Threat To The Mobility Premium - Clear and Present Danger

The Shosteck Group's latest study warns that the threat to the mobility premium is a "clear and present danger." The rapid adoption of Internet pricing and a slowdown in subscriber growth in some markets could potentially drive the mobile industry down the commodity route towards a low margin "bit-pipe" access business model. The increasingly widespread adoption of "all-you-can-eat" data tariffs for 3G services, and the increasing size of voice "buckets" in some markets is driving the industry away from usage based pricing models towards the flat-rate subscription models adopted by ISPs since early 2000.

And there are yet more threats to the mobility premium. Certain developments in alternative wireless broadband access technologies and consumer electronics could enable users to by-pass the mobile operator altogether. For example, WiFi is already providing mobile users a choice beyond the cellular network for access to the Internet, for access to content and soon even for voice while on the move.

"There is a danger that longer term profits from music or video downloads will probably not add up to what mobile operators are hoping for," stated Jane Zweig, CEO, The Shosteck Group. "Too many forces are combining against it. Downloading and uploading to and from users' PCs via wired/wireless connections is relatively simple, plus removable memory cards are increasingly being used for data transfer," Ms Zweig continued. "Added to these forces is the competition/overlap from portable music and video players like the iPod."

"Mobile may not be able to justify a premium for content services which can be just as easily accessed via other, online mechanisms," stated John Darnbrough, Senior Associate. "The impact on the mobility premium may be greater than most operators want to believe."

The study also suggests that although revenues expected from the Mobile Internet may be starting to materialize at last, as 3G is finally becoming established, mobile operators themselves may not be the major recipients of that revenue. Developments outside the control of the operators are creating a shift from mobile operator controlled portals to a more open Internet model.

"Barring some notable exceptions, the Walled Gardens created since the birth of the Mobile Internet are becoming a thing of the past," Ms. Zweig said. "The mobile industry is starting to experience the Internet Effect - where content and services are being brought to market from an almost infinite number of sources. Though operators provide the services and infrastructure that make the Mobile Internet possible, the content and services flowing through it are increasingly being provided by entrepreneurial, independent content providers and aggregators."

The emergence and rapid growth of the "direct-to-consumer" or "off-portal" market - where consumers can purchase mobile content from third parties directly instead of from the mobile operator - has helped to significantly grow the Mobile Internet market, but perhaps at the expense of the operator's own portals.

Such developments could be seen as both an opportunity and a threat to the mobile industry as it struggles to recoup the vast investments in 3G licenses and networks.

The study also analyzes the threat of market entry from players outside of the traditional telecoms industry, such as the major Internet Portals, and media and consumer electronics companies.

For example, in 2005, all four major Internet portals launched new integrated VoIP and IM services and have launched new initiatives in the Mobile Internet search market.

"All of the major Internet portals -- Google, Yahoo!, MSN and AOL -- are now looking to create new revenue streams by building integrated communications and content services that people will pay for," stated John Darnbrough. "They understand that communications services will bring users back to their portals and thus keep their advertising customers happy too," continued Mr. Darnbrough. "Because of the personal nature of mobile services, these Portal players are anxious to develop a strong presence in the mobile space - which may mean working with, or competing against, existing mobile operators."

Along with the heavy hitters of the Internet, major consumer brands and media companies are moving into telco territory as well. Many have or are about to launch new mobile initiatives either as MVNOs, WiFi service providers or independent mobile portals. All are on a quest for the ultimate prize -- the "quad play" of telephony, TV, Internet and mobile.

"The involvement of the major Internet portals and media companies in the Mobile Internet could change the business model towards one driven by paid advertising and promotions, in addition to service and content revenues from users," commented Ms. Zweig.

This is not what mobile operators had in mind when they envisioned the profits they alone could reap from charging for content services over the Mobile Internet.

Will Internet and media players partner with operators, or will they fight with all the leverage they've got?

A major transformation of the mobile industry is coming, especially as it converges with the IT and entertainment industries. The potential shift of power towards global content and portal owners, especially in a media world driven by advertising and brand, signals a potential shift towards a lower margin "access" business for mobile operators.

Significant changes to the structure of the mobile industry seem inevitable and this latest Shosteck Group study does not shy away from exploring them. As one example, it looks at the possibility of mobile operators separating their wholesale and retail operations - either as a result of market forces or regulatory/political forces.

"Rather than fear and fight such a trend," Mr. Darnbrough said, "operators should embrace it, and be prepared to profit from it by building strong wholesale businesses based on a 'smart-pipe' rather than a 'bit-pipe' business model."

Posted to the site on 31st January 2006