Redefining a Mobile Service Provider

There is a paradox at the heart of the mobile telecom industry. Despite skyrocketing data use and proliferation of connected devices, the industry is facing a structural crisis that raises serious questions about its sustainability and growth. With mobile penetration rates in almost all markets well above 100 percent, competition among MNOs has grown fiercer and more focused on price reductions. Traditional sources of revenue have been undercut by OTT services such as WhatsApp and Skype. The increase in consumer data usage has been a mixed blessing in that it has placed pressure on operators to make expensive improvements to the capacity and coverage of their networks. Finally, national regulators have become increasingly activist with regard to pricing, M&A activity and service requirements, further increasing costs for providers.

In the face of this paradox—increasingly large amounts of money flowing through the mobile industry while operator revenues grow ever flatter—we expect to see new business models, revenue drivers, pricing strategies and even leading players. Ultimately, the results of these changes could be the redefinition of the term “mobile service provider.” We have already begun to witness the first steps of this process. MNOs have worked to reevaluate their core offerings in order to find new sources of revenue or to reduce churn. The defining trait of 2014 was MNOs’ drive to acquire the infrastructure needed to offer converged packages. Operators around the world—but particularly in the hypercompetitive European markets—pushed to lock in customers and raise monthly spending by offering quad (mobile, fixed voice, broadband and cable television) packages. Further, non-core value-added elements like Spotify, Netflix and other content-driven services became increasingly important in plan construction, forcing operators to branch out into new partnerships and ventures.

A dramatic recent example of this occurred in the U.S. with Verizon’s US $4 billion acquisition of AOL—a play to secure AOL’s mobile ad software, more proprietary content and new revenue streams in an increasingly competitive market. This type of news is an illustration of how the distinction between content creators, information aggregators, device manufacturers and service providers continues to grow blurrier. Just as we expect mobile operators to be packaging more non-traditional features in with their mobile packages, we believe that there is an opportunity for other types of companies to enter the mobile services space and use these services as a way to augment their traditional packages.

With Facebook’s acquisition of WhatsApp and Google’s ever-expanding reach across all realms of digital life—including its recently launched U.S. MVNO running on the Sprint and T-Mobile networks and its discussions with Hutchison Whampoa for international expansion—we would not be surprised to see either of these entities begin to pivot increasingly into mobile service as an add-on to their traditional offers. While projects like Google Loon/Fiber and Facebook Zero made headlines before retreating from the industry consciousness, the economic conditions that initially drove these initiatives remain—giant internet content providers that have significantly higher margins are growing impatient with mobile and broadband providers’ ability to connect their potential customers. Further, MVNOs like FreedomPop are experimenting with new business models like ad-based data sales. Finally, whether through mesh networks, ever-expanding Wi-Fi hotspots or new technology solutions, MNOs’ hegemony over mobile data is likely to be challenged in the coming years. The high and growing demand for large volumes of fast data makes the industry a prime target for disruption if an adequate alternative presents itself.

There are so many variables in play that it is impossible to make a firm prediction as to the precise long-term evolution of the industry. However, this much is certain—for MNOs to be successful in the future they will have to be adaptive and flexible in terms of developing new revenue streams and fending off non-traditional rivals. Maintaining outmoded plan structures and customer acquisition strategies will almost inevitably lead to painful disruptions. The current structural and competitive environment have the potential to change the core MNO business model in a way not seen since the launch of the iPhone in 2007 and the beginning of the mobile-data revolution. As such, strategic choices made by operators in the coming years will have an outsized impact on the future of the industry as a whole.

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Google Will Likely Face European Antitrust Charges

The European Union’s competition chief, Margarethe Vestager, is expected to make an announcement on Wednesday that U.S.-based internet giant Google has abused its dominant (90 percent) position on the search-engine market, according to a report based on statements by individuals with knowledge of the matter. The European Commission’s investigation of Google’s business, which has been ongoing for five years, has focused on whether its internet search engine gave preferential treatment to the company’s own products, for example, those for online mapping, shopping and travel. More than two dozen European companies and other organizations have filed antitrust complaints against Google. If Google does not answer any formal charges that may be filed, the maximum fine it could face is €6 billion (US $6.4 billion), which would represent about 10 percent of Google’s annual revenue. To date, the record fine levied by the EC for abuse of dominance is €1.1 billion against Intel in 2009. The European government has been under a great deal of pressure to step up the pace of its investigation and to take action against Google. The impending announcement with regard to the abuse of dominance issue comes as Google prepares to make a significant inroad into the mobile service sector outside the U.S. Having announced the impending launch of MVNO services inside the U.S., Google last week reportedly entered into talks with Hutchison Whampoa to establish MVNO services in the U.K., Ireland, Italy and several other countries where Hutchison has networks, in which there would be free roaming—that is, the same rate charged no matter where the service is used. While the EC’s potential action is to be directed against Google’s search engine, there can be no doubt that a heavy fine and restriction of the company’s core business in Europe would have a negative effect on its ambitions to challenge MNOs in the region. While Google’s huge size and influence give it access to markets and the capital to innovate and enter new sectors, these very traits also make it an inviting target for anti-competition charges.

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