Mobile operator services consumption has increased massively in volumes of minutes, messages and megabytes, but prices have also fallen significantly and will continue to do so. European mobile operator revenues are generally flat or declining, with growth in data spending doing no more than offsetting some of the decline in voice for most operators.
Machine-to-machine (M2M) communications and the Internet of Things (IoT) will create growing demand for mobile network connectivity, but revenue potential is mostly in the broader ecosystem implementing entire solutions and in providing holistic application services, such as in security monitoring and home automation. That might also be worth mobile operators pursuing. More fundamentally, however, they must also ensure they seize network services demand growth in general and accommodate it with corresponding cost reductions right across their networks.
My October column on smartphones was the first in a three-part series examining market growth in mobile devices and operator services. My second article showed how the mobile ecosystem is also rapidly expanding and converging into other industries with devices which are not handheld or worn. This third article indicates that M2M and IoT connectivity services will only make modest contributions to mobile network service revenues in the coming years until 2020.
Plunging prices weaken ARPUs but generate massive traffic growth
According to GSMA Intelligence, global mobile revenues were up 3.75 per cent while ARPUs declined 3.97 per cent in 2013. The financial picture for European operators is worse, because lower prices per minute and per gigabyte, and lower spending per connection have not increased volume demand for network traffic and connections sufficiently to raise revenues. European mobile operator revenues, ARPUs and EBITDA margins have all declined significantly in recent years. This is despite the revolution in mobile communications, with mobile broadband and smartphones rising from niche to predominant in the last eight years.
European revenues in decline
European mobile ARPUs in decline
European mobile operator EBITDA margins in decline
Meanwhile, according to the Ericsson Mobility Report, network traffic has increased 17-fold on smartphones and three-fold on other personal devices including mobile PCs, tablets and routers (typically connecting PCs, tablets and smartphones at home via Wi-Fi where fixed broadband networks do not reach). Smartphone traffic is twice that of everything else and its dominance is likely to persist. Minutes of use are flat, but voice still accounts for the majority of mobile revenues in Europe. Consequently, operator revenues from smartphones overwhelm everything else and will probably continue to do so for many years.
M2M and IoT represent very small proportion of mobile communications with respect to the number of network connections and the amount data traffic in particular. Also according to GSMA Intelligence, 63 million cellular M2M connections represented only 5.8 per cent of Europe's total 1.08 billion mobile connections in the fourth quarter of 2014.
GSMA Intelligence's forecasted increase to 229 M2M million connections out of a 1.36 billion total in 2020--a growth factor of 3.6 with 166 million additional connections--is not as impressive as it may seem, given the all the excitement about M2M and IoT. That is still only 17 per cent of total connections. One might believe that GSMA Intelligence is being too conservative, but there is justification why much higher growth is considered unlikely.
Embedding cellular capabilities into the design of durables is time-consuming, the propensity for consumers to select these premium models (and pay extra for them) may be low and selling opportunities can be a long time coming. Most people in Western Europe lose, break or for other reasons replace their smartphone with a brand new one every couple of years. On average, cars are kept a lot longer and a large proportion of people buy second hand. Fridges, washing machines and domestic heating systems might last a decade before their owners seek replacements and are unlikely to need cellular connectivity to join the IoT. If they do, it will probably be provided by Wi-Fi from a cellular router serving many other devices at home in the minority circumstances where the consumer lives in a remote area with no wireline broadband.
It is unlikely the ARPUs on M2M devices will be anywhere near those on other devices. M2M devices do not do voice, which accounts for more than half of total ARPUs. Most mobile M2M implementations including remote metering and appliance monitoring typically demand only very small amounts of data. Video entertainment streamed to the back seats of cars, along with safety and systems management information up-front and under the bonnet, could be a substantial exception, but there are few other examples of data-guzzling applications. Instead, mobile health and driverless cars could substantially increase performance requirements with regard to low latency and high reliability. Perhaps that would provide an opportunity for some premium pricing if such measures do not fall foul of "net neutrality" demands to treat all traffic equally.
Diversification and back to basics
While substantial growth of M2M and IoT provide modest opportunities for increased network services revenues, most of the money will be generated elsewhere in the ecosystem, as indicated in my previous column. Some operators are recognising this and responding by diversifying to offer a much wide range of services.
For example, AT&T is capitalising on opportunities in home security and home automation with its Digital Life offerings, of which fixed and cellular connectivity are just small parts. This makes AT&T a head-to-head competitor with U.S. home security market leader ADT. AT&T's brand and distribution will help expand the market substantially. It also has the luxury of much better financial performance than European operators. This has made this expansion initiative easier to justify and finance. Telefónica has agreed to license Digital Life on a trial basis in Europe.
For European operators, there is also a more fundamental need for stronger pricing power to improve profit margins as mobile broadband traffic continues to grow substantially on various devices, including smartphones, which will continue to dominate for many years. Further operator consolidation with mergers, such as that touted for Three and O2 in the UK, if allowed by the competition authorities, will help. In addition, operators must continue to drive down network and other operational costs.
Keith Mallinson is a leading industry expert, analyst and consultant. Solving business problems in wireless and mobile communications, he founded consulting firm WiseHarbor in 2007. Find WiseHarbor on Twitter @WiseHarbor.