Is the MNO broadband business at risk of spinning out of control?
The business of mobile broadband is – at least outwardly – the mobile industry’s success story of the past few years. But as mobile broadband becomes a mass-market service, challenges are beginning to appear. Following article looks at some of the key issues faced by mobile network operators.
Point 1: Mobile broadband is not a marginal business any more as it is rapidly becoming their core business. This is demonstrated by the figures recently published by Vodafone.
The recently published Q4 reports for developed market mobile operators indicate that the momentum of voice services – their cash machines – has further decelerated as a consequence of the economic downturn. The numbers strongly suggest that the only remaining option for growing the MNO business is to concentrate sales and marketing efforts on growing mobile broadband revenues.
Figures disclosed by Vodafone in their latest interim report illustrate this shift clearly: Over 60% of Vodafone UK’s net post-paid additions accounted for data only contracts in the last three quarters, and this percentage had been as high as 85% in the quarter with the weakest post-paid growth of the recent period.
But are operators in full control of this fundamental shift in the business model?
Point 2: Mobile broadband has become a mature and attractive mass-market product, and mobile broadband services clearly have the potential to replace voice as the main source of revenue for MNOs. Mobile broadband revenues thus far also appear to be relatively insensitive to the global economic crisis.
“The timing has been fortunate, as during the two years that have elapsed between the start of the mobile broadband boom and the recent downturn in the voice revenues, mobile data service have had enough time to mature in terms of packaging and marketing communications,” says Pal Zarandy, principle consultant of Omnitele.
He also acknowledges the leadership and marketing excellence of many global MNO in creating the new cash cow. But Omnitele also strikes a cautionary tone: many operators still lack a comprehensive overall long-term cost model for running a sustainable business.
Point 3: According to Omnitele’s experience the accuracy of the business plans – particularly with regards to costs - for mobile broadband is often questionable. In most cases this is because mobile broadband technology experts are not sufficiently involved in the business planning process.
“MNOs usually produce a business plan matching revenues and costs, and this is typically prepared by a product manager. But product managers tend to develop cost models based on marketing, sales and other non-network items,” says Mr Zarandy. “The question is how accurately such models capture traffic related capital and operational expenditures that a CTO will need to budget for on the network side to keep up with the traffic surge,” he continues.
Point 4: Omnitele offers a sophisticated cost-modelling framework for mobile broadband services, which can aid in resolving these and other business-critical issues. But be forewarned: the outcome is often surprising – and can be a cause for concern.
Pal Zarandy demonstrated this point during the Mobile World Congress in Barcelona by showing the Omnitele techno-economic mobile broadband business modelling framework. The computerized model allows a detailed analysis of the network cost-base for mobile broadband as the traffic grows.
By entering the number of base stations, the targeted user experience, the size of subscriber base, and their predicted data traffic, the model calculates the future capital and operational expenses triggered by the traffic.
“We have seen cases when the average monthly usage of the flagship data packages has been nearly 10 GByte per month per subscriber. Depending on the concentration of the traffic in the busy hour, the cost of capacity upgrades triggered by the network load can easily rise above 1,000 € per subscriber in CAPEX alone. Matching such cost figures with the retail revenues realised from those packages does not look like a great business from P&L and especially not from cash flow point of view,” said Mr Zarandy.
Point 5: If the mobile broadband has become the number one growth engine for mobile operators, but the profitability of mobile broadband is questionable, does that mean that the long-term profitability of the entire mobile operator business is in jeopardy? The current situation should raise concerns, but there are remedies, say the business strategy experts at Omnitele.
Antonios Drossos, Vice President of Omnitele’s business consulting unit stated that a profitability analysis service often makes operator executives raise a few eyebrows. Such an analysis often reveals serious problems with long-term profitability.
“The good news is that there are a number of measures that can be taken to get the business back on track. Controlling busy hour traffic of heavy users, revisiting pricing mechanisms with infrastructure suppliers, and adjusting retail pricing of data packages are the most straightforward options,” said Mr Drossos.
Point 6: The commercial staffs of many MNOs have traditionally received incentives based on short-term revenue gains rather than on the long term, sustainable profitability of the end-to-end business case.
In Omnitele’s experience many MNOs face a challenge when staff from marketing, technical, and financial departments need to work together to develop a full end-to-end business case for mobile broadband.
Often the incentives and key objectives of the various department heads are different and at times even at odds with each other. Often CMOs are focused on maximizing net subscriber additions, and therefore they usually prefer to sell fully unlimited volume data service packages. Meanwhile, CTOs are most often under pressure to keep network budgets under control, and therefore prefer to install strict volume control effectively limiting peer-to-peer traffic.
Developing a comprehensive end-to-end business model is often an elegant solution that caters to the needs of all stakeholders and resolves issues – such as those described above – in an effective manner.
As the dependency on services yielding uncertain profits rises, it is vital for operators to bridge the gap between technology and commercial teams. This can be done by establishing an end-to-end business cases capturing real network costs and by linking the incentives of the marketing and technology teams to the real profits of the overall business case.
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