Value of international calling declines

OvumRecent comments by the chief executive of Zain Jordan have focused attention on the impact that smartphone communication apps will have on telcos’ international call revenues.
 
The impact will also be felt by governments, which earn revenues by taxing incoming international calls. While it might be tempting for telcos or governments to seek ways to prevent the use of these apps, such efforts are bound to fail. Ultimately, telcos and governments will have to accept that international calling will no longer be a “cash cow”.
 
Zain Jordan concerns
The chief of Zain Jordan, Ahmad Al Hanandeh, recently warned the growing use of communication apps will have a negative impact on telco revenues. In comments reported by The Jordan Times, he said. “The number of mobile holders using the Internet to make phone calls and send SMSs and MMSs is on the rise, which is affecting revenues generated by telecoms companies.”
 
While KPN voiced similar lamentations in 1Q11 on the impact of ubiquitous mobile broadband in developed markets, the complaint from Al Hanandeh confirms that emerging market telcos are facing the same challenges. Given the impact that desktop services such as Skype have had on fixed operators, it is fair to say that this trend is affecting all telcos around the world.
 
We were surprised that Zain Jordan felt it necessary to call for more regulation to help protect telco revenues. Apps are already an established part of the telecoms landscape, and it is unlikely that telcos or regulators can perpetually exclude them. In our report Mobile Operator Responses to VoIP: The Six Steps, we argued that neutralization was the best approach for telcos, and that any attempt to block VoIP will ultimately fail.
 
The market for international calls and messages is particularly vulnerable to communication apps because telcos have long treated it as a cash cow by charging a premium for the services. For example, it is cheaper for both sender and receiver to exchange a 1-MB email file than to send a SMS from the UK to Jordan. Cheaper smartphone prices, the increased adoption of mobile broadband services, and the wider availability of apps will only increase the level of app-led substitution.
 
 
The only sensible approach for operators is to restructure their business models and prices to adapt to this new reality. For example, the pricing sweet spot for many telcos will lie somewhere between metered data access and unlimited voice and SMS services. This could then form part of an overall strategy to earn the majority of revenues from mobile data access rather than metered voice calls. Other operators may need to begin reducing the price disparity between domestic and international calls. Many fixed telcos already do this, and several telco groups offer it to roaming mobile customers (e.g. Vodafone Passport and Zain’s One Network).
 
Governments must look beyond
The practice of taxing incoming international calls is quite common in emerging markets, where governments treat it as a de facto tax on expatriate citizens. For example, the cost of an international call from the UK to Ghana is over 200% higher than a call to Nigeria as a result of these taxes.
 
As the proliferation of illegal SIM boxes shows, an overly expensive tariff regime has its own risks. In June 2012, Revector reported that mobile telcos and governments were losing $150 million (€117 million) from the illegal termination of minutes. This involves rogue SIM-box operators terminating VoIP originated international calls on a local SIM card to mask its origin.
 
As more emerging market users embrace smartphones with VoIP apps, the need for an intermediary will disappear. It then won’t be long before the volume of incoming international calls falls below the point at which the cost of collecting the tax is more than the revenues raised by the tax itself.
 
Emeka Obiodu is principal analyst, telco strategy, at Ovum.

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