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4G growth Will 4G bring growth by Didier Levy, Arthur D. Little Despite 4G, European telecom operator revenues will continue to decline although somewhat more slowly. Nevertheless moving to 4G is extremely important for European telecom operators whose current networks are running out of capacity. 4G LTE can carry 70 per cent more traffic than the latest 3G technology - enough to meet capacity needs for the next ten years. To build profits, operators will need new tariff structures, partnerships with content providers and others, cost reductions, better network utilisation and network sharing. Didier Levy is the Director of Arthur D. Little’s ‘TIME’ -Telecommunications, IT, Media and Electronics - practice; he has extensive experience in strategy, marketing & distribution, organization and transformation projects in the TIME sector as well as in other industrial and services sectors. During many years Mr Levy has assisted players of the telecom and media industry (mobile, fixed, broadband, pay-TV, vendors) in different parts of the world. In particular, he has led many projects in growth strategy, product design and pricing, distribution as well as operational performance improvement. Didier Levy is a graduate of HEC Paris and holds a MSc from the London School of Economics 4G and European revenue recovery European telecom operators saw revenues down by 3.8 per cent in 2012. Will 4G reverse the trend Although 4G will quickly become essential, it will not revive the sector’s revenues. In fact we expect that despite 4G, revenues will continue to decline in Europe: -1.8 per cent per year on average by 2016. The sector could return to growth if LTE smartphones generated data ARPU of EUR17/ month by 2016e i.e. EUR7 higher than today’s data ARPU on 3G smartphones - this is a stretch. Nevertheless this demonstrates the high importance of a successful move to 4G for European telecom operators. For operators, moving to 4G LTE is a nobrainer… European operators’ 3G networks will soon hit a ‘capacity wall’ and 4G LTE is a great tool to surmount this. Moreover 4G LTE is a better technology than 3G; the amount of traffic that can be carried on a given amount of spectrum is almost 70 per cent higher on 4G than it is on HSPA+, the latest version of 3G. Based on our traffic and capacity modelling, we found that thanks to 4G spectrum, operators will not face capacity issues for an average of a decade: specifically not before early 2022 for operators with 800MHz spectrum and some time in 2020 for those without. Network demand and capacity for a typical operator Source: Arthur D. Little, Exane BNP Paribas …and we expect customers to adopt 4G quickly The US, Japanese and Korean markets where 4G rapidly became successful, benefited from specific circumstances not shared by European operators. Still we believe that 4G will be a commercial success in Europe. Customers are growing increasingly frustrated with the 3G experience, a problem that will only get worse as usage increases. LTE will bring a better service, with download speeds three to five times faster (15-20Mbps versus 4-6Mbps) and response times five times shorter. The take-up of LTE should accelerate in the second half of 2013 and throughout 2014. We expect 100 per cent of new smartphones and tablets to be LTE-enabled from 2015, leading to a 54 per cent penetration of 4G-enabled devices in the population by 2016. We do not expect 4G to restore the industry’s pricing power We expect 4G to significantly boost mobile data traffic. Experience in the US, South Korea and Japan has shown that traffic per device is higher on 4G than on 3G, driven by faster speeds, lower latency and datahungrier devices. In addition, US operators have shown that ‘shared data’ plans (enabling a monthly data allowance to be used across multiple devices) could accelerate the connection of more devices to networks. However our analysis shows that the move to 4G is unlikely to restore pricing power in the industry. In many cases, price levels keep declining due to operators offering higher data plans for the same price. Thus, the transformation of traffic growth into revenue growth is not apparent. 4 • EMEA 2013
4G growth Differentiation is elusive Unlike Verizon Wireless and AT&T, leading European mobile operators will struggle to sustainably differentiate themselves from challengers for the following reasons: Spectrum differentiation Challengers’ spectrum assets are far in excess of their revenue market shares, giving them room for growth; conversely, leaders have lower spectrum share than revenue market share and are hence more constrained. Cost differentiation Costs will be lower under 4G than 3G, but the decline will take time to materialise and all parties will benefit eventually. With 4G, network costs will become a smaller part of the total cost base over the long term; correspondingly, “other opex” will become an increasingly important factor to monitor - this is good for the leanest, not for the largest. Differentiation from owning fixed networks Fixed-line networks will be an increasingly essential part of mobile networks, with WiFi offload and small cells being a key part of future architecture. However, for mobile operators, there are alternatives to owning fixed-line assets. Quad-play differentiation It is too early to say whether customers will prefer to bundle tablets with smartphones in shared data plans as is seen in the US or with fixed broadband in quad-play bundles as in some European markets. However, mobile-only players certainly have one less option compared with their integrated competitors. So what can operators do 1. Monetising data - new tariff structures The transformation of traffic growth into revenue growth depends on how operators price their mobile data bundles. We believe that the most attractive structures are usage caps, which are already common practice in Europe and shared data plans, which have developed in the US and are starting to be seen in Europe e.g.at Telia Sweden, SFR in France and O2 Ireland. These shared plans are a great way to encourage users to connect more devices to cellular networks - and hence to generate more traffic revenues over time. 2. Innovating in services through partnerships Tech giants and content providers such as Apple and Google are in tight control of the mobile services ecosystems and most of the value of additional services such as maps, music, etc. is unlikely to go to mobile operators. However, with the move to LTE, we see several opportunities for mobile operators to generate value in additional services - focusing on content heavy applications (cloud storage, on-demand media, video conferencing…), with potential benefits either directly (generating revenues) or indirectly (stimulating mobile data traffic and/or acting as customer retention tools). 3. Continuing cost reduction programmes With a further decline in revenue trends ahead, reducing costs will remain of paramount importance. The cost of capacity is a small component of the overall cost structure today (c.EUR3/month per customer, i.e. c.20 per cent of the total cost base) and will further decline in the coming years, despite exponential growth in data traffic (EUR2/month per customer in 2020e). Being the lowest-cost provider will become even more important in the future - and those most likely to benefit from a cost differentiation in the long term are those achieving better efficiencies on their ‘other opex’. For a typical operator, achieving a ten per cent efficiency gain on the mass of ‘other opex’is equivalent to achieving a 25-30 per cent gain on the capacity-related costs in 2013e, and to a c.50 per cent gain in 2020e. The key opportunities relate to transformation towards an ‘online centric’ business model - with opportunities to save on commercial costs (direct online sales versus indirect physical distribution), customer management (self care versus call centres), billing (e-billing and direct debit), marketing (simplification of offers; use of targeted online tools rather than expensive TV advertising), etc. 4. Optimising network utilisation Offloading mobile data traffic on fixed-line networks via WiFi, femtocells, etc. is (and will increasingly be) a key element of mobile network strategies, with two key benefits: Spectrum optimisation: WiFi operates on a different spectrum to 3G and 4G, so offloading traffic to WiFi helps enable to save on spectrum utilization. In our core scenario, we assume the share of traffic which offloaded onto WiFi will increase by 25 per cent (of the total traffic) by 2017e. In this scenario, the operator’s spectrum assets are modelled to be fully used by 2022. In an alternative scenario assuming no incremental offload, the spectrum would become saturated more than two years earlier. Cost optimisation: small cell solutions are significantly cheaper than large outdoor macro-cell antennas. However, because the incremental cost of capacity is small anyway, we estimate that the cost gain enabled by offloading an additional 25 per cent of traffic onto WiFi reaches less than one per cent of the total cost base of a typical operator. Integrated fixed-mobile players can leverage the fact that they own both fixed and mobile network assets. However, mobile operators do not need to own fixed-line assets themselves to benefit from this. There are many other options available today or which will develop over the coming years. 5. Consolidation or network sharing European mobile operators have thought about in-market consolidation for many years. There would be significant synergies in terms of costs and potentially of ‘market repair’. However, this could come under regulatory scrutiny from the relevant competition authorities. Mobile network sharing is an alternative which can generate savings ranging from ten per cent to 30 per cent on network capex and opex. The roll-out of LTE networks is a good opportunity to look at this as it is easier to generate synergies when rolling out a new network than when trying to consolidate two existing ones. However, financial benefits have to be weighed against the potential strategic consequences e.g. enabling smaller players to access scale benefits that would otherwise be reserved for leading players or reducing opportunities to create significant network differentiation. In conclusion 4G represents a key opportunity for telecom operators to address customers’ growing usages and to provide ten years additional capacity to European mobile networks. As a result, 4G will quickly spread across Europe and will experience commercial success. Will 4G be enough to put telecom operators on the path of growth again Probably not as such, but operators will take advantage of this new technology to innovate in their offerings, their services and their networks. For customers, networks and operators, 4G will quickly become essential. • EMEA 2013 • 5
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