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The mobile operator’s dilemma (and opportunity): The fourth curve

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Mobile operator profits have more than doubled in the last 10 years. The trifecta of fast broadband networks, well-designed mobile computing devices, and the insatiable supply of content, applications, and services has unleashed consumer demand for more like never before. But operators can’t rest on their laurels.

The mobile industry is set to hit what I call its fourth revenue curve, where they will derive their sales from providing services such as payments, software and mHealth as opposed to providing voice, texting or bulk data. How they handle this fourth curve will determine if operators continue to dominate the value chains or become irrelevant. Here’s what’s at stake.

In 2012, the global mobile services revenue will hit $1.5 trillion. This is after last year’s landmark total global mobile operator revenue exceeded $1 trillion — a new industry high. But that peak isn’t guaranteed to last.

The four revenue curves explained

For much of the last three decades, voice has dominated the revenue streams for almost all operators. However, in 2013, the global voice revenues will fall below the 60 percent threshold. So far, the drop in voice revenues has been compensated by the rise of messaging revenues and the data access revenues. However, some nations and operators have started to experience declines in messaging revenues as well.

The sigmoid or the S-curve growth has been well understood and applied to various disciplines. If we segment the operator revenues by voice, messaging, and access and correlate them with subscription growth, in most cases, as the subscriber penetration approaches the 70-90 percent band in a given revenue segment, revenue hits a peak, stagnates for a bit and declines. The amount of time the revenue curve stays in the stagnation phase depends on the market competitive dynamics and usage profile of the subscribers in a given country.

The first revenue curve of voice is already in decline for a majority of the developed markets like the U.S., Japan, and Western Europe. The second revenue curve of messaging is on the decline in some nations like the Philippines, Netherlands, Taiwan, Spain, and Italy while approaching saturation in countries such as the UK, France, and the U.S. Both of these curves are on the rise in developing countries, which are still in the subscriber growth phase.

The third revenue curve of data access is in the growth mode around the world for all nations; however, the margin pressure on this revenue base is the strongest of the three as the operators rush to meet the growing data demand that is doubling every year in most major markets. We are likely to see this growth continue for the next 3-4 years before this curve also starts approaching its peak.

The fourth curve

When that happens, all three revenue curves will be in decline. This means that the net revenue for some of the operators will decline, in some cases precipitously. This will happen to operators around the world at different time intervals, unless the fourth revenue curve starts to take shape in the near term to help cushion the decline.

The fourth curve is quite different from the previous three. It primarily consists of value-added (VAS) and over-the-top (OTT) services such as VoIP, IP messaging, cloud, mHealth, telematics, advertising, payments, commerce, etc. As such, the fourth curve is not a single curve but rather a combination of dozens of smaller curves.

The barriers to entry are low and the main competitors are not fellow operators but well-funded Internet players like Google (S goog) and Facebook (S fb). The business model is less about metered access and more about value creation.

The growth of revenue in this fourth curve will be critical. For some operators, a weak fourth curve will be fatal. They won’t be able to arrest the fall in the overall net revenue and investor pressure will force them to consolidate or learn to live with lower margins or go out of business.

Handling the fourth curve: Adapt or die

Based on the strategy chosen, the operators will likely fall into three major buckets: access only, enabler, and digital lifestyle solution providers. To be an effective and a long-term competitor on the fourth curve, operators have to become OTT players themselves. This requires innovation, financial muscles, and a ruthless mindset to capture its share from the value chain.

The operator might play all three roles depending on a given vertical in a given country. However, without playing a significant role in the latter two categories, operator revenues over the long haul will start to resemble those of utilities – billions of dollars in revenue but the margins might shrink to 8-12 percent from the current 30 to 40 percent.

Greater competition on the fourth curve works in the best interests of the consumer. Given that the service layer is detached from the access layer, the choice of solutions across any given vertical will be good for the consumer. The startup ecosystem will also benefit from a more diverse telecom services landscape as the number of potential customers and acquirers will increase. Regulators will have their work cut out for them to keep the market fair and competitive.

An operator’s ability to recognize the importance of the fourth curve in its long-term survival plans will pretty much define their role in the ecosystem. Many will fail and get assimilated by the tides of consolidation. But, some will move and adapt, either forced by the financial climate or the desire to innovate, and launch new services that fuels their growth for the next decade. Indeed their future will be defined by how they react to the 4th wave of mobile.

Chetan Sharma is President of Chetan Sharma Consulting and is one of the leading strategists in the mobile industry. He has served as an advisor to senior executive management of several Fortune 100 companies in the wireless space and is probably the only industry strategist who has advised each of the top 6 global mobile data operators. He is author or editor of 8 mobile related books and more than 125 research papers and articles.

17 Responses to “The mobile operator’s dilemma (and opportunity): The fourth curve”

  1. I don’t know why analysts continue to belittle ‘access’ – carriers can continue to reap revenue for several years by providing access to all types of end devices – charge more for LTE, LTE-Advanced etc. and with the end of unlimited usage, they can also charge higher for data access.
    Trying to compete with Apple, Amazon, Google and the other software players is a loser’s game. The carriers have no experience nor have they made any significant progress in competing with these players. Not going to happen!

  2. Allan Bennetto

    Interesting article … I doubt whether many existing operators can actually move fast enough in this space to have an impact and commercialize on the fourth curve. I suspect we will see more partnerships and acquisitions than the operators going it on their own. How that plays out from a revenue perspective remains to be seen, but I believe there is a more significant opportunity should the relevant stakeholders be willing to collaborate with each other.

  3. Soma Ramasamy

    Chetan, good article. This is certainly a trillion dollar question facing the industry. I have two points that are not touched on in this article.

    Point #1: will the order of magnitude of the actual revenues made in the 4th curve be similar to the previous curves…as implied in the charts and conversations. Vast majority of the OTT services are free or indirectly funded (Ad) and the low entry barrier in that space might continue the trend

    Point#2: given that the access business is regulated, spectrum constrained and increasingly getting concentrated with the top 2 players having ~70% market share…will the pricing lever not be more aggressively used by the operators to preserve ( at least arrest ) the margins?

    • Chetan Sharma

      thanks. more details in the paper.

      1 – actual revenue could end being at least the size of the messaging curve if not greater. the curve is not just communications apps but other areas like cloud, health, retail .. some operators are already > $1B on this curve

      2 – absolutely, that’s why i talk about the strategy on the existing curve to preserve the margins but they have to invest in the 4th because eventually the revenue from the first three individually and in aggregate will decline

  4. Good article, Chetan…

    My first comment is around the “trifecta”, which I’ve always seen as 1) advanced networks, 2) advanced devices, and 3) the “mobile lifestyle” that in turn has opened new opportunities around content, applications, and services. Perhaps we are all saying the same, but different perspective (

    About the fourth curve, I see it not that different from the previous three (from the high-level perspective) — the 4th curve I see as a *transformation* of the three previous ones. Voice will be voice, but over IP networks (VoIP). Messaging will be messaging, but over IP networks (IP messaging). Data-access (or pipe) will always be the prevailing revenue source for operators, but w/ latest 4G+ technologies — latter is what they do best. And while it makes total sense for operators (they have been talking about this for years) to offer their *Infrastructure as a Service* (messaging, billing, payment, M2M management, etc), based on past experience and history, I am not convinced they will succeed when the 4th cycle/curve comes around. But those services & content coming from 3rd party service-providers, that is, the ecosystem (OTT services and content), over the operator’s data-access, will!

    I’m summary, I would not necessarily say “adapt or die” but instead I would qualify it a bit more by saying something like “embrace the ecosystem, or die”.


    • Chetan Sharma

      “embrace the ecosystem” is part of that adaptation process and there are different tiers and nuances which i discuss in the paper. the 4th curve is actually quite different than the previous 3 – some overlap but different nonetheless. time will tell how this plays out but no one in their right mind will say that all will succeed or all will fail. some operators are adapting well others are not.

      • BTW, Chetan, let me add something then a question — one of the reasons I hesitate seeing the operators making any real impact beyond access in the future, is in a big part, due to the silo mentality. To truly make overall impact, they must address this across operators with the goal of maximizing reach… But will operators really make such leap? And/or will consumers make such a leap?

        (It just doesn’t click right now for me; I am still not convinced that is the case – esp. based on experience. That is why I say it is a better approach for them to leverage the ecosystem/3rd parties.)


  5. cameron b

    this is pretty much nonsense, especially the competitor table. To compete, you have to have a viable offering… and non of the MNO have a offering that space. The MNO core competency is access. Customers pay 50, 60, 70 … a month for access. Slicing it up as voice and data leads to distortions

  6. Kevin Bauer

    Great thought provoking article. I don’t pretend to know the answers, but thoughts I would add to this article include:

    – I think we could see more global carrier consolidation to take advantage of emerging markets as an extender of the data revenue curve.  This presents possibilities for retailers internationally that they don’t have easy access to today.

    – I for one do not buy the a la carte approach to VAS implied in the article.  I agree with some of the comments that Carriers are not software companies.

    – I can, however, see carriers start to act like portals. In fact they’ve done this in the past and in many ways still do today.  The proliferation of mobile services will likely lead to subscription overload where consumers feel they get nickeled and dimed to death with subscriptions for a la carte services.  Carriers would be ideally placed to buy in bulk and then offer larger subscription packages of services (think cable and satellite).  If they have a ubiquitous mobile wallet product, they can do this while maintaining better margins through the pickup of interchange fees.

    In the end, it’s the doorway strategy that proved so successful for Google. Control the traffic and take a slice of the money as it goes through it. Smart play if they can pull it off.

    • Pedro Luis Chas Alonso

      I don’t think operators can really join the OTT party. They are pipe builders but the pipes are and will continue to be extremely important and their value and the income associated to them will not decrease (at least so dramatically as is intended in the article). Telcos will exploit technology efficiencies (e.g. LTE, WIFI…) and will move from unlimited traffic tariffs (in the line of the last Verizon tariff moves) and they can survive very well.
      There are perhaps other (complementary to their main pipe provider role) roles that the telcos can have (but with not so big an income associated to them). For example to act as a proxy in order to really defend the users from the abuses of the OTT companies (e.g. many of them privacy related) and to provide strong and dependable identity (on the basis of the SIM).
      Why people think that the value of access connectivity will dissapear?. Connectivity is THE main enabler now and in the future.

      • It is not that the value of access will disappear, but that the “thing” that maximizes access (usage and related revenue) are the services and content themselves. Otherwise, no one would care/ever use the network. Operators by not playing or not succeeding on the services/content space, they are missing a big piece of the pie. But, I say, instead of trying to control, as we have seen again and again in the past, instead, embrace the ecosystem; which they are doing much better now, but not by choice.

  7. I agree with we’re quickly heading to an “Everything over IP” / OTT model, and that service innovation and delivery will be the growth drivers in that environment. However, I’ve seen little that leads me to believe that the incumbent MNOs are moving aggressively into those areas (with a few notable exceptions like TU Me). The overall situation is quite similar to the legacy entertainment industry’s efforts with SOPA, where they tried to legislate an end to the competitive pressure they are experiencing with content distribution via the Internet.

    Instead of embracing the inevitable change and competing in those new markets, the incumbents are using their deep pockets and political connections to do everything in their power to delay and disrupt the innovators. We’re seeing that now with MNOs in Europe and Asia blocking OTT apps that threaten their voice and messaging cash cows. Pretty much the exact opposite of your prescription.

  8. Miko Matsumura

    This is exactly the problem… being a fan of Chetan Sharma and @Om of course I dig this article. How will these mega companies sum the area under the VAS curve? I say it’s through developer platforms.

  9. Chetan, I realize you are a long time carrier partisan, but I thought you had wised up a bit by now. Given the miserable record these jokers had in these various services before Apple and Google handed them their head, why do think that will change at some point in the near future? Newsflash: a leopard can’t change its spots. The carriers are (very mediocre) pipe builders. Even though they do even that poorly, it is what they should stick to. Leave it to us software and hardware guys in Silicon Valley to define the rest. At least we’ve got the consumer’s interests at heart.

    • Derek Kerton

      Consider the possibility that the carriers could partner with innovators, and capture a share of that value. They don’t need to invent it themselves, just spot it and partner with it.