The disintermediation of GSM operators
Mobile Network Operators are at serious risk of losing revenue to disruptive startups in the next 12 to 24 months. By: Justin Spratt, VoIP Mobile General Manager at Internet Solutions
In South Africa the kings of mobile telephony are of course MTN and Vodacom, with Neotel and Telkom pushing their new CDMA wireless technologies. They have all spent massive amounts of capital building networks and are quite understandably vehement in protecting their investments. The problem is the market is facing increased competitive threats from businesses making use of disruptive technologies, just like any market that yields abnormal profits for a prolonged period would.
Corporate South Africa and consumers are fed up paying exorbitant telephony prices. Both India and China enjoy cellular call costs that equate to around 20 South African cents. Clearly the average call cost of R2 in South Africa is vexing. Even accounting for population numbers, geography is also sparse which means capital investment is likely very large in those countries.
There is however a global trend that is emerging. AT&T bought a company late last year that gave it 20,000 Wi-Fi Hotspots across America and has subsequently allowed Skype traffic across its mobile network, enabling users to make cheaper calls. EBay also recently announced that it will list Skype as a separate unit in early 2010, while BP has already enabled Wi-Fi at all of its 9,000 franchises across the UK.
What these facts indicate is that the Mobile Network Operators (MNOs) are at serious risk of losing revenue to disruptive startups in the next 12 to 24 months. Revenues are in fact already leveling and Average Revenue Per Users (ARPUs) are falling. So, you can be sure that despite healthy balance sheets MNOs are worried about declining revenue growth.
One of the most hyped disruptive technologies, which has been growing steadily over the last five years, waiting for the chance to steal market share from the MNOs is Voice over IP (VoIP). VoIP uses “packet switched” technology to essentially deliver telephony using internet rules. It is deemed disruptive because it slashes the fixed cost base of delivering telephony, and the fall in the capital investment required has meant startups can now enter this industry relatively easily.
This is by no means breaking news, as almost everybody has heard about VoIP, or at least Skype. Skype use currently erodes 8% of the world’s telephone minutes and generates $240 million in revenue for eBay. Thus far, despite the success of Skype and VoIP gaining a great deal of traction in other areas, this technology has struggled to be as dominant in the “fixed line” space. However, the tipping point is nigh!
Competitive threats usually come in two flavours, namely new licenses or innovation. Markets normally favour transformation that follows Schumpeter’s creative destruction theory on innovation, as it yields either lower prices or higher functionality. Nonetheless, Neotel and Cell C have made good ground through the government bequeathed licensed route, adopting the same “circuit switched” technologies of the other industry incumbents. The problem is that large scale investment is then required to leverage the license and deliver a return, which can only be achieved by way of continued high prices. So it doesn’t really solve the pricing problem.
Startups and smaller companies have obviously preferred to take the innovation route, using “packet switched” technologies to ensure they have a lower cost barrier to entry. This has obviously led to a number of new technologies being launched, as well as existing technologies being combined to offer something that is greater than the sum of its parts.
A case in point is the use of Wi-Fi combined with VoIP, which is giving rise to the ultimate disruptive technology – “VoIP over Wi-Fi”. This technology will inevitably lead to the disintermediation of the GSM operators.
Wi-Fi is unlicensed spectrum and is a fraction of the cost of GSM and CDMA technologies. It makes up for its shorter range with its ability to deliver much higher throughputs, and if you add the Wi-Fi savings to those derived from using internet packet switching technologies like VoIP, prices fall significantly.
As to the quality, I have first hand experience and can personally attest to the level of quality offered when using Wi-Fi as the network, as opposed to GSM. Tests such as PESQ and MOSS, which measure call quality, also show “VoIP over Wi-Fi” can yield better quality. Yes, you read right, and I have experienced it.
So the question that begs answering is, if we can get better phone quality using cheaper, unlicensed technology, like Wi-Fi why can’t we get a service that does just that? The answer is South Africans can and very shortly will have access to this type of service. In my opinion the future is very clear. Cheap mobile telephony is only a matter of months away. Whether that is delivered via GSM or “VoIP over Wi-Fi” remains to be seen. If it is delivered over the GSM network the disruptive nature of “VoIP over Wi-Fi” will ensure that operators have to address the crippling price issue.
A case in point is VoIP in townships. Where people can least afford it some rates are as high as R2.80 per minute, yet it is widely known within the industry that the variable cost to terminate a GSM call is around five cents. So, why the disparity between price and cost then? This I unfortunately don’t know, but MTN’s latest financials indicate that some of the answer might be in their bank account.
So clearly the incumbents have room to drop prices and combat any new “VoIP over Wi-Fi” entrants, but in my view we are unlikely to see this happen very soon. Revenue churn is not something any shareholder will be happy to see and until “VoIP over Wi-Fi” starts taking market share in excess of 1% (about R800 million in today’s terms) we are unlikely to see price discounting from the GSM carriers. More likely it will come from the smaller, disruptor type providers.