Posts Tagged Strategy

GSM – Gone So Much … or is it?

  • A Billion GSM subscriptions & almost $200 Billion GSM revenue will have gone within the next 5 years.
  • GSM earns a lot less than its “fair” share of the top-line, a trend that will further worsened going forward.
  • GSM revenue are fading out rapidly across a majority of the mobile markets across the Globe.
  • Accelerated GSM phase-out happens when pricing level of the next technology option relative to the GDP per capita drops below 2%.
  • 220 MHz of great spectrum is tied up in GSM, just waiting to be liberated.
  • GSM is horrific spectral in-efficient in comparison to today’s cellular standards.
  • Eventually we will have 1 GSM network across a given market, shared by all operators, supporting fringe legacy devices (e.g., M2M) while allowing operators to re-purpose remaining legacy GSM spectrum.
  • The single Shared-GSM network might survive past any economical justification for its existence merely serving legal and political interests.

Gone So Much … GSM is ancient, uncool and so 90s … why would anybody bother with that stuff any longer … its synonymous  with the Nokia Handset (which btw is also ancient, uncool and so 90s … and almost no longer among us thanks to our friend Elop …). In many emerging markets GSM-only phones are hardly demanded or sold any longer in the grey markets. Grey market that make up 90% (or more) of  handset sales in many of those emerging markets. Moreover, its not only AT&T in the US talking about 2G phase-out but also an emerging market such as Thailand is believed to be void of GSM within the next couple of years.

bananaphone

A bit of Personal History. Some years ago I had the privilege to work with some very smart people in the Telecom Industry on merging two very big mobile operations (ca.140 million in combined customer base). One of our cardinal spectrum strategic and technology arguments were the gain in spectral efficiency such a merger would bring. Anecdotally it is worth mentioning that the technology synergies and spectrum strategic ideas largely would have financed the deal in shear synergies.

In discussions with the country’s regulator we were asked why we could not “just” switch off GSM? Then use that freed GSM spectrum for new cellular technologies, such as UMTS and even LTE. Thereby gaining sufficient spectral efficiency that merging the two business would become un-necessary. The proposal would have effectively turned off the button of a service that served at ca. 70 Million GSM-only (incl, EDGE & GPRS) subscribers (at the time) across the country. Now that would have been expensive and most likely caused a couple or thousands of class action suits to the beat.

Here is how one could have thought about the process of clearing out GSM for something better (though overall its is more for richer and poorer). There is no “just …press the off button”, as also Sprint experienced with their iDEN migration.

customer migration

Our thoughts (and submitted Declarations) were that by merging the two operators spectrum (and sites pool) we could create sufficient spectral capacity to support both GSM (which we all granted was phasing out) and provide more capacity and customer experience for the Now Generation Technology (i.e., HSPA+ or 4G as they like to call it in that particular market … Heretics! ;-). A recent must read GigaOM blog by Keith Fitchard  “AT&T begins cannibalizing 2G and 3G networks to boost LTE capacity” describes very well the aggressive no-nonsense thinking of US carriers (or simply desperation or both) when it comes to the quest for spectrum efficiency and enhanced customer experience (which co-incidentally also yields the best ARPUs).

It is worth mentioning that more than 2×110 Mega Hertz is tied up in GSM, Up-to 2×35 MHz at 900MHz (if E-GSM has been evoked) and 2×75 MHz at 1800MHz (yes! I am ignoring US GSM band plans, they are messed up but pretty fun nevertheless … different story for another time). Being able to re-purpose this amount of spectrum to more spectral efficient cellular technologies (e.g., UMTS Voice, HSPA+ and LTE) would clearly leapfrog mobile broadband, increase voice capacity at increased quality, and serve the current billions of GSM-only users as well as the next billion un-connected or under-server customer segments with The Internet. The macro-economical benefits being very substantial.

220 MHz of great spectrum is tied up in GSM, just waiting to be liberated.

Back in the days of 2003 I did my first detailed GSM phase-out techno-economical analysis (a bit premature one might add). I was very interested in questions such as “when can we switched off GSM?”, “what are the economical premises of exiting GSM?”, “Why do operators today still continue to encourage subscriber growth on their GSM networks?”, “Today … if you got your hands on GSM usable spectrum, would you start a GSM operation?”, “Why?” and “Why not?”, etc..

So why don’t we “just” switch off GSM? and let go of that old in-efficient cellular technology?

How in-efficient? you may ask? … Pending a little bit on what state the GSM is in, we can have ca. 3 times more voice users in WCDMA (i.e., UMTS) compared to GSM with Adaptive Multi-Rate (AMR) codec support. Newer technology releases supports even more dramatic leaps in voice handling capabilities.

voice efficiency GSM vs wcdma

Data? what about cellular data? That GSM, including its data handling enhancements GPRS and EDGE, is light-bits away from the data handling capabilities of WCDMA, HSPA+, LTE and so forth is at this point a well establish fact.

Clearly GSM is horrific spectral in-efficient in comparison to later cellular standards such as WCDMA, HSPA(+) and LTE(+) and its only light (in a very dark tunnel) is that it is supported at lower frequencies (i.e., more economical deployment in rural areas and for large surface area countries). Though today that no longer unique as UMTS and LTE are available in similar or even lower frequency ranges. … of course there are other economical issues at plays as well, which we will see below.

Why do we still bother with a 27+ year old technology? a technology that has very poor spectral efficiency in comparison with later cellular technologies. GSM after all “only” provides Voice, SMS and pretty low bandwidth mobile data (while better than nothing, still very close to nothing).

Well for one thing! there is of course the money thing? (and we know that that makes the world go around) ca. 4+ Billion GSM subscriptions worldwide (incl. GPRS & EDGE) generating a total GSM turnover of 280+ Billion US$.

In 2017 we anticipate to have a little less than 3 Billion GSM subscriptions generating ca. 100+ Billion US$. So ….a Billion GSM subscriptions and almost 200 Billion US$ GSM revenue will have dis-appeared within the next 5 years (and for the sake of mobile operators hopefully replaced by something better).

In this trend APAC, takes its lion share of the GSM subscription loss with ca. 65% (ca, 800 Million) of the total loss and ca. 50% of the GSM top-line loss (ca. 100 Billion US$).

The share of GSM revenue is rapidly declining across (almost) all markets;

gsm revenue share

The GSM revenue as share of the total revenue (as well as in absolute terms) rapidly diminishes, as 3G and LTE are introduced and customer migrate to those more modern technologies.

If the should be any doubts GSM does not get its fair share revenue compared to its share of the subscriptions (or subscribers for that matter):

2012 GSM RS vs MS

While the above data does contain two main clusters, it still pretty well illustrates (what should be no real surprise to any one) that GSM earns back a lot less than its “fair” share (whatever that really means). And again if anyone would be in doubt that picture will be grimmer as the we fast forward to the near future;

2017 GSM RS vs MS

Grim, Grimmer, Grimmest!

Today GSM earns a lot less than its “fair” share of the top-line, this trend will be further worsened going forward.

So we can soon phase-out GSM? Right? hmmmm! Maybe not so fast!

Well while GSM revenue has certainly declined and expected to continue the decline, in many markets the GSM-only (e.g., here defined as a customers that only have GSM Voice, GPRS and/or EDGE available) customers have not declined in proportion to the related revenue might fool us to believe.

gsm market share

The above statistics illustrates the GSM-only subscription share of the total cellular business.

There is more to GSM than market and revenue share … and we do need to have a look at the actual decline of GSM subscriptions (or unique users which is not per se the same) and revenue;GSM_actual_decline

The GSM revenue are expected to massively free fall over the next 5 years!

However, also observe (in the chart above) that we need to sustain the network and its associated cost as a considerable amount of customers remain on the network, despite generating a lot less top line.

As we have already seen above, in the next 5 years there will be many markets where GSM subscription and subscriber share will remain reasonable strong albeit the technology’s ability to turn-over revenue will be in free-fall in most markets.

Analyzing data from Pyramid Research (actual & projection for the period 2013 to 2017), including other analyst data sets (particular on actual data), extrapolating the data beyond 2017 by diffusion models approximating the dynamics of technology migration in the various market, we can get an idea about the remaining (residual) life of GSM. In other words we can make GSM phase-out projections as well as get a feel for the terminal revenue (or residual value) left in GSM. Further get an appreciation of how that terminal value compares to the total mobile turnover over the same GSM phase-out period.

The chart below provide the results of such a comprehensive analysis. The colored bars illustrate the various years of onset of GSM phase-out; (a) the earliest year which is equal to the lower end of light-blue bar is typically the year where migration off GSM accelerates, (b) the upper end of the light-blue bar is a most-likely year where after GSM no longer would be profitable, and (c) the upper end of the red bar illustrates the maximum expected life of GSM. It should be noted that the GSM Phase-out chart below might not be shown in its entirety (particular right side of the chart). Clicking on the Chart itself will display it in full.

gsm phase-out projections

Taking the above GSM phase-out years, we can get a feeling for how many useful years GSM has left in terms of economical-life and customer life-time defined as which event comes first of (i) less than 1 Million GSM subscriptions or (ii) 5% GSM market-share. 2014 has been taken as the reference year;

remaining usefull life of GSM

It should be noted that the Useful Life-span of GSM chart above might not be shown in its entirety (particular right side of the chart). Clicking on the Chart itself will display it in full.

AREAS #MARKETS GSM –
REMAINING LIFE
Western Europe               16       4.1 +/- 3.3 years
Asia Pacific               13       6.4 +/- 5.0 years
Middle East & Africa               17     11.0 +/- 6.2 years
Central Eastern Europe                 8       6.9 +/- 4.8 years
Latin America               19       6.6 +/- 3.7 years

That Western Europe (and US which has not been shown here) has the most aggressive time-lines for GSM phase-out should come as no surprise. The 3G/UMTS has been deployed there the longest and the 3G price level to GDP has come down to a level where there is hardly any barrier for most mobile users to switch from GSM to UMTS. Also the WEU region has the most extensive UMTS coverage which also removes the GSM to UMTS switching barrier. Central Eastern Europe average is pulled up (i.e., longer useful life) substantial by Russia and Ukraine that shows fairly extreme laggardness in GSM phase-out (in comparison with the other CEE markets). For Middle East and Africa it should be noted that there are two very strong clusters of data distinguishing the Gulf States from the African Countries. Most of the Gulf States have only a very few years of remaining useful life of GSM. In general the GSM remaining life trend can be described fairly well with the amount of time UMTS has been in a given market (i.e., though smartphone introduction did kick-start the migration from GSM more than anything else), the extend of UMTS coverage (i.e., degree of pop and geo coverage) and the basic economics of UMTS.

In my analysis I have assumed 4 major triggers for GSM phase-out;

  1. Analysis shows that once the 3G (or non-2G) ARPU is below 2% of the nominal GDP per capita an acceleration of migration away from GSM speeds up. I have (somewhat arbitrarily) chosen 1% as my limit where there is no longer any essential barrier of customer migrating off GSM.
  2. When GSM penetration is below 5% as a decision point for converting (by possible subsidies) GSM customers to a more modern and efficient technology. This obviously does depend on total customer base and the local economical framework and as such is only a heuristics rather than a universal rule.
  3. Last but not least, my 3rd criteria for phasing out GSM is when its base is below 1 million subscriptions (i.e., typically 500 to 800 thousand subscribers).
  4. Last but not least, before complete phase-out of GSM can commence, operators obviously need to provide the alternative technology (e.g., UMTS or LTE) coverage that can replace the existing GSM coverage. This is in general only economical if comparable frequency range can be used and thus for example for UMTS coverage replacement of GSM in many cases re-farming/re-purposing 900MHz from GSM to UMTS. This last point can be a very substantial bottleneck and show stopper for migration from GSM to UMTS, particular in rural areas or in countries with very substantial rural populations on GSM.

Interestingly enough, extensive data analysis on more than 70 markets, shows that the GSM phase—out dynamics appears to have little or no dependency on (a) the 2G ARPU level, (b) 2G ARPU level relative to 3G ARPU and (c) handset pricing (although I should point out that I have not had a lot of data here to be firm in this conclusion, in particular reliable data for grey market handset pricing across the emerging markets is a challenge).

One of the important trigger points for onset of accelerated GSM phase-out is the pricing level of the next technology (e.g., 3G) option relative to the GDP per capita.

Migration decision appears less to do with the legacy price of the old technology or old technology price relative to new technology pricing.

gsm market share vs 3G arpu to gdp

Above chart illustrates an analysis made on 2012 actual data for more than 70+ markets all across WEU, CEE, APAC, EMEA and LA (i.e., coinciding with markets covered by Pyramid Research). It is very interesting to observe the dynamics as the markets develop into the future and the data moves towards the left indicating more affordable 3G pricing (relative to GDP per capita) and increasingly faster GSM phase-out as is evident from the chart below providing the same markets as above but fast forwarded 5 years (i.e., 2017).

5yrs add gsm market share vs 3G arpu to gdp

Firstly the GSM ARPU level across most markets is below 2% of a given markets GDP per capita. There is no clear evidence in the country data available that the GSM ARPU development has had any effect on slowing down or accelerating GSM phase-out. Most likely an indication that GSM has reached (or will reach shortly) a cost level where customers become insensitive.

gsm market share vs 2G arpu to gdp

Conceptually we can visualize the GSM phase-out dynamics in the following way were as the 3G gets increasingly affordable (which may or should include the device cost depending on taste), GSM phase-out accelerates (i.e., moving from right to left in the illustrative chart below). While the chart illustration below is more attuned to emerging market migration dynamics of GSM phase-out it can of course with minor adaptations be used for other more balanced prepaid-postpaid markets.

We should keep in mind that unless the mobile operators new technology coverage (e.g., UMTS, LTE, ..) at the very least overlap the GSM coverage, the migration from GSM to UMTS (or LTE) will eventually stop. This can in countries with a substantial rural population in particular become a blocking stone for an effective 100% migration. Resulting in large areas and population share that will remain underserved (i.e., only GSM available) and thus depend on an in-efficient and ancient technology without the macro-economical benefits (i.e., boost of rural GDP) new and far more efficient cellular technologies could bring.

share of gsm and 3G affordability

That’s all fine … what a surprise that customers wants better when it gets affordable (like to have wanted that even more when it was not affordable)… and that affordability is relative is hardly a surprising either.

In order for an operator to make an informed opinion about when to switch off GSM, it would need to evaluated the remaining business opportunity, or residual GSM value, against the value for re-purposing the GSM spectrum to a better technology, i.e., with a superior customer experience potential, and with a substantial higher ARPU utilization.

Counting from 2014, the remaining life-time aka terminal aka residual GSM revenue will be in the order of 850 Billion US$ … agreeable an apparently dramatic number … however, the residual GSM revenue is on average no more than 5% of total cellular turnover and for many countries a lower than that. Actual 45 markets out of the 73 studied will have a terminal GSM revenue lower than 5%.

terminal gsm revenue share histogram

The chart below provides an overview of the Residual GSM Revenues in Billion of US$ (on a logarithmic scale) and the percentage of Residual GSM value out of the total cellular turnover (linear scale) for 75 top markets spread across Western Europe, Central Eastern Europe, Asia Pacific, Middle East & Africa, and Latin America.

gsm terminal revenue & share

Do note that the GSM Terminal Revenue chart above might not be shown in its entirety (right side of the chart). Clicking on the Chart itself will display it in full.

It is quiet clear from the above chart that, apart from a few outliers, GSM revenue are fading out rapidly across a majority of the mobile markets across the globe. Even if the residual GSM topline might appear tempting, it obviously need to be compared to the operating expenses for sustaining the legacy technology as well as considering that a more modern technology would create higher efficiency (and possible ARPU arbitrage) and therefor mitigate margin decline sustaining more traffic and customers.

Emerging APAC MNO Example: an emerging market in APAC has 100 Million subscriptions and ca. 70 Million unique cellular user base.One of the Mobile Network Operators (MNO) in this market has approx. 33% market share (revenue share slightly larger). in 2012 its EBITDA margin was 42%. Technology cost share of overall Opex is 25% and for the sake of simplicity the corresponding GSM cost share is in 2012 assumed to be 50% of the Total Technology Opex. As the business evolves it is assumed that the GSM cost base grows slower than non-GSM technology cost elements. This particular market has a residual GSM revenue potential of approx. 4 Billion US$ and the MNO under the loop has 1.3 Billion US$ remaining GSM revenue potential.

Our analysis shows that the GSM business would start to breakdown (within the assumed economical framework or template) at around 5 Million GSM subscriptions or 3.5 Million unique users. This would happen around 2019 (+/- 2 years, with a bias towards earlier years) and thus leave the business with another 3 to 5 years of likely profitable GSM operation. See the chart below.

mno gsm phase-out example

This illustration shows (not surprisingly) that there is a point where even if the phasing-out GSM turns-over revenue, from an economical perspective it makes no sense for a single mobile operator to keep its GSM network alive for a diminishing customer base and even faster evaporating top-line.

In the example above it is clear that the MNO should start planning for the inevitable – the demise of GSM. Having a clear GSM phase-out strategy as soon as possible and targeting GSM termination no later than 2018 to 2019 just makes pretty good sense. Looking at risks to the dynamics of the market development in this particular market there is a higher likelihood of no-profit being reached earlier rather than later.

Would it make sense to startup a new GSM business in the market above? Given the 3 to 5 years that the existing mobile operators have to meet retire GSM before it becomes un-profitable, it hardly make much sense for a Greenfield operator to get started on the GSM idea (seem to be better ways for spending cash).

However, if that Greenfield operator could become The GSM Operator for all existing MNO players in the market, allowing those legacy MNOs to re-purpose their existing GSM spectrum (and possible with a retro-active wholesale deal), then maybe in the short term it might make a little sense. However, it quiet frankly would be like peeing in your trousers on a cold winter day, it will be warm for a short while but then it really gets cold (as my Grandmother used to say).

What GSM strategies makes really sense in its autumn days?

Quit clearly GSM Network Sharing would make a lot of sense economically and operationally as it would allow re-purposing of legacy spectrum to more modern and substantially more efficient cellular technologies.

The single Shared-GSM network would act as a bridge for legacy GSM M2M devices, extreme laggards and problematic coverage areas that might not be economical to replace in the shorter – medium term. Thus mobile operators could then solve possible long-term contractual obligations to businesses and consumers having fringe devices connecting with GSM (i.e., metering, alarms, etc..). The single Shared-GSM network might very well survive for a considerable time past any economical justification for its existence merely serving legal and political interests. Thanks to Stein Erik Paulsen who pointed this problem out for GSM phase-out.

I am not (too) hanged up about the general Capex & Opex benefits of Network Sharing in this context (yet another story for another day). The compelling logical step of having 1 (ONE) GSM network across a given market, shared by all operators, supporting the phase-out of GSM while allowing to re-purpose legacy GSM spectrum for UMTS/HSPA and eventually  LTE(+), is almost screamingly obvious. This furthermore would feed a faster migration pace and phase-out as legacy spectrum would be available for re-purposing and customer migration.

Of course Regulatory authorities would need to endorse such a scenario as it de-facto would result in a smelling-like creating a monopolistic GSM operator albeit serving all in a given market.

The Regulatory Authority should obviously be very interested in this strategy as it would ensure substantial better utilization  of scarce spectral resources.  Furthermore, not only gaining in spectral efficiency but also winning the macro-economical boost from connecting the unconnected and under-served population groups to mobile data networks, and by that, the internet.

ACKNOWLEDGEMENT

I have made extensive use of historical and actual data from Pyramid Research country data bases. Wherever possible this data has been cross checked with other sources. In my opinion Pyramid Research have some of the best and most detailed mobile technology projections that would satisfy even the most data savvy analysts. The very extensive data analysis on Pyramid Research data sets are my own and any short falls in the analysis clearly should only be attributed to myself.

, , , , , , , , , , ,

6 Comments

SMS – Assimilation is inevitable, Resistance is Futile!

Short Message Service or SMS for short, one of the corner stones of mobile services, just turned 20 years old in 2012.

Talk about “Live Fast, Die Young” and the chances are that you are talking about SMS!

The demise of SMS has already been heralded … Mobile operators rightfully are shedding tears of the (taken-for-granted?) decline of the most profitable 140 Bytes there ever was and possible ever will be.

Before we completely kill off SMS, let’s have a brief look at

SMS2012

The average SMS user (across the world) consumed 136 SMS (ca. 19kByte) per month and paid 4.6 US$-cent per SMS and 2.6 US$ per month. Of course this is a worldwide average and should not be over interpreted. For example in the Philippines an average SMS user consumes 650+ SMS per month pays 0.258 US$-cent per SMS or 1.17 $ per month.The other extreme end of the SMS usage distribution we find in Cameroon with 4.6 SMS per month paying 8.19 US$-cent per SMS.

We have all seen the headlines throughout 2012 (and better part of 2011) of SMS Dying, SMS Disaster, SMS usage dropping and revenues being annihilated by OTT applications offering messaging for free, etcetcetc… & blablabla … “Mobile Operators almost clueless and definitely blameless of the SMS challenges” … Right? … hmmmm maybe not so fast!

All major market regions (i.e., WEU, CEE, NA, MEA, APAC, LA) have experienced a substantial slow down of SMS revenues in 2011 and 2012. A trend that is expected to continue and accelerate with mobile operators push for mobile broadband. Last but not least SMS volumes have slowed down as well (though less severe than the revenue slow down) as signalling-based short messaging service assimilates to IP-based messaging via mobile applications.

Irrespective of all the drama! SMS phase-out is obvious (and has been for many years) … with the introduction of LTE, SMS will be retired.

Resistance is (as the Borg’s would say) Futile!

It should be clear that the phase out of SMS does Absolutely Not mean that messaging is dead or in decline. Far far from it!

Messaging is Stronger than Ever and just got so many more communication channels beyond the signalling network of our legacy 2G & 3G networks.

Its however important to understand how long the assimilation of SMS will take and what drivers impact the speed of the SMS assimilation. From an operator strategic perspective such considerations will provide insights into how quickly they will need to replace SMS Legacy Revenues with proportional Data Revenues or suffer increasingly on both Top and Bottom line.

SMS2012 AND ITS GROWTH DYNAMICS

So lets just have a look at the numbers (with the cautionary note that some care needs to be taken with exchange rate effects between US Dollar and Local Currencies across the various markets being wrapped up in a regional and a world view. Further, due to the structure of bundling propositions, product-based revenues such as SMS Revenues, can be and often are somewhat uncertain depending on the sophistication of a given market):

2012 is expected worldwide to deliver more than 100 billion US Dollars in SMS revenues on more than 7 trillion revenue generating SMS.

The 100 Billion US Dollars is ca. 10% of total worldwide mobile turnover. This is not much different from the 3 years prior and 1+ percentage-point up compared to 2008. Data revenues excluding SMS is expected in 2012 to be beyond 350 Billion US Dollar or 3.5 times that of SMS Revenues or 30+% of total worldwide mobile turnover (5 years ago this was 20% and ca. 2+ times SMS Revenues).

SMS growth has slowed down over the last 5 years. Last 5 years SMS revenues CAGR was ca. 7% (worldwide). Between 2011 and 2012 SMS revenue growth is expected to be no more than 3%. Western Europe and Central Eastern Europe are both expected to generate less SMS revenues in 2012 than in 2011. SMS Volume grew with more than 20% per annum the last 5 years but generated SMS in 2012 is not expected to more than 10% higher than 2012.

For the ones who like to compare SMS to Data Consumption (and please safe us from ludicrous claims of the benefits of satellites and other ideas out of too many visits to Dutch Coffee shops)

2012 SMS Volume corresponds to 2.7 Terra Byte of daily data (not a lot! Really it is not!)

Don’t be terrible exited about this number! It is like Nano-Dust compared to the total mobile data volume generated worldwide.

The monthly Byte equivalent of SMS consumption is no more than 20 kilo Byte per individual mobile user in Western Europe.

Let us have a look at how this distributes across the world broken down in Western Europe (WEU), Central Eastern Europe (CEE), North America (NA), Asia Pacific (APAC), Latin America (LA) and Middle East & Africa (MEA):

sms_revenues_2012 sms_volume_2012

From the above chart we see that

Western Europe takes almost 30% of total worldwide SMS revenues but its share of total SMS generated is less than 10%.

And to some extend also explains why Western Europe might be more exposed to SMS phase out than some other markets. We have already seen the evidence of Western Europe sensitivity to SMS revenues back in 2011, a trend that will spread in many more markets in 2012 and lead to an overall negative SMS revenue story of Western Europe in 2012. We will see that within some of the other regions there are countries that substantially more exposed to SMS phase-out than others in terms of SMS share of total mobile turnover.

sms_pricing sms_per_individual

In Western Europe a consumer would  for an SMS pay more than 7 times the price compared to a consumer in North America (i.e., Canada or USA). It is quiet clear that Western Europe has been very successful in charging for SMS compared to any other market in the World. An consumers have gladly paid the price (well I assume so;-).

SMS Revenues in Western Europe are proportionally much more important in Western Europe than in other regions (maybe with the exception of Latin America).

In 2012 17% of Total Western Europe Mobile Turnover is expected to come from SMS Revenues (was ca. 13% in 2008).

WHAT DRIVES SMS GROWTH?

It is interesting to ask what drives SMS behaviour across various markets and countries.

Prior to reasonable good quality 3G networks and as importantly prior to the emergence of the Smartphone the SMS usage dynamics between different markets could easily be explained by relative few drivers, such as

(1) Price decline year on year (the higher decline the faster does SMS per user grow, though rate and impact will depend on Smartphone penetration & 3G quality of coverage).

(2) Price of an SMS relative to the price of a Minute (the lower the more SMS per User, in many countries there is a clear arbitrage in sending an SMS versus making a call which on average last between 60 – 120 seconds).

(3) Prepaid to Contract ratios (higher prepaid ratios tend to result in fewer SMS, though this relationship is not per se very strong).

(4) SMS ARPU to GDP (or average income if available) (The lower the higher higher the usage tend to be).

(5) 2G penetration/adaptation and

(6) literacy ratios (particular important in emerging markets. the lower the literacy rate is the lower the amount of SMS per user tend to be).

Finer detailed models can be build with many more parameters. However, the 6 given here will provide a very decent worldview of SMS dynamics (i.e., amount and growth) across countries and cultures. So for mature markets we really talk about a time before 2009 – 2010 where Smartphone penetration started to approach or exceed 20% – 30% (beyond which the model becomes a bit more complex).

In markets where the Smartphone penetration is beyond 30% and 3G networks has reached a certain coverage quality level the models describing SMS usage and growth changes to include Smartphone Penetration and to a lesser degree 3G Uptake (not Smartphone penetration and 3G uptake are not independent parameters and as such one or the other often suffice from a modelling perspective).

Looking SMS usage and growth dynamics after 2008, I have found high quality statistical and descriptive models for SMS growth using the following parameters;

(a) SMS Price Decline.

(b) SMS price to MoU Price.

(c) Prepaid percentage.

(d) Smartphone penetration (Smartphone penetration has a negative impact on SMS growth and usage – unsurprisingly!)

(e) SMS ARPU to GDP

(f) 3G penetration/uptake (Higher the 3G penetration combined with very good coverage has a negative impact on SMS growth and usage. Less important though than Smartphone penetration).

It should be noted that each of these parameters are varying with time and there for in extracting those from a comprehensive dataset time variation should be considered in order to produce a high quality descriptive model for SMS usage and growth.

If a Market and its Mobile Operators would like to protect their SMS revenues or at least slow down the assimilation of SMS, the mobile operators clearly need to understand whether pushing Smartphones and Mobile Data can make up for the decline in SMS revenues that is bound to happen with the hard push of mobile broadband devices and services.

EXPOSURE TO LOSS OF SMS REVENUE – A MARKET BY MARKET VIEW!

As we have already seen and discussed it is not surprising that SMS is declining or stagnating. At least within its present form and business model. Mobile Broadband, the Smartphone and its many applications have created a multi-verse of alternatives to the SMS. Where in the past SMS was a clear convenience and often a much cheaper alternative to an equivalent voice call, today SMS has become in-convenient and not per se a cost-efficient alternative to Voice and certainly not when compared with IP-based messaging via a given data plan.

exposure_to_SMS_decline

74 countries (or markets) have been analysed for their exposure to SMS decline in terms of the share of SMS Revenues out of the Total Mobile Turnover. 4 categories have been identified (1) Very high risk >20%, (2) High risk for 10% – 20%, (3) Medium risk for 5% – 10% and (4) Lower risk when the SMS Revenues are below 5% of total mobile turnover.

As Mobile operators push hard for mobile broadband and inevitably increases rapidly the Smartphone penetration, SMS will decline. In the “end-game” of LTE, SMS has been altogether phased out.

Based on 2012 expectations lets look at the risk exposure that SMS phase-out brings in a market by market out-look;

We see from the above analysis that 9 markets (out of a total 74 analyzed), with Philippines taking the pole position, are having what could be characterized as a very high exposure to SMS Decline. The UK market, with more than 30% of revenues tied up in SMS, have aggressively pushed for mobile broadband and LTE. It will be very interesting to follow how UK operators will mitigate the exposure to SMS decline as LTE is penetrating the market.  We will see whether LTE (and other mobile broadband propositions) can make up for the SMS decline.

More than 40 markets have an SMS revenue dependency of more than 10% of total mobile turnover and thus do have a substantial exposure to SMS decline that needs to be mitigated by changes to the messaging business model.

Mobile operators around the world still need to crack this SMS assimilation challenge … a good starting point would be to stop blaming OTT for all the evils and instead either manage their mobile broadband push and/or start changing their SMS business model to an IP-messaging business model.

IS THERE A MARGIN EXPOSURE BEYOND LOSS OF SMS REVENUES?

There is no doubt that SMS is a high-margin service, if not the highest, for The Mobile Industry.

A small de-tour into the price for SMS and the comparison with the price of mobile data!

The Basic: an SMS is 140 Bytes and max 160 characters.

On average (worldwide) an SMS user pays (i.e., in 2012) ca. 4.615 US$-cent per short message.

A Mega-Byte of data is equivalent to 7,490 SMSs which would have a “value” of ca. 345 US Dollars.

Expensive?

Yes! It would be if that was the price a user would pay for mobile broadband data (particular for average consumptions of 100 Mega Bytes per month of Smartphone consumption) …

However, remember that an average user (worldwide) consumes no more than 20 kilo Byte per Month.

One Mega-Byte of SMS would supposedly last for more than 50 month or more than 4 years.

This is just to illustrate the silliness of getting into SMS value comparison with mobile data.

A Byte is not just a Byte but depends what that Byte caries!

Its quiet clear that an SMS equivalent IP-based messaging does not pose much of a challenge to a mobile broadband network being it either HSPA-based or LTE-based. To some extend IP-based messaging (as long as its equivalent to 140 Bytes) should be able to be delivered at better or similar margin as in a legacy based 2G mobile network.

Thus, in my opinion a 140 Byte message should not cost more to deliver in an LTE or HSPA based network. In fact due to better spectral efficiency and at equivalent service levels, the cost of delivering 140 Bytes in LTE or HSPA should be a lot less than in GSM (or CS-3G).

However, if the mobile operators are not able to adapt their messaging business models to recover the SMS revenues (which with the margin argument above might not be $ to $ recovery but could be less) at risk of being lost to the assimilation process of pushing mobile data … well then substantial margin decline will be experienced.

Operators in the danger zone of SMS revenue exposure, and thus with the SMS revenue share exceeding 10% of the total mobile turnover, should urgently start strategizing on how they can control the SMS assimilation process without substantial financial loss to their operations.

ACKNOWLEDGEMENT

I have made extensive use of historical and actual data from Pyramid Research country data bases. Wherever possible this data has been cross checked with other sources. Pyramid Research have some of the best and most detailed mobile technology projections that would satisfy most data savvy analysts. The very extensive data analysis on Pyramid Research data sets are my own and any short falls in the analysis clearly should only be attributed to myself.

, , , , , , , , ,

5 Comments

Machine Intelligence Blog

It's not Magic! It is mainly Linear Algebra Applied Creatively!

AI Strategy & Policy

Artificial Intelligence Strategies & Policies Reviewed. How do we humans perceive AI?; Are we allergic to AI?, Have AI aversions? or do we love AI or is it hate? Maybe indifference? What about trust? More or is it less than in our peers? How to shape your Corporate AI Policy; How to formulate your Corporate AI Strategy. Lots of questions. Many answers leading to more questions.

Things I tend to forget

if I don't write it down, I have to google for it again

Wireless End-to-End

A blog serving the wireless communications industry