The mobile operator’s dilemma (and opportunity): The fourth curve

Mobile operator profits have more than doubled in the last 10 years. The trifecta of fast broadband networks, well-designed mobile computing devices, and the insatiable supply of content, applications, and services has unleashed consumer demand for more like never before. But operators can’t rest on their laurels.
The mobile industry is set to hit what I call its fourth revenue curve, where they will derive their sales from providing services such as payments, software and mHealth as opposed to providing voice, texting or bulk data. How they handle this fourth curve will determine if operators continue to dominate the value chains or become irrelevant. Here’s what’s at stake.
In 2012, the global mobile services revenue will hit $1.5 trillion. This is after last year’s landmark total global mobile operator revenue exceeded $1 trillion — a new industry high. But that peak isn’t guaranteed to last.

The four revenue curves explained

For much of the last three decades, voice has dominated the revenue streams for almost all operators. However, in 2013, the global voice revenues will fall below the 60 percent threshold. So far, the drop in voice revenues has been compensated by the rise of messaging revenues and the data access revenues. However, some nations and operators have started to experience declines in messaging revenues as well.
The sigmoid or the S-curve growth has been well understood and applied to various disciplines. If we segment the operator revenues by voice, messaging, and access and correlate them with subscription growth, in most cases, as the subscriber penetration approaches the 70-90 percent band in a given revenue segment, revenue hits a peak, stagnates for a bit and declines. The amount of time the revenue curve stays in the stagnation phase depends on the market competitive dynamics and usage profile of the subscribers in a given country.
The first revenue curve of voice is already in decline for a majority of the developed markets like the U.S., Japan, and Western Europe. The second revenue curve of messaging is on the decline in some nations like the Philippines, Netherlands, Taiwan, Spain, and Italy while approaching saturation in countries such as the UK, France, and the U.S. Both of these curves are on the rise in developing countries, which are still in the subscriber growth phase.
The third revenue curve of data access is in the growth mode around the world for all nations; however, the margin pressure on this revenue base is the strongest of the three as the operators rush to meet the growing data demand that is doubling every year in most major markets. We are likely to see this growth continue for the next 3-4 years before this curve also starts approaching its peak.

The fourth curve

When that happens, all three revenue curves will be in decline. This means that the net revenue for some of the operators will decline, in some cases precipitously. This will happen to operators around the world at different time intervals, unless the fourth revenue curve starts to take shape in the near term to help cushion the decline.

The fourth curve is quite different from the previous three. It primarily consists of value-added (VAS) and over-the-top (OTT) services such as VoIP, IP messaging, cloud, mHealth, telematics, advertising, payments, commerce, etc. As such, the fourth curve is not a single curve but rather a combination of dozens of smaller curves.
The barriers to entry are low and the main competitors are not fellow operators but well-funded Internet players like Google (S goog) and Facebook (S fb). The business model is less about metered access and more about value creation.
The growth of revenue in this fourth curve will be critical. For some operators, a weak fourth curve will be fatal. They won’t be able to arrest the fall in the overall net revenue and investor pressure will force them to consolidate or learn to live with lower margins or go out of business.

Handling the fourth curve: Adapt or die

Based on the strategy chosen, the operators will likely fall into three major buckets: access only, enabler, and digital lifestyle solution providers. To be an effective and a long-term competitor on the fourth curve, operators have to become OTT players themselves. This requires innovation, financial muscles, and a ruthless mindset to capture its share from the value chain.

The operator might play all three roles depending on a given vertical in a given country. However, without playing a significant role in the latter two categories, operator revenues over the long haul will start to resemble those of utilities – billions of dollars in revenue but the margins might shrink to 8-12 percent from the current 30 to 40 percent.
Greater competition on the fourth curve works in the best interests of the consumer. Given that the service layer is detached from the access layer, the choice of solutions across any given vertical will be good for the consumer. The startup ecosystem will also benefit from a more diverse telecom services landscape as the number of potential customers and acquirers will increase. Regulators will have their work cut out for them to keep the market fair and competitive.
An operator’s ability to recognize the importance of the fourth curve in its long-term survival plans will pretty much define their role in the ecosystem. Many will fail and get assimilated by the tides of consolidation. But, some will move and adapt, either forced by the financial climate or the desire to innovate, and launch new services that fuels their growth for the next decade. Indeed their future will be defined by how they react to the 4th wave of mobile.
Chetan Sharma is President of Chetan Sharma Consulting and is one of the leading strategists in the mobile industry. He has served as an advisor to senior executive management of several Fortune 100 companies in the wireless space and is probably the only industry strategist who has advised each of the top 6 global mobile data operators. He is author or editor of 8 mobile related books and more than 125 research papers and articles.