Customer centricity is the order of the day

Mobile data is finally coming of age following years of dependence on messaging to drive non-voice revenues.

Ernst & Young’s latest telecommunications study ‘The power of the pipe’ is based around interviews with 18 leading executives in the European and North American telecommunications sectors. In these turbulent economic times, telecoms stocks are seen as defensive while ARPU is holding up in Western mobile markets, so network owners are seen as safer bets than many.  However, operators’ strategic objectives are firmly focused on the end-user: customer issues head the list of strategic objectives identified by our participants with financial imperatives appearing further down the list.

Interestingly, service innovation and new investments are at opposite ends of the scale of priorities. This may partly be explained by sense within the industry that the assets required for innovation-whether in terms of customer information or broadband-capable networks-are in many cases already in place. The underlying challenge thus becomes one of harnessing them more productively.

Coping with a data storm

Mobile data is finally coming of age following years of dependence on messaging to drive non-voice revenues. Smartphone and dongle take-up are timely growth stories as legacy voice revenues come under pressure from termination and roaming rate reductions.

But opportunities and risks are present in equal measure, with customer receptivity to a new wave of services on the one hand offset by the divergence of data usage growth and data revenue growth on the other. With mobile data traffic set to grow at a CAGR of 131 per cent between 2008 and 2013 according to Cisco, the network burden will be top of mind for all players. Backhaul investment is a given but a balance between catering for new demand while improving existing operations is vital.  As one participant put it, “it’s about customer intimacy and operational excellence.”

Scale economies are now a pre-requisite for many players-network sharing is not just a cost reduction play but a key route to meeting demand for high-speed services as mobile operators begin making headway in the broadband market. Meanwhile, growing calls to reduce energy wastage undermine the idea of duplicated networks: the need for network rationalisation becomes apparent from many angles.

Going forward, 4G heralds not just faster network speeds but improved network economics, providing more scope for network sharing and helping to reduce the cost of backhaul.  That LTE will signify a merging of GSM- and CDMA-based migration paths is another boost for the industry and its scale economies. Even so, strategic approaches to LTE require fine-tuning, with the role played by femtocells in deployments still uncertain, for example.

Qualifications on convergence

While substitution between fixed and mobile voice has been clear for many years, the end-game in terms of broadband customer ownership is far less certain. To date, mobile broadband has often been taken up as a complement to, rather than replacement for, fixed broadband access and the jury is out on how the interrelationship between fixed and mobile broadband will evolve. One participant stressed that, “mobile operators think that they can capture some of the fixed broadband market but over time the fixed line will support services that mobile operators can only dream of.” While mobile may well lag fixed line in terms of data throughput-and by association the range of services that can be provided-the introduction of faster 4G networks is also viewed as a game-changer, with another participant declaring that, “LTE will eventually displace fixed-line broadband.”

Yet opinions vary on substitution scenarios in internet access, and current bundles of fixed and mobile broadband typically see one of the two discounted, often for a limited period, with the emphasis on up-selling another access option to existing customers.

Even in better established voice, TV and broadband bundles, the precise role of mobile is unclear. A survey conducted by Ernst & Young on bundle take-up and switching behaviour saw the option of mobile voice services rank only sixth among ten triggers for consumers to switch bundles. Aside from promotions that offer fixed-line rates for mobile calls made in the home, services with fixed and mobile elements have been the result of largely defensive moves to help reduce churn, with the more aggressive players still in the minority.

Looking ahead, operators must pay heed to local market factors: the level of mobile-only homes and fixed-network reach will have an important say in the take-up of FMC.  Within Europe, for example, over one-third of Italian homes are landline-free while there is still a significant rump of fixed-only households in Germany.

Innovation in the spotlight

Wider convergence scenarios are at an earlier stage. A consistent customer experience regardless of the type of application, device and delivery technology will take time. One industry leader suggested that, “to have consistent access from any device-a mobile, a PC, a TV screen-will take three to five years.” Nevertheless, the addressable market of digital natives for whom web services are second nature is rapidly widening, and the mobile industry is confident that it can benefit from the rise of mobile web services. One interviewee was keen to stress that the, “the phenomenon around social networking.  is just communications under a different name according to the way we see it.” With almost one in five US mobile internet users accessing social networking sites at the end of last year, the correlation is clear.

Even so, integrated devices that empower end users come with health warnings attached. Operators are taking advantage of smartphone take-up-new customer wins, churn reduction and increased data usage are all plusses-but technology brands are driving device demand and customers are more and more conditioned by the web experience. With application stores now showing the way in terms of additional services where content portals have historically struggled, operators are more aware than ever of the role of technology brands in both customer centricity and service creation.

While many in the industry see these forces at work as signs of the collaboration necessary to bring new services to market, others are less sure. One participant asked: “Who holds the power between the mobile operators and the device manufacturers?” Another said that while, “partnerships are enablers for services. there’s always a cost to a partnership relationship.”

Notions of how far up the content value chain mobile players can go are up for debate, but there is certainly a growing feeling that content distribution is the natural place for operators to sit. One thing is for sure: Greater interaction between operators themselves-such as the agreement between Vodafone, China Mobile, Softbank and Verizon Wireless to develop a common developer platform-will help accelerate the market for mobile software. Despite this, the two-year contracts associated with current subsidy levels could be said to work against device innovation.

There are certainly areas where mobile operators can unlock additional value. Although receptivity to network and device openness varies, the location-sensitive nature of the mobile channel has a long way to go. As such, context-aware services-of which homezone mobile calling services has been a promising initial step-can be developed much further. By leveraging their assets around customer information, operators can not only provide end users with more compelling services, they can also monetize user data for interested third parties, such as advertisers, which can in turn support charging models for messaging and navigation services, for example.

Historically the mobile device has played a supporting role in direct marketing and sales promotion, but operators need to further demonstrate the additional value add that is available.  In this way, mobile can both cement its role in the media mix while also positioning itself as a unique advertising channel.  For this to happen, improvements in terms of customer analytics are key, with one interviewee stating that, “it’s about bringing together advertising, location and presence.”

Regulation on the radar

One area to which operators will need to give particular consideration is regulation. In the recent past, much of the focus has been on termination and roaming rate reductions, which have hit the industry hard. In the future these challenges will continue – existing glide paths will not achieve symmetry between fixed and mobile rates, something the EC remains keen to address.

Meanwhile, spectrum release and re-farming will be occurring at different times and across different frequency bands. The benefits are clear-improved data service capability and a more equitable apportioning of frequencies-but re-purposing existing spectrum while also managing the digital dividend in a way that sustains demand and boosts competition will be no mean feat. One participant was quick to underline that, “it’s one of the unknowns right now, in terms of how spectrum will be priced.” Even established practices such as network sharing may see a greater degree of scrutiny, while regulatory focus on convergence may have implications for mobile content and mobile TV opportunities. Some in the industry even see new market structures forming with network separation agendas a future talking point.

Ultimately, Western mobile markets are being treated as part of a greater industry whole. Termination rate reductions may be an ongoing pain point for operators but can improve the business case for fixed mobile convergence in the long term. Competition concerns will also persist, with one participant adamant that LTE’s substitution potential will create, “an interesting dilemma for regulators in Europe as they are so oriented to fixed broadband.”

At the same time, accepted thinking around the number of in-market networks needed to sustain competition is changing, while the rise of broadband on the move means mobile networks are increasingly seen as national, strategic assets. Growing demands around data retention and young people’s access to mobile broadband content, operator intimations of job creation through mobile broadband rollout and redefinitions of universal service obligations to include broadband all suggest a more important connection between operators and governments.

So while customer centricity will remain the central plank of operator strategies, engaging with a wider range of industry actors-whether they are fellow operators, technology vendors, regulators, governments or other third parties-will play a pivotal role in supporting mobile operator ambitions in an increasingly digital world.

Figure 1: What are your top three strategic objectives?
Rank Strategic objective
1 Customer value/centricity
2 Service innovation
3 Cost efficiency
4 Cash management
5 Service quality
6 Maintaining profitability
7 Market leadership
8 Network quality
9 Operational efficiency
10 New investments
Source: Ernst & Young The power of the pipe




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