|Europe I 2007
|Convergence – a fresh look for an old business
|Co-founder, Research Director and Lead Analyst
|Wireless Technologies at Rethink Research Associates
Caroline Gabriel is the Co-founder, Research Director and Lead Analyst for Wireless Technologies at Rethink Research Associates. Rethink is a London, UK-based market research and consulting company specialising in technologies and business models for service providers and vendors in the broadband wireless, 3G, fixed/mobile convergence and wireline broadband market. Before Rethink, Ms Gabriel spent a large part of her career in various senior positions at VNU Business Publishing Europe, most recently as European Editorial Director. Ms Gabriel obtained an MA in Modern History from Oxford University, UK.
Convergence is driving an epic competitive battle. Fixed operators and cablecos need mobile capabilities, broadcasters need access to converged networks, and wireless carriers need ways to deliver fixed services. Those that don’t adapt will disappear. Incumbent fixed and wireless players face expensive, complex upgrades to fibre and 3G/4G wireless broadband. Newcomers, such as Google and Microsoft, with their push to create citywide wireless networks for people on the move, will reduce dependence upon cellphones and disrupt even the latest converged business models.
Recently, it has seemed as if the whole telecoms world has reached a consensus on the convergence of fixed/mobile and wired/wireless communications – everybody needed them. Service providers and media owners believe that the best way to increase their share of consumer and enterprise spending in the future will be to offer bundles of services over multiple wired and wireless networks – the famous ‘quadruple play’, with one provider offering voice, data, video/broadcast and mobile services, included under a single brand and bill. This way the provider, potentially, gains 100 per cent of the customer’s total spending on communications and media. The consumer gains because the quad play offers them simplified billing, lower total cost, and broadband access to the Internet – including cost savers like VoIP – from any device and location. Finally, the enterprise, which has largely led the convergence trend so far, is looking for cost and efficiency improvements derived from voice and data over a single IP network. The more creative corporations are also looking to converged systems to support new applications such as enhanced video communications and improved supply chain interaction, plus mobile enterprise functionality, to support an increasingly scattered workforce. All this presents a huge challenge for existing service providers. They need to migrate to an infrastructure capable of supporting the quad play. They also need to deal with the all-important trend towards ‘personal broadband’ – broadband access that is individual, belongs to the user, rather than the household or business, and can be carried everywhere, enabling seamless communications at work and at play. For established providers, the challenge is compounded by the need to support legacy systems and customers for a lengthy period of time – the dwindling but still profitable dial-up base, the GSM cellular users and so on – and by the appearance of new players in the telecoms field. The most daunting of these are well-funded start-ups such as the US’s Clearwire, and media or content companies. The media and content companies see IP networks and, in many parts of the world, deregulation and new spectrum, as their first chance to control access as well as content. Particularly interesting is a joint venture between four major US cable TV operators – Comcast, Time Warner Cable, Advance/Newhouse and Cox – with mobile operator Sprint, to deliver a quad play over both the cable networks and Sprint’s 3G and future 4G systems. Another one to watch will be Rupert Murdoch’s News Corp, which could severely disrupt the traditional operators in the US, Europe and elsewhere once its DirecTV and Sky satellite TV operations move into wired and wireless broadband access and mobile services starting in 2007. The priorities are now clear for operators. Wireline operators have to gain mobile capabilities quickly, hence the US cablecos’ deal with Sprint Nextel. Broadcasters have to access converged networks, and so we see News Corp/DirecTV embarking on a complex web of deals. Wireless-only carriers either need to enhance their networks sufficiently to deliver fixed services, too, or find a DSL or cable partner. Even the stalwartly non-wired Vodafone is now moving rapidly, if belatedly, to launch converged services in its most pressurized markets including, most recently, the UK and Italy. In some places Vodafone, like other wireless-only operators, will create a 4G-class network capable of delivering fixed broadband access and television as well as the classic mobile offerings. In the short term, however, it is more likely to partner with owners of wireline networks, such as BT in the UK. Operators that have both wired and wireless activities are suddenly in vogue – after years of being undervalued because their fixed lines appeared to be an albatross round their necks. France Telecom/Orange and Deutsche Telekom/T-Mobile, for instance, are unifying their brands and their fixed and mobile infrastructures to deliver converged services to consumers and businesses. Others, like Japan’s NTT, are bringing their formerly autonomous mobile units back into the fold. However, convergence remains a huge challenge for these incumbents. On one hand, they have to invest billions to upgrade their wireline copper networks to all-IP and fibre, and to upgrade their wireless GSM and 3G to next generation ‘4G’. All this will then need to be unified via complex convergence architectures using IMS, IP Multimedia Subsystem, to support all-IP services over multiple networks. On the other hand, they have to create a commercially viable transition programme for legacy systems and customers. The other, even more important, challenge is to find a sustainable profit model for all this. In the first phase, convergence – at least for consumer markets – largely means bundling. This has significant proven impact on improving customer uptake and retention and makes optimal use of under-exploited modern 3G and fibre networks. Bundling’s positive impact on customer acquisition and retention is clear – one operator can control all of a user’s activity in voice, video and broadband access, boosting its share of that user’s spending – even if the customer is actually spending less overall than for discrete services. This lower total bill and the increased buy-in to a single provider also encourages loyalty (or customer apathy), and the convenience and predictability of a single bill is a significant lure. However, bundling is not a proven boost to profitability, especially as the move to all-IP encourages the entry of non-traditional players with no legacy. New players have the freedom to start from scratch with brand new business models such as the push by companies such as Google and Microsoft to fund the creation of citywide wireless networks. These networks provide free or cheap broadband access – on the move – to citizens, and so reduce their need to access the cellular network. Even Hutchison’s 3G-only arm, ‘3’, demonstrates this disruptive effect. Although it has been in the market for some years and has made limited impact to date, it is now showing the real advantage of having no legacy networks and customer base. It is exploiting its 3G wireless networks in Europe to offer the first true mobile Internet service, with unlimited browsing, flat rate DSL-style pricing and partner services such as Skype VoIP. All this makes the market very hard for traditional cellular operators, which are used to charging a premium for mobility, especially in voice, and to controlling where on the Internet their subscribers roam. The UK example, then, highlights the two key challenges for large operators in Europe. For companies with just one network, the challenge is to provide quad-play; for wired/wireless majors, the challenge is to remain competitive in the converged world by taking on an increasingly internationalized set of rivals, while ensuring that bundling sustains their profitability and market share. Triple-play, when delivered over a single efficient IP network, can achieve significant operating expense economies that offer latitude for price cutting without too much pain for profits, but when the fourth arm of mobility is introduced, operators need to support – or partner with – at least two networks, and possibly more to introduce broadband wireless to the equation. A recent report by Exane BNP Paribas and Arthur D Little warned that bundling and fixed/mobile convergence will have a severe impact on major operators’ margins in the coming year, especially as users throw out fixed lines, and make heavier use of WiFi at the expense of cellular. The report is also sceptical that consumers will pay the premium rates for new services that would be required to compensate for the lower spending on basic functions like voice. It forecasts average revenue growth in the European telecom services market of just 3.1 per cent in mobile and 1.3 per cent in fixed, almost one percentage point slower than last year (with the main growth decline in mobile, which rose by 8 per cent a year in 2002-2005). Another study, by KPMG, found that 40 per cent of users are not prepared to pay any premium for advanced multimedia services even as part of converged bundles. Such statistics are deeply worrying for traditional service providers, especially when faced by new rivals that can plan from scratch for these new market conditions, and may already have created business models and derive cashflow from related businesses, notably Internet and content/media. Convergence will drive not only cost savings for consumers and enterprises, but will enable new ways of living – including all the changes in habits created by personal broadband and always-on access to the Internet – and new applications that rely on ubiquitous availability of high speed broadband. Although this will engender another phase of the Internet revolution for businesses, consumers and society at large, it will present traditional service providers with the dual challenge of funding networks that are sufficiently powerful to support such high levels of activity, and of making a profit on those networks. This will almost certainly lead to a new breed of converged operators, many of whom will not come from the current telco ranks.