Author: Paul Chrisp

Even to mention Hans Snook, is to reveal one’s age.  But back in what now feels like prehistory, he led Orange in the UK from 4^th entrant MNO to the heights of style and leadership.  One of the many things he is reputed to have said was that SMS revenues were the only example of profits coming from nothing.  And those profits were lovely – more than lovely, they were vast, unanticipated and growing year on year.

“Weren’t we clever?” mused the various CEOs of the MNOs.  But Hans was wiser than that.  SMS functionality was not designed by COOs, or CMOs, or CEOs.  Not even by CTOs.  But by some now forgotten techies who thought a text-based communication channel could be embedded in mobile networks for very little effort and could be useful for some reason at some time by someone.  Maybe.

The thing about SMS was that it really was money from nothing.  It tapped into something people really liked, and it grew like crazy.  And best of all, almost all the revenues earned by the MNOs from SMS dropped straight through to EBITDA as there were virtually no incremental costs to offset against it.  

Of course, a goldmine like that was never going to be left uncontested and so today we have WhatsApp and all the other OTT messaging providers.  Meanwhile the MNOs have the wizzened carcass of SMS revenues that they now give away for free, should anyone want to bother using SMS rather than any of the better, newer options.

Sure there is RCS and the improvements that could have brought to SMS, but that is a story of stable doors and horses.  The race has been run.  The prizes awarded.  The losers vanquished.  The winners victorious.

But this is not a story about SMS per se.  It is a story about “super profits”.  

SMS or “messaging”, to give it a more generic name, was a case of super profits – huge returns for minimal investment.  Entrepreneurs looking to spot the next growth opportunity in communications technology need to be looking for the SPBs – the super profit bubbles.

“Ah”, you say.  “There are none.  It is too late.  They have all been identified”.  What rubbish you speak!

Consider, for example, roaming costs, which have been excessive forever – because the MNO stranglehold was unbreakable – well, almost unbreakable.  eSIMs changed all that.  Now only the rich, the lazy and the uninformed pay exorbitant roaming costs.  The rest of us click a few buttons on our smartphones in a magical sequence and “voila”, we have cheap roaming costs.  This assault on a seam of super-profit gold is creating new companies as we speak, some of which are now growing into giants.

IOT connection revenue is another area being attacked.  The MNOs that want to earn the high per-SIM revenues typical of SIMs used by people are experiencing a very nasty shock.  Horror of horrors, but some hungry MNOs are meeting the demand for lower prices for IOT use.  “Stop!” cry the old guard.  “You’re taking value out of the market!  Keep the prices high.  Exploit our monopoly.  Don’t respond to the demand or we might have to work for our huge salaries!”  But it is too late.  The earthquake is coming, despite the MNOs’ attempted fightback using differential rates and contractual mechanisms.

Other industries are seeing the same thing – often adjacent industries.  How many of you reading this now have a Wise card in your wallet?  Or a Mondo or one of the others.  Those cards target the SPBs (remember that term, the Super Profit Bubbles) that were earned for years by the banks and by the currency exchange providers at airports etc.  Many of us will remember back only a few years ago to the huge fees we used to pay for exchanging or sending currency, coupled with the poor exchange rates we used to get if ever we tried to send money abroad.  But that SPB has now shrunk and Wise and the others have arrived and grown to impressive size.

So the lesson – look for the SPBs.  Don’t assume they are all gone.  There are plenty still about in the communications sector.  And if you want a hint of where one might be lurking, think about the way data is exchanged at no cost in the fixed internet, but at significant cost in the mobile one.

Usually, keynote speeches are a disappointment. But not today, Thursday 5th September. At the GSMA’s Mobile 360 Series in Brussels, the keynote speech delivered in the morning by Franco Bernabé was a scorcher. Mr Bernabé is the Chairman of the GSMA and Chairman and CEO of the Telecom Italia Group.

With Neelie Kroes herself, one of several Vice-Presidents of the European Commission, sitting barely 2 metres from him, he delivered a clear and articulate broadside to the esteemed commissioner. His message was that the balance between (i) finding the next Eurocent reduction in a retail or wholesale price-point and (ii) creating the right conditions for necessary investment in European mobile infrastructure was fundamentally flawed. And those flaws could be traced directly to the 2 news stories from earlier this week when Europe’s size on the mobile world stage declined markedly. First on Monday 2nd Sept, Vodafone cashed in its chips in Verizon and walked away from the US table; and then on Tuesday, Microsoft swallowed Nokia’s handset business. How the tables have turned! As recently as the mid-2000s, the US and possibly the rest of the world were all followers to Europe in mobile technology. But no more, as this week’s events underline.

How was Commissioner Kroes going to respond, we all wondered, for she was next up to speak. Would she bristle? Would she fight? Her opening words made it clear that even she was not sure what line to take for she said she was tempted to put her speech away and give a different one entirely. But she did not – a few short remarks, and then it was on with her prepared speech as if Mr Bernabé had said nothing. Her speech, however, included a passage on the importance of investing in 5G: We were leaders in 3G, we missed 4G, now let’s focus on 5G, she told the room.

“The elephant!” I thought. “She must acknowledge the elephant! It is not only clearly in the room but it has just thrown its trunk high in the air and trumpeted so loudly that it will have been heard across Europe.”

But Commissioner Kroes finished her speech, sat briefly and then slipped out quietly as if nothing had happened.

And for the rest of the day, no one else mentioned the elephant either. Many worthy speakers gave many impassioned presentations on many aspects of connected cities, or smart cities as they were also called. In all of them, there was unquestionably a role for mobile technology to play if the dream was to be realised. But the issue of the underlying conditions for inward investment being wrong…. It was never mentioned.

Never, that is, till the final keynote session at the end of the day. And that, my friends, was yet another scorcher.

What a day; an outstanding start and a blistering end. Shame about the middle – bit hard to stay awake sometimes.

So what happened in the final session?

It began tamely enough with Anne Bouverot, the Director-General of the GSMA, making a few non-controversial closing remarks. But then she was joined on the stage by Jon Fredrik Baksaas, the CEO and President of Telenor together with Christian Salbaing, the Deputy Chairman of Hutchison Whampoa Europe. One of Commissioner Kroes trusted lieutenants, Anthony Whelan was due to be there as well, but some excuse about Brussels traffic was given and a vague hope that he would arrive before the end of the session.

With the EU Commission’s seat on the panel empty, Mr Barksaas quietly and with great authority did again exactly what Mr Bernabé had done in the morning: he pointed out the elephant. His message was clear: what I took from it was that however worthy everything talked about today may be, none of it was likely to happen if the conditions for investment did not improve. The focus, he said, is too much on pricing and not enough on the conditions to create the necessary return on investment. He drew the comparison between Europe and the US, saying that if Europe’s ratio of “capital investment to sales revenue” had been 15% as was typical in the US instead of the 8% it had been, then the situation in which Europe now finds itself, having gone from leader to laggard, would be very different.

His theme was then picked up by Mr Salbaing who made the point that it was not good enough to wait for 5G and just concede on 4G. As he said, “G’s” come around about once every 10 years so the next one is not likely to be here before 2022/23. That was too long to wait. Remedial action was required now.

And then along came Mr Whelan. His taxi had taken a wrong turn he said. Personally, I was expecting nothing. He had not heard the day’s events. He had not been present at either of the crucial keynote sessions. I was ready for platitudes and generalities to see out the last 20 minutes before I had to dash off for to catch the Eurostar back to London.

How wrong can you be!

Mr Whelan didn’t just acknowledge the existence of the elephant. He stared it in the eye and commanded it to be quiet. This was no mere Brussels flunky sent out to fill the last 20 minutes of an industry talking shop. This was a serious piece of controlled aggression handled masterfully by the unassuming Mr Whelan. Without flinching, he stood toe-to-toe with both Mr Salbaing and Mr Barksaas and traded arguments.

Commissioner Kroes department was preparing a major legislative initiative that was unlikely to be popular with the mobile industry. But the policy would be balanced, reflecting the right balance between the legitimate interests of the mobile investors and the interests of the EU citizens. There was a sweet spot, he said, where unit costs go down and operators will actually be able to increase their revenues, ARPUs and profits by reducing the unit prices they charge.

As for the elephant itself – specifically, data roaming rates – Mr Whelan likened this to crack cocaine. You don’t get off it in a day, he said. But there is no doubt that you have to get off it. It is dangerous for the industry as a whole. And if you are going to have to get off it, there is no doubt that it is better to get off it yourself rather than be forced off it by someone else.

All in all, a very interesting day – one that I am very pleased I stayed to the end of or I would have missed the fiery last session.

Whatever comes out in the Green paper, it certainly looks like it is going to cause fireworks to fly. And on this topic, Mr Salbaing had the last word. Good regulation is very important he said. But worryingly, this green paper feels like it is being rushed out because next year we are due to have a new EU Parliament and a new EU Commissioner. It is in no one’s interests to be held to ransom by the date of the next EU elections in April 2014. Have the courage, he said, if the regulation is being rushed and is not properly thought through, to stand back and say: it is too important that we get this right. Do not rush it out because of the April 2014 date.

July and August are important months for mobile operators – at least they are in the northern hemisphere. Important, not because people spend that time buying new mobile phones and the like, because they don’t. Instead they do something far more interesting: they go on holiday. And when they go on holiday, they take their mobiles with them.

As a result, the warm, smug glow of success permeates the quiet boardrooms of almost every mobile operator as ARPUs soar while the lazy summer months pass.
Consumers in Europe though have every reason to be mystified by what is going on. In the world of roaming, they really do not know whether they are living through the best of times or the worst of times.

On the optimistic side, they have been bombarded over recent weeks with messages telling them that the cost of roaming has been dramatically reduced by the benevolence of their service providers. They may even have seen similar announcements from one or other of the telecoms regulators, either at home or in Brussels, trumpeting the latest consumer benefit from the latest regulatory intervention.

But consumers are not fools – and they have long memories. On the negative side they have seen it all before: messages announcing price reductions have arrived in previous summers, followed by large unwelcome phone bills that land on their doorsteps some months later as the summer comes to an end. “You’re not going to fool me again this year,” they think. So in their thousands, they turn off data roaming, they buy local SIM cards, they scout around for free WiFi or any combination of these and other cost-saving techniques.

Which is it then: the best of times or the worst of times? After all, the Lions did humble the Wallabies, a Brit has won Wimbledon, the Tour de France is again claimed by the UK and England are currently dominating the Ashes – surely all things are possible. Perhaps this really is a good time to go roaming?

1st July 2013 saw the latest reduction of roaming charges across Europe. These reductions, forced onto operators by regulators, are part of a series of annual price reductions that have been going on for some years. Regulated retail data prices fell on 1st July 2013 by 40% per MB from €0.25 to €0.15. At the same time there have been more modest falls in the prices for inbound and outbound voice calls and for text messages. These price reductions are clearly good news, but consumers are right to be wary: the reductions are not really significant in the overall scheme of things. Using a phone abroad may cost less than it did last year, but it still costs a lot more than it does at home so the message remains the same: consumers who do not want a big bill when they get home should keep a tight and canny rein both on how and how much they use their mobile abroad.

1st of July 2014, however, may be a different story – but again consumers should not hope for too much. From that date more fundamental changes to the roaming regime are due to take effect. Specifically, citizens in the EEA (i.e. the 27 EU countries plus 3 other countries) will no longer have to get roaming services from the same operator that provides their domestic service. Instead, they will be able to get roaming services from an ARP (Alternative Roaming Provider) or by way of LBO (Local Break Out). Fundamentally, both ARPs and LBO are an attempt by regulators to break the monopoly that mobile service providers currently enjoy and open up the market to competitive forces. The question is though: will either ARPs or LBOs have the desired impact of driving down the market price for roaming to the same level as at home?

First, ARPs. It had been hoped that ARPs would do for roaming prices what MVNOs did for domestic prices. Evidence on the ground however, suggests that there are going to be few businesses, if any, that will set themselves up to be ARPs. If this is right, then clearly something has gone awry in the regulatory framework. In this context the finger looks to be pointing at 2 things: first, ARPs have not been given any rights to steer traffic onto any particular foreign network which leaves them at the mercy of whatever steering decisions the DSP (Domestic Service Provider) may choose to apply for its own purposes; and second the price at which the ARPs are able to buy roaming services for onward resale to consumers is too high for the ARP to be able to establish a viable business.

Second, LBOs. Here the news is better and it does look that LBOs will reach market and will have an impact. LBO’s can be thought of as the mobile equivalent of someone buying a WiFi package when they land in a holiday destination, but instead of buying access to WiFi, the consumer uses his or her credit card to buy access to one or other of the mobile networks in the vicinity. In theory, it may be the identical access on the identical network that the consumer would get via his or her DSP, but it is likely that the price will be dramatically lower, so much lower that it should be about the same price that the consumer would pay when using the mobile back home.

Make no mistake, the goal that the regulators are driving towards is one in which the citizens of Europe can roam freely across the member states with no appreciable roaming premium at all. Given that we Europeans are so used to losing our shirt and much else besides if we even look at our mobiles while on holiday, this may seem to be an unattainable goal. But it is not. In the US it happens already: US subscribers can roam across state boundaries without premiums, irrespective of whether or not they stay on the home network or roam onto another network. True, our American cousins pay more per month for their mobile service, but that sense of having been massively over-charged for a short call or a quick data session is something that they no longer experience. And if it can happen across the United States of America, it can happen across the Member States of Europe. There is no technology barrier here: it is a purely a pricing issue. In Europe, we are simply so conditioned to paying excessive roaming charges that we struggle to conceive of a world where they do not exist.

In all this though, one must not ignore the plight of the operators – because they are in a difficult situation. Whilst having to pay for new spectrum licenses, for LTE roll-out, for refreshes of old technologies and fund expensive new smartphones for customers, the operators are absorbing unprecedented pressure on their revenues. The pressure is from both regulators and market forces – both driving revenues down. Many think that the situation is unsustainable and that something will have to give because increased investment levels in the face of declining revenue is a toxic mix. But regardless of how difficult the plight, this roaming issue is entirely of the operators own making. It was they who chose to exploit roaming by way of super profits, totally disassociating the prices charged from the costs of supply. And it is that particular chicken that is now coming home to roost. One way or another the combined regulatory forces of Europe are going to drive excess profit levels out of roaming.

The correction is coming – it is only a question of how long it will take. July 2014 will be a significant milestone on that journey, but it seems likely that European roamers will continue to be exploited for 1-3 years beyond that point. It is unlikely to be the advent of ARPs that causes the correction. Certainly the annual roaming price reductions are not going to do anything other than reduce slightly the level of excess pricing. LBOs will have some impact but it will be limited. Perhaps it will be the latest initiative announced by Neelie Kroes that will bring down the curtain on this sorry chapter of excess pricing. One thing however is clear: it is not a question of “if”, merely of “when”.

Curiously, mobile operators will be better off in many ways once the correction has occurred. Until that has happened, their customers will continue to behave in a sophisticated way and will swap SIMs, bearers, apps and networks in order to avoid being exploited. In such a situation, true customer loyalty is impossible to build and at the same time, opportunities are created for new entrants to claim a valuable slice of the overall value chain. But once the price distortions have been eradicated, the operators can rebuild some of the loyalty and trust that they seem to be destroying with wilful abandon at present and can fight off the new entrants.

Meanwhile, what is a consumer to do? Well for me, it has to be a SIM card from a foreign operator when I go on holiday. The best package of data that my operator offers to me is £35 for 200 MB which is 17.5p/MB. Contrast that with the deal I can get in Germany on a SIM-only, Pay-as-you-go package – 3GB for €20 meaning the price is 0.67 Eurocents per MB. That is roughly 1/30 of the rate my operator offers. An alternative way of looking at it is that by swapping SIMs, €20 will get me a decent sized data bundle that would cost me £525 if I had got the same allowance from my home operator at its best rate. For me therefore, the decision is an easy one.

Many issues and questions do arise from the above, some of which are listed below. At Azenby we can help and would welcome the opportunity to discuss them further.
1. How ready are the European networks going to be for the new regime by the deadline of July 2014?
2. Is there any way that Non-European operators find a way to benefit from the changes going on in the European theatre?
3. What should a European operator do and what should it be aware of in relation to ARPs, LBO etc?
4. How do the changes in European roaming make things better or worse for OTT players?
5. Should a European operator embrace LBO services or not? And if so, what is the best way to do so?
6. What are the opportunities and risks for a potential ARP entrant?