Will Fixed Network Revenues Grow as Mobile Revenues Slow?

Over the last decade, mobile revenues have driven global telecom earnings. But could that change?

Some might argue that fixed networks are poised for a period where investments in that segment have less risk, and faster revenue growth, than the mobile segment.

That might not necessarily mean that fixed networks grow faster than mobile, but that fixed network revenues decline less than mobile revenues, in many markets.

Oddly enough, if mobile revenue growth slows enough, improved fixed network revenue growth would at least change the composition of revenues in the direction of fixed networks.

Though some might disagree, at least some service providers might now believe building and operating gigabit networks represents a revenue growth opportunity, beyond Google Fiber and the handful of municipal or other gigabit networks in operations or trying to get off the ground in the United States.

In some Western European markets, there might also be some new thinking that faster revenue growth is possible in the fixed network high speed access market, than in the mobile segment.

In some ways, those prospects are relative. Recent tier one service provider results in Western Europe show faster decline in mobile retail revenue than in fixed.

Researchers at Analysys Mason argue that, at the very least, fixed network revenue will hold up better than mobile revenue, and also that the share of total revenue generated by fixed networks will grow over the coming five years.

That might require a nuanced assessment, as a change in revenue contribution represents, in large part, a deceleration of mobile revenue.

The unanswered question is the relative value users now place on fixed access and mobile access services. It might be assumed that the value of mobility “always” is higher. But churn rates in the recent recession since 2008 show that at least in some countries, such as Spain, users abandoned mobile services and kept fixed services.

And one key change in the market is the relative value of Internet access and voice services. You might argue that the value of mobile voice is marginally challenged by the growing importance of Internet access as the key value for any access network.

In other words, the single most crucial service is Internet access, and fixed line services in most markets represent a better value proposition than mobile Internet access. And one might argue the value of mobile voice also changes under such conditions.

According to Analysys Mason analysts, mobile revenue in most Western European countries has decoupled from changes in gross domestic product, and is now performing significantly worse than the economy is, as a whole. That, one might suggest, also indicates that, in some instances, mobility has less value to end users than Internet access.

Also, fixed networks also are less dependent on voice revenue than are mobile networks, exposing the mobile segment to greater potential losses.

Service revenue from services other than IP data accounted for 76 percent of the total for mobile in 2012 in Western Europe.

Mobile retail revenue by type, Western Europe, 2010–2012 [Source: Analysys Mason]

Fixed operators' exposure to voice is substantially lower. About 67 percent of fixed operator revenue (excluding content) in Western Europe comes from data services in 2012.

Fixed retail revenue by type, Western Europe, 2010–2012 [Source: Analysys Mason)

Also, mobile voice appears to be the most discounted service in quadruple-play packages, leading to “a swift erosion of the value of mobile voice in the market as a whole,” Analysys Mason says.

For example, almost all of the revenue and earnings erosion caused by Free Mobile's entry to the French market was attributed to mobile services, whereas revenue attributable to fixed-line services did not shift from its long-term trajectory.

Fixed service revenue arguably might be less exposed to economic downturns than mobile, as well. Again, it is a bit of a nuance, but fixed network revenue might be more stable than mobile revenue, over the next five years, in many markets.

But there is a wild card. As most mobile devices are equipped for Wi-Fi access, and as those devices become content consumption platforms, with most usage at indoor or at least stationary locations, it is more feasible for Wi-Fi access to provide the Internet access.  

And that potentially means fixed-only networks could disrupt much of the “mobile” Internet access value proposition.

Revenue Role Reversal for Fixed, Mobile Networks?

In many ways, mobile service providers might hope Western Europe does not represent the future of the global business. In some ways, fixed network operators might hope Western Europe is a model for the future.

The reason is that fixed network revenue sources seem to be growing, as a percentage of total industry revenues, compared to mobile revenue sources, which seem to be shrinking, as a percentage of total industry revenues.

That doesn’t necessarily mean fixed network revenue is growing; it simply is shrinking more slowly than mobile revenues.

It appears mobile is poised for more serious revenue declines than fixed services. “A key factor is mobile's dependence on legacy non-data services compared with fixed-line or cable,” Analysys Mason says.

Already, about 67 percent of fixed operator revenue (excluding content) in Western Europe came from data in 2012.

In fact, though it will strike many as odd, the Great Recession and continuing economic sluggishness in Europe has produced evidence that European consumers consider their fixed service more essential than their mobile services, something many would assumed would operate in the reverse--with mobile services deemed more important than fixed.

Fixed service revenue seems to have been more stable than mobile revenues. In fact, fixed-line bundles have the best take-up in some of the more economically challenged countries, Analysys Mason notes.

Perhaps the primary reason for that fixed network preference is the value-price relationship, compared to the value-price relationship for mobile Internet access.

Also, with growing availability of Wi-Fi access in public and outside the home areas, it is easier to use “Wi-Fi only” or “Wi-Fi mostly” as the Internet access medium.

Oddly enough, after a long period where global growth was driven by mobile services, there now appears to be an opportunity for at least some new growth in the fixed network space based on providing services to mobile users.

Mobile data traffic increasingly is used at locations where fixed operators can supply most customer needs at lower cost and price. The reason is that most consumed data occurs when people are not “out and about,” but at stationary locations, most commonly the home or office.

Though a decade ago the notion that Wi-Fi hotspot networks could be a substitute for mobile access proved incorrect, some believer there could well be a different business terrain over the next several years.

Potentially, fixed broadband providers could cooperate with public Wi-Fi providers, or use owned assets, to create Wi-Fi access that is a reasonably useful primary Internet access method for some customers.

To counter that threat, mobile operators are adding their own public Wi-Fi networks, in part to offload traffic from the mobile network and in part to provide data services at lower cost.

The important potential new development is the reversal of “growth” prospects for mobile and fixed networks. Or, as some analysts suggest, which segment will decline less.

Mobile Service Provider Revenue Sources

Fixed Network Service Provider Revenues

Perhaps significantly, mobile spending is viewed as more discretionary than fixed network spending, by analysts at Analysys Mason.

Recent results from larger operators in Europe already show faster decline in mobile retail revenue than in fixed, and Analysys Mason forecasts that mobile will represent a declining share of total operator retail telecoms revenue during the next five years.

Spain might provide an example. Though overall service provider revenue is projected to decline over the next two years, fiber-based services on the fixed side and wholesale services or business-to-business mobile services are where revenue growth will be found, according to a new analysis by Pyramid Research.

The Spanish communications market generated €22.6bn ($29.0bn) in 2012, which represented an eight percent decline year-on-year.

Due to the prolonged economic recession, expected to last another two years in Spain, communications market service revenue will return to growth in 2015, up 2.3 percent a year.

Fiber to the home revenues will grow at a compound annual growth rate of 58 percent between 2013 and 2018, reaching $3.3bn in 2018,” says Pyramid Research Senior Analyst, Stela Bokun.   

Mobile revenue growth will come from the enterprise and wholesale segments.

The key takeaway is that revenue growth will be tough, and that growth might be stronger (or declines less sharp) in the fixed network segment of the business.

Mobile Dominates Both Broadband Access and Voice, Globally

Mobile voice subscriptions now outnumber fixed voice connections about six to one, globally, and

about 76 percent of all Internet access connections globally use mobile connections, according to the International Telecommunications Union.

In other words, mobile is the dominant way most people use either voice or Internet access. At the same time, the percentage of people who actually buy voice service from a fixed network is declining, both in developed and developing markets.

Those facts have implications for revenue growth, capital investment and business strategy,

shaping not only “who” is in the business but “how” they approach the business and “where” the revenue growth is, which services are growing and which are declining.

In the U.S. market, for example, revenue growth has shifted to mobile segment, with one important exception.

AT&T and Verizon are seeing revenue growth in their fixed network segment, on the strength of high speed access services and video entertainment.

Google Fiber likewise anchors its service with gigabit high speed access service, complemented with video entertainment. Note that Google Fiber does not offer branded voice service. To be sure, Google has said it would have offered voice service, were the regulatory burdens not so high.

Still, Google Fiber shows that high speed access and video entertainment are the lead apps for a fixed network business.

Even smaller telcos, despite losing money overall, are seeing growth in high speed access services.

In the first quarter of 2014, for example, Fairpoint data and Internet services revenue grew nearly 11 percent, year over year, from $14.9 million to $19.9 million, largely on the strength of services sold to business and organization customers.

Data and Internet services revenue also increased sequentially in the first quarter, for the fifth consecutive quarter, Fairpoint Communications says.

Voice access lines. on the other hand, declined 6.8 percent year-over-year as compared to 7.8 percent decline a year ago.  

That provides just one example of a change in the value of a fixed access network. Whether a fixed network service provider is Google Fiber, Fairpoint Communications, AT&T or Verizon, value increasingly is anchored in high speed access, with video entertainment being the important second app.

Among the possible ramifications of U.S. industry consolidation that could happen were regulatory authorities to approve Comcast’s purchase of Time Warner Cable, an AT&T bid for DirecTV and a Sprint acquisition of T-Mobile US, not to mention any others that also could follow in the immediate wake of such restructuring, is impact on high speed access services.

Comcast would become the largest supplier of consumer high speed access in the United States. AT&T might be able to devote most of its fixed network bandwidth to Internet access services. And Sprint might find it has to re-enter the fixed network Internet access business, as a condition of getting approval for its mobile merger.

Still, overall, since global  revenue and subscriber growth is driven by mobile services, not fixed network services, capital investment will skew towards mobile networks as well, as each incremental unit of fixed network investment produces less incremental revenue than a similar unit of investment in mobile assets.

But the shift in value for fixed networks is clear. In a new twist, fixed Internet access networks provide value as a key way to backhaul mobile Internet traffic.

In some cases, up to 80 percent of mobile traffic is offloaded to Wi-Fi networks, for example.

And fixed network coverage is likely to remain rare. By the end of 2014, fixed broadband penetration will reach about 10 percent of homes globally.

And as consumers seem to be abandoning fixed network voice services in both developing and developed regions, additional investment in new fixed networks is likely to remain limited, wherever it does not already exist.

Some 44 percent of all fixed broadband subscriptions are in Asia and the Pacific, and 25 percent are in Europe. So 69 percent of fixed broadband connections are in those two regions.

In contrast, Africa accounts for less than 0.5 per cent of the world’s fixed broadband subscriptions, and despite double-digit growth over the last four years, penetration in Africa remains very low.

Africa, the Arab States, and CIS are the only regions with double-digit fixed broadband penetration growth rates.

The Americas region stands out with the lowest growth in fixed broadband penetration, estimated at 2.5 per cent and reaching a penetration rate of around 17 per cent by end 2014.

Europe’s fixed broadband penetration is much higher compared with other regions and almost three times as high as the global average.

source: ITU

The point is that the value of fixed networks has to change: such networks cannot provide value as voice vehicles. Instead, high speed access and mobile network offload, plus video entertainment, are emerging as the long-term value of fixed networks.

But where fixed networks operate, revenue growth will be driven by Internet access services.

By the end 2014, there will be almost three billion global Internet users, 66 percent of which live in the developing world.

But mobile networks will supply 2.3 billion of those total connections, or about 77 percent of all Internet access connections.

By way of contrast, there were at the end of 2013 about 1.16 billion fixed voice lines in service, according to the International Telecommunications Union. More importantly, the ITU suggests fixed telephone penetration has been declining for the past five years.

The ITU data suggests there will be about 700 million fixed network high speed access lines in service, or about 60 percent of the number of voice lines. Over time, that percentage is going to grow, at least in part because voice now has shifted to mobile networks.

There will be, at the end of 2014, about seven billion mobile phone users. Some 3.6 billion of these will be in the Asia-Pacific region, and the developing world will account for 78 percent of the world’s total mobile subscribers.

In Africa and Asia and the Pacific, mobile penetration will reach 69 percent and 89 percent, respectively in 2014.

Penetration rates in the CIS, Arab States, the Americas and Europe have reached levels above 100 percent and are expected to grow at less than two percent in 2014.

But even mobile connections are shifting in the direction of adding mobile Internet access. Globally, mobile broadband penetration will reach 32 percent by end 2014; in developed countries, mobile broadband penetration will reach 84 per cent.

In developing countries, mobile broadband adoption will be 21 percent.

Mobile broadband penetration levels are highest in Europe (64 percent) and the Americas (59 percent), followed by CIS (49 percent), the Arab States (25 percent), Asia-Pacific (23 percent) and Africa (19 percent), the ITU says.

By end 2014, 44 percent of the world’s households will have Internet access. About 31 percent of households in developing countries will be connected to the Internet, compared with 78 percent in developed countries.

More than 90 percent of the people who are not yet using the Internet are from the developing world.

In Africa, almost 20 percent of the population will be online by end 2014, up from 10 per cent in 2010.

What Comes Next After Mobile Data Peaks?

At least until 2016, mobile broadband will be the product  that offers the single highest revenue contribution to growth, analysts at Ovum say. The issue, you might well say, is “what comes after that?”

The reason is simply that replacing the primary “voice” revenue source is a big undertaking.

Mobile broadband will grow 19.2 percent annually and generate $122.9 billion in incremental revenue between 2013 and 2016. Ovum predicts. Over a four-year period, that suggests annual revenue of about $31 billion.

That’s a healthy figure, but in the context of a global business generating about $2 trillion a year, or about $20 billion a month, even mobile broadband represents about $2.6 billion a month. In other words, the "law of large numbers" is at work. 

Any new revenue sources that aim to replace existing key sources have to become "big" at some point. Many of the "new sources," such as public cloud, enterprise Ethernet, IPTV, and managed and hosted IP voice, will grow at double-digit rates, Ovum suggests. 

But ask yourself whether any of those sources currently represent even half a billion a month in revenues.
International Telecommunications Union figures illustrate the issue. In 2011, there were about 8.8 billion subscriptions in service, including fixed voice, fixed broadband, mobile voice and mobile broadband.

But fully 67 percent of those connections are mobile voice lines. Only about 12 percent of those subscriptions are for mobile broadband. In other words, it takes quite a lot of growth of mobile broadband to “move the needle” on total revenue.

Similarly, only about 13.5 percent of total connections are for fixed network voice, and only about seven percent of total lines are fixed broadband accounts.

By definition, big changes in revenue come from changes in those key revenue sources, especially what happens with mobile revenue. 

Global Subscriptions	(millions)
Fixed-telephone subscriptions	2009	2010	2011
Developed	555	548	539
Developing	694	680	665
World	1'249	1'227	1'204
Mobile-cellular subscriptions
Developed	1'384	1'413	1'514
Developing	3'263	3'898	4'457
World	4'647	5'311	5'972
Active mobile-broadband subscriptions
Developed	450	516	635
Developing	165	256	458
World	615	773	1'093
Fixed (wired)-broadband subscriptions
Developed	271	293	309
Developing	193	235	280
World	465	528	589

Mobile broadband has been leading revenue growth for mobile service providers for some time. But revenue is a "leaky bucket." In other words, new revenue is being earned, but legacy sources are dwindling at the same time.

In some markets, such as Western Europe, the shift of revenue sources is even more pressing.

The decline in European fixed telephony revenues is accelerating (-8.3 percent in 2011 and –31 percent over the last five years), driven in part by a negative five percent growth of fixed lines in service, according to the European Telecommunications Network Operators Association.

Since 2005, fixed line subscribers have declined 22 percent.  The bad news is that mobile revenues, long the driver of industry growth, also are declining (-0.6 percent)

Mobile voice revenues were down 4.7 percent in 2011 (–13.2 percent over the past three years), a decline driven by significant drops in some large countries: Spain (-8.3 percent), France (-8.2 percent) and Germany (-7.1 percent).

Fixed network broadband revenue is the bright spot, as revenues were up 6.5 percent in 2011.

Mobile services, though, remain the bulk of telco revenues, accounting for 52 percent of the total market (142.7 billion EUR in 2011).

But you might reasonably ask whether it is reasonable to expect many new lines of business to collectively approach the $123 billion in incremental revenue contributed by mobile data services between 2013 and 2016.

One way of illustrating the magnitude of new revenues required is to note that, globally, mobile service providers will lose about $1 billion a month in voice and messaging revenues in 2013, Yankee Group analysts predict.

Over a four-year span, assuming the rate of decline does not change, mobile service providers would lose about $48 billion in voice and messaging.

But mobile service provider data revenue will increase from $319 billion in 2011 to $550 billion by 2016, so total mobile service revenue will increase from $1 trillion in 2011 to $1.15 trillion by 2016, the Yankee Group estimates. 

Note the figures: total revenue grows $150 billion. But mobile data grows $231 billion. So other revenue is dwindling.
The global mobile voice and messaging market will decline from $758 billion in 2012 to $746 billion in 2013. That's only about $12 billion, so most of the loss is coming from somewhere else, with fixed network voice being the logical culprit in most developed markets.

In terms of growth, mobile remains key. On a global basis, telecom service provider revenues, topping $2 trillion in 2012,  were generated mostly by mobile services. Some 60 percent of total revenue was earned by mobile operators, Ovum  says.