Can mobile operators compete against web-based service providers?

Posted by Dimitris Mavrakis Tuesday, December 8th, 2009

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Cloud based service providers are entering the mobile market at an increasing rate, offering services that compete directly with operator offerings directly. Google Voice, Skype, Apple’s MobileMe, Facebook Mobile and Twitter are examples of services that introduce value by demoting the mobile network into a dumb pipe. Although operators have attracted subscriber attention by offering exclusive high-end smartphones - including the Apple iPhone, Palm Pre and Motorola Droid - there is limited revenue potential since aggressive subsidies are necessary to achieve mass market penetration and in several cases, handset manufacturers impose stringent requirements to partner with mobile operators.

Mobile operators have realized that they are facing a crossroad.

They can choose to remain a dumb pipe, where third party service providers offer their own services, generate revenues and use the mobile operator as a simple transport network. Since the mobile operator has no control over this process, there is no quality guarantee and users may subscribe to free Web-based services that are commonly used in the computing environment. Ericsson has published a white paper illustrating that a dumb pipe strategy is profitable and not as pessimistic as mobile operators have been arguing, but the increasing deviation between mobile broadband traffic and revenues will reduce profit margins considerably and make infrastructure CAPEX decisions harder for mobile operators.

The most advanced operators can choose to become a smart pipe, where the network provides value to subscribers and service providers by being intelligent. Operators can offer services themselves (e.g. Vodafone 360) or partner with selected third party service providers so that the burden of application/service development is offloaded from the mobile operator. Contrary to the dumb pipe paradigm, these operators have the means to exercise control on services over their networks, meaning that quality can be assured for   their subscribers and that service provider partners will have guarantees that their services will offer a positive user experience. Operators that are equipped with the infrastructure to enable a smart pipe can also become matchmakers between their subscribers and service providers, given that mobile operators hold valuable information and service analytics about all aspects of subscriber communications and behaviour.

Since now, operators have been unable to implement a smart pipe strategy since technology was either not available or immature. However, 2009 has experienced a flurry of activity on core and service delivery infrastructure, bringing technology that can enable a smart pipe strategy within the mobile operator’s reach. Such technologies include IMS, 3GPP policy based management, open network APIs and advanced OSS/BSS platforms that can efficiently share subscriber data with third parties.

The most important question that operators haven’t yet addressed, is whether end users will be interested in differentiated services, or in other words, paying more for guaranteed quality services. Subscribers that are likely to use these services most likely subscribe to services that are Web based and either free, freemium, ad-supported or very competitively priced. As such, introducing additional charges to guarantee quality may not be welcome in the competitive mobile market. On the other hand, operators may argue that high quality services may be reserved for premium subscribers  - primarily business customers - but significant revenue opportunities arise from mass market penetration.

The following case studies illustrate the two poles of service delivery in mobile, one that is completely decoupled from the operator and one that is completely controlled by the operator:

Google Voice: A telecommunications service that providers a US number to its subscribers, allowing them to route calls to other phone numbers but also make free calls and send free SMS in US and Canada. Google has developed a smartphone client for iPhone (that has been rejected by Apple) and Android - which is now being used throughout North America. Although Google Voice is more relevant where bill-and-keep is the de facto charging standard (notably North America), it is cannibalizing operator voice revenues by shifting voice and SMS traffic through Google’s data network - when the Google Voice client is used. Given that Google is an advertising company and has the potential to inject advertisements in all aspects of communications (e.g. SMS and ringback tones), it can generate new revenues from existing communications channels and relegate operators to dumb pipes.

Vodafone 360: The new operator branded service is a replacement of Live!, the portal that allowed Vodafone’s subscribers to consume content uploaded and controlled by the operator. Contrary to Live!, 360 is social networking focused and brings several networks together: Twitter, Facebook, email, chat, IM, address books and location base services. The phone address book combines contact lists from selected social networks and uploads them to Vodafone’s servers for backup. As such, end users can access their data from the mobile phone and the Vodafone webpage which is available from any connected computer. Vodafone has currently released two handsets tailored for the services and is expected to release more while expanding supported devices beyond its own branded 360 handsets.

Vodafone 360 has experienced a lukewarm reception in a market that is dominated by cutting edge user interfaces and user demand a high quality experience on their mobile. Industry insiders have argued that these kinds of services may not ingrained in the operator DNA and that they should keep to what they do best, i.e. operate and maintain their network. Vodafone 360 is the first attempt to create value around the mobile network rather than through handsets but 360 has clearly failed to create the market buzz that touch screen handsets created, particularly the iPhone, Palm Pre and Motorola Droid.

Mobile operator CTOs are currently assessing the strategic opportunities of smart pipe networks and most of them will likely attempt to become a smart pipe. International Tier-1 operators (Vodafone, Telefonica, Orange) have the subscriber base, manpower and capital that gives them the best conditions of becoming smart pipes. Interest in open network APIs, developer communities, operator app stores and operator services (including Vodafone 360) illustrate that operators are attempting to evolve to a more open, intelligent entity that can enable third party services while guaranteeing quality for subscribers but time will tell whether they will succeed and end users opt to buy into the new services.

As part of our ongoing analysis, we will be looking at operator and cloud based services in mobile during 2010 with increasing interest as several mobile network infrastructure technologies start to deploy, including IMS and policy based management.