The largest operator is China Mobile with just 11% market share. Vodafone is a distant second with 5% market share. This data underscores the fact that the operator market is very fragmented and ripe for consolidation. Compare this with the market share of handset vendors – Nokia is at 40% and Samsung is approaching 20% (top 2 handset vendors have 58% market share while 20 top operators together are able to garner this much). Till very recently, the upper hand was with carriers and the other players in the ecosystem had to follow the operators. The mobile services were about voice and simple services like SMS, MMS and mobile internet. This means that the scale was not so important for the success and even smaller operators with 10-15 million subscriber base were able to sustain themselves. However, now after the popularity of Apple application store, there are many such stores that have been announced by handset vendors but only one by a carrier (Vodafone). The device vendors can pre install the application store in new devices that they sell and can use the carriers like a bit pipe. Due to their high market share, they get higher reach and hence they become the preferred platforms for developers. Nokia sells over 400 million devices every year is well positioned to reach as many as a billion mobile phone users due to their installed base. This means that Nokia not only becomes the favorite destination for developers but also has the ability to apportion its platform development cost over a large base. The operators cannot match the scale of Nokia as even the largest operator does not have the subscriber base which is as large as the installed base of Nokia. Android is an open source operating system and hence can scale itself fast as it can be used in handsets across the vendors.
It requires millions of dollars to develop SDP (Software Development Platform) and if the scale is missing, then the operator would either need to charge higher tariffs from its subscribers or would have to partner with platform owners like Android, Nokia and Apple to offer high end services. Vodafone recently announced its own application platform and hopes to implement across its alliance partners. The $23 billion deal between Bharti and MTN would help them to spread the IT and platform cost over a larger base. Low ARPUs in their markets does not justify high investment in IT at the same time, it is important to invest in IT to get the subscriber satisfaction and prevent its consumers from churning.
Over the last few years, the decline in ARPU has been significant with the voice tariffs and roaming charges coming down. The roaming tariffs in Europe are under severe pressure. At the same time, the subscriber base is stagnating as the mobile penetration is reaching the saturation stage. This means that the only alternative left with operators in Europe and US is to look at acquisition in Asia and Africa. Vodafone has been following the strategy of expanding into African nations and has taken over Hutch’s operations in India to get a foothold in emerging markets. Falling ARPUs also mean that the cost recovery of platform development would take a lot longer and hence unless there is operator consolidation, the mobile operators would continue to destroy wealth at the stock exchanges.
In a few countries, the spectrum available for mobile services is too small or it is divided amongst a large number of players, e.g. in India, there are 15-16 players offering their services leading to very small quantum of spectrum for each player. In such scenarios, consolidation may happen sooner than later. I expect the incumbent operators in India to takeover the new operators not for their subscriber base but for the spectrum that they hold.
There are three levels of consolidation – Domestic, regional and inter-continental. Governments across countries have argued that they need to increase the number of operators to increase the competitive intensity leading to benefits to consumers. However, it is seen that the impact of competition on tariff diminishes steeply after the 3rd or the 4th operator in any market. It is likely that the smaller operators without scale would be taken over by larger operators in their markets. The next level of consolidation would be within the region like there are operators which operate in markets across Africa or Middle East and have expanded by taking over smaller operators in other countries but within the same continent or region. Finally, I expect M&A activity amongst the regional players across continents to be able to get the scale. There are many targets that are ripe for a potential take over, e.g. Orascom (operations in 11 countries), Zain (operations in 24 countries), and Telekom SA
Due to the current economic conditions (read credit crunch) and reluctance of smaller operators to sell, the consolidation may not move at a fast pace. In such a scenario, it is possible that mega alliances are formed amongst operators. The already exist a few alliances like the Bridge Alliance of 11 operators in Asia, East African Operators Alliance, Vodafone alliance with China Mobile and Verizon, etc. The existing alliance would be strengthened and new onces will be formed that would be more tightly knit together rather than just a preferential roaming agreement.
In summary, the operator landscape is going to change tremendously in next five years with the emergence of mega operators or operator alliances. The consolidation would help the operators gain scale that would give them higher bargaining power against the resurging ecosystem players. There is no alternative to consolidation in front of operators.
Mohit is a telecom professional with rich experience over 15 years. His expertise is in the area of strategy and planning and his work experience includes stints with two of Big 5 consulting organizations, a telecom operator and a handset vendor. Mohit can be reached at firstname.lastname@example.org