Operators to move customers up the mobile value chain

13 Jan 2003

If there is one word which best sums up the year facing the mobile sector it is consolidation. After last year’s whirlwind of new technologies, product launches and rebrandings, the industry – not to mention the user – could do with a breather.

GPRS networks were put in place during the first half of the year and multimedia messaging services were introduced in the second. One eye-popping new device after another rolled onto the market, from O2’s xda to the Nokia 7650 camera phone. The networks’ marketing machines hit top gear and millions were spent informing and educating consumers and corporate users about the technological feast that awaited them.

Even though no groundbreaking new technology is scheduled for launch this year – 3G won’t arrive until early 2004 – in many ways 2003 could be an even more significant year for the Irish mobile industry. A year in which the industry moves further up the value chain from voice to data. A year when technology and tariffs take a back seat to new content and revenue generation. Most of all, a year when customer retention supplants customer acquisition as the industry’s holy grail.

The last of these points has an inevitability about it, since mobile phones have reached virtual saturation point in most European markets. If networks are unable to expand their user base significantly, they need to squeeze more out of individual users to keep revenues growing on an upward curve.

“Squeezing” more out of users is not a term Paul Farrell, senior commercial manager at O2 Ireland, is entirely comfortable with – he prefers “harvesting” – but he agrees that the operator will be pushing data services very hard to get a return on its investment and in doing so will gradually transform itself from a telco into something else entirely.
“At this stage, we’re entering the entertainment business. We’re competing for someone’s time and discretionary income. If you’re sitting on the bus you can make a call, download a game, send a media message – it’s up to you,” he says.

Content applications such as ring tones, premium competitions via SMS (short messaging service), gaming and picture messaging are all becoming increasingly important sources of revenue. While picture messaging has attracted most attention so far, Farrell believes that the service won’t really take off until camera phones become more ubiquitous and the networks sort out the interoperability issue – whereby an O2 customer can send a media message to a Vodafone user and vice versa. In the meantime, gaming is likely to provide a happier hunting ground for operators in the short term at least.

“All media messaging phones are Java compliant and you’ve got a relatively high penetration of these phones in the market,” notes Farrell. “We’ve already seen strong numbers from the gaming side. My initial feeling is that … we’ll see more revenue in the games arena in the first six months of the year than we will in media messaging.”

The exact revenues earned from the various data services will depend on the prices levied, but setting pricing will not be easy for the networks, according to Paulo Pescatore, a senior telecoms analyst at IDC in London.

“You’ll need to find sweet point: you can’t go too high, because you deter users; you can’t too low because your profit margins suffer. You need to start at the middle to top range and slowly work down to find the sweet point,” he says.

As networks work to reduce churn within their customer bases, this task will be made harder by the fact that mobile number portability, which has been on the cards for three years, looks like it will finally arrive in June. This will allow users to switch between the networks without changing their number, including the 08x prefix.

Number portability is being introduced to stimulate competition in the marketplace and reduce tariffs, but it is unlikely to in any way change the status quo. The reality is that there are two strong mobile networks in the marketplace and a third weak one. Will 2003 be the year when Meteor gets gobbled up by a larger telco? The prime candidate for such a move would be Hutchison Whampoa (now rebranded 3 in Europe), believes IDC’s Pescatore.

“Hutchison looks likely to buy Meteor,” he comments. “Meteor’s got a credibility problem; it started out competing in mass market but is now targeting the corporate space. How can you go into the corporate market when you haven’t established yourself yet and where O2 and Vodafone are already entrenched? Also, [its parent company] Western Wireless is not a big player in the telecoms market. If Hutchison does buy them, I think Hutchison would be more credible. You’d then have three big hitters [in the Irish market].”

As 3 will also be the first network to launch 3G services in Europe this year – in the UK and Italian markets – its competitors will be certain to closely monitor the uptake of the services. However, with ready money to be made from data services and 3G handsets slow to arrive on the market, few other networks will be rushing to join it.