Developing a Practical Forecast Methodology to

Produce a Ten-Year Subscriber and Revenue Forecast

for Mobile Markets

Coleago Consulting Ltd

IBC Conference - Boston, MA - September 1999

Stefan Zehle, Director, Coleago Consulting Ltd

Mobile: +44 7974 356258 Fixed: +44 20 7221 0094 e-mail: stefan.zehle@coleago.com

www.coleago.com

1
Agenda

• Introduction to Coleago Consulting Ltd

• Forecast objectives
• Determining potential demand
• Generating a penetration forecast
• Price elasticity of demand
• Voice revenue and usage forecast
• Revenue for data services

2
Coleago’s consultants have worked on mobile projects in 28
countries.
• Coleago’s consultants have advised clients with regards to
all issues of mobile business development including
demand assessment, tariffing, positioning, interconnect,
coverage roll out, business planning, market forecasting,
etc.
• We have carried out market studies and advised clients on
licence bids, business planning, due diligence, acquisition
evaluation, etc. Austria, Belgium, Denmark, Finland,
France, Ireland, Italy, Netherlands,
Norway, Poland, Sweden, UK
Canada

Israel, Kuwait
Caribbean, El Salvador,
Mexico
Australia, China, Hong
Argentina, Brazil, Kong, Korea, Malaysia,
Venezuela Taiwan, Singapore
3
Typical forecast objectives.
• Generate reliable forecasts of market demand for a
mobile telephony business.
• Forecast based on primary data gathered through
market research interviews with an integrated
approach.
• The forecast must be presented in form of a
spreadsheet model to to enable the running of
sensitivities and interface directly with financial
and engineering models.
• The forecasting methodology and model must
deliver results quickly and must be easy to use,
while also producing excellent quality of analysis.

4
Main forecast outputs required.

• Penetration & total subscribers

• Price elasticity of demand
• Average monthly voice bill
• Interconnect revenue and costs
• Minutes of use
• Revenue for data services
• Data traffic

5
Determine potential demand for mobile services.

• The main objective of market sizing is to determine

potential demand.
• Ideally a large scale quantitative survey amongst a
representative sample of the population provides the
main input into a forecast.
• In a questionnaire based survey demand is likely to be
be underestimated - develop a questionnaire structure
that compensates for this.
• Primary market research will underpin any assumptions
made using economic analysis or benchmarks.
• Use a mixture of primary market research, economic
analysis, benchmarks and vision.

6
Potential demand is a sub-set of the addressable market.
Example of a developing country:

Total Population 50% With Sufficient Income

100%

60% Old Enough

Addressable Market 30%
to Own
80% Expresses Interest:
Mobile Phone
Potential Demand 24%
of Population

7
Questionnaire to determine potential demand and price
elasticity of demand.

Sample Don’t Mobile No No FMC No

of Popu Use Propo- Interest Interest Propo- Interest
lation Mobile sition in Mobile in Mobile sition in FMC

Existing Interest Suggest Interest Rejecters:

Mobile in Prices in Classifi-
User Mobile Fall FMC cation Data

Proposition Preference FMC Potential

Mobile v.s. FMC Demand
Mobile Potential
Demand
Determine How Much
Willing to Pay to Adopt &
Price Elasticity of Mobile &
Use per Month
FMC Demand as Function of
Potential Demand
Maximum Potential Mobile &
FMC Demand Willing to Pay
Minimum
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Potential demand for mobile operators.

• All those who are interested and who are also willing
and able to pay a minimum amount comparable to the
cost of PSTN usage.
• Demand is demand in the economic sense, because it is
backed by willingness and ability to pay.
• Some people, regardless of price have no interest in
mobile.
• Maximum potential demand ceiling is likely to change
over time due to the bandwagon and age shift effects.
• Looking at the propensity to adopt by age provides a
window to the future.
• Factors other than age are important, in lower income
countries income is a discriminator.

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Propensity to adopt mobile by age - example from Western
European country: Age is an important discriminator.

Propensity to Adopt by Age

80%

70% y = -0.0106x + 0.9686

2
R = 0.9333
60%
Potential Adopters

50%

40%

30%

20%

10%

0%
17 27 37 47 57 67 77
Age of Potentail Adopters

A Western European country, sample 1,000 interviews 1997

10
Correlation between propensity to adopt mobile & income
- example high income country: Income does not matter.
Propensity to Adopt Mobile by Income
70%

60%
Potential Adopters in Sample

50%

40%

30%
y = 0.0003x + 0.4019
2
20% R = 0.684

10%

0%
0 100 200 300 400 500 600 700 800 900
Annual Household Income '000

A Western European country, sample 1,000 interviews 1997

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Correlation between propensity to adopt mobile & income
- example lower income country: Income matters.
Propensity to Adopt Cellular by Income
60%

y = 0.0852x + 0.0471
Potential Adopters in Sample

50% 2
R = 0.9818
40%

30%

20%

10%

0%
<30 30-50 50-70 70-90 90-110 >110
Monthly Net Income

A Far Eastern country, sample 1,500 interviews 1996

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Maximum potential demand assumptions for each segment
should be anchored in consumer and business demographics.
• Segmentation must be appropriate to long term forecasting.
This may not be the same as segmentation for other
purposes.
• The potential demand assumptions should be linked to
changing demographic patterns and changes in income.
• The potential demand 60%

sets a penetration 50% Potential Demand Ceiling

ceiling, conceptually 40%

Penetration of Population
the maximum potential 30%

penetration is the level 20%

Penetration

at which the product 10%

life cycle curve reaches 0%

its upper limit.

1990

1991

1992

1996

1997

1998

2003

2007

2008
1993

1994

1995

2004

2005

2006
1999

2000

2001

2002
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The mobile subscriber market penetration forecast can be
based on the product life cycle concept and curve fitting.
• Curve fitting to forecast the penetration. An extensive
body of research (Chambers, Jantsch, Bewley & Fiebig and
others) on the use of curve fitting to forecast the product
life cycle for telecoms markets and similar markets
underpins the validity of this approach.
• A penetration curve which
The Product Life Cycle Curve
fits well with historic
Introduction
market data determines a Growth Phase Maturity

trend based on the product Decelerating

life cycle. There is an

element of self-validation. Accelerating
• If historic data is not
available benchmarks can
be applied.

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 Empirical evidence of s-shaped product life cycle curve.

World Mobile Telephony Subscribers

350,000
Rest of World
Low Income Australasia
300,000
High Income Australasia
Central & South America
250,000 North America
Western Europe
Subscribers '000

200,000

150,000

100,000

50,000

0
Dec-88

Dec-89

Dec-90

Dec-91

Dec-92

Dec-93

Dec-94

Dec-95

Dec-96

Dec-97

Dec-98
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Various s-shaped growth curve functions are available,
must be asymptotically bounded function.
• The upper asymptote is the potential demand identified
in market survey.
• Pearl’s equation logistic curve has advantages in terms
of manageability in the forecasting model.

Product Life Cycle Model Formula

Pt = (1 + a * e -b*t )-1
where:
Pt = % of the maximum potential penetration year t
t= years from launch
a = a factor skewing the curve
b = a constant
and
b = 1 / tm * ( ln ( (a / ( 1 / 0.99 )- 1)))
where:
tm = total number of years to maturity
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 Select a penetration forecast curve which fits historic data.
Total Market Subscribers Model vs. Actual
800
Installed Base Model '000
700 Installed Base Actual '000

600
Subscribers '000

500

400

300

200

100

0
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

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Include factors in curve to model economic impact of speed
of growth - example from a high income country.

Correlation Between Increase in Mobile Telephony Penetration and Macroeconomic

Conditions in the UK
3.5% 6.0%

5.0%
Increase in Penetration of Pops % Points

3.0%
4.0%
2.5%
3.0%

Real GDP Change

2.0% 2.0%

1.5% 1.0%

0.0%
1.0%
-1.0%
0.5%
Mobile Penetration Increase -2.0%
Real GDP Change
0.0% -3.0%
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

18
Include factors in curve to model economic impact of speed
of growth - example from a lower income country.
Correlation Between Increase in Mobile Telephony Penetration and Macroeconomic
Conditions in Mexico
0.8% 8.0%
Mobile Penetration Increase
Increase in Penetration of Pops % Points

0.7% Real GDP Change 6.0%

0.6% 4.0%

Real GDP Change

0.5% 2.0%

0.4% 0.0%

0.3% -2.0%

0.2% -4.0%

0.1% -6.0%

0.0% -8.0%
1989 1990 1991 1992 1993 1994 1995 1996 1997

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Typical mobile penetration forecast.
Cellular Penetration - History & Forecast
40%

35%
Penetration of Population

30%

25%

20%

15%

10%

5%

0%
1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006
• Curve only useful if average monthly bill level at any
forecast level of penetration can be established.

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Measuring price elasticity of demand with regards to
monthly cost of ownership for potential users.

• Based on Van Vestendorp approach to price elasticity

testing: “What is the highest price which you would
consider paying in respect of your average monthly
bill?”
• Most respondents think in monthly budgets rather than
minutes of use, the monthly budget is in effect the
monthly bill a new mobile subscriber is prepared to pay.
• Analyse data points to determine link between the
monthly bill marginal subscribers are prepared to pay
and penetration of maximum potential demand.

21
Price elasticity of demand empirical evidence: Demand is
driven by the value proposition, minutes for an amount of
money.
Marginal Monthly Bill & Installed Base of Cellular Subscribers USA
160
Monthly Bill Marginal Subscribers 1997 Real

140
1988
y = -28.632Ln(x) + 335.49
120 R2 = 0.9105

100 1989
US$

80 1990
1992
1991
60
1993 1994
40 1995 1996

1997
20

0
0 10,000 20,000 30,000 40,000 50,000 60,000
Cellular Subscribers '000

22
Marginal voice bill forecast as a function of penetration of
potential demand - example high income country.
Price Elasticity of Demand vs. Monthly Cost of Ownership
2,000
1,800
1,600 y = -312.3Ln(x) + 95.529
Monthly Bill Incl. VAT

2
1,400 R = 0.9832
1,200
1,000
800
600
400
200
0
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
% of Maxiumum Potential Demand

A Western European country, sample 1,000 interviews, 1997

23
Marginal voice bill forecast as a function of penetration of
potential demand - example lower income country.
Price Elasticity of Cellular Demand Against Cost of Ownership
1,000
900
-2.7861x
y = 947.34e
Monthly Bill Including Tax

800 2
R = 0.9285
700
600
500
400
300
200
100
0
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
% of Maximum Potential

A Central American country, sample 1,500 interviews, 1996

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The average monthly voice bill is forecast using a variety
of parameters.
• The starting point is the current average monthly bill in
the market.
• The average monthly bill forecast is the current average
monthly bill plus the sum of marginal bills.
• Adjust for price elasticity of demand for existing
subscribers - how do they react to tariff changes.
• Output is a forecast of the average monthly bill as a
function of the penetration forecast.
• A particular venture’s forecast of the average monthly
bill should be in line with the market average, but there
can be differences to compensate for other elements of
the marketing mix.

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Price elasticity of demand of existing subscribers.

• Conventionally the price elasticity coefficient indicates

the effect a change in the price of a good will have on
the quantity demanded.
• In the Coleago model the price elasticity coefficient is
applied to the monthly bill instead of quantity
demanded.
• Values for the price elasticity coefficient are similar to
the conventional method, it is essentially the same
concept.
• Avoids some of the complexities (e.g. different
elasticities for line rental,. call charges, etc.) and
produces a good result.
• Use benchmarks to determine coefficients.

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Price elasticity of demand formula.

Price Elasticity - Conventional

Q2 = Q1 * ( 1 + ∆P * -E )
where:
E= the price elasticity coefficient
Q1,2 = the quantity demanded in year 1, 2
∆P = the % change price from year 1 to year 2
Price Elasticity - Applied to Monthly Bill
B2 = = B1 * ( 1 + ∆P * ( 1 - E ))
where:
E= the price elasticity coefficient
B1,2 = the average monthly bill in year 1, 2
∆P = the % change in tariffs from year 1 to year 2

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Relationship between marginal and average monthly
mobile voice bill and penetration.
Price Elasticity of Demand vs. Cost of Ownership
14% 90

80
12%

Monthly Bill 1996 Real Incl. Tax

70
10%
60
Penetration

8% Penetration
50
Average Bill
6% Marginal Bill 40

30
4%
20
2%
10

0% 0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

A Central American country, sample 1,500 interviews, 1996

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A range of factors impact on the average monthly bill and
revenue.

Additional
Additional use
use from
from
fixed
fixed mobile
mobile
convergence
convergence users
users
substituting from
substituting from
fixed
fixed network
network
Decline
Decline in
in mobile
mobile per
per
minute
minute tariffs
tariffs
Average
Average Additional
Additional spend
spend for
for
Decreasing Increasing non-voice
Mobile
Mobile non-voice services,
services, e.g.
e.g.
Trend Trend Internet
Bill
Bill Internet access
access
Lower
Lower spending
spending
marginal
marginal users
users
subscribing
subscribing to mobile
to mobile Price
Price elasticity:
elasticity:
services
services Existing
Existingsubscribers
subscribers
increase
increase use
use due
due to
to
decline in per minute
decline in per minute
tariffs
tariffs

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Voice traffic forecast in minutes of use.
• Based on benchmarks make assumptions on the %
split outbound vs. inbound traffic, international
calls, roamed calls.
• The average monthly bill forecast divided by the
average per minute price produces the average
number of minutes per month per subscriber.
• Decline in tariff will drive increase in usage.
• Price elasticity also depends on mobile tariff
relative to fixed. Substitutional usage is generated
as people start using mobile as primary phone.
• Fixed voice minutes are higher than mobile minutes
(400 per line/month is Europe, 1,000 in USA).

30
 Average monthly bill and mobile originated minutes
forecast result based on survey & forecast model.
Average Voice Bill & Minutes of Use per Customer
600 180

Av. Monthly Minutes of Use - Outbound

160
500
140
Average Monthly Bill

400 120

100
300
80

200 60

40
100 Minutes
20
Voice Bill
0 0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
A Western European Country, 1,000 Interviews.

31
 Empirical evidence of price elasticity of demand and
minutes of use.

UK Mobile and Fixed Spend per Minute & Usage per Line 1994 -1997
0.80

0.70
Average Price per Minute

0.60 Vodafone & Cellnet

0.50
Orange
0.40

0.30

0.20
One2One
BT Fixed Network
0.10

0.00
0 50 100 150 200 250 300 350 400 450
Source: Oftel Stats 1994-97
Originated Minutes per Month

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Additional revenue from data services should be forecast
separately to account for new revenue from data services.
• Mobile users pay for applications. Data e.g. Internet access
is additional on top of voice usage.
• Assumptions for
potential demand and Evolution of Data Speed in GSM

spend to generate user

& revenue forecast. 2001-2002 3rd generation wireless services,

• Difficult to research, (WCDMA), up to 2 Mbit/s

2000 High rate data speeds and capacity (EDGE)
use existing spend for

Data Speeds
1999 Internet like IP packet services (GPRS), up to 171.2 kbit/s
e.g. for Internet access 1998 Landline modem speed high speed circuit

as benchmark. switched data services (HSCSD), 14.6-56.6 kbit/s

1997 Basic GSM data at 9.6 k/bits & SMS

• Paradigm of digital
economy: A shift in Evolution of GSM Platform and Radio Technology

spending patterns.
Source: Nokia, adapted by Coleago

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 Revenue per subscriber is likely increase because price
elasticity coefficient for voice may be greater than 1, and
due to additional spend on data services.
Conceptual Trend in Average Monthly Bill per Subscriber
70
Voice Bill - Marginal Users
Voice Bill - Existing Users
Average Monthly Bill per Subscriber

60
Voice Bill - Average User
Data Bill - Average User
50
Total Bill - Average User

40

30

20

10

0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

34
Reasonableness checks increase confidence in results.

• Compare bottom up result with top down estimates.

• Is the amount forecast for the average monthly voice bill
at maturity reasonable compared to PSTN bills today?
• Calculate total mobile market value on basis of
subscriber and average monthly bill forecast.
• Compare to GDP of the country. Is the result
reasonable?
• If results are not reasonable lower penetration forecast
or decrease tariffs.

35
Leverage the advantage of spreadsheet based market
forecast modelling.
• The linking of a spreadsheet based marketing model to
the financial and engineering models allows the
running of scenarios in minutes.

Market
Market Forecast
Forecast
Model
Model

Technical
Technical
Model
Model

Financial
Financial
Model
Model

36
Conclusions

• An integrated methodology.
• Demand and price elasticity of demand directly
traceable from market research through to the business
plan.
• Demand and price elasticity easily modelled in business
plan for running of sensitivities and scenarios.
• Additional revenue from data services can be compared
to capex for data services.
• Inspires confidence of decision makers: Used in several
successful licence bids, to obtain debt financing of new
and existing mobile ventures, to obtain board approval
for investment decisions.

37
Visit our website to obtain further information.

• You can obtain this paper and other Coleago conference

papers and articles from our website.
• Related papers on trends in mobile tariffs and fixed mobile
convergence can also be downloaded.

Stefan Zehle, Director, Coleago Consulting Ltd, 47 Holland Park, London W11 3RS, UK
Tel: +44-7974-356 258 e-mail: stefan.zehle@coleago.com

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