GSMA Article

ANALYSIS

Convergence through whatever means necessary (consolidation or organic)

February 2015

GSMA Intelligence gsmaintelligence.com [email protected] @GSMAi

https://gsmaintelligence.com

GSMA Intelligence Convergence through whatever means necessary

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Contents

Executive summary ............................................................................................................................ 3

1 What is happening? .................................................................................................................. 5

2 Where is it happening? .............................................................................................................7

3 Why is it happening? ................................................................................................................ 9

3.1 Technological changes ............................................................................................................... 9

3.2 Regulation ....................................................................................................................................... 9

3.3 Defensiveness .............................................................................................................................. 10

3.4 Economies of scale ................................................................................................................... 10

3.5 Media convergence .................................................................................................................. 10

4 Potential implications ...............................................................................................................11

4.1 Horizontal consolidation likely to continue if not accelerate further ....................... 11

4.2 Fully asset-based converged operators need to leverage economies

of scale to remain competitive.................................................................................................11

4.3 Scale most important factor in making a wholesale-based convergence

business model successful ........................................................................................................12

4.4 A pure mobile strategy may be successful with right model, enough scale ........ 14

5 Potential future directions; engagement across ecosystem

increasingly important ............................................................................................................16


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Executive summary

Convergence, such as has occurred to date, has largely been enabled by two exogenous

factors: technology and regulation. All-IP networks have blurred the lines between networks

and the packets carried over them as well as enabled improved quality of service, for

example IPTV services. Consumer expectations of higher quality services with seamless

mobility and access to data and content have increased concurrently.

While technology continues to rapidly evolve, regulation has lagged. In particular, regulators

continue to place greater emphasis on specific market segments rather than viewing the

TMT market holistically, with the greatest scrutiny on proposed transactions which would

increase concentration within a particular segment of the market. This has encouraged

horizontal consolidation as operators search for greater economies of scale.

For integrated operators in particular, defensiveness has been the key attraction of

convergence to date. Virtually all report significant improvements in churn or customer

lifetimes. Possibly just as important, a converged operators greater scale gives it increased

negotiating leverage with advertisers, content providers, and other ecosystem partners.

These savings can be at least partially passed on to consumers, increasing competitiveness

and defending otherwise at-risk customers and revenues. It is important, however, that

operators design and price their convergence offerings around consumer needs and

desires, rather than competing on price alone, and that any scale benefits passed on to

consumers do not unnecessarily erode value creation.

It is therefore clear that scale is even more important in a converged world than it ever

has been, and this is particularly the case for operators who utilise wholesale agreements

to add services and capabilities. For example, a broadband operator utilising its Wi-Fi

network as the base off of which to launch a mobile offering with a mobile virtual network

operator (MVNO) agreement as a fallback will likely have potential returns proportionate

to its Wi-Fi scale. MVNO contracts also may not be as attractive as in the past, therefore

the Wi-Fi scale advantage is likely to grow.

The acceleration of convergence strategies and moves towards greater horizontal consolidation

would seem to imply that there is a limited probability of success for other business models.

However, there remains a potential path for mobile-only players examples include T-Mobile

U.S. and 3 in Europe to aggressively court the youth-orientated mobile-only household, which

is a growing demographic already 43% of U.S. adults1. Non-convergent operators will need

to maintain a lean cost structure, be adroit at marketing and be aggressive competitors, with

most markets unlikely to support more than one operator following such a strategy. Inevitably,

some households will take services delivered over copper, fibre or cable infrastructure as their

lives evolve, but just as importantly, expanding 4G+ coverage and affordability both of 4G+

devices and services may make remaining a mobile-only household increasingly feasible as

demographics continue to shift in that direction as well.

1 Source: National Health Interview Survey, U.S. Centers for Disease Control and Prevention (CDC), July 2014

www.cdc.gov/nchs/data/nhis/earlyrelease/wireless201407.pdf


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It is still unclear what proportion of consumers will choose to subscribe to quad-play from

one operator in order to achieve the seamless, device- and network-agnostic access to

data and content that operators are increasingly offering. To date, other than through

exclusive but expensive content rights, it is not clear what a fixed/cable operator

can offer that consumers cannot now (and many do) get already, on an la carte basis and at a reasonable and transparent price. Moreover, a poorly designed and functioning

convergence offering may do more damage to an operators brand and business model

than good.

Having said that, pure-play mobile operators will face stronger competition as new players

will start to offer mobile services leveraging asymmetric competition. The threat from

Wi-Fi-first mobile offerings launched by fixed/cable broadband operators with significant

scale in Wi-Fi is particularly potent. They are also more likely exposed to any increase

in churn from SIM technological changes such as remote provisioning. The risk of doing

nothing will be not only potential revenues lost to a competitor, but also a gradual erosion

of operators relevance to the consumers, leaving price as the principal arena in which pure

mobile players can compete. Therefore, while a pure mobile strategy may remain viable,

management may believe that the medium-term risks of remaining independent are likely

to outweigh the financial and execution risks of participating in industry consolidation or

finding alternative routes to convergence.

The future promises even greater blurring of lines between networks, data, content,

software and devices, with a greater number of competitors in each space where

previously there have been only a handful who have been dominant in only one or a small

number of segments of the TMT market. Consumer expectations of seamless integration

of data, software and content across all access means networks and hardware, including

a growing array of connected devices will continue to grow. Successful operators in

the future will need to adapt their offerings and business models to ensure they remain

relevant to consumers.


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1. What is happening?

Convergent offerings often referred to as dual-, triple-, or quad-play depending on the

number of services offered and subscribed to are not a new phenomenon at all, with

established incumbents attempting to use their generally more expansive and ubiquitous

asset bases to their advantage for the better part of the past decade. What is happening

now is an extension and in fact an acceleration of that across the service provider universe,

with operators who own assets in all four product categories (wireline voice, fixed/cable

broadband, television, and mobile voice and broadband) attempting to gain competitive

advantage from these assets by bundling these services into packages which, it is hoped,

non-asset-based competitors will struggle to replicate.

Aside from the technical ability to offer all services, incumbents and other convergent-

capable operators are using bundles to offer attractively-priced packages that, on a like-

for-like basis, are competitive and may be priced at a discount to la carte options. They are able to do so in many cases due to their scale advantages and increasing network

efficiency and utilisation boosted by increasing dominance of IP infrastructure. In some

cases, incumbents are using their scale and technological advantages to introduce bundles

which effectively rebase their pricing to more sustainable and competitive levels but also

gaining an advantage through lowered churn, further scale advantages in areas such as

billing and customer service, improved negotiating leverage with content and ecosystem

partners, and potentially increasing or at least protecting a customers total revenue, even

if ARPU on a per-service basis might be lower than it was previously.

The convergence strategy has accelerated significantly over the past year and can now be

firmly described as multi-directional. Almost every player is moving into a new space, one

previously dominated by another operator which was not previously a direct competitor.

Convergence has been accelerated by M&A, but it also occurring organically. As an example,

Vodafone, through its Project Spring investment programme, is re-investing some of the

proceeds of the sale of its Verizon Wireless stake in improving its 4G networks as well

as moving towards being a convergent player. Vodafone is achieving this both through

acquisitions such as cable operators ONO in Spain and Kabel Deutschland in Germany while

organically building fibre networks elsewhere. From a competitive perspective, there is no

real difference between wireline incumbent BTs announced intent to buy mobile operator

EE and Vodafones cable acquisitions: each seeks to remedy a competitive deficiency,

which - given the cost of these acquisitions the acquirors clearly believe was a significant

and potentially debilitating deficiency.

It has also become clear that there is growing consumer demand for convergent products.

Many were sceptical initially that bundling, especially on the part of incumbents, was

anything more than a way to lower pricing, especially on fixed voice and broadband, to more

competitive levels, without announcing headline price cuts to basic, unbundled services that

generate media coverage and consumer expectations of lower prices. Convergent operators

believe that consumer expectations of being able to receive all desired services under one

package/bill have grown concurrent with their expectations of seamless, network- and

device-agnostic access to all of their data and content.


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However, evidence of burgeoning consumer demand is, at this point, moderate at best.

Belgian cable operator Telenet has taken eight years to reach 19% quad-play penetration

among its cable base since launching an MVNO-based mobile product in 2006, although

take-up has accelerated in the past few years. Among incumbents, Telefnica has fared

well, achieving one-third penetration of its wireline base with its Fusin offer while

Oranges Open has achieved about 18% penetration of the French wireline base (though

43% of broadband subscribers). In the U.S., Verizon, which is the mobile market leader,

has achieved a respectable 36% TV penetration rate but has invested in fibre-to-the-home

(FTTH), a high-quality but expensive proposition2.

Furthermore, there is a growing mobile-only market which, given its youth orientation,

is a growing demographic. In the U.S., for example, over 40% of households have only

a mobile connection3. Given U.S. 4G networks now reach 98% of the population4, it is

far from obvious that these households will be receptive to quad-play offers, particularly

those that require a monthly line rental payment for fixed voice service.

Moreover, so-called seamless access to documents, data and content can be enabled

through cloud-based storage (e.g. Dropbox) and content (Netflix, iTunes, etc.) platforms

that, apart from connection speed, are completely independent of access method. For

mobile-only customers, only exclusive (and therefore expensive) content may sway

significant numbers to adopt a convergence product.

Operators will also need to adjust the metrics or key performance indicators (KPIs) that

they track and report, both internally and to the market, in order to measure the success

of their convergence initiatives, adjust offerings expeditiously to remain competitive as

appropriate, and communicate this with the appropriate stakeholders. Just as the manner

in which an operator launches a convergent strategy will vary, so too are there likely to

be a fairly small variety of KPIs deemed most relevant by specific operators. Eventually,

opinion is likely to coalesce around a handful of standard metrics, with some variation

likely by operator and region. Cable operators for some time have commonly reported

metrics that give a sense of multi-play take-up, such as revenue generating units (RGUs)

per subscriber or household, where pay TV, broadband, wireline voice service and mobile

(where applicable) are each one RGU. Many also report average revenue per user (ARPU)

either solely or additionally to the per-connection standard on an ARPU per household or

per customer relationship basis. Beyond cable, Verizon takes a similar approach, no longer

reporting per-connection ARPU but rather average revenue per account (ARPA). However,

this approach has yet to gain traction among Verizons closest peers.

2 All figures are for Q3 20143 Source: AT&Ts Plan For the Future: No Landlines, Less Regulation, The Wall Street Journal, April 2014.4 Source: GSMA Intelligence, Q4 2014

http://www.wsj.com/articles/SB10001424052702304834704579403090132882148


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2. Where is it happening?

With no significant exceptions, convergence is occurring entirely in developed markets,

principally due to a lack of pervasive, high-quality fixed/cable infrastructure in most

developing markets. The few exceptions are largely limited to select urban areas, such as

Vodacoms recently announced plan to reach 250,000 homes and businesses with fibre-

to-the-home/premises (FTTH) in major centres in South Africa5 (which has over 9 million

households nationally), while also seeking approval to acquire the countrys second-largest

fixed broadband provider, Neotel6. Notably, this is the only FTTH rollout in Africa of which

we are aware, and there are no significant new deployments to highlight elsewhere in the

developing world. Rather, combinations of alternative access technologies may substitute

for fibre or cable-based broadband in developing markets. One potential alternative

are satellite operators, which are on average stronger content provider competitors in

developing markets than in developed, to combine (whether through M&A, wholesale

agreements, JVs or other structures) with mobile operators to offer at least a dual-play

bundle. Basic DSL can be utilised, where available, to offer triple- or quad-play bundles.

Convergence is, however, occurring to some extent in virtually all developed markets,

including Asia-Pacific, Europe, and North America. Moreover, there are only a few exceptions

to the development and evolution of convergence. For example, until recently, the UK had

lacked an infrastructure-based nationwide quad-play capable operator as BT had spun-off

its mobile business to shareholders in the early 2000s, which became O2. As mentioned

previously, BT is acquiring EE, which will reposition it is the only nationwide, fully asset-

based convergent player. However, cable operator Virgin Media already competes with BT

in many parts of the UK utilising its MVNO contract, and others such as Sky and TalkTalk are

expected to follow a similar path to convergence equality. Other markets vary somewhat,

in particular to the extent that cable operators are an infrastructure-based alternative to

fixed incumbents (e.g. Italy has no cable whatsoever, and in many other European markets,

cable coverage of the population is far from dominant, but is a nearly ubiquitous alternative

in the Benelux and Scandinavian countries and North America).

Convergence in the consumer and corporate customer segments also vary; while consumers

increasingly expect access to content, contacts and applications in a seamless manner,

corporates are focused more on the opportunities around big data and analytics, without

regard to networks or devices.

5 Source: Vodacom picks Alcatel-Lucent for FTTH in convergence drive, Fierce Wireless, January 20156 Source: Vodacom to buy Neotel for R7bn, Business Report , May 2014

http://www.fiercewireless.com/europe/story/vodacom-picks-alcatel-lucent-ftth-network-convergence-drive/2015-01-26http://www.iol.co.za/business/companies/vodacom-to-buy-neotel-for-r7bn-1.1690292


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Convergence strategies in developed markets have driven the acceleration of horizontal

consolidation; that is, acquisitions of companies or businesses that add to the acquirors

service capabilities as well as its scale, rather than scale in its existing core markets only.

We have already seen several transactions announced of this type, for example:

AT&Ts US$48.5bn offer for satellite TV operator DirecTV, which has over 20m TV

subscribers nationwide as compared to AT&Ts 6m IPTV subs and whose IPTV product

is only available in 22 of the 50 states

Numericables purchase of French mobile operator SFR for approximately 17bn

BTs acquisition of mobile operator EE for 12.5bn

Vodafones acquisitions of cable operators Kabel Deutschland for 7.7bn and ONO for

7.2bn in Spain

Orange Spains offer for fixed broadband operator Jazztel for 3.4bn

KDDI of Japan has merged its cable operations with those Sumitomo, giving the

combined company 52% share in TV7

KT of South Korea took control of satellite operator now called SkyLife in 2011, while

also developing a wireline-based IPTV platform

7 Source: J:COM and JCN to finalise merger on 1 April, TeleGeography , February 2014

https://www.telegeography.com/products/commsupdate/articles/2014/02/28/j-com-and-jcn-to-finalise-merger-on-1-april/


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3. Why is it happening?

Before assessing the rationale for individual operators strategies, there are two fundamental

factors which are enabling the acceleration of convergence.

3.1 Technological changes

Consumers expectations of seamless mobility and access to data and content are

increasing, at the same time as all-IP networks are blurring the lines between networks

and the packets being carried over them. By moving towards an all-IP network, operators

logically separate their service layer from the physical transport, at all points in the network.

Higher capacity, all-IP networks also help improve quality of service, for example for

wireline incumbents IPTV offerings, while at the same time lowering marginal costs. So-

called carrier-grade Wi-Fi and the addition of Wi-Fi calling to mobile operating systems

is also encouraging dominant broadband operators to seek out new ways to harness and

monetise this advantage.

Recent statements by BT management exemplify the importance of technological changes

in the acceleration of convergence. Regarding the proposed EE acquisition and the potential

for regulatory delays or conditions that might make the acquisition less attractive, BT said

it is progressing our own plans for providing enhanced fixed-mobile converged services

for businesses and customers, and that it remains confident on delivering on these

plans should a transaction not take place. BT also said the EE deal would enable us to

accelerate our existing mobility strategy whereby customers will benefit from innovative,

seamless services that combine the power of fibre broadband, Wi-Fi and 4G. Its more

than quad-play. For us its about the convergence of networks, and quad-play is just one

element of that8.

3.2 Regulation

Regulatory regimes historically have tended to lag changing market dynamics, and this

appears to continue to be the case in most regions. In particular, regulators currently are

placing the highest level of scrutiny on M&A transactions which would increase concentration

in one segment of the telecoms market. For example, proposed combinations of T-Mobile

U.S. first with AT&T and even with the much smaller Sprint were blocked by regulators,

and while four mobile market-consolidating transactions have been completed in Europe

this decade (UK, Austria, Ireland, and Germany), approval of the transactions has required

a minimum of 12 months and often longer and have required significant conditions upon

receiving the green light, such as the requirement to release of 30% of O2 Germany and

E-Pluss combined spectrum for use by MVNOs9. By contrast, French cable operator

Numericables purchase of the second largest French mobile operator SFR took eight

months to be approved with considerably lighter commitments required10.

8 Source: BT positions mobility as key area; claims EE deal on track, Mobile World Live, January 20159 Source: Telefnica, August 201410 Source: Numericable Group, October 2014

http://www.mobileworldlive.com/bt-positions-mobility-key-areawww.telefonica.com/en/shareholders-investors/pdf/hr_20140829_2.pdfhttp://pr-groupe.microsites.cdn.sfr.net/nc/investors/agenda/PR_ADLS_Authorization_271014_.pdf


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For all operators, there are a handful of rationales and potential advantages to convergence

that help to justify its occurrence and validate the expectation that it will continue:

3.3 Defensiveness

Nearly all operators especially incumbents cite lower churn and increased customer

stickiness as a key advantage of their convergence strategies. Lowering churn will increase

operating margins as a result of lower subscriber acquisition and retention costs (SACs/

SRCs) and other operating costs relating to customer disconnections. A further defensive

aspect of the convergence model is protection of an otherwise vulnerable revenue base;

for example, a fixed or cable operator adding mobile RGUs to existing customers accounts,

likely at a much lower cost of acquisition than a new customer. Again this is happening pan-

directionally, so examples such as Telenet adding mobile RGUs are equivalent in intent to

Vodafone using its acquisition of ONO to encourage its Spanish mobile customers to take

broadband and television (new RGUs) from it. This defends the business by discouraging

churn as well as protecting the revenue base by providing a greater number of services

that might otherwise be provided by competitors.

3.4 Economies of scale

Streamlining of billing and service operations; a reduction of wholesale costs due to

greater ownership of backbone network (especially relevant for pure mobile operators);

increased negotiating leverage with content providers, advertisers, and indeed all aspects

of ecosystem; and the ability to price more competitively as a result of this scale and these

synergies.

3.5 Media convergence

Combined with content ownership, especially exclusive content rights, operators have the

potential to convert their positioning from that of a dumb pipe to a stronger, more relevant

player in the eyes of consumers. Examples include BT and Telefnica Spains acquisitions

of exclusive sports content rights and Comcasts acquisition of TV network and film studio

NBC Universal.


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4. Potential implications

4.1 Horizontal consolidation likely to continue if not accelerate further

The implications of these varied and rapid changes are many, are far-reaching and there will

no doubt be some that cannot be fully anticipated. Nevertheless, there are a few outcomes

that seem all but certain: most operators will look to expand their service offerings into

other spaces, those which are often dominated by another operator that may not be a

primary competitor now, leading to a greater number of competitors in each product area

but most likely a reduction in the total number of competitors in an amalgamated sense in

the medium- to long-term. We have recently seen an acceleration of consolidation and this

is likely to continue if not accelerate further.

For mobile operators, the term consolidation generally is assumed to mean a reduction

in the number of competitors with licensed spectrum in a particular market. While this

type of consolidation will continue, a greater number of transactions are likely to involve

horizontal moves, that is, acquisitions of companies or businesses that add to the acquirors

service capabilities as well as its scale, rather than scale in its existing core markets only.

We have already seen several transactions announced of this type, such as those listed in

section 2 (Where).

In the case of the Orange Spain-Jazztel transaction, the rationale for it was succinctly put

by Orange CEO Stephane Richard as follows: We are doing this deal to accelerate our

growth in Spain, particularly in fixed-mobile convergent offers. The new company will be

the incontestable number two in fixed services and third in mobile behind Vodafone, but

we think well be able to take second place pretty quickly11.

To assess the ramifications and strategic issues and choices facing operators today, we

divide the operator universe into three categories (yet are aware that even these lines are

and will continue to blur): fully asset-based converged players; converged players which

rely on wholesale access for at least one critical element; non-converged (single or dual-

play) operators.

4.2 Fully asset-based converged operators need to leverage economies of scale to remain competitive

It is clear that scale is probably even more important in a converged world than it ever

has been, with converged operators needing to chase greater scale as they look to defend

their existing revenue streams and customer bases from new competitors. Operators that

lack particular elements of the bundle are likely to continue to look at acquisitions to

complement their existing asset portfolios.

The category of fully asset-based converged operators, by which we mean able to offer

quad-play predominately over its own infrastructure, includes most western European

11 Source: Orange offers to buy Spains Jazztel for 3.4 billion euros, Reuters, September 2014

http://uk.reuters.com/article/2014/09/16/uk-orange-jazztel-idUKKBN0HA1SN20140916


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incumbents in their home markets as well as former telecoms monopolies in the rest of

the developed world. BT in the UK is the only major example of a European incumbent not

currently in this category, an anomaly its proposed acquisition of EE would correct. The

U.S. is the largest market where an equivalent to the incumbent model does not currently

exist; while Verizon and AT&T both have high-quality nationwide mobile networks with

significant market shares (35% and 31% respectively12), their local fixed networks do not

have nationwide coverage but rather regional dominance. Additionally, they face cable TV

operators which have historically dominated the pay TV market and have done a good

job at cross-selling broadband to these homes; for example Comcasts penetration rate

of broadband as a percent of homes passed is only 1.5pp lower than its rate of video

penetration. However, these structural differences do not indicate that convergence is

happening at a slower pace in the U.S. than elsewhere, only that it is taking place in differing

manners which reflect the assets each player is starting with, where its strengths currently

are and where it may be able to turn a current weakness into a potential opportunity.

Among both incumbents and dominant wireless networks, adoption of a convergence

strategy whether requiring the acquisition of new assets or not is seen primarily as a

defensive manoeuvre, and indeed virtually all incumbents identify reduced churn as a key

benefit of the strategy.

Additionally, as asset-based operators, it simply makes sense to utilise these assets to the

greatest possible extent. This is particularly the case when competitors launch convergent

products which gain traction. In such a case, an operator with assets in all products areas

will likely feel compelled to launch a convergent product, if only to minimise customer and

revenue losses.

4.3 Scale most important factor in making a wholesale-based convergence business model successful

Scale is also a key factor for operators who utilise wholesale agreements to add services

and capabilities. Telenet again provides a useful example; its market share in its core service,

pay TV, in Flanders (northern Belgium) exceeds 70% of the homes passed by its network

and it has a very high broadband market share among its TV homes as well approaching

75%. Concurrently, it has scaled-up its Wi-Fi platform from 120 hotspots in 2003 to

approximately 2,000 public Wi-Fi hotspots plus an additional one million Homespots

(Wi-Fi router signal splitting into private and public SSIDs, which was introduced in 2011)

as of Q3 2014. On the back of this Wi-Fi network, it reached an MVNO agreement with

Mobistar to provide voice service and fill in coverage nationally outside of Flanders and

fallback coverage within Flanders. This has enabled Telenet to reach a 19% mobile market

share with its cable customer base, with mobile revenues over 15% of group revenues

and, although margins by product are not broken out by the company, Telenets overall

EBITDA margin has remained stable but very high, at 54% as at Q3 2014, unchanged over

the past two years. A similar business model with these margins is unlikely to be able to be

replicable by operators without the same level of scale.

12 Source: GSMA Intelligence, total mobile connections excluding M2M, Q4 2014


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One proposed business combination which would provide a potentially similar level of

broadband dominance off of which to launch a mobile offering, should it decide to, is the

combination of Comcast with Time Warner Cable in the U.S. The combined businesses

would provide broadband service to over 30 million households, or approximately one-

quarter of all U.S. households and a 35% market share13. Its nearest competitors have far

fewer: AT&T (excluding DirecTV) has over 16 million while Verizon has just over 9 million.

While it has not completed the Time Warner Cable acquisition and has not announced

any mobile offering, its previous acquisition of NBC Universal gives it some exclusive

content. Moreover, in its most recent results (FY 2014), its investment in cable increased

by 14% YoY due, in part, to cloud initiatives such as cloud-based DVR service, which would

position it well for a network- and device-agnostic content offering should it move to

add a mobile offering to its bundles. Recently, regional cable operator Cablevision, which

covers many New York metro suburban areas but notably has no residential broadband

in Manhattan, launched a Wi-Fi-only mobile offering starting from US$10 per month. The

regional nature of the plan, lack of major commercial/business centre coverage, and lack

of MVNO coverage fallback will limit the attractiveness of the plan, but is an example of

how broadband scale, albeit on a regional basis in this case, can be leveraged to expand

into mobile services at very limited marginal cost.

A recent example of an operator which is pursuing a convergence strategy with wholesale

products in some areas (including mobile via an MVNO agreement with O2) but is

struggling due to its lack of scale thus far is TalkTalk in the UK. TalkTalk claims to have taken

a respectable 11% of net mobile connections in December 2014, but its overall share of total

UK connections at the end of 2014 stands at just over 0.5%14. As with other operators, it is

seeing churn improvement, down 0.3pp to 1.3% in the final calendar quarter of 2014, but

the associated cost savings are taking longer to come out, the CEO stated, and offered

EBITDA guidance for its full financial year (ending March 2015) which is expected to be

towards the lower end of market expectations15.

It has generally been assumed that wholesale offerings, such as MVNOs or LLU-based

broadband services, do not offer as attractive returns as network ownership, despite the

much lower capital requirements. It is also believed that MVNO contracts may not be as

attractive as in the past, as mobile operators see MVNOs as part of a convergence offering

as an increasing threat. While examples such as Telenet might make one wonder if this

is no longer the case, BTs proposed acquisition of EE would seem to confirm that full

ownership and control of a network, while far from being the only route to an acceptable

return on invested capital (ROIC), is still the most advantageous. This is particularly the

case when one considers that BT had already established an MVNO agreement with EE

and was expected to announce a consumer mobile offering by the end of 2014 on the

back of that agreement and its Openzone Wi-Fi network16. What is clear is that there are

a range of options and outcomes, and each has some advantages and disadvantages, but

the number of fully-convergent players is likely to continue to increase.

13 Source: Comcast-Time Warner Cable Deal Still Up in the Air a Year Later, New York Times, February 2015.14 TalkTalk reported December 2014 mobile subscribers as a percentage of GSMA Intelligence total mobile connections excluding M2M, Q4 201415 Source: TalkTalk talks up quad-play success, but warns on costs, Fierce Wireless, February 2015.16 Source: BT looks to launch consumer 4G services this year, Mobile World Live, April 2014.

http://dealbook.nytimes.com/2015/02/08/comcast-time-warner-cable-deal-still-up-in-the-air-a-year-later/http://www.fiercewireless.com/europe/story/talktalk-talks-quad-play-success-warns-costs/2015-02-04http://www.mobileworldlive.com/bt-plans-consumer-4g-launch-year


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4.4 A pure mobile strategy may be successful with right business model, enough scale

That being said, there is no right business model for all operators; each have their advantages

and disadvantages. There remains a potential path for mobile only operators. Such non-

convergent operators need to maintain a lean cost structure, be adroit at marketing and

be aggressive competitors, with most markets unlikely to support more than one operator

following such a strategy. Examples include T-Mobile U.S. and 3 in Europe, with a focus

on aggressively courting the youth-orientated mobile-only household, which is a growing

demographic. In the UK, for example, the proportion of mobile-only households has risen

from 10% in 2006 to 16% in 2014, with over a quarter of those up to age 34 living in mobile

only homes17. In the U.S., the overall proportion of mobile-only households reached over

40% in 2013, up from under 10% in 2005, and reportedly three-fifths of adults under 3018.

Inevitably, some will take some services delivered over copper, fibre or cable infrastructure

as their lives evolve. But just as importantly, expanding 4G+ coverage and affordability both

of 4G+ devices and services may make remaining a mobile-only household increasingly

feasible as demographics continue to shift in that direction as well.

20%

25%

30%

35%

41%

40%

45%

2008 2009 2010 2011 2012 2013

Figure 1: Percentage of U.S households with only mobile phone service

Source: U.S. Centers for Disease Control and Prevention (CDC)

Moreover, a consumer does not in practice need to subscribe to quad-play from one

operator in order to achieve the seamless, device- and network-agnostic access to data

and content. To date, other than through exclusive but expensive content rights, it is

not clear what a fixed/cable operator can offer that consumers cannot now (and many

do) get already, on an la carte basis and at a reasonable and transparent price. For example, it is possible to watch Netflix, iTunes, HBO or any other content at home on

17 Source: The Communications Market 2014, Ofcom, August 201418 Source: AT&Ts Plan For the Future: No Landlines, Less Regulation, The Wall Street Journal, April 2014.

http://stakeholders.ofcom.org.uk/market-data-research/market-data/communications-market-reports/cmr14/http://www.wsj.com/articles/SB10001424052702304834704579403090132882148


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a TV or computer connected via a fixed or cable broadband network and pick up the

same bookmarked content later on a tablet connected via one mobile network and/or a

smartphone connected via another network.

However, in all areas of telecoms markets, scale is arguably the most important determinant

of profitability and ROIC. Regulators continue to look at concentration in market segments

more with much greater scrutiny than the TMT market holistically. The rise of convergence

and of new competition in the mobile market from fixed/cable broadband operators

leveraging their Wi-Fi strengths to build a competitive mobile offering and so putting

further pressure on pricing, may ultimately encourage regulators to shift their approach.

Market dynamics may then force regulators to allow pure mobile operators to build the

scale they will need to survive in a market whose dynamics have shifted so much that

looking solely at the market share of licensed mobile operators will have less and less

relevance.

Nevertheless, pure mobile operators will face stronger competition as new players will

start to offer mobile services leveraging asymmetric competition. The threat from Wi-

Fi-first mobile offerings launched by fixed/cable broadband operators with significant

scale is particularly potent. Pure mobile operators could also the most at risk of higher

churn as a result of moves towards remote SIM provisioning and soft SIMs, all factors that

may see the perceived attractiveness of the convergence strategy grow in the future. The

risk of doing nothing will be not only potential revenues lost to a competitor, but also a

gradual erosion of operators relevance to the consumers, leaving price as the principal

arena in which pure mobile players can compete. Therefore, while a pure mobile strategy

may remain viable, management may believe that the medium-term risks of remaining

independent are likely to outweigh the financial and execution risks of participating in

industry consolidation or finding alternative routes to convergence.

Given technology and media convergence and the generic rise of the importance of

mobility to consumers, it seems even more unlikely that a fixed/cable-only operator will

not struggle to remain relevant without offering some mobile service, even if it is only a

spotty one such as Cablevisions. BTs managements comments, cited earlier, would seem

to validate the dominating view that network convergence and consumer demand for

seamless, integrated services incorporating mobility will drive these operators to seek a

path to convergence, whether by participating in consolidation or leveraging their scale in

Wi-Fi as a base off of which to build a mobile offering and a convergence strategy.


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5. Potential future directions; engagement across ecosystem increasingly important

The future promises even greater blurring of lines between networks, content, data,

software and devices, with a greater number of competitors in each space where previously

there have been only a handful who have been dominant in only one or a small number

of segments of the TMT market. Consumer expectations of seamless integration of data,

software and content across all access means networks and hardware, including a growing

array of connected devices will continue to grow.

Of greatest relevance to mobile operators (standalone or as part of integrated operators)

will be a greater number of competitors as new players will start to offer mobile services

leveraging asymmetric competition. New competition is likely to arise from cable or other

telecoms operators with significant Wi-Fi scale to launch a mobile offering with low marginal

cost. Additionally, competition is also likely to arise from companies in adjacent spaces,

such as possibly Google,19 Alibaba, or other tech giants in some form, and competition is

likely to strengthen from OTT players such as WhatsApp, among others. Whether these

players, who may enter the mobile space without licensed spectrum and with relatively

asset-light business models, are viable competitors in the long-term remains an open

question. The recent AWS auctions in the U.S., which raised more than expected and in

which satellite player Dish spent approximately US$10 billion but does not have plans to

deploy this spectrum for its own use, would appear to validate the view that spectrum in

licensed bands is a valuable, scarce resource.

However, engagement with potential new entrants and competitors whose business models

may be in transformation is likely to be increasingly necessary for all market participants.

Regardless of the underlying network strategy, a focus on either operational scale or price

leadership alone are unlikely to be sustainable market strategies in the longer term.

19 Source: Googles Next Telecom Move: Becoming a Wireless Carrier, The Information, January 2015

https://www.theinformation.com/Google-s-Next-Telecom-Move-Becoming-a-Wireless-Carrier


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About GSMA Intelligence

GSMA Intelligence is the definitive source of mobile operator data, analysis and forecasts,

delivering the most accurate and complete set of industry metrics available.

Relied on by a customer base of over 800 of the worlds leading mobile operators, device

vendors, equipment manufacturers and financial and consultancy firms, the data set is the

most scrutinised in the industry.

With over 26 million individual data points (updated daily), the service provides coverage

of the performance of all 1,400+ operators and 1,200+ MVNOs across 4,400+ networks, 65

groups and 237 countries worldwide.

gsmaintelligence.com [email protected] @GSMAi

About the author

Mike Melon Lead Analyst

Mike joined GSMA Intelligence in October 2014 as a Lead Analyst with

a focus on financial and M&A analysis. Prior to GSMA, he started his

career as an investment banker at Goldman Sachs while also covering

the European telecoms sector for a decade in the research division of

Goldman Sachs, and later for an independent research firm.

https://gsmaintelligence.commailto:info%40gsmaintelligence.com?subject=http://twitter.com/GSMAi


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Whilst every care is taken to ensure the accuracy of the information contained in this material, the facts, estimates and opinions stated are based on information and sources which, while we believe them to be reliable, are not guaranteed. In particular, it should not be relied upon as the sole source of reference in relation to the subject matter. No liability can be accepted by GSMA Intelligence, its directors or employees for any loss occasioned to any person or entity acting or failing to act as a result of anything contained in or omitted from the content of this material, or our conclusions as stated. The findings are GSMA Intelligences current opinions; they are subject to change without notice. The views expressed may not be the same as those of the GSM Association. GSMA Intelligence has no obligation to update or amend the research or to let anyone know if our opinions change materially.

GSMA Intelligence 2014. Unauthorised reproduction prohibited.

Please contact us at [email protected] or visit gsmaintelligence.com. GSMA Intelligence does not reflect the views of the GSM Association, its subsidiaries or its members. GSMA Intelligence does not endorse companies or their products.

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