. They must allow, facilitate—even promote—consolidation of the operator markets. It's time to accept that we were all a bit crazy 10 years ago. This is the time to fix it.

Consolidation would strengthen the mobile market and enable the operator/Internet relationship to become more symbiotic than it is today. Operators have the customer base, the billing relationships, and the customer behavioral data, but users don't need four parallel highways to the nearest hamburger joint or coffee shop. Internet companies have the freedom and flexibility to introduce new mobile services and applications—but they need the operators as their route to customers.

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