strategic case for fixed-mobile convergence, The
Providing services that combine fixed and mobile elements is seen as a way to both grow revenues and reduce costs by a growing number of telecoms players, which have formed the fixed mobile convergence alliance (FMCA).
Ovum believes that integrated operators have the strongest case for driving in the direction of FMC. But they need to carefully evaluate whether the sum of the potential to grow ARPU, reduce costs and churn, and effectively defend against fixed mobile substitution (FMS), is sufficient to counterbalance the concerns of revenue cannibalisation, and the costs of organisational restructuring, and overcoming of regulatory and technology barriers.
Fixed-only operators see FMC as a way of defending against FMS, and Ovum expects most to push for FMC services if they manage to overcome one key barrier: finding a willing mobile partner which will provide them with wholesale mobile access.
Mobile operators have some incentives to drive FMC services, in both reducing costs and targeting enterprises more effectively. But Ovum expects most of them to wait and see what happens with FMC in the short term, particularly as they are busy with developing their 3G networks and services.
FMC IS HOT AGAIN
Despite repeated past failures in fixed mobile convergent (FMC) services (most notably in the late 1990s, with GSM/DECT phones), the momentum in the current wave of FMC services appears to be building up. Most of the momentum is carried forward by the FMC Association (FMCA):
* FMCA was founded in July 2004 by BT, Brasil Telecom, Korea Telecom, NTT, Rogers Wireless of Canada and Swisscom;
* there was further development in November 2004, when four new members entered the alliance – AT&T, Bezeq (Israel), Cegetel (France) and KPN (Netherlands);
* in May 2005, seven additional members entered the alliance – Auna (Spain) , Belgacom (Belgium) , Cesky Telecom (Czech Republic) , PCCW (Hong Kong), True (Thailand), Telecom New Zealand and Telkom South Africa.
* In September 2005 Eircom (Eire), France Telecom, TDC Mobile (Denmark), Telecom Italia, TeliaSonera (Sweden) and Optus (Australia) joined the alliance.
The list of operators above is an impressive one, as it includes some of the world’s largest operators with a combined 500 million customer base. However, most of the members are former incumbent operators (with or without a mobile subsidiary), with a sprinkling of mobile operators and fixed altnets (alternative fixed network operators, i.e. non-incumbents).
The services are still in the early stages of development. There are few commercial launches of convergent devices; after considerable delays, BT’s Fusion was soft launched in June 2005. Furthermore, the demand for these is yet to be defined and quantified.
In spite of the high number of players declaring their ambitions to develop FMC services by joining the FMCA, many operators are still unsure whether FMC services will benefit their business.
This article seeks to provide a balanced discussion on two key questions:
* will FMC services benefit or harm the business of integrated, fixed and mobile operators?
* should integrated, fixed and mobile operators launch FMC services now and/or in the future?
There are different levels of integrating fixed and mobile services in Figure 1.
Bundled fixed and mobile services arguably represent the most basic FMC services.
These often include one contract, one customer point of contact and/or one bill, so there is very little integration of the services. There is a growing trend of bundling fixed voice and data with mobile services for business customers and increasing broadband and mobile bundles for consumers. Many operators have used bundles as the first step before closer integration of the services, as well as to assess demand for ‘one-stop shop’ services.
Integrated services include all of the features of bundled services, as well as intelligent call routing, one voicemail/unified messaging, and/or one number, while still maintaining separate devices. Examples of these services are TDC’s Duet service or France Telecom’s Unifié services.
To many people the idea of FMC is that of convergent devices that work on both fixed and mobile networks. KT’s Du service is the only current example, based on the Bluetooth cordless telephony profile (CTP) protocol, although the user controls the roaming between networks. The ‘holy grail’ of FMC is one device switching calls and sessions seamlessly across different access networks. BT’s Fusion service and the trials of many operators which use the Unlicensed Mobile Access standard (UMA) architecture and handsets, aim to deliver seamless handover.
THE FMC STRATEGIC CASE FOR INTEGRATED OPERATORS
The strategic case for an integrated operator that has both fixed and mobile operations appears balanced at a glance. Among the drivers for FMC services for integrated operators are:
* to grow their average revenue per user (ARPU)
* to reduce their costs and grow average profit per user (APPU)
* to reduce churn and enhance customer loyalty
* to differentiate against competition
* to counteract FMS.
However, there are a number of strategic issues that will act as barriers for integrated operators as they consider the merits of launching FMC services. These are:
* the fear of revenue cannibalisation
* organisational structure and culture-change requirements
* potential regulatory barriers
* complexity of implementation.
Drivers for FMC
Integrated operators can grow the ARPU of single service customers by upselling them to convergent services. For example, there is little doubt that upselling a broadband customer to a UMA-based FMC service can contribute towards greater revenues for the service provider, as it can gain the fixed voice and mobile revenues from that customer. However, upgrading a mobile-only customer to a UMA-based FMC device will require that customer to buy a broadband connection – but not necessarily from the same provider, as UMA devices in their current specification can work over any broadband connection.
The second point is arguable. Operators with customers who get both fixed and mobile services could end up with lower, not higher ARPU from these customers. This is due to the fact that customers will expect a discount on bundled and integrated services (compared to the sum of the separate services) in order to take them up.
On balance, integrated operators can expect higher ARPU where they have many single service customers whom they can upsell to convergent services. Where many or most of integrated operators’ customers already take both services it could be difficult to grow ARPU in the short term. In fact, if operators are not careful, ARPU may actually decline at first, before new services such as convergent video telephony make a positive impact in the longer term.
There are a number of areas where telcos can potentially reduce their costs as they launch convergent services. These include:
* mobile radio access network costs
* subscriber acquisition/retention costs
* mid and back office costs
* network management costs.
Convergent services will mean that customers are getting a bigger package from the operator, and what were formerly separate services are now integrated, or converged together. The evidence from operators that are providing bundled services is that customers who get bundled services tend to churn less than single service customers, and in some cases the churn rates are 50% lower. As integrated services offer greater benefits to customers than the bundles (see Figure 1), one can argue that this lower churn rate will at least remain as low with FMC customers, if not reducing further.
Differentiate against competition
Integrated operators have the greatest opportunity to use FMC services to differentiate against stand-alone fixed and mobile operators, as well as cable operators. KPN, for example, faces fierce mobile competition from four mobile network operators (MNOs) and over 20 mobile virtual network operators (MVNOs) and service providers, while in the fixed and broadband markets it is challenged by a combination of altnets and cable operators. An attractive seamless FMC service can clearly differentiate KPN from all of these onedimensional competitors. No doubt, this has been one of the reasons KPN has joined the FMCA.
Defend against fixed mobile substitution (FMS)
Integrated operators will in general lose out as a result of FMS. Ignoring costs and margins, integrated operators in the long term will have lower revenues as a result of FMS. In the early stages of FMS development, when customers maintain both fixed and mobile subscriptions and only shift traffic over the mobile network, integrated operators will see that revenues may grow – although this will only be the case if their mobile market share matches their fixed market share.
However, as customers use their fixed services less and less, an increasing number of them will ‘cut the cord’ and go ‘mobile only’. In this case the mobile division of an integrated operator may gain a slightly greater spend (if it had an equivalent market share), as some of its subscribers place all of their traffic over the mobile networks. As a result of this, the loss to the fixed unit will be much greater due to the loss of subscription revenues, which are typically part of a fixed service. Hence, the combined long-term effect of a ‘doing nothing’ strategy will be a continual reduction of revenues for most integrated groups.
Convergent solutions can help neutralise some of the drivers for FMS. In short, they can provide one number/one device to users who like the convenience and functionality of mobile devices (mobility, address book and value-added services), while at the same time save them money and give them better quality of in-building calls.
Barriers to FMC
Fear of revenue cannibalisation
FMC devices may lead to cannibalisation of some mobile revenues with some customers, particularly enterprises. However, if this is the price of actually keeping the customer rather than losing it altogether (as a result of them cutting the cord or churning to competition, for example), many operators may be tempted to opt for the lesser evil.
Organisational culture and structure of fixed and mobile divisions
The different organisational cultures of the fixed and mobile divisions, and their current management as separate units, with most integrated players are significant FMC barriers. Often, staff in many mobile parts of integrated players see themselves as the ‘trendy’ part, and often have less than adequate respect for the ‘boring’ fixed division colleagues. A European incumbent, which has made an early move to integrate the sales operations of the fixed and mobile divisions, confessed that the ‘fixed’ and the ‘mobile’ people at first even refused to talk to each other.
The whole area of regulation of significant market power (SMP) players’ convergent services is another strategic obstacle that integrated operators (typically incumbents) will have to overcome. Regulators are currently split between their obligation to prevent abuse of market dominance on one hand and, on the other, to avoid stifling innovation. Nevertheless, as FMC services do mean bringing together fixed and mobile services, SMP players can expect obligations such as opening their service to competitors or being prevented from using customer data from one division into another.
There are several additional issues that add to the ‘complexity’ of implementing FMC services in an integrated operator, as they disturb the established way of operation:
* Customer relationship management (CRM) systems will need investment and integration in order to support FMC services
* Billing FMC services poses its own set of challenges. A call or a session may have started on the fixed network and been carried on the mobile one, presenting a challenge to the billing systems
* Seamless roaming between network calls and sessions presents itself with a unique set of challenges
* Device and access point sourcing and negotiating is a new activity for the fixed divisions. WiFi devices pose their own challenges due to space and battery life issues, albeit more for vendors than operators themselves.
THE CASE FOR INTEGRATED OPERATORS IS IN FAVOUR OF FMC
On balance Ovum believes there is a positive case for integrated operators providing FMC services and that the drivers for take-up of FMC by integrated operators (particularly the ability to defend against FMS and reduce costs) are stronger than the drawbacks (particularly the potential of mobile revenue cannibalisation).
THE FMC CASE FOR ‘FIXED-ONLY’ OPERATORS
The FMC strategic case for standalone fixed operators is stronger. Among the potential benefits of FMC services for fixed only operators are:
* defend against FMS
* grow ARPU
* reduce churn
* differentiate against competition.
However there are obstacles in the strategic case for fixed-only operators. These are:
* the need for a willing mobile partner, and the related revenue sharing issues
* complexity of implementation
Defending against FMS
Fixed operators only lose in the case of FMS when users ‘cut the cord’, as they do not have a mobile division to capture the positive aspect of the trend. Ovum’s argument (outlined in the case for integrated operators) that FMC services can aid operators to slow or stop FMS remains the same.
The same arguments outlined in the case for integrated operators apply here. The mobile part is a new revenue stream to fixed operators, and upselling standalone fixed/broadband customers with a mobile service, through a bundle, integrated service or convergent device will mean higher ARPU for the service provider.
The arguments above on the churn reduction benefits from bundled and convergent services apply here to some extent, but not entirely. The evidence from the market is that the more services a customer gets from a service provider, the less likely it is to churn from that supplier. However, there is a risk that higher mobile churn, which is often tied to the more frequent change/upgrade in handsets, may spill over to the FMC customers of a fixed operator. The risk is that previously loyal fixed/broadband customers may begin to leave more often as they seek a better FMC device.
Differentiate against competition
FMC services can act as a differentiating factor for fixed-only operators against the competition only if competitors are not themselves launching FMC services. If they are, and these services are proving successful, FMC services will become a survival factor rather than a differentiating one. For example, if Deutsche Telekom were to launch a FMC service in Germany and it gained traction in the market, it would become imperative for Arcor to launch something similar. This is because its survival would be threatened by both mobile-only operators such as Vodafone and O2, which are targeting the market with substitution strategies, and Deutsche Telekom’s FMC services.
Obstacles to FMC
Need for a willing mobile partner
Fixed operators will need a very willing mobile partner giving them access to their mobile network in order to launch FMC services. This can represent the greatest barrier for fixed-only operators in their quest for FMC services. The more complex FMC services require deep access to an MNO network in order to integrate the two networks and to provide presence management and seamless handover of calls and sessions.
The good news for fixed-only operators keen on MVNO access (for FMC services) is that regulation and market developments are moving in their favour. Many alternative mobile operators (such as non-incumbent and non-Vodafone subsidiaries) are still struggling to achieve sufficient scale and profitability. These players are keen on capturing wholesale opportunities despite the fact that it may mean cannibalisation of some of their retail revenues. Even Vodafone has entered this role in the UK by acting as the wholesale partner to BT in its Fusion project.
FIXED OPERATORS MUST LAUNCH FMC SERVICES TO SURVIVE
On balance, the FMC case for fixed-only operators is a matter of survival. As their revenues are being squeezed not only by fixed competition but also by mobile operators through FMS, launching FMC services is the best response. However, they will need to negotiate full MVNO access in order to provide full FMC solutions, which will not always be easy. In addition, they will need to be careful to prevent high mobile churn ‘infecting’ their fixed/broadband subscriber base as a result of a shift to FMC services.
FMC AND ‘MOBILE-ONLY’ OPERATORS
The FMC case for mobile-only operators does not appear compelling at first sight, as there are considerable issues standing in the way. These are:
* the view of mobile operators worldwide that mobile will prevail in light of current trends of substitution
* the fear that FMC services will cannibalise revenues
* the need to find a willing fixed partner.
The potential benefits from FMC services for mobile-only operators can be:
* the ability to target enterprises more effectively
* a reduction in radio access network costs
* a means to deal with the issue of in-building coverage and capacity.
Impediments to FMC
‘Why bother?’ outlook
The growing trend of FMS has encouraged mobile operators to develop a view, which can be summarised as:
* more and more users are moving to become ‘mobile only’, particularly if they are encouraged with home/office zone tariffs, which provide lower-price calls within a dedicated area;
* this will lead to users cutting the cord and eventually going mobile only;
* in light of the above, why go through the pain and expense of integrating mobile services with fixed equivalents?
* with fully-loaded 3G/HSDPA networks mobile operators feel they will have sufficient capacity and bandwidth to cater for most of the communication needs of most users.
There is substantial evidence of gradual FMS in many markets . Most FMS to date has included a shift of traffic from fixed to mobile networks as the mobile premium (mobile to fixed pricing differential) has declined, while ‘cutting the cord’, although evident, has on average been minimal.
On balance, the mobile premium is expected to continue to decline but much more gradually, than has been the case so far. As broadband prices reduce further and retail VoIP services gain traction there is the possibility that the effect of FMS can be slowed down, or even reversed in some markets.
Ultimately, while the trend of FMS will be slower than mobile operators believe it will be, the risks and expense of integrating fixed and mobile services is far greater than simply pursuing a substitution strategy, at least in the short term.
Fear of revenue cannibalisation
If other operators launch FMC services, a mobile operator will see some of its in-premises revenues come under threat. However, if the mobile-only operator itself launches FMC services will this be the case?
This will depend on the tariff structure that the mobile operator chooses to adopt. Mobile operators are already prepared to offer home/office zone tariffs without fear of cannibalising their revenues and margins – and there is little difference in these tariffs to the FMC tariffs, while FMC also provides lower costs to match the lower tariffs.
Need for a willing fixed partner
In some FMC implementations (such as UMA) the fixed partner does not strictly need to be willing – in-premises calls are carried from the Bluetooth/WiFi access point through the user’s broadband connection onto the UMA controller and the core mobile network.
However, for most FMC services and particularly for business FMC services there is a need for a willing fixed operator; this raises issues such as revenue sharing, billing, call/session handover and quality of service. All of this increases the complexity of implementation and the amount of work for a mobile-only operator.
Advantages of FMC
Fixed operators are still seen as the more trusted supplier of communications services to enterprise customers. Despite some exceptions, going ‘mobile only’ has largely not appealed to them, as many place heavy emphasis on the quality and reliability of the fixed services and PBX functionality. Providing services that integrate the fixed and mobile benefits to enterprises may be a more effective strategy for mobile operators to capture enterprise spend than purely pushing mobile-only services. There are examples of mobile operators moving in this direction: in November 2004 NTT DoCoMo began offering NEC’s WlANANCDMA N900ÎL handset to enterprise customers. N900iL is the first terminal to support IP telephony over WLAN.
The arguments outlined above in the case of integrated operators in terms of saving radio access costs also apply here. Again, many if not most mobile operators now have newlybuilt and largely empty 3G networks which are there to be filled with traffic, hence there is no immediate pressure to seek ways to reduce the costs of radio access capacity. However, this may not remain the case once the network is being filled with high bandwidth applications such as mobile Internet access, video telephony and video downloads.
Provide better in-building coverage
Providing in-building coverage and capacity has been an issue for most mobile operators, due to the radio wave nature of mobile technology. 2G operators have typically addressed it by covering built up areas with dense base station networks. However, this has been expensive, particularly for those operating in less densely populated areas. In-building penetration is a bigger issue with 3G networks, as the WCDMA penetrates walls less well than GSM, its cell radiuses are smaller, and the technology is more expensive.
Hence, using a subscriber’s fixed/broadband connection and an access point as a base station (as with the UMA standard) may be a less expensive way to provide better inbuilding coverage than the existing mobile-only approach.
A LONG-TERM CASE FOR FMC
Despite some of the potential benefits for ‘mobile-only’, there is not so much a pressing case for standalone mobile operators to launch FMC services as there is a lack of compelling incentives in the short to medium term. Mobile operators see FMC services as costly and complex to develop, with unproven advantage over a pure substitution strategy. This may change if and when FMC services begin to gain traction in the market, and 3G networks reach capacity constraints. For now, mobile operators will be content to wait and see what success FMC initiatives by fixed and integrated operators have and to focus on their substitution strategies.
REFERENCES. See Ovum’s latest report: Fixed-to-mobile substitution benchmark: Europe.
Angel Dobardziev, Ovum
Angel Dobardziev is a Senior Analyst and the Service Manager of Ovum’s WirelineStrategy advisory service. Angel leads a team of analysts providing strategic advice to vendors and operators, which includes some of the largest players in the world. The service provides strategic analysis of industry and product trends, evaluations of the corporate strategy of major players around the world, and reports with advice on making the most of emerging opportunities.
Angel has an in-depth understanding of the competitive strategies of key wireline service providers and has substantial experience in advising major operators on key strategic issues. In addition, Angel is one of Ovum’s foremost experts on the Eastern European telecoms markets.
Copyright Telecommunication Society of Australia Ltd Summer 2005
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