Mobile connections: the threats behind the impressive stats

Interesting news that connected devices in the world now number higher than the population of the planet – the source of which appears to be somewhere around here.

Self-evidently, this is not the same as saying that everyone in the world has a phone – the number of westerners with a multiplicity of devices, providing density figures much in excess of 100%, provides enough of an expanding market to account for by the majority of connected people. Nevertheless, there is an interesting, if obvious, comment to make on the state of international development and solidarity when the number of people without access to safe, clean water and basic sanitation still lies in the billions while those in developed countries have access to not just one, but two, three, four or more connected devices.

Apart from that, it is the growth in mobile which has been so impressive – around 2001, as the chart in this article shows very well, the number of mobile connections globally was around the same as the number of fixed line ones (despite a history of just ten years at that point), but, in the ten years since then, the phenomenal growth rate has seen the number of mobile connections reach a figure around five times that of fixed ones. Indeed, by 2015, there are predictions that the number of connected devices will be twice that of the world’s population as near as 2015, while Ericsson has been predicting 50bn connections by 2020 for at least the last two years.

Impressive growth rates, for sure (if indeed achievable), but, as I argued below, growth as a goal is problematic and, in this context, I also note that Juniper Research has also this week produced another of its warnings that mobile costs may well exceed revenues within four years. Additionally, Nokia is also reporting difficulties arising not least from lower device selling prices as network operators start to drive prices down – a factor which will become more apparent should the France Telecom-Deutsche Telekom procurement link-up be successful – while other handset makers are also feeling the pinch. Counteracting the problems facing mobile companies, at a time of a need for the inevitable increased expansion of investment to deal with the implications for network capacity of such a high number of mobile connections, to say nothing of financially struggling countries looking to spectrum auctions as a source of cheap state finance (which themselves carry evident dangers), is a question that will heavily occupy not only mobile operators and their workers, but also regulators and policy-makers, over the next few years.

Sky clouds the picture

Sky has been much in the news these last 24 hours, not least for the continuingly spreading tentacles of Hackinggate, for Offsidegate, which has – rightly – now claimed Richard Keys (albeit via a resignation) as well as Andy Gray, and for Culture Secretary Jeremy Hunt being minded to refer to the Competition Commission NewsCorp’s bid for the majority of BSkyB that it doesn’t already own on the grounds of the threat to media plurality (although he has given NewsCorp more time to come up with a bit of a defence – if you like, a sort of opportunity to re-examine an assistant referee’s offside decision).

Somewhat squeezed out by all these MBs of bandwidth coverage, but also of considerable importance in its own right, is Sky’s purchase of The Cloud – a network of 22,000 urban Wi-Fi hotspots across Europe. Other operators are also in the market, with the key aim of being able to retain subscribers across a range of platforms rather than loosing them to other operators in different locations, so Sky’s acquisition is absolutely within the prevailing market strategy. The Cloud – both in its own right as well as via its arrangements with market leader BT Openzone – is likely to have a large market share but, with a nod to the impact over time of Sky’s obvious pulling power, this is not a question of market dominance of the Wi-Fi hotspot market.

But, the news was broken by The Sunday Times – which, of course, is also in the NewsCorp stable. So, a newspaper arm of a media company (and one which charges for online access) gets first dibs on the story of an important business acquisition of another company in the same group. Perhaps Jeremy Hunt might like to focus on the media plurality aspects of that when he sits down to ‘negotiate’ NewsCorp’s bid for BSkyB with The Digger over the next few days. That’s right – negotiate. In the context, what a terrible word. Perhaps Hunt should, as advised by Ofcom, have simply blown for offside. One aspect of the ConDem’s attempt to ‘return policy to ministers’ is that we end up with this sort of undignified haggle over terms which leaves the process itself completely lacking in integrity.

Tesco Mobile reaches 2.5m

One of my more enduring posts on these boards is the one(s) relating to UK mobile market share. Outside the big four/three (plus 3…), the mobile world is dominated by virtual network operators of which the largest are Virgin Mobile (which pitches up on the T-Mobile network) and Tesco Mobile (which uses O2) – thus neatly putting each on either side of the everything everywhere/3 and Vodafone/O2 network duopoly.

So, in this context, I noted with interest this week Tesco Mobile announced that its subscriber base had topped 2.5m (indeed, it was one of the company’s bright spots in an apparently disappointing Christmas period). Tesco Mobile reported this Christmas as its ‘best ever‘ [NB Not sure about the longevity of this link], increasing its subscriber base in each quarter and the total by 25% over the course of 2010 (thus adding 500,000).

The company believes it is ‘well on the way to becoming the No. 1 MVNO’. Last time I posted, Virgin Mobile had a total of just under 3.2m subscribers although these refer to the end-2009 position. Whether Tesco is gaining ground needs to await further figures from Virgin Mobile – and there is no reason to assume that Virgin Mobile, as a separately-owned company, is sharing the same woes as T-Mobile. Nevertheless, 25% growth in a saturated market – there are over 80m ‘active’ mobile subscriptions in a country of 60m+ people – is an impressive achievement and the gap is evidently likely to have narrowed sharply.

Ofcom published its 2010 second quarter market update figures just over a week ago; this was the first quarter in which joint figures were published for Everything Everywhere (the merged T-Mobile and Orange operation). This indicated that Vodafone had 17.3m subscribers, O2 20.7m and Everything Everywhere 27.1m (Section 3 on the mobile market, Table 4 – p. 20). The data is incomplete since it excludes 3 and also, apparently, both Virgin Mobile (now) and Tesco Mobile, but it evidently shows a mobile market for the top players of 65.1m subscribers, leaving the rest therefore with 15m. These would divide roughly as follows: 3 claims 6.2m subscribers (a figure which is in all its press releases, the most recent of which is here); while Tesco Mobile now has 2.5m. This would leave room for – say – c. 3.6m with Virgin Mobile [Edit 20 February: I was over-generous: it’s actually 3.1m (Table C4, p. 20)] and the remaining 2.7m or so as various re-sellers and niche players and a market structure something like this (figures approximate):

Mobile market share 2010

One of the uses of Ofcom’s 2010 Communications Market Report, whose publication I blogged about a couple of posts ago, is its publication of reliable stats on the state of the different market segments in the telecoms industry, including the mobile one. Over the past year, mobile has been a particularly interesting example of what happens next to markets in a pure state: market policy in the UK had striven for a competitive model and, outside of the new 3G operator, 3 UK, the other four operators had grown to a situation in which they were of a roughly, not exactly but nearly, equivalent size.

The result? Further growth in a market which has already 1.3 connections per person, via the addition of new subscribers, became increasingly difficult and more expensive, not in the short-term (it being easy to run short-term loss leaders) but to retain them in the long-term (although O2 seems to have done rather well out of its now-expired iPhone exclusivity agreement). Furthermore, regulatory action in the mobile sector has seen falling prices (as confirmed in the 2010 CMR, Figure 5.39 shows a 22% fall in average monthly retail voice revenues per mobile subscription between 2004 and 2009, while Figure 5.38 seems to confirm that mobile retail revenues have peaked).

All good for consumers – but somewhat less good for the operators. The effect has been for operators to seek merger – in the UK, T-Mobile and Orange have merged to form everything, everywhere; a merger which was allowed with fast-track approval and scant scrutiny at the EU level despite the wishes of consumer and indeed competition organisations in the UK.

Figure 5.46 of the 2010 CMR provides a current estimate of the market shares of the five mobile operators, which look as follows:

The merged everything, everywhere organisation thus has a market share of 42% – a market dominant operator has been created as a result of regulatory lack of interest among the competition authorities (at the EU level) in intervening in mobile operators’ wish for the market to reflect more of their interests – and in contravention of the direction of mobile market competition policy which had been to create the sort of perfect market that has now been disrupted.

The above figures include mobile virtual network operators, of which the most significant is Tesco Mobile (which uses O2) and Virgin Mobile (which uses T-Mobile) – though there are several others. Tesco Mobile has ‘more than 2m’ customers (p. 19), while Virgin Mobile has 2.2m pre-pay and 1m contract customers (p. 8). Tesco Mobile’s market share is about 2.5%, taking the share of O2 of direct subscribers down to 25.4%; that of Virgin Mobile about 4%, taking T-Mobile down to 17.5% direct subscribers (and everything, everywhere to 38.6%). Actually, network sharing arrangements between O2/Vodafone and T-Mobile/3/Orange have essentially split the mobile market into five (now 4) operators but just 2 networks.

An interesting perspective of what happens to a competitive market when it represents too good a deal for consumers and (therefore) an insufficiently profitable one for operators: the natural trend for those most affected (T-Mobile and Orange are the only two operators to have seen a decline in market share between 2004 and 2009) is to move away from competition and to seek market dominance not by organic growth but by merger.

The response of the other operators will be interesting with 3, the smallest operator, looking vulnerable as a relation of its size, with Vodafone, which merged with 3 in Australia as the two smallest operators in that market, already having been rumoured as a potential buyer, although its affiliation to the smaller of the essentially two networks which operate in the UK may help it fight off any such advances.