Are mobile network operators losing the battle for subscriber ownership?

Is the network operator-owned SIM card the final frontier in the battle for ownership of the subscriber relationship before we will see a truly globalised network of virtual network operators (VNOs) emerge? Just what is the potential impact of the combination of handset manufacturers, application ecosystems and alternative network options on the traditional network operator business model? And how might mobile network operators (MNOs) change course as a result? This post looks at a few key trends that are defining an interesting future scenario in the mobile telecommunications space.

A future of communications choices for subscribers

In previous posts I touched on the impact of some core trends in the mobile telecommunications industry, particularly in the areas of smartphone penetration, pervasive application downloads and the rise of VNOs. Now, those trends are even more prevalent, especially since we’ve seen more VNOs enter the global market, greater advances made in smartphones, and a maturity of the global application ecosystems around iOS and Android.

A quick look back in time: 10 years ago, circuit-switched voice was the main reason for having a mobile device and fixed networks were unfashionable. Since then, packet-switched mobile data has seen tremendous growth both in terms of coverage and throughput, but since the introduction of the Wi-Fi feature in smartphones, mobile networks have also experienced an increasing amount of data traffic being offloaded to Wi-Fi access points. Fixed networks with Wi-Fi last-mile connectivity are now back in fashion, often handling the full mobile device data requirements for a family household, a coffee shop full of customers, or a hotel full of guests. When a subscriber’s mobile voice and mobile messaging needs are handled more efficiently and cheaply by a fixed-network operator, a significant market disruption has occurred.

With so many additional options for connectivity and communications beyond just the mobile network operator, there is a fierce battle going on for subscriber ownership. And one that, if current strategic directions are still followed, looks to be a losing one for mobile network operators, unless they can find ways to disrupt their own business models before it’s too late.

Communications service providers don’t need to own physical networks

By communications service provider I refer to any entity that enables communications: be it an application or a network. The trend for subscribers to use alternative voice service providers, downloaded as smartphone apps is more compelling than ever before. The computing power of today’s latest devices, coupled with constant improvements in voice codec efficiencies, means that a user choosing to use a mobile VoIP service provider instead of a mobile network operator’s equivalent voice option receives close to the same quality of service for a far cheaper price. This is a foundational premise: networks will always get faster, and VoIP quality will always get better. Where does that leave a mobile network operator’s traditional application bundle of circuit-switched voice and SMS?

Think about a device such as an iPod Touch. Essentially, with a VoIP client loaded on it, this device is simply a SIM-less mobile phone with full voice calling (Skype, amongst other options), video calling (Facetime) and text-messaging (iMessage, Whatsapp) capabilities. In future, there will be countless other Wi-Fi-only smart devices out there that will have the ability to communicate without the need to source connectivity directly from a MNO. There are already examples of innovative start-ups that have identified this gap: VNOs such as Republic Wireless in the USA is an example of an early market mover that offers “unlimited” communications services using a network of Wi-Fi access points. When out of Wi-Fi coverage, the Republic Wireless device “falls back” to Sprint, but this is not transparent to the average subscriber, and doesn’t need to be. These types of VNO services are an early signal of a future where a communications service provider brand and its underlying network technology may one day be two separate commercial entities.

Shifting the MNO brand to mobile – the first step

MNOs that have not already released mobile applications that encapsulate their offerings risk losing touch with their customers, or worse still, losing their customers completely.  And beyond just applications, the bigger, longer-term picture is that MNOs will have to re-invent their offerings as a VNO: offering a cloud-based equivalent of their services, manifested as a branded smartphone application experience. To remain relevant in future, the MNO must also able to follow their customers around where ever they may roam in the world, and at a price point that makes them more competitive than the over-the-top alternatives.

Without at least having a smartphone app front-end to a holistic set of cloud-based communications services, the network operator’s brand risks being forever attached, or associated by perception, to its physical infrastructure. In effect, this roots the brand’s influence to a limited geography, and worse still, a subset of SIM-card based subscribers within that geography. Meanwhile, the cloud-based communications services that MNOs today are competing with have no such territorial limitations. It hardly seems a fair playing ground, but it is the reality. The situation looks even more ominous for MNOs if the current trajectory of device manufacturer brands becomes even more powerful

Device manufacturer brands are defining the customer experience and choice

So strong are these brands, that today the typical thought process for a subscriber deciding on a new device probably goes along these lines:

Device brand/OS/apps eco-system  –> Pricing Plans –> Network Operator

Today, it is the device brand, OS and apps eco-system that are top of mind as the main criteria a subscriber considers before purchasing a new mobile communications contract. This selection process is as a result of the incredible real-time reach of the brand marketing, product launch anticipation and product awareness of the major device manufacturers, particularly Apple & Samsung. So powerful are the global influences of these brands, coupled with their application eco-systems (iOS Appstore & Android/Google Play), that individual operator brands are simply dwarfed in comparison.

The only decision criteria left to consider by the time the choice of network operator is reached is the price/subsidisation of the handset, the price of the services, and then the coverage/quality/care aspects of the particular network operator. Even the “two-year” contract with handset subsidy is under threat, as device manufacturers shift into annual updates of their most popular handsets and tablets. These product refreshes build to such stratospheric levels of hype, that many subscribers are prepared to pay cash to upgrade their handsets before their two-year network contract is even completed.

Will Apple & Google become the “least cost data routers” for the world’s data traffic?

Consider the following scenario:

What if the major device manufacturers became so dominant and powerful that users of their products started to refer to themselves “Apple subscribers”, “Samsung subscribers” or “Android subscribers”. Device manufacturers with such efficient application eco-systems, already hooked into user payment reconciliation systems, with accessibility from any network anywhere in the world, puts them in a position to bypass network operators and build on the direct commercial relationships with subscribers. The next wave of devices could “opt-out” of using the SIM card, and just generically connect to the device manufacturer’s service portal (similar to the Amazon Kindle model). The end user then selects a voice/data tariff plan and simply buys it from the app store, irrespective of what network the device is connected to.

What if they then start acting as “least cost data traffic routers” for their customers? In other words, the device manufacturers take on the role of a “data intermediary” or “mediation broker”, buying airtime and data access bundles in bulk from global network operators and selling these as products through their appstores? End users would be spoilt for choice, able to select the best airtime deal for an immediate upcoming call, or an unlimited data bundle for the next two hours, or a monthly iMessage package, and not have to care about which network provider’s infrastructure they are connected to.

In a world where the mesh between Wi-Fi, GSM, 3G, HSPA+, Wimax, LTE and LTE-Advanced is increasingly more interconnected, this model not only removes the complexity of network selection from the end user, but promises a highly competitive marketplace. A wholesale auction engine could be constantly selecting the best network service deals for users, in the background, in real-time. In future, these auctions will be automatically negotiated by artificially intelligent representatives from each network operator bidding to provide the best services and the best prices at the best places to customers all over the world.

“ARPE” is the new ARPU

What are two implications for MNOs faced with this scenario?

MNOs might have to give in to the realisation that users with communications devices are not their exclusive territory anymore. This leads to the first key realisation that their revenue stream from their subscribers, traditionally measured as ARPU, will need to be supplemented by revenue streams from eco-systems, measured by “ARPE”. ARPE, or Average Revenue Per Eco-system, will in future represent the wholesale revenue of an operator’s circuit-switched voice airtime and packet-switched voice, messaging and data bundles made from sales through the eco-systems of the world’s major device manufacturer application stores.

Secondly, MNOs will be forced into a situation of extreme focus: either services (cloud-services) or infrastructure (bit-pipes). Offering both will be limited only to a few multinationals with the resources to control both services and access services, but for the majority of MNOs, the route to long-term survival starts with being the best at coverage and data capacity in order to win the real-time bidding wars that future eco-system owners will run on a global scale.

See how ConnectedFutures can help your organisation develop scenario plans by expanding on the thoughts and ideas put forward in this blog post. Visit the ConnectedFutures website.

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