'Dumb pipe' fate need not befall mobile operators

As mobile operators seek to drive revenue growth from flat rate, or nearly flat rate, data access packages, one of the main concerns is whether or not they will end up being commodity ISPs – the dreaded “dumb pipes” scenario.

But analysts at Ovum this week said that the same fate need not befall the mobile operators as it did the ISPs which adopted this approach for the internet model several years ago.

“The short answer is that operators don’t have to be dumb pipes, unless they are stupid. There are ways to avoid this,” said Michele Mackenzie, service manager and practice leader.

It’s well known that mobile operators have unique resources to draw on that fixed broadband ISPs of the time did not, namely in depth information about their customers and unique network-based assets such as location.

The route to finding new revenue sources to future-proof their businesses once access becomes commoditised, means that operators should adopt the position of intelligent facilitators, or “smart pipes”. In this guise they can act as a platform and channel in the value chain for supporting third-party content and other services while still maintaining a position as a core provider of anywhere broadband access and key communications services. “This is not such a terrible place to be,” said Mackenzie.

But Ovum points out that operators are on challenging ground when it comes to content services, which the analyst views as a “misplaced holy grail”.

Operators need to look at how they support content services going forward, and be smarter about their approach. Ovum suggests a handful of ways they could do this, including, offering their own paid for content and services, but majoring on one or two services; offering their own and third party content on an ad-supported basis; and providing access to free content, which would drive usage and access revenues.

“One of the challenges that operators face is that a lot of content which is paid for today will become ad supported going forward – or at least some components of it will”, said Eden Zoller, principal analyst of consumer practice at Ovum. “However, we do not believe that the mobile internet model will go the same way as the fixed model and become wholly ad supported. There will continue to be a mix of paid for and ad-supported content over mobile,” Zoller said. This is largely because the economics over mobile do not stack up, with the CPM (cost per thousand ads) rate generally insufficient to cover mobile network and delivery costs.

Ovum’s findings echo a similar analysis by telecoms.com parent Informa Telecoms & Media, which recently said that even mobile operators in emerging markets will have to follow their more mature counterparts in the adoption of radical new business models if they are to protect their profit margins. While mobile operators in emerging markets will continue to enjoy strong revenue growth in the short to medium term as they fulfil strong demand for basic connectivity, even they will have to embrace new ways of running their businesses when growth inevitably slows.

Informa notes that the focus is moving away from a limited number of services provided by the operator to internet access and operators’ non-SMS data revenue base is in the process of shifting from services to basic access. The services users are beginning to use on their mobiles are provided by internet players rather than mobile operators.

As such, the analyst expects that mobile operators can look forward to a period of growth in mobile broadband connectivity. But to capitalise on this opportunity, operators need to invest heavily in new high-capacity networks, effectively marking a transition to becoming ISPs. To avoid the fate of fixed-network ISPs, mobile operators will then either need to partner with internet firms and share revenues and/or develop a smart-pipe strategy. This involves ‘exposing’ different parts of their networks to third party service providers and monetising access to them.