A look at the rise of Content and Universal Service Suppliers (CUSS) and what this means to the mobile world as we know it today.

A CUSTOMER DRIVEN CHANGE CONFRONTS US
An analysis of the telecom market today tells us that what most people want to do on their mobile is view content, that they will pay for some it, that they want it conveniently delivered wherever they are (at home, at the office and while they are out and about) and that they want to view it on all their terminals and devices. They expect to be able to make a voice call and send a message as well but these are now taken for granted and the expectation is that they should be just thrown in as part of the allowances.

Every so often an industry undergoes dramatic and fundamental change which uproots established norms and rules, creating the conditions for new growth to occur. The opportunity is often exploited by a new entrant or an established player from an adjacent sector. Sometimes the catalyst for change is driven by regulators, sometimes by market disrupters using new technology and sometimes because the way of doing business has been reinvented by a new entrant with new products. The last 20 years has seen significant disruption to Financial, Transport, Retail and Manufacturing.

Telecommunications has been going through its own disruption but perhaps we have only seen the tremors so far and the real shocks are yet to come. What people want to do on their device is the catalyst for disruptive change about to sweep through the telecom industry.

MOBILE AS A DISRUPTER
The mobile industry itself was a beneficiary of industry change partly driven by regulatory intervention, new technology and new products and services. The advent of the “new mobile industry” saw a rapid decline in the fortunes of established wireline operators who were saved from almost terminal decline by the advent of ADSL technology which they branded as ‘broadband’. This in itself was driven by the biggest market disrupter of all – the internet. It was people’s desire to access the internet which drove ADSL demand rather than anything particularly clever that the wireline service providers were doing. Although largely unnoticed at the time, we were witnessing the beginning of customer needs and requirements being influenced by the content they wanted to access rather than the method of accessing that content. For the first time, the access medium was becoming just a matter of convenience where only the cost of access mattered to the end user. This wasn’t just consumer led. In the enterprise world, the desire to access email (content) gave birth to Blackberry and business users even carrying around a second device.

Mobile was protected from this phenomenon to a certain extent because it was able to levy a premium in its pricing for the convenience of mobility. It also had managed the device distribution very well in most markets so that the customer saw their mobile service provider as the place to get the latest device – often heavily subsidised in exchange for longer term contracts. The handset device itself, being far superior to anything being offered by the wireline operators, meant it became the phone of choice for making calls for many people, even when the desk phone was at hand. Even something as simple as the mobile phone book was responsible for calls being originated on the mobile device rather than on the desk top phone or the home phone. Mobile also offered the advantage of the ‘one number’ meaning users could be reached anywhere, anytime on their mobile phone. The big switch-over from fixed to mobile was well underway. A new generation were emerging who saw no need at all for having a phone tied to the home. The mobile device met all of their needs.

Mobile phone service providers also faced local competition from other licensed mobile operators – something that the traditional wireline carriers had been immune to for many years and consequently struggled with when new players arrived on their block. The competition kept the market fresh, leading to innovation unheard of in the old fixed world such as per minute billing, voice mail, international roaming, pre-payment, simple text messaging, free local calls and so on. Mobile was on the charge and the wireline carriers struggled to compete. The industry change was well and truly underway.

MOBILE DATA ARRIVES BUT WHERE ARE THE SERVICES?
The mobile phone industry saw the need to include the internet into the user offering. Although some early examples of doing this using GPRS (2.5G) and WAP (Wireless Application Protocol) were over hyped and underwhelmed the customer, the need to have internet access on the mobile device was now paramount in almost everything the mobile industry was doing. In a way WAP typified the Telco mentality and approach to services – this was a protocol which was marketed as a service! The need to get ever faster data access on mobile was the prime driver in all the standards work being undertaken in the newly formed 3GPP and was instrumental in the advent of W-CDMA as the chosen bearer for the new third generation for services. But here the first struggle began. What exactly were 3G services?

Where was the new revenue opportunity coming from? Where was the ROI for the necessary but huge investments being made in the new technology and the spectrum licenses?

The drive for faster and better (and cheaper) access for mobile customers also made adoption of IP essential and was duly introduced into the standards work for the next generation of technology – no matter that MNOs had not yet figured out the new revenue models for 3G!

IT WAS IP THAT CHANGED THINGS
Mobile was to learn the same lesson that the wireline operators learnt. IP opens the door and lets in all sorts of new players and they bring with them fresh ideas and concepts that have universal appeal. They focus on the service and the product, not the technology and Telcos have always struggled with this. With the advent of IP mobile networks and smart sophisticated devices, the internet players were quick to see mobile as a very new and important access medium for their own services. The established internet players were already providing services that users wanted, so accessing them on the mobile device seemed a natural next step. The beauty for the internet service providers was that – just in the case of wireline internet – the customer paid for the access. Mobile network operators were now being caught in the same trap that had ensnared the wireline operators. Access was important for the customer – but not valued.

The intrusion into the MNOs cosy world by the so called OTT players came as a shock. IP messaging services such as WhatsApp were killing SMS revenues and now voice apps such as Skype, Vonage and Viber threaten voice revenues. Increasingly the MNO is selling data only – in reality, access to other people’s services. Not a great position to be in. If we add to that the advent of ‘free’ WiFi hot spots and wireless routers in the home, users were becoming savvy in finding the cheapest access or even free access.

TRULY, MNOs ARE AT A CROSSROADS
Mobile Operators can see the changing dynamics in the market place. We believe that they have five viable options open to them:

1. Engage in active network sharing deals to improve market position and business performance through substantial reductions in operating costs
2. Consolidation of MNOs in each market
3. Changing the business model to become a very efficient mobile carrier and ditch all the thrills
4. Diversify and buy wireline business to lessen dependency on mobile revenues and expand the services portfolio – in particular, include more relevant enterprise services
5. Find a way to become part of the new value chain and not be the ‘dumb pipe’. This means buying the sort of content that customers will pay for or forming allegiances with content owners

In our view, content is king and content is the ‘killer App’. So nothing new here then but we wonder if the MNOs have seen this reality? In the UK market, we have seen all five of the above strategies playing out. T-Mobile and Hutchinson 3 completed a 3G RAN share and created a new JV to own and operate the infrastructure, MBNL Ltd. Telefonica 02 UK and Vodafone responded by forming Cornerstone to create greater network efficiencies. T-Mobile and Orange then consolidated to form EE reducing the number of MNO competitors from five to four. Vodafone have bought the Cable & Wireless fixed line business (and continue to buy other wireline companies around Europe).

Vodafone have also struck deals to include Sky Sports, Spotify and Netflix in their 4G red deals, demonstrating that 4G alone doesn’t appeal to customers – it’s what you do with it that matters.

CONSIDER OTHER DEVELOPMENTS IN THE UK MARKET
BT, who got out of mobile when they sold their mobile arm 11 years ago, entered the recent 4G spectrum auctions in the UK with serious intent and paid £186.5m for new mobile spectrum. Before and after this, BT has spent £2bn on buying up sporting TV rights including £738m on a small part of the Premier League Football rights, £152m for rights to Aviva Premiership Rugby, and more significantly, out-bid the long standing holder of UEFA Champions League rights, BSkyB, forking out a whopping £897m. On top of this BT has also bought rights for tennis and BT also announced a distribution deal with the Eurosport channels, which will bring tennis, cycling and snooker coverage to its customers. Compare this to the spend on spectrum and one can see that BT is putting a much higher value on content than on access. They see that content matters.

Liberty Global, the US Company that owns Time Warner and Viacom and is already a significant cable, broadband and MVNO player in Europe, bought Virgin Media for £15bn. BSkyB agreed a £211m takeover deal for broadband firm Easynet and followed that up by buying BE from 02 for £200m and then The Cloud to create 23,000 WiFi hot spots.

This means the leading Broadband providers in the UK are:

1. BT (PlusNet) 7,385,000
2. Sky Broadband (BSkyB, O2, BE Broadband) 5,247,000
3. Virgin Media 4,524,200
4. TalkTalk (AOL, Tiscali, Pipex) 4,206,000
5. EE (Orange and T-Mobile) 775,000
Source ISP Review http://www.ispreview.co.uk/review/top10.php

CONTENT IS SHAPING THE MARKET DYNAMICS
Significantly, the four major Broadband providers are all ‘wireline’, all with content and three of the four are existing mobile service providers through MVNO relationships. All of this tells us that the telecoms market, both wireless and wireline, is reforming quickly and that content, along with the means of distribution, are the two fundamental planks of the emerging strategies.

People will pay for the content they want to watch but the content owner needs to have the full range of delivery capabilities to get the content to as many customers, in as many places, at all times and on all devices. This is where the battle is now being fought and how this plays out in the next few years will shape the future telecoms market for the next decade.

THIS CHANGES EVERYTHING FROM MVNOs
We are now seeing the ‘third wave’ of MVNO players. The first wave saw MVNOs positioning themselves as price leaders – they have mostly fallen by the wayside. The second wave were better at targeting segments, using their brand and/or channel distribution. Some of these have been successful, particularly those with excellent execution. The second wave of MVNOs have been able to get enough traction in the market place to force MNOs to start to view them differently. They realise that if an MVNO can sign up five million customers then the MNO better make sure that those customers are on their network! The second wave of MVNO still focus on voice and messaging as prime services. They do include data in their bundles buts its access only. The success of the larger second wave of MVNOs has also triggered a different approach from MNOs. They now see having a smaller number of large MVNOs as being strategically much better than the previous situation of a large number of small MVNOs. Consequently a ‘clear-out’ of small MVNOs began.

THE THIRD WAVE OF MVNOs
The next wave of MVNOs are content carriers. They bring a new dimension to the market place. They bring valuable content. Looking at this new wave of MVNOs gives us valuable insight into how the market will change in the coming years.

Liberty, in buying Virgin Media, gains access to wireline and mobile methods of distribution (Virgin Mobile being a long standing MVNO in the UK). BT, already with substantial wireline and fibre distribution, has obtained 4G spectrum and changed its MVNO host from Vodafone to EE. BT is gearing up for re-entry into mobile but it will look totally different to the BT that exited the market 11 years ago. It will look to consolidate the enterprise space with a complete package of communication solutions for corporates through to SMEs but also attack the domestic and consumer market by leading with rich content. Sport to begin with, but it’s unlikely to end there. The early significant increase in BT Broadband customers off the back of the free BT sport promotion is testimony to the strength of this strategy.

Sky have been active in pushing Sky Go out to their customers beyond the DTH (Direct to Home) channel and more and more, Sky customers access Sky content from their tablets and smartphones. So far, Sky have left it to their customers to figure out their own access but obviously The Cloud was part of the process of making it easier to access Sky content and – significantly – a lot cheaper than using up the data allowance on the mobile tariff plan. And therein lies the dilemma for the MNO; rich content gobbles up data resources. An HD feature film can easily consume 5GB of data. That’s most people’s monthly allowance gone in one viewing! The stresses on the MNO’s network resources – even with LTE, new spectrum and small cells, is going to be severe. The jury is still out on whether LTE can deliver the rich content and other data services at the right economics in a data hungry market. This in itself is another driver for mobile network operators to seek the economies of scale that network sharing brings.

ALL ROADS LEAD TO CONTENT
An analysis of the all of this tells us that people want content: Entertainment falls into content needs; people will pay for some it; they want it conveniently delivered wherever they are (at home, at the office and while they are out and about) and they want to view it on all their terminals and devices.

Mobility is clearly part of this requirement but it is inconceivable that the MNOs of today can continue to charge for data at the rates we see in the market currently. 4G/LTE as a premium is a part dream. Customers expect that new technology means lower prices, not higher. There is little room for manoeuvre on price reductions given the high cost base of delivering data, even with network sharing and other radical solutions. Clearly the MNO needs to be part of the end-to-end content value delivery chain and that means finding a new commercial strategy which makes them relevant to the content owners. They have to be offering their mobile networks to the content owners but the conventional wholesale and MVO models just won’t wash any more. What worked (kind of) for voice and text just doesn’t do it in the new world of content driven business models.

THE NEW EMERGING MODEL
There is no longer sufficient perceived value in voice and text services to sustain MVNOs and beyond voice and messaging, their locker is empty. MNOs need to embrace a totally new philosophy and create new commercial frameworks for the new breed of MVNOs (and let’s stop calling them MVNOs now) or face a long slow decline. It’s unlikely that we will see mobile services delivered by service providers which look and feel anything like todays MNOs. The MNOs that adapt and adopt one of the strategies outlined above can succeed and prosper but with different looking business models (and probably lower margins) than have been used to in their commercial lives so far.

So what will the landscape look like in the new world? Some of it we can see today: Messaging will continue to be dominated by the host of new providers, WhatsApp, Kakao, Snapchat, Facebook, iMessage, and more than likely a host of new messaging service providers as well. Most messaging Apps will be add-ons contained within bigger new media services where convenience and simplicity will be fundamental. Others will be differentiated in some way with some form of highly original user case or user segment. All will be free.

Voice will follow this same route and even when VoLTE arrives and gains traction it will look much the same as the other VoIP Apps that beat them to market, such as Skype, Viber and Vonage. There will be a plethora of others as well, many embedded in Apps. And of course many of the IP Messaging Apps will have evolved to include voice as well. The pricing model will be very similar to the way OTT players have operated so far; free at point of use for the customer – for the vast majority of voice calls that they make. One can only help but feel that MNOs own voice offering, be it VoLTE or 3G/2G, will need to be free or included in all-you-can-eat tariff plans. We don’t hold up much hope for RCS making any difference to this changing-of-the guard. It’s too little, too late.

CONTENT CALLS THE TUNE
It is undoubtedly those who own and control content that will shape the new paradigm. As I said earlier, mobile networks are an important part of getting the content to the end user. However, as we learnt in the original structuring of the internet world, the carrier is a convenience to the content owner and as far as the content owner is concerned, the access provider needs to scratch a living in providing the access alone. One can discuss just how long this model is sustainable. Building and operating access networks, be they fibre or wireless, is an expensive occupation and the revenues need to come from somewhere to justify the continued investment in the carrier infrastructure. But this argument is not new and so far has had little impact on how the cake is divided up between content owner and content deliverer. From time to time we hear stories – or are these threats? – from Google and other internet kings that they will build their own super highway or launch balloons to provide direct access. One suspects that a deep look into the costs of these scare them away from taking the next steps. We can’t get away from the fact that providing access is capital intensive and expensive to operate.

WHERE DO ACCESS PROVIDERS FIT INTO THE NEW WORLD?
Access providers need to find the way of adding value in the delivery chain beyond being a dumb pipe. For example, if a customer wants to watch premium content on their mobile device and will pay £5 for this, could the carrier be paid a small percentage of this to deliver the film using Quality of Service guarantees to maximise the user experience? It’s obvious to us that universal access must not be allowed to get in the way of inevitable market drivers. Could content owners pay carriers to deliver ‘mobisodes’ to devices or perhaps to download films and other content overnight when networks are underutilised?

Some of these options and perhaps others may come to bear and the carrier will see its place in the new value chain. The crucial point is that this will be determined by what the content owners want to do and not what the MNO wants to offer. This is the realty behind an inevitable restructuring of wholesale and MVNO commercial deals.

THE SERVICE PROVIDERS OF THE FUTURE
This then brings us to the crux of the matter. The need to redefine the relationship and commercial model between those who want to offer services and products to mobile users and the access providers who will deliver them. The days of the MVNO as we understand them today are numbered. They rely on re-selling (albeit through re-branding) voice and messaging to conventional mobile customers but as voice and messaging trends towards being free, so the revenue stream dries up. The new ‘MVNO’ emerges and they are the content holders with the rights to the distribution for the only product the customer will pay for directly – content. We highlighted three of the potential new Service Providers in the UK market previously. Call them quad players or as we like to call them Content and Universal Service Suppliers (CUSS). They will be calling the shots and bundling (today’s) mobile services into their portfolio. This is an inevitable and unavoidable outcome. This will not be done through today’s conventional MVNO commercial models. New commercial constructs are required which reflect the fact the mobile carrier is no longer irreplaceable. The content kings have marginalised them and they will need to play by the new rules set by them.

CONTENT AND UNIVERSAL SERVICE SUPPLIERS (CUSS) 
The new CUSS provides conventional communication needs for the vast majority of users. With Sky I buy content and get broadband for free. With BT, I buy BT sport and get broadband for free. The end result is the same in both cases. The customer hook is the content. Voice and messaging become commodities bundled into the core offerings of the package but the big difference being that the content players have the ability to still make charges for voice calls and messaging services even they may still appear to be a bolt-on or an add-in in pricing terms. Will MNOs be able to compete for what has traditionally been their core services? Not using the conventional way they do business today. They either need to follow BT into buying content, do the sort of deals we see Vodafone striking, or adjust to life as an efficient carrier and rescale their businesses to be profitable on the sort of margins that are the lot of Utilities.

MNOs WILL NEED TO ADAPT
CUSS players are set to reshape the market going forward. Not all today’s MNOs see this yet but the ones that react and adapt first will be best positioned to still be left standing when it all shakes out. There are many advantages awaiting MNOs in this new model. The revenues from direct retail alone will not give the sort of returns necessary to allow ongoing investment in LTE, LTE+, 5G, 6G and it goes on and on because advances in access technologies will always be happening.

Allowing the new CUSS access to their networks is a good way to sell many more units of use, to expand greatly the number of addressable customers as well as the range of content and other services that customers are prepared to pay for. Re-establishing an upward cycle in revenues has to be the goal for today’s MNOs and CUSSs are a way to make that happen, not a competitive force to be discouraged.