Fixed-line: a comeback?

Nowadays, mobile operators’ concerns revolve around protecting their cash-cow from fierce competition. Regulatory price pressure, new licenses, MVNO agreements, disruptive players, disintermediation or new access technologies are just some of these threats. However, as attention focuses on defending their mobile share, it is shifting away dangerously from their historical competitor, the fixed-line

Fixed-line operators do not seem to be doing well in most European markets. For years they have struggled to survive in an environment of change and business decline. In Czech Republic, for example, fixed-line subscriptions have decreased at CAGR of 8.8% between 2002 and 2007, and are currently at 22.7% of total population. The same is happening in other countries, with decreases in 2006-2007 of 5.7% in Austria (now at 24.7%), 3% in Hungary (32.3%), 5% in Poland (28.6%), and 7.8% in Slovenia (36.3%). Nevertheless, the fact that fixed-line operators have been struggling does not mean mobile operators can overlook them. By battling their way through crisis for so long, they have developed an almost kamikaze survival tool-kit – the bundle-offer.

When mobile operators report churn, it does not necessarily mean a service disconnection – most churners will normally move on to another provider. In contrast, for fixed-line operators a churner normally implies a service disconnection (VoIP phone or alternative operators that deal directly with the incumbent, where service remains active, are exceptions). Once voluntarily disconnected a customer will not, under normal circumstances, re-establish a connection. The high risk to current and potential fixed services is leading fixed-line operators to develop a pressure strategy to hold the connection based on bundles – the grouping of fixed-line with other communication services in a package with a strong value incentive.

Today, services most commonly grouped are voice, broadband and recently IPTV. Some operators may also offer mobile in a quad-play bundle (BT, Virgin Media, Neuf Cegetel), although many operators still remain cautious about it (Orange, Vodafone, O2) and penetration is still insignificant. In the future, it is possible that bundles will also include home security, mobile broadband, insurance policies, and content subscriptions. Even though it is difficult to say which will be the winning combinations – dual-play, triple-play, quad-play or other –, it is inevitable that they will become an important part of the communications market.

However, an attractive bundle-offer – providing sufficient value discount to attract current users (churning from competitors) or from non-penetrated segments – may also hurt fixed-line operators. The danger of this comes from potential destruction of market value, as lower prices are set for “subsidized” services and un-bundled service revenues are cannibalized. Regardless, fixed line operators have no choice but to embark on this “kamikaze” tactic in order to survive.

For pure mobile operators this presents several issues. mmC Group developed an assessment of short/medium term bundling threat for a Central-Eastern European mobile market leader, which was based on the following vectors:

Market bundles and respective value proposition

Current and future demand

Positioning impact

Risk for value-destruction

Impact across P&S line

P&L drivers

This analysis highlighted that, by maintaining a home fixed-line connection, bundling could hurt mobile operators indirectly. This effect is connected with FMS weakening, as it would (i) maintain traffic to and from mobiles and (ii) stabilize a high share of fixed communications in total voice market. Furthermore, this would (iii) sustain mobile operators’ debt through high interconnection costs, (iv) limit usage of already under-capacity networks, and (v) cap take-up of mobile datacards as an alternative for fixed access broadband.

With mobile operators so focused on their own industry and on preserving their margins from direct competition, they seem to have overlooked the strengthening of bundle-offers and its impact on the business. Are they prepared to fight such aggressive survival instinct from fixed-line operators?

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