Who is going to survive the multi-services war?

The development of broadband is driving operators to expand their offers through services that converge voice and data, fixed and mobile telephony, content services and Internet access. And the pace is stepping up: first double-play, then triple-play, with a multi-services, multi-channel offer now regarded as the minimum necessary to be competitive. Benoît Felten, Senior Manager at Arcome and Isabelle Roussin, EVP Marketing, Highdeal, discuss why operators are vying to come up with innovative services ever faster, or risk seeing their ARPU erode. They evaluate the respective assets of each type of operator and explain the key factors for success in what promises to be a brutally competitive market.

Benoît Felten, Senior Manager, Arcome

Isabelle Roussin, EVP Marketing, Highdeal

Transaction Reporter: First of all, exactly what ground do multi-services cover?

Isabelle Roussin: The increase in broadband and network convergence has enabled today’s operators to market an impressive array of IP services by combining all the existing means of communication: fixed and mobile phones, desktops, laptops and PDAs, among others.

Benoît Felten: The multi-services offer can be broken down into five families:

• Interpersonal communications: voice, e-mail, data sharing, photos and music.
• TV over IP, via ADSL connection, with features such as personalized programming and virtual video recorders.
• Leisure: video or computer games on demand
• Home automation, including video surveillance and remote controlled access and appliances.
• E-commerce through tele-shopping broadcasts and interactive advertising linked to online merchant sites.

IR: The number of potential offers and sheer volume and variety of the services that are combined makes bundling a necessity. It opens tremendous marketing opportunities based on finely-tuned customer segmentation. Impending multi-services offers will provide service bundles, each one targeting different age groups, lifestyles, family situations, consumer habits or even household revenues. Imagine, for example, a “senior” fixed-rate multi-services pack for mobile telephony, voice over IP, the Internet, as well as special interest TV channel bundles, online bingo, senior university programming, alert systems linked to specialized on-site services for health-related emergencies, for instance.

TR: What are the challenges facing these new services operators?

BF: The telecommunications market has always been a buyer’s market: who, as little as 10 years ago, could have possibly imagined that the mobile phone penetration rate would top 80% in France and 100% in Sweden? Certainly not the users! The arrival of broadband is encouraging operators to continue revving up the market. Transmission capacities double every 18 months and are 20 or 30 times greater than what’s actually needed. However, customers will be willing to pay for all these new capabilities only if they are convinced that they are really useful.

IR: All these broadband-generated offers have resulted in a price war, upsetting all the traditional models such as pricing by usage, in favor of fixed-price bundles, and leaving historical sources of revenue, in particular for voice services, vulnerable to offers of unlimited communications via VOIP. These major groundshifts are forcing all operators to seek new services and new sources of revenue to prevent their ARPU from eroding. This is not a particularly pleasant prospect, especially since operators have to maximize their returns on the huge investments made in order to upgrade their systems, networks and acquire licenses for the new UMTS/3G standards.

BF: It has become vital for them to propose new offers that are both attractive and unique. They have to find ways to convince their customers continue to spend the money that they are no longer willing to spend on today’s services, now considered a simple commodity.
They have to do this very quickly and on a very large scale as the prices for traditional services have bottomed out and, with new services costly to develop, it is critical for them make up for these losses in volume.

TR: Is it possible to evaluate the potential of this new market?

BF: It’s difficult to do as most of the services are still in the incubation phase and market penetration is low. Anyway, there are too many different players, types of business and models to add up potential revenues in a coherent way. The only approach that makes any sense would be to combine household expenditures for each item: TV, fixed and mobile telephony, broadband (high-speed) Internet, home systems, etc.

IR: According to an Infonetics’ market research study, the voice application server market grew 223% in 2004 and will generate US $474 M in 2008.

BF: But once again, its not the lure of a hypothetical “boon” that’s driving operators in the multi-services race, but a genuine concern about curbing revenue erosion and building customer loyalty.

IR: This last point is particularly important: it has been proved that “triple-play” offers not only enhance customer knowledge, but have also succeeded in cutting the churn rate in half in the case of U.S. cable operators.

TR: How do you position the different players and how do they approach the market?

BF: The present market forces are well known: historical operators from the wireline sector, cable operators, Internet service providers, and mobile operators. All of them are legitimate multi-services market players and ready to grasp the opportunity to expand their empires and outdo their direct or indirect competitors. In addition, players from the application layer such as Google and Yahoo have been toying with the idea of positioning themselves on the market.

IR: There’s also the media to be reckoned with: US Virgin Mobile, Universal Music, and ESPN in the US, who have shown that it’s possible to be an MVNO and profitable. M6 and NRJ in France have based themselves on this model and are starting to offer mobile services to broadcast their content. All these new entrants have a significant marketing advantage as they know their audiences inside-out.

BF: Incumbent operators are the ones who are the most threatened and therefore the most set on launching new services. Their classic model: “everyone uses the telephone and each minute brings me money” is on the wane. But they do have the advantage of controlling a subscriber network with a highly effective cost structure, very strong customer relationships and management: in France, aside from those who have taken active steps to have their line entirely unbundled, everyone gets a France Telecom bill. Incumbents also typically have the financial resources that give them staying power and allow them to look towards the future. Their competitors, who are obliged to focus on short term objectives, are often unable to implement such long-term strategies. However, incumbent operators are handicapped in bringing new offers to market because of their typically heavy, slow-moving structures, as well as by regulations imposed because of their historically dominant position.

Cable and satellite operators are positioned very differently according to country. In France, the situation is difficult: insufficiently developed technology, a lack of profitability and a TV broadcasting market constantly under attack by other operators: in short, it will be tough going. The situation is better in the U.K., where well-established companies have a 40% market share, are financially powerful and were also quick to diversify in telecom services.

Independent ISPs are very well placed and have nothing to lose since the resource that serves to develop the multi-services market, high-speed Internet, is the very core of their business. They are taking advantage of yet another opportunity to add new services as usual. They don’t have to change their model, but just sit back and watch their revenues grow. On the negative side, they are not familiar with voice services and not many of them have the financing capacities required to develop costly multi-service offers.

Mobile operators are becoming formidable competitors. Fixed-mobile convergence makes them highly credible given that convergence is no longer a mere technological concept, but a market reality (take the BT Fusion offer in the UK, for example). They have important assets: their market is already consolidated, often international, and they control their customer base, which gives them significant striking power. However, they still rely heavily on voice revenues and, along with fixed line operators, may be destabilized by the arrival of new VOIP models (Skype, etc.)

TR: What do you believe are the key factors for success in this multi-service market war?

BF: Foresight is of prime importance. Operators who refuse to reconsider their initial business model run the risk of being phased out. In order to survive they will have to rapidly find a way of promoting services other than voice to their customer base.

IR: Between the price drop for “traditional” services and the rise in costs linked to new services development, all of the operators will face a profitability problem. IMS architecture is a technological tool for reducing costs. It is one solution, but all operators won’t be able to adapt the technology because of the initial capital expenditure required.

However the longer-term benefits of IMS are clear: the costs of developing each new application are reduced by 60% (cf. Transaction Reporter n°10). Another solution lies in marketing: operators have to be the first to bundle highly targeted offers and take them to market after ensuring that the offers are profitable. Given the abundance of services and complexity of the customer segments targeted, they will have to carry out numerous preliminary tests and be ultra-reactive in implementing the solutions and pricing models retained.

The Highdeal Transactive® pricing and rating system is a significant part of the answer to all these requirements. Designed as separate modules capable of processing rating alone, or adding account balance management, or even complete billing, payment and collections, the system is immediately compatible with the IMS architecture and can be integrated as an add-on in existing infrastructures. It enables users to carry out tarif simulations based on numerous criteria required upstream, and downstream, to manage very large transaction volumes by pricing and rating services that combine voice, images, video, in pre or post-paid mode. Highdeal also simplifies revenue sharing with the entire value-chain: fixed and mobile operators, ISPs, media companies and application & content providers.