Despite increases in the penetration of smartphones discussed in a previous post, the outlook for mobile network operators remains challenging. My analysis of the latest data from Vodafone shows that the combination of intense price competition and price regulation is causing mobile voice revenues as a proportion of total mobile revenues to drop significantly. In the UK, voice will account for only about half of mobile revenues by March 2012.
Across Western Europe, the voice revenues of mobile network operators are being squeezed, through a combination of:
- intense price competition
- cuts in mobile termination rates, forced by telecommunication regulators.
Over the last five years, voice revenue per customer has generally decreased significantly for Vodafone, in Germany, Italy, Spain and the UK, as shown in the figure below. Over the five years to March 2011, voice revenue per customer has declined 42% in the UK, 36% in Germany, 29% in Italy and 21% in Spain.
Mobile network operators have been able to avoid even steeper declines by encouraging voice usage, for example by offering bundled tariffs and stimulating fixed-mobile substitution.
In general, there have been increases in the number of voice minutes per customer, as shown in the figure, below. However, these have not been sufficient to reverse the decline in voice revenues. In the five year period until the end of March 2011, the number of voice minutes per customer in Vodafone’s networks increased by 33% in Germany, 19% in the UK, 13% in Italy and 11% in Spain.
Compared with declining voice revenues, mobile data revenues, in general, have continued to increase, driven by greater adoption of mobile broadband services and the rapid take-up and usage of smartphones.
As a result, mobile voice revenues as a proportion of total mobile revenues are decreasing significantly, as shown in the figure, below. Among Vodafone’s four largest Western European mobile markets, the UK generates the greatest mobile data revenues, resulting in the lowest proportion of mobile voice revenue. In the year to March 2011, voice accounted for only 57.1% of mobile voice revenue for Vodafone UK, from 62.4% for the previous year – a drop of 5.3 percentage points. In the five year period up to March 2011, voice revenue as a proportion of total mobile revenue (from voice, messaging and data services) decreased by 22.6 percentage points.
We expect the downward pressure on voice revenues to continue. For example, in the UK, over the next four years there will be substantial reductions in mobile termination rates, driven by the UK telecom regulator, Ofcom. Mobile termination rates are the wholesale charges that mobile operators make to other network operators to connect calls to their networks. From the beginning of April 2011, Ofcom enforced a reduction in mobile termination rates from 4.18 pence per minute to 2.66 pence per minute for all UK mobile operators.
As shown in the figure, below, mobile termination rates will continue to fall year-on-year, to reach 0.69 pence per minute by March 2015. This roughly corresponds to an 80% reduction in termination rates over the next four years.
In its latest annual results report, Vodafone expects that these termination rate cuts will have a significant negative impact on revenue growth during the 2012 financial year.
The pressure on voice revenue demonstrates the critical need for mobile network operators to generate increased revenues from mobile data services, to help prevent significant falls in overall mobile revenues. Despite increasing penetration of smartphones, which will boost mobile data revenues, mobile network operators will continue to face major challenges in sustaining their existing mobile revenues.