European telecom operators saw revenues fall 3.8% in 2012. Will 4G reverse the trend?
Although 4G will rapidly become essential, it is unlikely to revive the sector’s revenues on its own.
We forecast that despite 4G adoption, European mobile revenues will continue to decline at an average rate of about -1.8% per year through 2016.
The sector could return to growth only if LTE smartphones generated average data revenue per user (data ARPU) of approximately EUR 17/month by 2016 — roughly EUR 7 higher than current 3G smartphone data ARPU. That outcome is optimistic, but it underlines how important a successful transition to 4G is for European operators.
For operators, moving to 4G LTE is an obvious decision…
Europe’s 3G networks are approaching capacity limits, and 4G LTE offers an effective way to overcome those constraints. LTE is a superior technology: the traffic carried per unit of spectrum is almost 70% greater on 4G than on HSPA+, the most advanced form of 3G.
Our traffic and capacity models indicate that, with access to 4G spectrum, most operators should avoid major capacity shortfalls for about a decade — typically not before early 2022 for operators holding 800 MHz spectrum, and around 2020 for operators without it.
Network demand and capacity for a typical operator
Source: Arthur D. Little, Exane BNP Paribas
…and we expect customers to adopt 4G quickly
Although the rapid 4G success seen in the US, Japan and South Korea depended on market-specific conditions not present across Europe, we still expect 4G to achieve strong commercial uptake in Europe. Consumers are increasingly frustrated by the 3G experience — a frustration that will grow as usage rises. LTE delivers a noticeably better experience: download speeds typically 3–5 times faster (about 15–20 Mbps versus 4–6 Mbps) and latency about five times lower.
Take-up of LTE should accelerate in the second half of 2013 and throughout 2014. We expect all new smartphones and tablets to be LTE-capable by 2015, resulting in roughly 54% penetration of 4G-enabled devices in the population by 2016.
We do not expect 4G to restore the industry’s pricing power
While 4G will materially increase mobile data traffic — experience in markets where LTE has already matured shows higher traffic per device, driven by faster speeds, lower latency and more data-hungry applications — that traffic growth does not automatically translate into revenue growth. In many markets, price points are falling as operators offer larger data allowances for the same price, and shared data plans can further accelerate device connections without proportionate revenue uplift.
Differentiation remains difficult
Unlike leaders such as Verizon Wireless and AT&T, many European incumbents will struggle to sustain meaningful differentiation versus challengers for several reasons:
Spectrum differentiation? Challenger operators often hold spectrum assets that exceed their revenue market share, giving them headroom to grow capacity and market share. Leading operators, by contrast, may have less spectrum relative to their revenue share, constraining their ability to expand.
Cost differentiation? While 4G lowers cost per bit relative to 3G, those cost reductions accrue industry-wide and take time to materialize. Over the long term, network costs will form a smaller portion of total costs, making “other opex” a more important determinant of competitive advantage — benefiting the most efficient operators rather than simply the largest.
Differentiation from owning fixed networks? Fixed networks will play an increasingly important role in mobile strategies through WiFi offload and small cells, but mobile operators can access fixed connectivity without directly owning fixed-line assets. Ownership helps integrated players, but it is not essential to benefit.
Quad-play differentiation? It remains unclear whether consumers will prefer bundling tablets with mobile shared-data plans (as in the US) or with fixed broadband quad-play bundles (as in some European markets). Mobile-only players simply have one fewer bundling option compared with integrated competitors.
So what can operators do?
Monetize data — new tariff structures
Turning traffic growth into revenue growth hinges on how operators price data. We see two attractive approaches: usage caps, already common across Europe, and shared data plans, which have been successful in the US and are beginning to appear in Europe (for example, at Telia Sweden, SFR in France and O2 Ireland). Shared plans encourage users to connect multiple devices to cellular networks, which can increase long-term data revenues.
Innovate services through partnerships
Major tech and content companies like Apple and Google dominate the mobile services ecosystem, and much of the value from services such as maps, streaming music and app stores flows to them rather than to operators. Nevertheless, LTE creates opportunities for operators to add value through services focused on content-heavy applications — cloud storage, on-demand media, video conferencing and similar services — which can generate direct revenues or indirectly drive data usage and improve customer retention.
Continue cost-reduction programmes
With revenue pressures persisting, cost reduction remains critical. Today the cost of capacity is a relatively small part of the total cost structure (around EUR 3/month per customer, roughly 20% of total costs) and is expected to decline further even as data traffic grows (to about EUR 2/month per customer by 2020 in our view).
Becoming the lowest-cost provider will be increasingly important. Efficiency gains in “other opex” will translate into disproportionate advantages: for a typical operator, a 10% improvement in other operating expenses equals roughly a 25–30% improvement in capacity-related costs in 2013, and about a 50% equivalent by 2020.
Key opportunities lie in shifting toward an online-centric operating model — reducing commercial costs through direct online sales, lowering customer service expenses with self-care tools, cutting billing costs via e-billing and direct debit, and simplifying offers while using targeted digital marketing instead of costly mass TV advertising.
Optimize network utilization
Offloading mobile traffic to fixed networks via WiFi, femtocells and similar technologies is a central part of network strategy, with two primary benefits:
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Spectrum optimization: WiFi uses different spectrum from 3G and 4G, so diverting traffic to WiFi eases pressure on licensed spectrum. In our core scenario, WiFi offload rises by 25% of total traffic by 2017, helping operators defer spectrum saturation until around 2022. Without additional offload, saturation could arrive more than two years earlier.
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Cost optimization: small cell deployments are significantly cheaper than large outdoor macro cells. Still, because incremental capacity cost is already small, the savings from offloading an additional 25% of traffic to WiFi represent less than 1% of a typical operator’s total cost base.
Integrated fixed-mobile operators can exploit ownership of both network types, but mobile operators also have other options to secure fixed connectivity through partnerships, wholesale arrangements or managed services.
Consolidation or network sharing
In-market consolidation has been discussed for years and could deliver significant cost synergies and market structure improvements, but it faces regulatory hurdles. Network sharing provides a practical alternative, offering potential savings of 10–30% on network capex and opex. Rolling out LTE presents a timely opportunity to pursue sharing arrangements, since coordinating on a new network rollout can unlock greater synergies than attempting to combine existing infrastructures. However, sharing must be balanced against strategic considerations — it can enable smaller players to access scale benefits and may reduce opportunities for differentiation.
Conclusion
4G offers a critical opportunity for operators to accommodate rapidly growing usage and to extend European mobile network capacity for roughly a decade.
As a result, 4G will spread rapidly across Europe and achieve commercial success.
Will 4G alone put telecom operators back on a growth trajectory? Probably not. Yet operators can and will use the shift to LTE to innovate in products, services and network models — efforts that can help stabilize or eventually improve revenue trends.
For customers, networks and operators alike, 4G will quickly become essential.
Further details on the 12th joint Arthur D. Little and Exane BNP Paribas report “4G – going faster but where?” are available from the original report source.