It’s certainly been a very busy start to 2013 for Fon with a first quarter that’s been characterised by impressive commercial momentum.
Today’s joint announcement with Deutsche Telekom at CeBIT follows swiftly on from a partnership agreement announcement with Dutch incumbent telco KPN in late January. Fon’s partners now make up an impressive set of leading global telcos; from flagship partner BT in the UK to Brazil’s Oi and from SFR in France to Japan’s SoftBank.
In the broader context of Fon’s development, this latest deal is significant for two main reasons:
1. Firstly, Deutsche Telekom (DT) becomes the single largest tier-one partner that Fon has signed up to date; DT’s German business unit alone generated in excess of €22 billion ($28.65 billion) in revenues in 2012.
2. Secondly, this represents Fon’s first truly multi-market deal. The pan-regional group-level agreement announcement today covers commercial launches not only Germany, but also Bulgaria, Greece, Romania, Slovakia and Hungary. There must also exist the possibility of expanding that to other markets in DT’s footprint over time
This very much looks to be the type of deal that will have others queuing to knock at Fon’s door to understand their partnership strategy and business model in more detail.
Aside from just dotting the I’s and crossing the T’s on the contract today, DT and Fon have also put a clear stake in the ground and committed to build a network of 2.5 million community-sourced hotspots by the end of 2016, equating to roughly 20% of the 12-million strong fixed broadband customer base DT enjoys in Germany today. It’s certainly an impressive-looking number on the face of it, but is actually relatively conservative considering that the partnership with BT in the UK has already yielded more than 4.5 million hotspots, equivalent to almost 70% of its retail broadband base.
I wouldn’t be surprised to see that number as much as double if Deutsche Telekom pursues the strategy aggressively and sees strong traction upon launch in mid-2013.
The real driver of growth for BT in the UK was the decision to make it an opt-out decision for users if they wanted to add their hotspot to the growing BT Fon hotspot community. It is unclear today if DT is able or willing to take a similar approach in Germany, but perhaps the conservative number suggests that this may not be the way the operator is planning to roll out the “WLAN to Go” service in Germany.
Why is the deal important for DT?
Given that this deal is likely to have aroused considerable interest amongst other telcos globally, it’s worthwhile digging into the business case for DT in more detail.
DT’s corporate messaging around the deal may have been wrapped in the language of supporting DT’s ability to cope with growing mobile data traffic, but my sense is that the value of the partnership with Fon will be much more strongly felt from a branding, marketing and customer retention perspective.
Given that the initial footprint of hotspots pieced together through the deal will be focused in residential areas in Germany, it’s unlikely there is huge upside in terms of the potential to migrate even more mobile data traffic onto the fixed networks in volumes that materially impact the economics of serving its customers. As study after study has shown, the vast majority of in-home “mobile” (i.e. smartphone-originated) data usage in residential areas in European telco markets is already going over existing Wi-Fi hotspots hanging off the end of fixed broadband subscriptions and typically not over operators’ mobile networks.
Indeed, recent analysis we conducted of actual smartphone usage data in Germany in partnership with Mobidia suggested that private Wi-Fi already accounts for around 90% of the total traffic originating from smartphones. There is definitely still some upside to be had in this area, but it’s unlikely to be the game changer in terms of CAPEX-level impacts that really drives the business case for DT. As such, I think we have to look elsewhere to find out how this really makes a difference to DT both at the top and bottom line. I see at least three additional business models, of which two are likely to make a material difference to DT’s performance.
The first business model is to leverage the partner brand, together with strong messaging around a very large hotspot footprint, to build a compelling message to consumers at the retail level through strong above- and below-the-line marketing. We’ve seen in other markets that staid incumbent telco brands can get a “bounce” or a renewed lease of life by partnering with smaller, funkier brands from an Internet background. It was certainly true of BT after it originally launched with Fon back in 2007 and it’s also true of TeliaSonera’s deep partnership with Spotify or Orange’s deals in several European markets with Deezer.
These partnerships pay off in the form of helping to create differentiated propositions that can be built upon to stimulate increased customer acquisition levels and, importantly, attract customers from the competition by offering enhanced value.
Secondly, aside from supporting an attractive and genuinely differentiated proposition at the retail level, the in-field evidence from Fon’s existing partnerships has proven that active users of the Fon community Wi-Fi proposition are also significantly less likely to churn relative to those that do not make use of the service.
Even a one percentage-point difference in churn is enough to generate millions in terms of saved acquisition costs and lost revenues, so this churn-level impact is taken very seriously by Fon’s telco partners.
In Germany’s very competitive broadband market, where cable has made such significant recent headway, this potential benefit undoubtedly forms a very appealing part of the business case to Deutsche Telekom.
The third part of the pie is the possibility to gain incremental revenues from any paid-for usage on the Fon footprint by users from outside the community. There’s certainly evidence to suggest that this can help build useful additional revenue streams, but it is unlikely to have been a key driver for DT’s business case given the expected size and shape of revenue growth from that particular revenue line.
What’s down the line?
What’s really interesting is the potential for this deal to develop and expand. Not only in terms of covering even more of the DT European footprint, but also how this could help position the two partners to tackle what Informa sees as the next great opportunity in Wi-Fi – the provision of professional services to the “long-tail” public Wi-Fi segment.
In the official press release, Telekom Deutschland CEO Niek Jan Van Damme, made a promise to its customers that “no matter where you go, your WiFi will already be there”. As long as that statement remains anchored to this new residential Wi-Fi proposition and to DT’s existing premium public Wi-Fi footprint, that statement is unlikely to be true for the vast majority of DT’s customers.
By adding this residential-level proposition to its existing play at the end top end of the public Wi-Fi market (DT has 12,000 “premium” public Wi-Fi hotspots in Germany), DT is now covering two of three key segments of Wi-Fi with market-leading propositions. But it will still be missing the key third segment that makes up today’s total Wi-Fi market – independent public Wi-Fi, sometimes referred to as long-tail public Wi-Fi, where its presence today is limited, but where there is undoubtedly further scope to build in the future.
The opportunity in Germany is particularly compelling since stringent local regulation put into place by the German authorities has served to stifle the development of public Wi-Fi in the country. Put simply, there are far fewer hotspots in public locations in Germany such as coffee shops, restaurants, retail stores or hotels than in other European markets, such as the UK or France.
It’s a unquestionably a market opportunity that is ripe and ready to be captured and it will be interesting to see if today’s deal is a marker of more interesting things to come.
Thomas Wehmeier is a principal analyst for operator strategies at Informa Telecoms and Media. For more information, visit www.informatandm.com/