Within the past 10 years, market share of Mobile Only Telcos in Western Europe dropped from 40% to 20% of the total mobile market revenues.

Within the past years one could observe a strong trend towards national consolidation within the telecommunications sector in Western Europe. Aiming for an integrated portfolio of fixed and mobile access, as well as TV lately, Telcos began to merge, acquire complementary providers or expand their ecosystem otherwise. By bundling their products and services Telcos want to achieve twofold mainly. On the one hand they try to lower their sales costs through synergies. On the other hand they try to increase customer retention and create a lock in by binding them to many services at once. Both shall increase convenience on the customer side (less contracts to manage and price benefits) and make business more sustainable on the provider side (lower churn rates). Nevertheless, these initiatives are a great threat for all those Telcos, which are not able to offer integrated bundles, like for example Mobile-Only provider (MOs), which – as we will see – eventually face serious challenges nowadays.

MOs suffer under the trend of consolidation

Observing the mobile market of Western Europe (WE) for the past ten years came out with two developments, which we believe are worth sharing. First, not less than 50% of the MOs have vanished from the Western European telecommunications market between 2006 and 2016. Second, and as a consequence thereof, the revenue shares MOs hold at the total mobile market decreased by 50%, too, leaving them with a final stance of only 20% of the market. These are clear indicators, which show that MOs are heavily suffering under the developments of the past years (consolidation and bundling). But why is that so?

One of the main aspects is clearly that the whole industry is struggling because mobile propositions are increasingly facing saturated and highly competitive markets. Especially for MOs the usage of telephony (core revenue driver of MOs in the past) as communication medium is decreasing, which resulted in a 25% cut in voice revenues over the past years. In addition, due to OTTs re-inventing the “old” telco services, e.g. WhatsApp for messaging or Skype for voice communication and therewith, the market relevance of MOs as provider of telco services (voice, messaging) is melting very fast. Third, with the boom of smartphones, the customer demand is becoming mainly focused on pure mobile IP-connectivity. MOs, however, are struggling with the monetization of the data traffic due to predominant flat rate prices. Fourth, Telcos are moving away from smartphones subsidies to optimize their margins, removing attractiveness of one of the key elements of their customer propositions and obliging smartphone vendors to build alternative sales channels to reduce their dependency. In one sentence: MOs are losing ground and are turning into bit pipe providers.

Another aspect is the current believe that the Mobile-Only business model is subject to a general structural disadvantage compared with the one of Fixed-Mobile-Converged players (FMCs). With their mono-product offering (mobile connectivity), MOs’ customers are more volatile than multi-play customers of FMCs who are bound in complex contracts. Further disadvantages of MOs are inferior sales efficiency (bundling products lowers sales cost per single product) and inferior network CAPEX efficiency (e.g. lack of offloading, more expensive backhaul deployment).

MOs have little room to react today

Whereas the consolidation within the Telco market puts a high pressure for change on the mobile providers, they are constraint by their overall limited structural abilities. In the last years, this most often left them with only three possibilities to prevent themselves from drowning in the heavy sea of the telco sector:

• Merger with mobile competitor: Enforcement of Mobile-only positioning via acquisition of a Mobile competitor, for example DREI (Hutchison) acquiring Orange (both mobile-only players) in Austria which led to an increase of mobile market prices during a limited time period.
• Merger with fixed Telco: Transformation into integrated Telco via a merger (or take over) with a fixed provider, for example Vodafone acquisition of Kabel Deutschland (TV and fixed BB) to become a fixed-mobile-converged (FMC) provider in Germany.
• Building up own fixed broadband infrastructure: Transformation into an integrated Telco via rollout of own fibre network or wholesale cooperation with fixed player, for example Bouygues Telecom in France, who is combining his own FTTH network with a wholesale cooperation with Numericable.

Looking at the situation today, however, shows that the windows of opportunities for those three options are nearly closed in most EU countries. First market repair through mergers is getting increasingly difficult nowadays, due to political interferences. The EU, for example, just recently denied the O2/Three merger in the United Kingdom. Another aspect is that the fixed broadband market in the EU is nearly fully consolidated – at least on national level. Finally, investments in own fixed networks would not only be considered late, but also risky and capital intensive.

Does this mean that MOs that are not able to react to the market and implement structural changes have reached a dead end? We don’t think so.

FMCs have not proven yet that they have a superior business model

First, FMCs simply lack agility. Looking at the technological effort to enable their targeted ecosystems, makes it rather clear that most FMCs have to modernize and simplify their production in order to make their ambitioned propositions work. Even though their size may seem to be a sign of power, in the coming years established FMCs will be self-absorbed in large transformation programs to digitize their companies, processes, OSS/BSS systems and customer touch points. In addition, recently created FMCs will be heavily engaged in large PMI programs to leverage expected synergies. As long as those programs are not successfully implemented, FMCs will be hardly able to react to agile propositions of OTT or MO competitors – making them bulky and slow.

Second, the volume of financial resources FMCs engaged in broadband rollout programs come with an enormous financial risk. FMCs still earn higher EBITs from their original copper/coax cables. Their current efforts to establish the newer fibre cables will thus only pay off in the long-term. Hence smallest unforeseen changes, speaking of problems coming from price decrease or lower utilization rate of the network, can have a huge negative impact on the business case at the end – making them highly vulnerable to unexpected market changes and disruptive initiatives of competitors.

MOs have the opportunity to attack

Taking both the lack of agility as well as the high risks FMCs have to overcome, leaves MOs with at least two points of vantage, where they can leverage their size as well as their “limited” differentiation to attack and eventually excel their integrative counterparts.

On the one hand, there is no way around whatsoever in developing innovative and aggressive propositions to acquire new customers in order to achieve revenue growth. However, this should happen in an increased focused manner. As a consequence, MOs need to redesign and increase their mobile-only value proposition and make it as attractive, hassle-free and sustaining as possible.

• First, overall touchpoints with customers need to be driven towards a “zero-touch”-approach.
• Second, customers need to be attracted by aggressively positioned and cheap “all you can eat” tariffs (which most MOs are already pursuing).
• Third, professional and capable staff can then leverage the overall service by delivering a superior customer experience through need-oriented proposition design. In order to spend as little time as possible with service inquires, a highly automated customer self-service environment must be put in place, taking the workload off the staff and shifting it onto the customer himself, e.g. by implementing cloud solutions.
• Fourth, attractive OTT offerings round up the device proposition and can drive value by means of an “ingredient-branding”-approach, positioning the proposition ahead of the classical services offered elsewhere.
• Finally, MOs have the chance to disrupt the common “taken-for-granted” procedures by e.g. releasing their customers from long-term contractual commitments. Highly flexible conditions guarantee customers superior experience even after closing their contract. T-Mobile in the US or PLAY in Poland for example are driving this approach extensively with their “unbundling strategies” conquering the ancient and little innovative business models in the telco sector.

On the other hand, however, MOs need to turn their apparent structural disadvantage into an advantage in terms of cost efficiency leadership. Lean cost structures need to compensate for cost handicaps in sales and networks. Thereby following has to be considered:

• First, the internal structures need to be radically overthought and, if needed, cut down to a minimum. There is a need for extreme internal and external flexibility, which is the only way to get as agile as needed in order to move on the market.
• Second, and this coming with a lean structure, expenditures need to be kept tight and overall cost efficiency measures need to be established, embodying them into the culture if necessary.
• Third, network investments need to be carefully carried out and should only focus on enhancing customer experience in the area of mobile offering.
• Fourth, and building on the latter point, each investment needs to undergo critical and financial-driven make or buy decision. Tools like BPO or body leasing should be considered as real alternatives and be pursued if they represent the cheaper alternatives.
• Fifth – Focus! The most important point is that MOs need to focus on their core business, wherever and whatever they pursue. Only this allows them to deliver a consistent and smooth customer experience and gives them a chance to compete and attack their bigger counterparts.

The crux is, however, that if MOs want to achieve operational excellence and form appealing propositions, they crucially need a management team which not only has the experience but also follows strictly the exact opposite of decision making by consensus. Hard and risky decisions will need to be made, which requires leaders that are trusted by shareholders and able to convince their internal organization to execute their decisions without questioning. The whole management team thus needs to act as a team which guides and sails the ship through those difficult waters.

It’s difficult – but not impossible

Nevertheless, at the end of the day there is a realistic chance of MOs finding their ways through todays’ heavy and restless sea of the telecommunications industry. Their agility, focused knowledge and better customer experience allows MOs to take side-ways which the heavy, often incumbent FMCs would not even consider in the first place. However, this can only be achieved if MOs become extremely lean in their processes and structures. The mobile-only business model is not yet doomed to be a phenomena of the past. However, much pressure has to be dealt with and each player needs to find its particular position within the market, building on rare and inimitable capabilities in order to survive. Spot-On value offerings, strategically chosen partners as well as a distinct pricing strategy are the ways to realize synergies and differentiate from as well as attack FMCs at the end. Because remember, FMCs yet have to prove whether all the efforts they undertake to become integrated providers pay off in the end, both financially as well as strategically.