The commercial case for fixed–mobile convergence: the short and long view

RESEARCH STRATEGY REPORT

THE COMMERCIAL CASE FOR FIXED–MOBILE CONVERGENCE:

THE SHORT AND LONG VIEW
RUPERT WOOD and STEPHEN WILSON

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© Analysys Mason Limited 2016
The commercial case for fixed–mobile convergence: the short and long view
About this report
This report offers a high-level view, based on evidence, of the
impact of one of today’s most significant trends in the telecoms
industry – that of fixed–mobile convergence.
The report looks at why fixed–mobile convergence is happening
(for example, as a result of commercial imperatives driven by peak
revenue in the mobile market) and assesses the immediate
impacts.
It looks at the short- to medium-term revenue and profitability
impact of retail bundling by focusing on developments in some of
the early-mover countries. It contrasts this with countries where in-
market mobile network operator (MNO) consolidation has
occurred, and with the performance of consolidated MNOs. It also
assesses the outlook for, and various obstacles to, fixed–mobile
convergence in non-European regions.
It assesses the long-term potential for cost savings and
performance leadership through a more closely integrated
network, and explores the pivotal position that fibre access plays
in future converged networks.
It is based on several sources:
 Analysys Mason’s research, forecasts, databases and surveys
 interviews with operators and vendors.
© Analysys Mason Limited 2016
KEY QUESTIONS ANSWER E D IN THIS R EPOR T
 What is convergence, apart from bundling?
 Do converged services actually make operators any more money – if the
services help to gain market share, do they also deflate the whole
market?
 What is the evidence that consumers actually want these services?
 What are the factors that lead mobile operators to directly invest in
fibre?
 Are mobile-only operators viable in developed markets in the long term?
 To what extent will convergence as a trend spread to emerging markets?
WHO SHOULD R EAD THIS R EPOR T
 Operator strategy teams that want an outline of the key issues with an
informed top-level view of value.
 Strategy and product/marketing teams within operators that operate in
middle-income markets where the mobile market is approaching peak
revenue.
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The commercial case for fixed–mobile convergence: the short and long view

CONTENTS

EXECUTIVE SUMMARY

THE RATIONALE FOR CONVERGENCE

FUTURE BUNDLING TRENDS AND RETAIL SUCCESS

FUTURE NETWORK TRENDS

APPENDIX: CASE STUDIES

ABOUT THE AUTHORS AND ANALYSYS MASON

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The commercial case for fixed–mobile convergence: the short and long view

Executive summary

The success of convergence strategies is not guaranteed, and Figure 1: The main aims of retail and network convergence
the evidence from recent bundling strategies is inconclusive.
Longer-term network convergence should solidify the
commercial case. FIXED BROADBAND MOBILE
The trend towards fixed–mobile convergence, propelled by
consolidation, is shifting from Europe to many other regions. The
aims are clear, but the evidence of success is patchy. Fixed– End-to-end network
Retail service convergence
mobile convergence has largely been a response to the dwindling convergence
opportunities for growth in mobile revenue or profit. Mobile has
Invest in
historically thrived on substitution, yet broadband substitution Reduce CAC
margin
appears more elusive than ever. These weaknesses have also led Rationalise
to in-market mobile consolidation, and in some cases to Reduce churn, resources
opportunistic acquisitions of MNOs by fixed and cable players. increase share Re-use fibre
Marginalise resources
disruptors Wi-Fi 3GPP
The immediate aim of converged players is to invest in margin and integration
marketing synergies to create a stronger platform for service Change cost
leadership and hence renewed retail growth. Initial evidence Cross-platform Rebalance base of
Increase content value of
suggests that despite an accelerated revenue decline caused by wholesale
pricing power spectrum
discounting, the trends are looking more positive. Some of this
improvement is enabled by consolidation (both mobile–mobile
and fixed–mobile), whereas the benefits of cross-platform service Service leadership Cost and performance leadership
evolution are more elusive.
Enable first-mover Marginalise Encroach on
Ultimately, ownership of fixed and mobile should enable operators advantage mobile-only adjacent industries
to allocate resources efficiently, and deliver cost and service
leadership. The signs are that operators are beginning to see how Source: Analysys Mason
this will work to their advantage.

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The commercial case for fixed–mobile convergence: the short and long view

Operators that are considering convergence see fixed-plus-mobile

services as the best way to combat the erosion of mobile revenue
Operators that are considering convergence know they first Figure 2: Revenue outlook for possible responses to ‘peak mobile’: fixed–mobile convergence
have to take a hit on revenue and margin, and will face many and in-market mobile consolidation
unknowns. Raise prices and
Peak mobile appears to have been reached in many advanced Peak mobile cross-platform
markets, particularly for consumer services, and the pattern is upsell?
starting to emerge in some middle-income markets too. Despite Price discipline and
strong growth in the volume of mobile data traffic, end users show improved margin
little appetite for increasing their spending. Fixed broadband
continues to be important to end-users because it represents the
cheapest way to deliver their rapidly rising overall data needs.

Mobile revenue
Bundling hitherto separate fixed broadband and mobile services, Underlying
sometimes as the result of fixed–mobile operator consolidation, is Invest in
mobile-only
one way forward. In the first years, this will result almost inevitably margin and Increase
problem
in a decline in mobile and overall revenue, leading to a decline in reduce churn market share
returns?
margin, as operators seek to lock in customers. However, it is
expected that this will increase market share, enable cross-
platform upsell opportunities, and enable operators to raise
prices. Ultimately, fixed and mobile revenue and margin growth Current mobile-
will, proponents reckon, converge in an upward trajectory. only model is
unsustainable
The main alternative is in-market mobile consolidation, which runs
the risk of not being permitted by regulators. Even if it is, and Time
greater pricing discipline is achieved, a further risk is that it simply
Base Fixed–mobile convergence
buys the mobile operator a couple of years of respite from further
Mobile consolidation
erosion as converged bundles gain in popularity and mobile
remains a supplement to fixed, not an alternative. Source: Analysys Mason

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The commercial case for fixed–mobile convergence: the short and long view

This report aims to provide a top-level view of the critical short- and long-
term commercial issues in fixed–mobile convergence
Convergence is about more than bundling. It has the potential to shape and transform the operator business.
The first section of this report examines the immediate rationale for fixed–mobile convergence and consolidation:
 why it has happened in Europe
 the hurdles that have to be overcome for it to occur outside Western Europe
 what are the external demand drivers, and how much success can be measured so far.
The second section:
 examines the trends in retail bundling and the near-term chances of success
 assesses development of commercial trends (revenue, market share, churn and EBITDA) in the early adopter markets
 looks at to what extent integrated operators can exert pricing power, and at how far upselling can be linked to price rises
 contrasts the commercial reality of markets where a high level of fixed–mobile convergence is already evident with markets where in-
market mobile consolidation has taken place, and examines the financials of consolidated MNOs.
The third section looks at the longer-term network cost and performance implications of fixed–mobile convergence:
 the ways fixed and mobile networks can support and complement each other (offloading, onloading, customer-base building) and lead to
commercial advantage over non-converged players
 the ways in which dense fibre access will become the glue that holds together end-to-end delivery not only of fixed-mobile consumer
services, but also future wireless services with densified RANs, TV delivery and enterprise services.

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The commercial case for fixed–mobile convergence: the short and long view

Recommendations

1
Operators need to time the switch in emphasis from customer land-grab to upselling and price rises.
Discounting will be necessary to create a basis for future growth, and changes to pricing structure, such as a
greater emphasis on SIM-only plans, can dilute this effect. However, operators need to consider first, how to
upsell, and second, how and when to put up prices without increasing churn. Adding value to the bundle at the
time prices are raised combines the two; in an economic environment that is becoming less harsh, users will be
inclined to take additional services or supersize mobile data-plans rather than to pocket a discount.

2
Mobile operators in middle-income economies need to plan strategically for a role in fixed-line services.
A mobile-only strategy leads to chronic under-supply of capacity, and misses the opportunity to monetise demand
for 100GB+ per month connections. It will lead to a continuous round of costly capacity boosts, but with very little
opportunity to increase revenue. MNOs need to break down bottlenecks to next-generation access, they need to
find ways to build up fixed-like usage behaviour (through for example fixed LTE) and they need to make sure that
potential customers make the link between mobile devices and fixed connections, and demonstrate the value.

3
Integrated operators need to focus on an ideal convergence goal, not on the assets they already possess.
Fibre-based access networks confer significant first-mover and cost advantage for densified, virtualised wireless
networks and for 5G. Operators must think of fibre not just as fixed broadband (FTTH), but as a strategic asset that
plays a key role in almost every aspect of telecoms service delivery. For established operators some of the effects
of convergence will be uncomfortable, but continuing to operate non-converged networks (not only mobile-only, but
separate enterprise connectivity and separate broadcast networks) will be increasingly costly and archaic.

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The commercial case for fixed–mobile convergence: the short and long view

CONTENTS

EXECUTIVE SUMMARY

THE RATIONALE FOR CONVERGENCE

FUTURE BUNDLING TRENDS AND RETAIL SUCCESS

FUTURE NETWORK TRENDS

APPENDIX: CASE STUDIES

ABOUT THE AUTHORS AND ANALYSYS MASON

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The commercial case for fixed–mobile convergence: the short and long view

About the authors

Rupert Wood (Research Director) is the lead analyst for our Fixed Networks and Wireless Networks research programmes, and his research
focuses on next-generation networks and convergence. Rupert regularly contributes to the international press on a wide range of telecoms
subjects and has been quoted by The Times, The Economist, Business Week, Telecommunications Online and Kommersant. Rupert has a PhD
from the University of Cambridge, where he was a Lecturer before joining Analysys Mason.

Stephen Wilson (Principal Analyst) contributes research to our Fixed Networks and Wireless Networks research programmes. He joined
Analysys Mason as a Senior Analyst in November 2012, having previously worked for Informa Telecoms & Media. Stephen has more than
5 years of experience of covering the telecoms industry and specialises in analysing fixed broadband access technologies and strategies, as
well as developments in European telecoms markets across fixed and mobile sectors. He has produced reports on DSL acceleration
technologies as well as regular updates on European markets, notably in Central and Eastern Europe. Stephen is a graduate in Politics,
Philosophy and Economics from St Catherine's College, Oxford University.

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The commercial case for fixed–mobile convergence: the short and long view

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PUBLISHED BY ANALYSYS MASON LIMITED IN APRIL 2016

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