There is a debate which has only really just started within the telecom sector over the long-term impact of mobile data.
On the one hand mobile data is clearly one of the few growth areas within the sector generating new revenues as new subscriber growth slows and as voice tariffs remain under downward pressure. But on the other hand there are those who view the current mobile data growth story with a certain degree of skepticism and focus more on the underlying "quality" of revenues especially in terms of their long-term impact on sector profitability.
As a starting point, there is no doubt that mobile data usage is growing substantially as a result of new products and improved equipment functionality. In Hong Kong, for example, the regulator estimates that the average 2.5G/3G mobile subscriber generated approximately 128 MB more data traffic in July 2010 than a year earlier while StarHub in Singapore (one of the few Asian telcos to publish mobile data usage) has seen total mobile data usage more than double over the past year.
This increasing usage is undeniably translating to new sector revenues. We recently estimated that nearly all the new revenues generated in Singapore telecom sector over the last 12 months were from mobile data while many telcos across the region are achieving accelerating data revenue growth over recent quarters.
But we view it as simplistic to point at increasing usage and revenue growth and conclude that this is obviously a good thing? In fact there are a number of reasons why we are not yet convinced that mobile data growth is an incremental positive on the sector.
First, telcos do not appear to be effectively monetizing the surging data usage as reflected in the substantial gap between the data usage growth and data revenue increases. And unfortunately given current pricing structures (driven by the desire of telcos to drive higher data usage), revenue collection per unit of data delivered is likely to remain far less than traditional voice and SMS traffic.
This is key to our second reason for caution: our working presumption is that mobile data margins and return on capital invested will be significantly lower than those achieved for voice and SMS as revenue per MB of data delivered declines at a faster rate than associated costs. Clearly there will be variations between operators (reflecting network topology, nature of end-user demand, pricing models etc) but we expect data to continue the general downward margin pressure.
Third, while data may be the current focus of attention, voice ARPUs remain under pressure. And importantly for mobile operators, the risk is that many of the new mobile data services are long-term (lower margin) substitutes for current voice and SMS revenues (e.g. instant messaging threatens SMS while VoIP is a long-term risk to mobile voice).
Furthermore, it remains unclear whether mobile operators will be able to avoid the dis-intermediation that fixed operators have generally experienced. If they do not, then the risk is that mobile operators could simply become pure access pipes offering a commoditized access service giving investors lower returns than previously achieved.
Less attractive option
We believe there is a general recognition within the sector that mobile data is a less attractive commercial proposition than traditional voice and SMS and consequently there is increasing focus on how the data business case can be improved. For example, a justification for LTE deployment is that it is far more cost effective in delivery of large data volumes than 3G or HSPA networks.
Similarly, operators are increasingly looking at network sharing, network outsourcing, femtocells, lower spectrum frequencies, usage caps and active subscriber throttling, and new pricing structures as mechanisms to improve the business case and expected returns on capital invested. All of these could reduce the above potential challenges associated with data growth.
In short, the mobile sector is in a transition from a low-risk, high-margin, high-return, voice-centric, as good as it gets environment to a higher risk, lower margin, lower return data/IP world. But this is a transition which cannot be avoided given the nature of end-user demand and ongoing competition between operators. As such, the key focus has to be how the mobile data business case can be strengthened ?otherwise, investors could view the implications of data growth more cautiously than many currently do.
William Bratton is head of Asia telecom research at Deutsche Bank
The views expressed are those of the author and do not necessarily reflect the official views of Deutsche Bank or its related entities.