Mobile Demand | Demand | Mobile Phones

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

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Agenda

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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

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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,
Canada Caribbean, El Salvador, Mexico Argentina, Brazil, Venezuela France, Ireland, Italy, Netherlands, Norway, Poland, Sweden, UK Israel, Kuwait Australia, China, Hong Kong, Korea, Malaysia, Taiwan, Singapore
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while also producing excellent quality of analysis. • The forecasting methodology and model must deliver results quickly and must be easy to use. 4 . • 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. • Generate reliable forecasts of market demand for a mobile telephony business.Typical forecast objectives. • Forecast based on primary data gathered through market research interviews with an integrated approach.

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 .

develop a questionnaire structure that compensates for this. 6 . Primary market research will underpin any assumptions made using economic analysis or benchmarks. Use a mixture of primary market research. • The main objective of market sizing is to determine • • • • potential demand. benchmarks and vision. Ideally a large scale quantitative survey amongst a representative sample of the population provides the main input into a forecast.Determine potential demand for mobile services. In a questionnaire based survey demand is likely to be be underestimated . economic analysis.

Potential demand is a sub-set of the addressable market. Example of a developing country: Total Population 100% 50% With Sufficient Income 60% Old Enough to Own Mobile Phone Addressable Market 30% 80% Expresses Interest: Potential Demand 24% of Population 7 .

Questionnaire to determine potential demand and price elasticity of demand.s. FMC Mobile Potential Demand Price Elasticity of Mobile & FMC Demand as Function of Potential Demand FMC Potential Demand Determine How Much Willing to Pay to Adopt & Use per Month Maximum Potential Mobile & FMC Demand Willing to Pay Minimum 8 . Sample of Popu lation Existing Mobile User Don’t Use Mobile Mobile Proposition Interest in Mobile No Interest in Mobile Suggest Prices Fall No Interest in Mobile FMC Proposition No Interest in FMC Rejecters: Classification Data Interest in FMC Proposition Preference Mobile v.

regardless of price have no interest in mobile. Looking at the propensity to adopt by age provides a window to the future. in lower income countries income is a discriminator. Factors other than age are important. Some people.Potential demand for mobile operators. Demand is demand in the economic sense. 9 . Maximum potential demand ceiling is likely to change over time due to the bandwagon and age shift effects. • All those who are interested and who are also willing • • • • • and able to pay a minimum amount comparable to the cost of PSTN usage. because it is backed by willingness and ability to pay.

9333 A Western European country. Propensity to Adopt by Age 80% 70% Potential Adopters 60% 50% 40% 30% 20% 10% 0% 17 27 37 47 57 Age of Potentail Adopters 67 77 y = -0. sample 1.Propensity to adopt mobile by age .000 interviews 1997 10 .9686 2 R = 0.0106x + 0.example from Western European country: Age is an important discriminator.

000 interviews 1997 11 .4019 2 R = 0. Propensity to Adopt Mobile by Income 70% Potential Adopters in Sample 60% 50% 40% 30% 20% 10% 0% 0 100 200 300 400 500 600 700 800 900 y = 0.684 Annual Household Income '000 A Western European country.Correlation between propensity to adopt mobile & income . sample 1.0003x + 0.example high income country: Income does not matter.

0852x + 0.9818 A Far Eastern country. Propensity to Adopt Cellular by Income 60% Potential Adopters in Sample 50% 40% 30% 20% 10% 0% <30 30-50 50-70 70-90 90-110 >110 Monthly Net Income y = 0. sample 1.0471 2 R = 0.Correlation between propensity to adopt mobile & income .example lower income country: Income matters.500 interviews 1996 12 .

conceptually the maximum potential penetration is the level at which the product life cycle curve reaches its upper limit.Maximum potential demand assumptions for each segment should be anchored in consumer and business demographics. • Segmentation must be appropriate to long term forecasting. • The potential demand assumptions should be linked to changing demographic patterns and changes in income. • The potential demand sets a penetration ceiling. This may not be the same as segmentation for other purposes. 60% 50% Potential Demand Ceiling Penetration of Population 40% 30% Penetration 20% 10% 0% 1990 1991 1992 1996 1997 1998 2003 2007 1993 1994 1995 2004 2005 1999 2000 2001 2002 2006 2008 13 .

There is an element of self-validation. Jantsch. body of research (Chambers. 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 Maturity Growth Phase market data determines a Decelerating trend based on the product life cycle. 14 • Curve fitting to forecast the penetration. Accelerating • If historic data is not available benchmarks can be applied.The mobile subscriber market penetration forecast can be based on the product life cycle concept and curve fitting. An extensive .

350.000 300.Empirical evidence of s-shaped product life cycle curve.000 50.000 Subscribers '000 200.000 100.000 150.000 0 Dec-88 Dec-89 Dec-90 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 World Mobile Telephony Subscribers Rest of World Low Income Australasia High Income Australasia Central & South America North America Western Europe 15 .000 250.

must be asymptotically bounded function. • Pearl’s equation logistic curve has advantages in terms of manageability in the forecasting model.1))) where: tm = total number of years to maturity 16 Pt = . • The upper asymptote is the potential demand identified in market survey.Various s-shaped growth curve functions are available. Product Life Cycle Model Formula (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 ).

Select a penetration forecast curve which fits historic data. Actual 800 700 600 Subscribers '000 500 400 300 200 100 0 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Installed Base Model '000 Installed Base Actual '000 17 . Total Market Subscribers Model vs.

0% 0.0% 1985 1986 1987 1988 1989 1990 1991 1992 6.0% -3.5% 2.0% 5.0% Mobile Penetration Increase Real GDP Change 1993 1994 1995 1996 -2.0% 1.0% 1. Correlation Between Increase in Mobile Telephony Penetration and Macroeconomic Conditions in the UK 3.0% 0.5% Increase in Penetration of Pops % Points 3.0% 2.0% 2.0% Real GDP Change 3.0% 4.5% 0.example from a high income country.0% -1.0% 1997 18 .5% 1.Include factors in curve to model economic impact of speed of growth .

3% 0.0% -4.0% -6.Include factors in curve to model economic impact of speed of growth .0% -2. Correlation Between Increase in Mobile Telephony Penetration and Macroeconomic Conditions in Mexico 0.0% 2.2% 0.7% 0.0% -8.0% 1989 1990 1991 1992 1993 1994 1995 1996 Mobile Penetration Increase Real GDP Change 8.6% 0.5% 0.4% 0.0% 6.0% 0.8% Increase in Penetration of Pops % Points 0.example from a lower income country.0% 4.0% 1997 Real GDP Change 19 .1% 0.

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. Cellular Penetration . 20 .Typical mobile penetration forecast.

Measuring price elasticity of demand with regards to monthly cost of ownership for potential users. the monthly budget is in effect the monthly bill a new mobile subscriber is prepared to pay. 21 . • 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. • Analyse data points to determine link between the monthly bill marginal subscribers are prepared to pay and penetration of maximum potential demand.

Price elasticity of demand empirical evidence: Demand is driven by the value proposition.49 R2 = 0.632Ln(x) + 335.000 20.000 60.000 Cellular Subscribers '000 40. minutes for an amount of money.000 50.000 30. Marginal Monthly Bill & Installed Base of Cellular Subscribers USA 160 Monthly Bill Marginal Subscribers 1997 Real US$ 140 120 100 80 60 40 20 0 0 10.000 1989 1990 1991 1992 1993 1994 1995 1996 1997 1988 y = -28.9105 22 .

600 1.Marginal voice bill forecast as a function of penetration of potential demand .9832 A Western European country.400 1.3Ln(x) + 95.200 1.000 800 600 400 200 0 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% % of Maxiumum Potential Demand y = -312. Monthly Cost of Ownership 2.000 1.529 2 R = 0.example high income country.800 Monthly Bill Incl. sample 1.000 interviews. Price Elasticity of Demand vs. 1997 23 . VAT 1.

34e 2 R = 0.Marginal voice bill forecast as a function of penetration of potential demand .7861x Monthly Bill Including Tax 800 700 600 500 400 300 200 100 0 y = 947.500 interviews. 1996 24 . Price Elasticity of Cellular Demand Against Cost of Ownership 1.000 900 -2.9285 0% 10% 20% 30% 40% 50% 60% % of Maximum Potential 70% 80% 90% 100% A Central American country. sample 1.example lower income country.

The average monthly voice bill is forecast using a variety of parameters. 25 . Adjust for price elasticity of demand for existing subscribers . • The starting point is the current average monthly bill in • • • • the market. A particular venture’s forecast of the average monthly bill should be in line with the market average. Output is a forecast of the average monthly bill as a function of the penetration forecast. The average monthly bill forecast is the current average monthly bill plus the sum of marginal bills. but there can be differences to compensate for other elements of the marketing mix.how do they react to tariff changes.

) and produces a good result. Avoids some of the complexities (e. • Conventionally the price elasticity coefficient indicates • • • • the effect a change in the price of a good will have on the quantity demanded.g.. call charges. 26 . In the Coleago model the price elasticity coefficient is applied to the monthly bill instead of quantity demanded. Use benchmarks to determine coefficients. Values for the price elasticity coefficient are similar to the conventional method. etc. different elasticities for line rental. it is essentially the same concept.Price elasticity of demand of existing subscribers.

2 the % change in tariffs from year 1 to year 2 Q2 = E= Q1.E )) where: the price elasticity coefficient the average monthly bill in year 1.2 = ∆P = B2 = E= B1.Conventional Q1 * ( 1 + ∆P * -E ) where: the price elasticity coefficient the quantity demanded in year 1. 2 the % change price from year 1 to year 2 Price Elasticity .Applied to Monthly Bill = B1 * ( 1 + ∆P * ( 1 .Price elasticity of demand formula. Price Elasticity .2 = ∆P = 27 .

Tax 80 . Cost of Ownership 90 70 60 50 40 30 20 10 0 2006 A Central American country.Relationship between marginal and average monthly mobile voice bill and penetration. 1996 28 Monthly Bill 1996 Real Incl.500 interviews. 14% 12% 10% Penetration 8% 6% 4% 2% 0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 Penetration Average Bill Marginal Bill Price Elasticity of Demand vs. sample 1.

Internet access Internet access Price elasticity: Price elasticity: Existing subscribers Existing subscribers increase use due to increase use due to decline in per minute decline in per minute tariffs tariffs Decline in mobile per Decline in mobile per minute tariffs minute tariffs Decreasing Trend Increasing Trend Lower spending Lower spending marginal users marginal users subscribing to mobile subscribing to mobile services services 29 .g. non-voice services.g. e.A range of factors impact on the average monthly bill and revenue. Additional use from Additional use from fixed mobile fixed mobile convergence users convergence users substituting from substituting from fixed network fixed network Average Average Mobile Mobile Bill Bill Additional spend for Additional spend for non-voice services. e.

inbound traffic. 1. The average monthly bill forecast divided by the average per minute price produces the average number of minutes per month per subscriber. • Based on benchmarks make assumptions on the % • • • • split outbound vs. Substitutional usage is generated as people start using mobile as primary phone. international calls. 30 . Price elasticity also depends on mobile tariff relative to fixed.Voice traffic forecast in minutes of use. roamed calls. Fixed voice minutes are higher than mobile minutes (400 per line/month is Europe.000 in USA). Decline in tariff will drive increase in usage.

Outbound Minutes Voice Bill 20 0 2007 31 . 1.000 Interviews. Average Voice Bill & Minutes of Use per Customer 600 500 Average Monthly Bill 400 300 200 100 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 A Western European Country.Average monthly bill and mobile originated minutes forecast result based on survey & forecast model. Monthly Minutes of Use . 180 160 140 120 100 80 60 40 Av.

Empirical evidence of price elasticity of demand and minutes of use.30 0.80 0.20 0.60 0.00 0 50 100 Source: Oftel Stats 1994-97 150 200 250 300 350 400 450 Originated Minutes per Month 32 Vodafone & Cellnet Orange One2One BT Fixed Network .10 0.40 0.70 Average Price per Minute 0.50 0. UK Mobile and Fixed Spend per Minute & Usage per Line 1994 -1997 0.

use existing spend for e. adapted by Coleago 33 .2 kbit/s 1998 Landline modem speed high speed circuit switched data services (HSCSD). up to 2 Mbit/s 2000 High rate data speeds and capacity (EDGE) Data Speeds 1999 Internet like IP packet services (GPRS). • Mobile users pay for applications.g. 14.6 k/bits & SMS Evolution of GSM Platform and Radio Technology Source: Nokia.Additional revenue from data services should be forecast separately to account for new revenue from data services. Internet access is additional on top of voice usage. (WCDMA). Data e. for Internet access as benchmark.g. • Paradigm of digital economy: A shift in spending patterns. Evolution of Data Speed in GSM 2001-2002 3rd generation wireless services. up to 171.6 kbit/s 1997 Basic GSM data at 9. • Assumptions for potential demand and spend to generate user & revenue forecast.6-56. • Difficult to research.

Average User 34 .Revenue per subscriber is likely increase because price elasticity coefficient for voice may be greater than 1.Average User Total Bill . Conceptual Trend in Average Monthly Bill per Subscriber 70 Average Monthly Bill per Subscriber 60 50 40 30 20 10 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Voice Bill .Marginal Users Voice Bill . and due to additional spend on data services.Existing Users Voice Bill .Average User Data Bill .

Is the result reasonable? • If results are not reasonable lower penetration forecast or decrease tariffs. • Compare bottom up result with top down estimates. • Compare to GDP of the country. • 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.Reasonableness checks increase confidence in results. 35 .

• The linking of a spreadsheet based marketing model to the financial and engineering models allows the running of scenarios in minutes.Leverage the advantage of spreadsheet based market forecast modelling. Market Forecast Market Forecast Model Model Technical Technical Model Model Financial Financial Model Model 36 .

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

Coleago Consulting Ltd. • Related papers on trends in mobile tariffs and fixed mobile convergence can also be downloaded. 47 Holland Park. Stefan Zehle. • You can obtain this paper and other Coleago conference papers and articles from our website.com 38 . Director. UK Tel: +44-7974-356 258 e-mail: stefan. London W11 3RS.zehle@coleago.Visit our website to obtain further information.

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