Can convergence bring voice revenues back to fixed-operators? Too late says Stewart Baines. And data may be tough too.
The rate at which incumbent fixed line operators are losing revenues from their voice businesses is staggering. Most are reporting annual declines of 5% year on year. Some double that.
The culprit, fixed-mobile substitution (FMS) was hardly planned for, yet consumers and businesses in their droves are picking up their mobile handsets rather than desktop phones to make calls when they are within a few feet of a fixed-line alternative. Ovum estimates that as much as 30-60% of mobile calls are made from the home. At this rate, analyst firm Analysys believes that mobile operators could capture 50% of total voice traffic within five years.
So with FMS gathering pace, need mobile operators worry about the fixed line community fighting back?
Maybe they should. At last incumbents have something to crow about: convergence. The fixed world joining up with mobility heralds a simpler service, for lower cost and more functionality. If all goes to plan, it will blind side mobile-only operators who think they can’t put a foot wrong. Or at least, that’s the idea. The truth may turn out to be a little more prosaic.
It’s new, again!
Fixed-mobile convergence is the latest big thing in town. BT started the ball rolling. The UK incumbent operator announced in May 2004 that within 12 months it will have launched the first fully-converged fixed-mobile service. It made a similar claim in 1998 with OnePhone, a joint venture with Ericsson that combined GSM and DECT. It failed miserably.
This time, BT claimed, it had got the concept right. Dubbed Project Bluephone, it unites a GPRS handset with a Bluetooth device that ships IP calls over a ADSL line whenever at home, and switches to mobile when out and about. What’s new about Bluephone is that it will feature live, bi-directional handover. Calls made from within the Class 1 Bluetooth zone will be charged at fixed-line rates. To the consumer, it shouldn’t make a difference. All billing and customer care for the service will be unified. BT intends to move from the Bluetooth to a WiFi bearer as soon as standards are in place. .
“Fixed mobile convergence is massively important to BT,” said Ryan Jarvis, the chair of the FMC Association and also BT’s chief of mobile products. “It’s really helping us to re-evaluate what it means to be a fixed network operator.” BT hopes to achieve £1 billion a year from convergence services by 2009. Bluephone — in both consumer and business modes — is intended to be the cornerstone of the campaign.
The UK incumbent is not alone in seeking to find a middle ground between the old empires and the new. BT is the inaugural chair of the Fixed-Mobile Convergence Association, a global group of fixed line incumbents that wants to take the fight back to mobile operators. Members Korea Telecom, NTT and Swisscom have all subsequently launched FMC services, with no doubt that Brasil Telecom, Rogers Wireless, AT&T, Cegetel, KPN and Bezeq hope to soon.
Korea Telecom can claim to have been the first to combine mobility and wireless commercially. Launched in 2004, it’s “Du” service combines CDMA and WLAN. In Korea, the mobile price premium can be up to 10 times a fixed line, so the opportunity for convergence is strong. Korea’s mobile operators are none-to impressed with KT. But as the country’s fixed line incumbent, KT is faced with monopoly controls and has not been able to subsidise the Samsung dual-mode handset, so consequently initial take-up has been slow, having racked up only 5000 customers so far. Also, Du does not support live handover, though this is not proven as a barrier to take up. What may prove a barrier is the rapidly growing 3G market. Korea has toppled Japan as the leading 3G market, adding to its status as the leading broadband market.
Empty seat at the table
So far, notable for their absence from the FMCA, have been mobile operators, though Jarvis does say that the FMCA is negotiating with a number of mobile-only operators now, and could see some joining up in February.
While Vodafone was included in the marketing hype of the Project Bluephone launch, both parties later admit that the mobile giant’s only real involvement with Bluephone is to become BT’s MVNO network provider. Clearly, Vodafone is quite happy to see fixed-mobile substitution continue to erode BT’s position. It benefits from wholesale business from BT, but its not about to promote Bluephone to its own customers.
And why should it? A report by the EU published in November 2004, shows that line substitution — where users cut the cord completely — is gathering pace. In Portugal and Finland, up to a third of households are now mobile only. On average, it is 15% in Western Europe. Call substitution, where fixed lines are retained, but calls placed on the mobile, is the most worrying indicator for fixed operators. In Holland, mobile calls were just 12% of total call volumes in the first half of 2001. Within two and a half years, it had boomed to 35%, similar to the levels seen in France, Spain and the UK. The total number of calls is growing, but not quickly enought to stop mobile eating the fixed lunch.
So why rock the boat? “Most of the mobile operators I talk to really aren’t interested in convergence. I think they would rather every fixed-line on earth was ripped out,” says Mahesh Pattani, strategic marketing director for LogicaCMG’s global telecoms business. “And they will remain lukewarm about FMC for sometime.”
Price is the key factor in dictating the rate of substitution. In Hungary, where the mobile price premium is the least, substitution is the fastest. Mobile calls now make up 48% of the total. Yet in Sweden, where mobile tariffs remain substantially more than fixed tariffs, substitution is at a snails’ pace.
“Its understandable that most mobile operators are not paying too much attention to convergence. Why should they?” asks Angel Dobardziev, a mobile analyst with Ovum. “They don’t want to share the customers they’re already winning. I believe they are wise to watch and wait to see how successful convergence is before joining in. There will be no first mover advantage.”
Ovum estimates that fixed-mobile substitution will continue for another 3-5 years before plateauing. As mobile price premiums continue to drop, it will only be factors such as call quality or coverage than keep some calls permanently fixed.
So what’s holding back convergence?
Technology standards battles aside, what may hold up convergence is the emphasis on pricing. Should FMC services be pitched as a cheaper alternative to mobile-only or should other factors be highlighted instead? And if pricing is the differentiator, why can’t the mobile-only service providers simply up the ante?
First, mobile operators can be quick to respond with predatory pricing. O2 Germany launched a home-cell tariff called Genion HomeZone in 1999, where its mobile subscribers would pay fixed-line prices for calls made within a designated home cell. Genion is a value-added package requiring a monthly subscription and is used by two-thirds of O2 Germany’s post-paid subscribers. This example has now been widely copied. O2 says that Genion is pitched against fixed operators rather than against mobile peers. While there are some technical advantages to O2’s network, and it does have surplus capacity, surely this is replicable elsewhere?
Without being location-specific, 3 has managed to do that in the UK. In 18 months from launch it has acquired around 2.5 million customers, and most of these have been drawn to bargain bucket pricing. The bundles are so substantial than even substituting all fixed calls for mobile ones, many customers are nowhere near using up all of their monthly allocation.
Under these circumstances, how can an FMC service use price as a differentiator?
Capacity to converge
One argument is that for an operator struggling with capacity problems, joining up with a fixed operator may make sense. It will share in the revenues from domestic calls, but can continue to maintain a price premium from out of home/office calls. “In the end, mobile operators will want to find a way out of the price wars. FMC would allow them to keep a premium on mobility,” says Steve Plunkett, Solutions Architect, Converged Networks Group Motorola. The US handset vendor has been BT’s handset developer for the Project Bluephone launch.
So if the incentive for fixed-only operators is to push convergence, and for mobile-only operations to take comfort in substitution, where does that leave the integrated operator, typically a country’s dominant fixed line player and a major mobile brand?
“In the long run, the integrated operator will benefit most from FMC,” says Mark Aafges, a senior consultant with Cap Gemini, “if they can exploit a converged back-office.” According to some estimates, 30% of operational costs could be saved by integrating a single data base, core network, provisioning and billing systems.
Already, France Telecom intends to bring together the Orange mobile brands and Wanadoo internet. While the integration of businesses will take time and a good deal of effort, it’s following the triple-play silk road.
Some believe converged services should be network-based and devices will remain distinct. “Convergence at the device level is not the goal. In fact, devices will proliferate,” says Ron Spithill, chief marketing office of Alcatel. ” We’ll see lots of overlapping functionality.”
Pattani agrees. “Concentrating on converged devices will mean you concentrate on voice, and to win at voice, price is the only differentiator.”
Together they stand and fall
With only fixed operators so far in the fray, some people are asking what’s the point of the FMCA. The answer seems to be that it gives the fixed community a shared voice. “It can be hard for small incumbents to get the mobile vendors to develop converged handsets,” said one vendor that wished to remain anonymous. “They get the feeling, and rightly so, that vendors are being leaned upon by larger mobile operators not to prioritise FMC developments.” While the FMCA will not set standards, it intends to specify a set of guidelines for the vendor community. Initially, it will be supporting UMA (unlicensed mobile access), SIP over Wifi and CTP over Bluetooth.
The entry of some mobile operators into the FMCA may see them offer their networks on a wholesale basis. But few would actively push their customers towards fixed-calls and cannibalise their own lucrative revenue. Mobile operators will, initially at least, see substitution a better bet than convergence.
And if fixed operators concede that the battle for voice has been lost to mobile operators, they should be careful about taking solace in data. After all, in homes and offices, surely data is best over a fixed-connection?
Not so says O2 Germany which in Spring 2005 will launch broadband services for the home at a price comparable to DSL services: but over 3G. Critics say hat 3G cannot compete toe-to-toe with copper. We’ll have to wait and see. Certainly, the arrival of HSDPA may change that. O2’s German 3G network may even support HSDPA by the end of the year, and cheap multi-megabit data services will be realistic, says the operator.
Motorola certainly sees an opportunity. It is due to launch a combined 3G modem, wireless router and firewall for home broadband use. Motorola’s Plunkett admits it won’t compete with high-end ADSL services, but some people, such as laptop users that work from home, may prefer the mobile version of broadband; the convenience of a single log on, billing relationship and access settings will compensate for a mobile price premium. Now, that’s a story I’ve heard before somewhere…