Warning: Last year's handsets earn last year's revenue
06 September 2007
Keeping existing customers and attracting new ones is a constant battle in any industry, but it is a particular challenge for mobile operators. A history of uninspiring customer service, combined with the ease with which people can swap operators, has created a breed of promiscuous mobile user that flits from network to network, taking advantage of the latest deal, discount or handset.
Although most operators maintain customer levels through aggressive acquisition methods, these acquisitions are expensive, which is less than ideal for operators. In a bid to increase the lifetime value of a customer, operators have introduced a plethora of loyalty-inducing services and offers.
Longer contracts is one of these – the latest Communications Market report from Ofcom, published in August this year revealed 79% of new contracts signed this year are 18 months or longer, with 24-month being far from unusual. Another of these is cheaper tariffs for SIM-only deals, combined with cash incentives for customers to keep legacy handsets, rather than have an upgrade each year.
Contracts: a millstone round the neck?
At first glance, lengthening contracts seems like a sure fire way of securing a larger slice of revenues. The longer you keep a customer, the more opportunity there is to generate income from them. However, life is never that simple and mobile customers are as fickle as they come. Evidence indicates that these contracts merely delay churn, which still averages at 30% [1].
Much more worrying is the impact longer contracts can have on service adoption. Longer contracts mean fewer upgrades as handsets are offered at the end of a contract as an incentive to customers to remain loyal. Fewer upgrades means old technology and old technology can seriously hamper the uptake of services.
This couldn’t happen at a worse time. ARPU is dropping throughout Europe: recent figures from Analysys Research, shows voice ARPU declining by as much as 15% since 2000 [2]. With price pressure increasing and regulation squeezing profit margins, no one is in any doubt that data services hold the key to reversing the revenue drop and a market filled with old handsets could have a hugely detrimental effect on service launches.
Multi-Media Money
MMS is a great example of a service that required a mass refresh of handsets in the market. It also perfectly demonstrates the value the service generates. MMS users spend on average 53.33 Euros per month compared to 38.96 Euros from SMS only users, that’s over a third more [3]. In Europe this year subscribers are expected to send 17.5 billion MMS, rising an astonishing 50% to just over 26 billion in 2008 [4] . This dramatic rise in traffic and revenue can be attributed to the availability and penetration of advanced handsets – originally equipped with cameras and now driving MMS traffic through music and other multimedia applications.
The demand for user-generated content – mobile blogging and the Web 2.0 phenomenon – is also driving MMS. Video functionality allows amusing clips to be captured as the action happens, and MMS combined with mobile internet allows the clips to be uploaded to sites like YouTube.
Integrated data services will be crucial in attempts to maximise revenue and seeding appropriate handsets into the market is a fundamental part of any service successful. Older handsets just won’t be able to cut the mustard.
But that’s not the end of the story. Mobile advertising efforts will also be impacted by out-dated handsets. Mobile operators are expecting to earn around 10% of their revenue from advertising in future. While some of this revenue will come from SMS, which has already proved to be an effective advertising medium, MMS and other converged services provide a much more compelling way to communicate the look, feel and sound of a brand – after all a picture speaks a thousand words. With old handsets, MMS could never have gained traction as quickly as it has and this revenue would remain un-harvested. Who knows what innovative new services the future will bring?
As well as impacting future service roll-out, the experience of existing services is also likely to be poorer with legacy handset. For many users the handset is inseparable from the operator and what are in reality handset limitations will often be blamed on the operator. Whether it’s network reception, battery life or accessing mobile email, the user interface will be determined by the handset and if that interface is old and clunky it will confuse less adventurous customers, and turn others off completely. Even the most popular phone gets sticky keys, a cracked screen or a shorter battery life as it ages.
SIM-only: Revenue Reducer?
The quality of service (QoS) issue is further compounded by SIM-only tariffs and incentivising retaining existing handsets. The idea behind SIM-only tariffs is to attract the price-sensitive customer by off-setting price-cuts and easy service cancellation for the customer with handset-subsidy savings for the operator.
On the surface this seems an ideal way of boosting revenues: but it is a short-sighted strategy which will ultimately stunt revenues. Price-sensitive users represent a valuable market segment and can be attracted to value-added services if they are marketed correctly. However, if these customers are stuck on out-dated handsets that are either not capable of delivering this service at all or can only do so with poor QoS then this revenue will be lost.
SIM-only highlights another issue: the initial set-up for value-added services. Whereas voice and SMS settings come as standard on the SIM, enabling users to get up and running straight away, MMS, WAP, IMS etc. have to be provisioned over the air and this process is often far from straight forward. This extra obstacle to the service can di