Exploding mobile Internet usage and subscriptions won’t make up for a 36% decline in traditional mobile operator revenues, leading average revenue per user (ARPU) to fall 15% in Europe by 2005, according to a new report by Forrester Research B.V. (Nasdaq: FORR). The report asserts that mobile carriers’ operating profits will disappear in 2007 and take six years to return, leading to major operator business failures and massive industry consolidation.
“European mobile operators will consolidate or disappear, and UMTS will be remembered as the trigger that imploded Europe’s mobile industry,” said Lars Godell, telecom analyst at Forrester’s European headquarters in Amsterdam. “We expect that consolidation will leave only five groups serving all mobile users in Europe by 2008.”
To assess operators’ prospects, Forrester created a model of average mobile operator revenues in the 17 markets of Western Europe. The analysis predicts that despite skyrocketing mobile Internet usage, the average annual revenue per European mobile subscriber will fall 15% between 2000 and 2005, from €490 to €419.
Voice, SMS messaging, and data connections for faxes and laptops drive operator revenues today, but Forrester expects prices for all three to decline rapidly in the face of increased competition. As mobile virtual network operators (MVNOs), unconventional resellers like grocers, and new UMTS entrants enter the mobile telephony market over the next five years, they will use voice as a loss-leader to steal faster growing mobile Internet users from incumbents. This individual rationality will lead to collective irrationality, eroding traditional revenue streams. The result: Voice will take a 44% hit, messaging will rise then fall, and only traditional data revenues will grow. All told, traditional mobile revenues per user will shrink by 36% between 2000 and 2005 to reach €313 per year.
While the 26 mobile operators interviewed for the report expect that new mobile Internet revenues will pick up the slack, Forrester’s analysis predicts dimmer prospects. Mobile Internet revenues from access, content, retail, advertising, location data, and other services will fall below expectations, totaling €106 per user annually — making up only 60% of shortfalls in traditional revenues and leaving a €69 ARPU hole.
To determine whether operators can sustain profits amid ARPU decline, Forrester modeled the operating profit of an average incumbent European operator through 2015, over the typical 15-year period of a UMTS license. Making conservative cost and revenue estimates, Forrester found that operating profit will begin to shrink in 2003, turn negative in 2007, and recover only in 2013. Why? Mobile penetration will approach saturation at the 76% that Forrester forecasts for 2005, marketing costs and competition will remain strong, and customer churn will remain high.
“Scale will become a key success factor as grim profitability prospects and huge capital requirements take their toll. As a result, winning operators will consolidate into five groups. Vodafone, T-Mobil, France Telecom/Orange, and BT Cellnet will make up four certain winners — these operators already have a significant Pan-European presence with moderate exposure to business failure. KPN, Telefónica, Telecom Italia, or NTT DoCoMo will be the additional wild card group to survive. Dominant players in smaller markets like Norway and Sweden will have to affiliate with these larger groups by 2008 — leaving no truly independent operators left at all.
“We expect that no new UMTS entrants — companies that are entering the market for the first time with new UMTS licenses — will survive after 2007,” Godell concluded. “Also, second-tier operators in high-license-cost countries like the UK and Germany will run out of funds before they can jump this hurdle as their ARPU drops more than their national competitors’. Finally, faced with ARPU drops of up to 43% by 2005, even dominant operators in hard-hit countries like the Nordics, Ireland, and Austria will have difficulty surviving.”