Operators see little profit from mobile broadband

According to Ofcom’s recently published Communications Market Report 2011, the UK communications industry has undergone some dramatic changes over the past decade. The report suggests that the UK is now a nation addicted to smartphones. The prevalence of smartphones (along with mobile broadband dongles) has led to rapid growth in demand for mobile data traffic, which has increased almost 40-fold in the last four years. Conversely, mobile operators have seen little increase in revenues over the same period, suggesting consumers are reaping the benefits from a contestable mobile industry.
In the broadband market, consumer satisfaction from next-generation access (NGA) services appears to be high, suggesting a willingness among customers to pay more for a super-fast broadband connection. Growth in the rollout of such services has been steadily increasing, with almost 60% of UK houses having access to super-fast services in July 2011. However, a quarter of households still have no access to the Internet, which will be of some concern to policy-makers who have been trying to get the UK online.
Despite growth in broadband penetration, primarily driven by the emergence of mobile broadband (9.5% of all ‘broadband accessing’ households are mobile broadband only), 26% of households are still without broadband access. This is largely the result of a generational gap, with many older people not understanding how to use the Internet or even a computer; only 25% of those aged 75 or above have fixed broadband (compared to the national average of 67%). The government’s aspirations to achieve the rollout of super-fast broadband to 90% of the UK by the end of 2015 is one thing, but encouraging uptake, particularly among some parts of society, is a different matter.
The prevalence of smartphones (as well as mobile broadband dongles) has led to huge growth in mobile data usage, which has increased almost 40-fold (4000%) since the fourth quarter of 2007. Smartphone users will nevertheless need to be aware that costs for data usage abroad are significantly higher than at home. A lack of competition in the international roaming market is to blame, as customers are reliant on how well their host operator has negotiated with partners in a particular country. The EC has proposed allowing customers to separate roaming services from their contracts, allowing them to pre-select a cheaper roaming contract. This would see pan-European roaming operators competing on price. To achieve this, the EC is mandating wholesale national roaming access to facilitate entry of competitors (in particular MVNOs).
An interesting observation from the research relates to bundles. More than half of UK consumers now purchase two or more communication services from the same supplier. The relevance of bundles in many national markets has increased significantly over the last few years, as convergence makes bundling more likely. In general, bundling is welfare-enhancing. It is usually a pro-competitive, customer-friendly strategy, and as such does not normally call for regulatory intervention. However, there are instances when the opposite can be the case. For instance, the ability for consumers to switch bundles is something that deserves attention, and will become more important as the practice of bundling increases. These will require careful monitoring by national regulators.
Despite the growth in mobile data usage, data revenues for operators have hardly increased. In 2010, the data traffic increase of 67% was accompanied by a revenue increase of only 4.3%. For operators the solution may lie in exploring new business models – a movement away from net neutrality (in which all data traffic is given equal priority) towards establishing a multi-tiered system, with prioritized data transport for those services which require higher bandwidth or lower latency such as HD video streaming and VoIP. Allowing operators to explore new revenue opportunities such as these could be one way to restore revenues, which have been falling year-on-year and in 2010 were actually less than they were in 2001 (in real terms); £42 billion (€47.7 billion) in 2001 compared to £40.5bn in 2010.
The fall in fixed-line subscriptions is accelerating; the number of fixed lines decreased from 34.2 million in 2009 to 33.4 million in 2010, representing the fastest rate of decline since connections began to decrease in 2002. This trend derives from the continued growth of fixed-to-mobile substitution, which has been partly fuelled by consumers wishing to switch to mobile to take advantage of desirable smartphone handsets and the lower cost of mobile calls. The effective cost of a call per minute from mobile is now less than from a fixed line.
The last decade has been a prosperous one for UK consumers of telecoms services, and the regulatory framework adopted by Ofcom appears to have done well to facilitate the investment and competition that has driven this. Ofcom must now ensure that its regulatory approach is fit for the next decade and is able to tackle the challenges that face the industry. At this point operators will no doubt be asking themselves, ‘where did all the profits go?’ With expensive network upgrades planned, the industry will be under increasing pressure to generate returns on these investments.
Following a period of consultation, Ofcom will soon set out its position with regards to net neutrality. It will be mindful of the state of the industry and should continue to be pragmatic in the stance it takes.