Analysys Mason: LTE can boost revenues, but alone can't make up for tough market conditions

Hilary Bailey

There has been a flurry of LTE launches in Western Europe in the past 12 months, and operators are looking to this strategy to make up for the decline in traditional revenue streams. However, analysis of markets where LTE has been established for up to two years shows great variation in the impact on revenue. This comment uses the latest update of our Telecoms Market Matrix (TMM) and Wireless networks tracker to analyse the impact of LTE launches on data revenue, and considers why the outcome has varied so much between countries.

Vodafone's data revenue has grown at an increased rate since the launch of LTE in Germany

An impressive number of Western European operators have launched LTE in the past nine months, including Proximus in Belgium; Bouygues Telecom, Orange and SFR in France; COSMOTE and Vodafone in Greece; H3G (3 Italia), TIM and Vodafone in Italy; Vodafone, Orange and Yoigo in Spain; Orange, Sunrise and Swisscom in Switzerland; and Everything Everywhere (EE) in the UK. In October 2012, Orange CEO Stéphane Richard declared that he saw the launch of LTE mobile services as crucial to increasing ARPU. Analysis of the revenue outcome for Vodafone in Germany following its launch of LTE suggests that there is good reason for such optimism (see Figure 1).

Figure 1: Vodafone's rolling annual data retail revenue, and total market smartphone share of handsets, Germany, Q1 2007–Q1 2013 [Source: Analysys Mason, 2013]

 

 

 

 

 

 

 

 

Vodafone Germany's rolling annual data revenue grew at a compound rate of 2.98 per cent per quarter in the two years before LTE was launched, but this increased to 4.18 per cent in the two years following launch (see Figure 1). It is tempting to attribute this sharp increase in data revenue to the launch of LTE, because data volumes on both LTE mobile broadband connections and LTE handsets are significantly higher than 3G. Furthermore, Vodafone charged a 10 ($13.36) monthly premium when it launched its LTE handsets. Had data revenue continued to grow at a similar rate as it did in the two years prior to launch, we might have expected it to reach 2.6 billion ($3.47 billion) in the fourth quarter of 2012, whereas the actual figure was3 billion. However, this analysis over-simplifies the matter for the following reasons.

  • Mobile broadband only accounts for a small proportion of total data service revenue (15 per cent for the German market overall in 2012), and adoption of LTE remains relatively modest. At the end of 2012, Vodafone Germany reported 283,000 fixed substitution subscribers (mainly LTE-based fixed-wireless home broadband but also simple LTE USB modems) and 135 000 LTE-enabled smartphones and tablets--a total of 418,000, just 1.4 per cent of its total active subscriber base. However, the RealLTE Zuhause home router service with voice attracts a monthly fee between 35 and 45, which offers good opportunity to monetise the LTE network capacity.
  • Not all the LTE revenue is new, because some of the LTE connections are directly offset by losses in fixed broadband. Vodafone has been encouraging its DSL users to migrate to LTE (it lost 358,000 DSL subscribers between the fourth quarter of 2010 and the first quarter of 2013), although it may also have gained from other operators' DSL customers switching to its LTE service.
  • The explosion in 3G smartphone adoption has the biggest influence by far on data revenue. Coincidentally, adoption raced ahead in the period after LTE launch, reaching 32 per cent of total active handsets at the end of 2012.
  • Vodafone Germany launched LTE handsets in the first quarter of 2012, but growth in data revenue actually began to slow soon after (in the fourth quarter of 2012 and the first quarter of 2013). This suggests that the transition from basic handsets onto smartphones is the crucial driver of increased revenue, regardless of the network.
  • LTE price premiums will be short-lived because market forces will eradicate them once LTE is established. At the time of writing, the overall cost of an LTE-enabled Nokia Lumia 925 on the Red M package was actually lower than a non-LTE phone on the same scheme.

Relatively few Western European operators actually reported an improvement in data revenue growth after launching LTE

Only seven of the 17 Western European operators that launched LTE before the first quarter of 2012 (one year before the latest revenue data published in TMM) reported an improvement in growth (see Figure 2).

Figure 2: Quarterly rolling annual data revenue before and after LTE launch, selected Western European operators [Source: Analysys Mason, 2013]1

 

 

 

Quarter-on-quarter compound growth rate

Country

Operator

Quarter of launch

2 years before launch

Less than 2 years after launch

Improvement (percentage points)

Sweden

TeliaSonera

Q4 2009

7.9%

13.4%

5.6

Austria

Hutchison 3G Austria (3)

Q4 2011

5.5%

10.6%

5.1

Norway

NetCom

Q4 2009

2.9%

5.5%

2.6

Germany

Vodafone

Q4 2010

3.0%

4.2%

1.2

Austria

T-Mobile

Q2 2011

1.1%

2.0%

0.8

Germany

Telefónica Germany (O2)

Q2 2011

3.9%

4.5%

0.5

Finland

DNA

Q4 2011

6.1%

6.2%

0.1

Finland

TeliaSonera

Q4 2010

4.0%

3.8%

–0.2

Denmark

TeliaSonera

Q4 2010

3.8%

3.1%

–0.6

Germany

Deutsche Telekom (T-Mobile)

Q1 2011

4.2%

3.5%

–0.8

Finland

Elisa

Q4 2010

4.5%

3.2%

–1.2

Sweden

Telenor

Q4 2010

6.9%

5.0%

–1.8

Denmark

TDC

Q3 2011

4.1%

1.8%

–2.3

Austria

A1 Telekom Austria

Q4 2010

1.5%

–0.9%

–2.4

Sweden

Tele2

Q4 2010

9.6%

6.8%

–2.8

Sweden

Hi3G (3)

Q4 2011

6.9%

3.8%

–3.1

Portugal

Optimus

Q1 2012

1.0%

–3.0%

–4.0

1The sum of data retail revenue over the previous four quarters. This eliminates the impact of seasonality on the figures. Note that in comparing retail data revenue, we are constrained by the reporting conventions of individual operators, which may allocate their revenue streams between voice and data services in different ways.

In countries where other factors are stunting revenue growth, it is clear that the launch of LTE does not compensate for these trends.

  • In Portugal, Optimus's rolling annual data retail revenue has been in steady decline since the third quarter of 2011, despite the launch of LTE in the first quarter of 2012. Harsh economic conditions have led to a reduction in discretionary spend, of which high-end mobile devices are a prime example. Public Wi-Fi is also very widespread, which will further limit data revenue growth.
  • In Denmark, data revenue is under attack from IP-based applications, which has heavily eroded messaging data revenue. Total data revenue is still growing, but at a severely attenuated rate. For TDC, launch of LTE was accompanied by a reduction in compound quarterly date revenue growth from 4.1 per cent to 1.8 per cent, although the launch may well have prevented a sharper decline.
  • TeliaSonera in Sweden and NetCom in Norway experienced significant acceleration in data revenue following their LTE USB modem launches. These countries maintained fairly high tariffs for LTE networks, delivering speeds that challenged fixed speeds, and mobile broadband was a strong contributor to revenue at the time of launch (30 per cent of data revenue in Sweden in 2010 was from mobile broadband). LTE smartphones did not arrive until nearly two years after LTE launch (October 2012 for both countries), but 3G smartphone adoption accelerated strongly during that period (increasing from 27 per cent to 40 per cent of active handsets in Norway between the end of 2009 and 2010). The launch of LTE coincided with an uplift in data revenue, but a direct causal relationship between the two is far from clear. Increased data usage may well drive LTE adoption, but not vice versa.

However, it may still be too early to see the full impact on revenue. It takes about 12 months after LTE launch for most operators to establish coverage of critical markets, and about two year years for fairly comprehensive coverage. With subscription-based services, and the cost of unsubsidised devices, initial adoption may not translate into observable revenue trends for at least two year years after launch.

Operators need to forge ahead with their planned network developments, and cannot afford to be left behind. In each of the cases documented above, it is certain that revenue outcomes would have been worse without the development of LTE. In terms of competitive advantage alone, being able to claim a highly developed network is a powerful marketing tool. Operators have to adjust their marketing efforts for LTE compared to their 3G offerings, in terms of pricing and bundling strategies. Successful operators are moving to multi-tiered data plans and multi-device plans for consumers and small businesses, which are helping to retain if not bolster ARPU rates. For many operators, this will evolve over a timeframe measured in years and not quarters.

Hilary Bailey has worked for Analysys Mason for more than 20 years. She specialises in quantitative forecast modelling and is a key contributor to the Core Forecasts research programme. She manages the Telecoms Market Matrix, which tracks and compares telecoms metrics and market shares for all the major fixed and mobile operators in Europe. Hilary has a degree in Economics from the University of Bristol, and an MPhil in Economics from the University of Cambridge.

Suggested Articles

Sprint said it will offer discounted service to customers age 55 and above.

Unlimited data plans placed a strain on carrier networks last year, but according to OpenSignal the carriers met the challenge.

Verizon plans to bring 5G to four U.S. cities this year and hopes to have standards-based equipment in place for some of those deployments.