The convergence of fixed line and mobile telecommunication services has this year begun in earnest with potentially severe repercussions for the European Telecom Services market, says the fifth annual research report, 'Facing Off on Convergence', from Exane BNP Paribas and Arthur D little.
The 104 page report, developed from 72 interviews with senior operational managers at fixed and mobile operators, equipment manufacturers and Internet services providers in 11 European countries, garnered significant agreement on: further rate cuts on mobile services driven by the imminent arrival of mobile-WiFi hybrid offers and, ultimately, of future broadband mobile technologies; ongoing mobile traffic growth (fixed-mobile substitution) boosted by these rate cuts. Fixed line revenues already falling continue to do so, mobile revenues follow; accelerated development of mobile broadband sustaining growth in mobile market, but high level of market sharing with internet services and content providers.
The arrival of hybrid handsets connecting to fixed, mobile and WiFi is driving the blurring and ultimately complete disappearance of traditional borders between fixed and mobile networks. Longer term, new technologies such as F-OFDM and WiMax will compound this situation whilst expanding the market.
Antoine Pradayrol, head of the Telecom Operators Team at Exane BNP Paribas commented that, "Many fixed line operators will make the most of these opportunities to enter the mobile market, mainly via voice over IP, but the mobile operators will use 3G to extend their lead, not only on voice, but also on broadband data services. This augurs for a proliferation of offers and therefore stiffer competition in coming years."
In bottom line terms the report forecasts, during the 2005-2010 period, the average growth in European telecom services to fall 0.8% pa, of which +3.1% pa on mobile and -1.3 pa on fixed line. This corresponds to a significant slowdown in mobile growth that currently stands at +8% pa (2002-2005) and deterioration in fixed line revenues that have remained flat in the same period. Thus, the share of household spending on telecom services will shrink.
Tough times for operators
At the operator level this means much stiffer competition through market share fragmentation and a decline in revenues. The report forecasts sector Earnings before Interest, Tax, Depreciation and Amortization (EBITDA) to fall 1% in 2005-2010, and sector Return On Capital Employed to decline to under 15% in 2010, vs over 20% currently in mobile and 15% in fixed.
The report also publishes an extreme scenario showing sector EBITDA 2005-2010 Compound Annual Growth Rate (CAGR) of between +1 and -4%.
Fixed-line operators have a strong negative exposure to fixed-mobile substitution, but have a real opportunity to develop in mobility. The best positioned are the small alternative operators positioned on broadband, which have little to lose on fixed voice and much to gain in investing in mobile. The Internet service specialists such as Yahoo! and Google are well placed to gain from convergence. They have no telecommunications services to protect, are network agnostic and therefore naturally convergent.
Agreements such as that recently announced by Vodafone with Microsoft and Google on mobile Internet services such as email and web search point to increased activity by Internet Service specialists with potentially less sharing of value for the operators. In this scenario companies such as Skype, Google Talk and Yahoo! Talk will take increasingly greater margins from data and voice resale.
For the consumer, much of this is good news. As convergence intensifies competition it will prompt price cuts on fixed broadband, mobile broadband and/or mobile voice depending on the country. Consequently the report forecasts a global market slowdown between 2005-2010.
WiFi paves the way for hybrid offers blending the benefits of a mobile offer (for voice) and of broadband wireline access (when the user is at home, the office or in a hotspot). This technology will provide broadband services that are more powerful and less expensive than 3G and should be a catalyst for mobile data. On voice, WiFi could accelerate the fall in mobile rates by as much as -15% in three years.
Fixed or mobile under pressure, according to the country
Convergence will not have the same impacts in each country. Countries where convergence will increase competition in mobiles include France, the UK and, to a lesser extent, Spain, the Netherlands and Belgium. On the other hand, in Germany fixed mobile substitution will accelerate. The pressure on fixed line operators is also likely to increase in Portugal, Austria and the UK; while in Italy and Switzerland convergence is likely to have a limited impact on competition.