How mobile operators can resist the pull of commoditization

Against the tide

Strategy& is part of the PwC network

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Dubai

David Tusa Partner +971-4-390-0260 david.tusa @strategyand.pwc.com

Milind Singh Principal +971-4-390-0260 milind.singh @strategyand.pwc.com

David Tusa is a partner with Strategy& in Dubai in the firm’s communication, media, and technology practice. He specializes in operational improvement and operations strategies in fixed, mobile, and space communications in emerging markets.

Milind Singh is a principal with Strategy& in Dubai in the firm’s communication, media, and technology practice. He works with policymakers, regulators, and operators across emerging markets, helping them navigate change and maximize their returns from digitization.

Ming-Chyuan Chan is an associate with Strategy& in Dubai in the firm’s communications, media, and technology practice. He focuses on marketing, sales, and innovation strategies for the communications and technology industries in emerging markets.

About the authorsContacts

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Creeping commoditization is one of the most overlooked challenges facing the global mobile communications industry. Like gravity, commoditization is a constant, invisible force that operators must work against at all times if they are to elevate themselves above the competition — and many are failing to do so. Our research indicates that over half of mobile markets worldwide are either already commoditized, or in imminent danger of becoming so.

To measure and better understand the scope of commoditization within the mobile industry, we have conducted research to understand the issue in greater detail. We have developed a score to understand the level of commoditization by country and by region. According to our methodology, mobile markets fall into four categories: “commoditized,” “on the edge,” “differentiated,” and “comfortable.” Most countries (52 percent) are either commoditized or on the edge. Although around 39 percent are classified as comfortable, we expect many of these to move down the ladder of commoditization in short order — unless operators in these markets take immediate steps to escape the gravitational pull of commoditization.

We have identified three escape plans that have already been put to use by a few operators around the world. Some operators have chosen to differentiate themselves by investing in a high-performance operating model and developing new revenue streams through sophisticated customer segmentation, others have sought to create the lowest possible cost operating model through outsourcing business processes and slashing other costs. A third group has pursued scale-driven benefits through consolidation and growth. Those companies that do not respond in some manner to the gravitational pull of commoditization will most likely experience a slow and steady decline.

Executive summary

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Commoditization manifests itself differently from one industry to the next, but the bottom line is that — branding aside — when commoditization exists the consumer cannot fundamentally distinguish the source of one product from that of another. This is a trivial issue for traditional commodities such as sacks of soy beans and barrels of crude oil. However, when commoditization occurs in industries where differentiation is vital, such as the mobile industry, turmoil ensues. Individual companies scramble to create competitive responses, usually cutting prices, which can drain tens of billions of dollars of value from the market.

To measure and better understand the scope of commoditization within the mobile industry, we have developed a commoditization score based on the comparison of two independent variables at the national level: market share and average revenue per user (ARPU).

For the first variable, we compared the difference between the market shares of the highest and the lowest players. A large delta indicates substantial differences between operators, pointing to a low level of commoditization.

For the second variable, we compared the difference in the value captured by all players in a market. A large difference in ARPU indicates operators address the market with substantially different price propositions, also pointing to a low level of commoditization. Conversely, a small difference in ARPU indicates very similar pricing and therefore a quite commoditized market.

Quantifying telecoms commoditization

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Commoditization zones

By scoring a country on these two measures, we can place each country into one of four commoditization zones. Each zone exhibits distinct traits (see Exhibit 1).

Zone 1: CommoditizedCountries within this zone have less than 25 percent difference in market share between the highest and lowest players in the market and less than 25 percent difference in ARPU. Operators in these countries are fully in the grip of commoditization’s gravitational force.

Exhibit 1Commoditization is a convergence of market share and ARPU spread in a telecom market

Commoditization Measurement Framework

Source: Strategy&

25

25 50

50

Commoditized

ComfortableDifferentiated

On the edge

Market share spread %

ARPU

del

ta %

Zone 2: On the edgeCountries in this zone have no more than a 50 percent difference in market share and ARPU between highest and lowest. Operators in these countries have some differentiation but are feeling commoditization’s gravitational pull.

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Zone 3: DifferentiatedThere is a large spread in the ARPU between operators in this zone and no more than a 25 percent spread in market share. Operators in these countries are largely free from commoditization.

Zone 4: ComfortableIn this zone, there is a greater than 50 percent spread in market share and ARPU between highest and lowest market players indicating that commoditization is far off — at least for the moment. However, this can change quickly if new competitors enter the picture or a competitor launches a highly aggressive pricing strategy.

Mapping commoditization by country

When we mapped 122 of the world’s mobile markets into these commoditization zones, three features of the map were notable (see Exhibit 2, page 7). First, only a handful of countries have both very large and very small operators (i.e., the spread in market share between the largest and smallest is greater than 50 percent), including Namibia, China, and Kenya. This indicates that the majority of countries have created evenly balanced mobile markets.

Second, a number of countries have operators whose difference in ARPU is greater than 50 percent. In India, Mexico, and Thailand, for instance, the difference in ARPU between the highest and lowest in the market is greater than 70 percent. These are relatively mature markets, in which a greater degree of price-level-setting could be expected as operators gradually activate pricing levers over time to compete for subscribers.

Third, the sheer number of countries whose mobile markets are either commoditized (17), or on the edge of commoditization (46), is striking. These two categories account for 52 percent of the total. Moreover, we believe that many of the 47 markets that we classified as comfortable will likely be pulled into the on-the-edge zone within the next couple of years. In other countries, however, operators enjoyed a more entrenched advantage. Mexico, Namibia, and Senegal, for example, demonstrated the widest difference between large and small, created both by regulatory imbalances and the benefits of self-reinforcing scale. These examples neatly illustrate how, in the absence of tough regulation, the largest operators tend to get larger and larger, enjoying pricing power to support the investment needed to maintain a dominant market share.

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Exhibit 2Most telecom markets are commoditized or on the edge

Source: World Cellular Information Service; Strategy& analysis

Selected Telecom Markets Commoditization Map, 2012

AR

PU

del

ta %

0

5

10

15

20

25

30

35

40

45

50

55

60

65

70

75

80

85

90

95

100

0 5 1006560 7570 8580 959055504540353025201510

Market share spread %

Malaysia

Czech Republic

Azerbaijan

Zambia

Finland

Estonia

Cameroon

Nepal

Oman

Madagascar U.K.

COMMODITIZED

SwedenBangladesh

Denmark

Gabon

LuxembourgGhana

SwitzerlandAustria

Burkina FasoUganda

Sri Lanka

Germany

Niger

South Africa

Central African Republic

Liberia

Tanzania

Senegal

ArmeniaEcuador

Sudan

Montenegro

Congo

Belgium

Thailand

Iran

Netherlands

Benin

Côte d’Ivoire

Laos

Australia

Paraguay

Democratic Republic of Congo

MauritaniaIsrael

EgyptNorway

India

Zimbabwe

Chile

Brazil

JapanFrance

Algeria

UAE

Peru

Guinea Republic

Qatar

Syria

Albania

Kuwait

Bahrain

Botswana

Saudi Arabia

Mexico

Morocco

Yemen

Angola

Ireland

Pakistan

Iraq

Sierra Leone

Argentina

Poland

Kenya

Cambodia

Jordan

Burundi

Romania

Spain

Russia

Vietnam

Chad

U.S.

Canada

Moldova

China

Turkey

Nigeria

Indonesia

Namibia

Portugal

DIFFERENTIATED

On the edge

COMFORTABLE

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Commoditization is a common threat, but the speed and drivers of commoditization vary from market to market. To illustrate this, we have chosen three markets: the U.K., the Netherlands, and the United Arab Emirates (UAE).

The U.K.

In 2007, the U.K. market’s four main operators (EE, Vodafone, Orange, and 3) enjoyed broadly similar market share. Yet the relentless competition among these four to offer the lowest prices drove the ARPU delta score from 50 percent to 12 percent as prices converged to a more or less even level between the operators (see Exhibit 3).

The speed ofcommoditization’s pull

Exhibit 3The U.K. market underwent rapid commoditization

ARPU Delta, Market Share Spread, U.K.

Source: World Cellular Information Service; Strategy& analysis

2012

2007

Market share spread %

ARPU

del

ta %

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The Netherlands

The Netherlands shows a similar dynamic but with some important differences. Consolidation in 2007 and 2008 between small players Orange and Ben (owned by T-Mobile) created a larger-scale operator and narrowed the gap between the largest and smallest in the market. Price competition followed, with the ARPU delta narrowing from 48 percent in 2007 to 13 percent in 2010. Interestingly, however, the ARPU delta then began to widen, reaching 24 percent in 2012, indicating that one operator was successfully creating a value premium, escaping the gravitational pull of commoditization (see Exhibit 4).

Exhibit 4The Netherlands market escaped from commoditization

ARPU Delta, Market Share Spread, the Netherlands

Source: World Cellular Information Service; Strategy& analysis

2007

2012

Market share spread %

ARPU

del

ta %

The UAE

The UAE tells the story of a five-year journey to commoditization. In 2007, the incumbent, Etisalat, enjoyed a commanding market share lead against its sole challenger, du, although with broadly similar prices. Since then, du has successfully eroded this advantage. Today, the two operators have equal market share at still similar prices. Interestingly, in 2009 Etisalat drove up ARPU, increasing the overall value of the market. If allowed to continue, this would have benefitted both operators by returning some value to the market. Instead, the challenger reacted in haste, driving prices down and forcing the incumbent to follow suit. The

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result was a price war. Loss of market value inevitably followed, with the ARPU delta narrowing to 15 percent in 2012 as Etisalat and du converged their offerings toward low common denominators such as per-second billing (see Exhibit 5).

Exhibit 5The UAE market had dramatic market share loss

ARPU Delta, Market Share Spread, UAE

Source: World Cellular Information Service; Strategy& analysis

20072012

Market share spread %

ARPU

del

ta %

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After examining commoditization in 122 countries, we used the national commoditization scores to develop a Commoditization Index (CI) that allows us to measure the level of commoditization at the regional level (see “Commoditization Index methodology”).

The CI measures the level of commoditization of regional groups of markets. For each region the CI is an equal-weighted average of ARPU delta and market share spread, with 1.0 being most commoditized. Equal weights were derived from correlation analysis of the resultant index with market performance,

with regional and global indices calculated using weighted averages of market indices. Revenue market size is used for weight calculation.

Commoditization Index= 1 − (0.5 x % ARPU Delta + 0.5 x Market Share Spread)

Regional commoditization trends

Commoditization Index methodology

Commoditization in the U.S. and Canada appears to be holding steady, with a few consolidated players focused on adding value to products and services rather than stoking price competition (see Exhibit 6, page 12).

The Asia Pacific region shares this dynamic; stable competitive environments exist in the largest markets: Japan, China, India, and Indonesia. However, price competition is fiercer and commoditization a greater threat in smaller markets, which is why the region scored lower than the U.S. and Canada.

Commoditization in the Middle East advanced rapidly up to 2011, although it receded in 2012. After a three-year annual growth rate of 7 percent in the CI, the index rose to 0.73 in 2011, higher than any other region. Fragmented markets and relentless price competition explains

In 2013 and 2014 operators have taken a much-needed step back from pricing convergence to emphasize product-based innovation, which now dominates the market agenda.

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much of this dynamic. The CI for the Middle East dropped back to 0.66 in 2012. In 2013 and 2014 operators have taken a much-needed step back from pricing convergence to emphasize product-based innovation, which now dominates the market agenda.

Europe, meanwhile, saw little movement in its CI score between 2009 and 2012. However, certain operators are driving ARPUs higher to escape commoditization, particularly in Germany. If this dynamic is sustained, the CI should fall in the coming years.

Latin America has the lowest CI at 0.51. The index is dominated by Argentina, Brazil, and Mexico, all of which are safely in either the differentiated or comfortable zones thanks to limited competition.

Africa has the second lowest CI score, but perhaps not for long. CI grew at an alarming 18 percent compound annual rate from 2009 to 2012 with a 42 percent jump in the index between 2011 and 2012 alone. Africa is, however, something of a special case given the wide disparity among its national markets. At one extreme is Namibia, which ranks with Mexico as the least commoditized markets globally. At the other extreme, Cameroon and Madagascar are close to perfect commoditization.

Exhibit 6The pace of commoditization varies across regions

Commoditization Indices, Compound Annual Growth Rate

Note: Lists of markets in each region and by level of commoditization are in the appendices. Source: Strategy&

0.730.72

+1%U.S. & Canada Asia Pacific Middle East

AfricaLatin AmericaEurope

0.700.71

2012201120102009

2012201120102009

2012201120102009

2012201120102009

2012201120102009

2012201120102009

0%

0.710.730.70 0.71

+2%

0.630.610.610.60

+1%

0.660.730.730.64

+18%0.60

0.420.310.36

+6%0.510.430.390.43

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We have identified three plays that operators around the world have used to drive sustained differentiation. We call these “commoditization escape plans,” and they can help operators to elude the gravitational pull of commoditization.

Play #1: Escape and challenge

The first involves investing constantly, such as in 4G (Long Term Evolution, or LTE, a high-speed data technology), customer engagement platforms, and in media and entertainment propositions. Coupled with building a high-performance operating model, this approach puts the operator on the front foot in the market, building the variety of different platforms needed to engage more closely with customers from different segments. Operators such as T-Mobile in Germany, SingTel in Singapore, and Vodacom in South Africa have used this play to develop new revenues from different market segments, boosting segment ARPUs, and driving engagement.

Market facing Conceptually, an operator must separate its network resources from its market-facing positioning. Draw focus away from bandwidth propositions to applications, services, and segment-specific messages. Relentlessly pursue the micro-clusters that advanced segmentation can yield, linking an ever-deeper understanding of customer needs back to specific propositions. Use gamification techniques to take these preferences to the market, as appropriate alongside carefully selected partners. Actively engage with over-the-top (OTT)1 players to seek win-win solutions, alliances, and situations in which the operator — as the ultimate owner of quality of service (QoS) and the arbitrator of customer identity — can bring value to the market.

Technology Invest in market-leading LTE commitments, Wi-Fi offloading (in which voice calls are transmitted over Wi-Fi networks, where available, to free up bandwidth and boost mobile data speeds), and gamification techniques to engage customers and encourage self-service solutions.2

Escaping the pull

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Operating model Develop an operating model that designs with speed, flexibility, agility, and a willingness to take risks in the market. Realign decision rights, incentives, and organization structures to accept and embrace measured risk-taking, looking at the Internet community to learn from mistakes. Develop core capabilities around partnerships, double-sided business models, and approaches that yield value from relationships, rather than traffic.

Play #2: Accept and adapt

This second approach accepts commoditization and tries to make the best of a poor situation. Operators using “accept and adapt” focus on gaining scale, boosting volume but not value. Having the lowest possible cost operating model is, of course, essential, and anchors the ability to drive prices lower and lower.

Business strategy Executing against this play requires a fundamental and unwavering commitment to driving costs out of the business at all possible opportunities. As such, it is not for the faint-hearted, and requires exceptional management leadership. Successful execution requires exceptional capabilities in managing outsourced service providers and trimming head count, as well as careful investment in productivity-enhancing customer execution capabilities. Stakeholders must also buy in fully to this model, accepting the impact that the volume versus value trade-off can bring to returns.

Technology Use self-service technologies, aggressive business process outsourcing, network asset securitization, and contracted network maintenance constantly to drive the lowest-cost operating model.

Regulatory Engage with regulators on issues such as active and passive radio access network (RAN) sharing, rights of way simplification, and simplified ownership transfer procedures for base station sites.

Operating model Streamline the operating model through extensive outsourcing that is supported by smart business processes that maintain adequate control of costs.

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Play #3: Consolidate to scale up

The third plan is to consolidate and grow, using economies of scale from a considerably larger customer base to lower unit costs and preserve price competitiveness.

Business strategy Executing this play requires firstly in-market consolidation, then an excellent post-merger integration process to capture the scale synergies on which this play depends. Synergy value will flow from consolidation at the network level, intelligently managing capacity to make the absolute most of combined network resources while attacking the fixed costs of operating a much larger network. Customer experience synergies will flow from pruning superfluous brands and customer engagement processes (i.e., consolidating call centers, customer relationship management, known as CRM, and segmentation infrastructures, etc.). Downstream synergies will flow from consolidating distribution and market-level structures.

Market facing Consolidation plays often present good opportunities to alter brand positions, consolidate and strengthen value messages to customers, and start the process of reengagement. Successful consolidators use the process to refresh how, and in which way, they talk to customers, often explaining directly “what’s in it for them” and “why they should stay with the new company.” It is the same for distribution and upstream partners — the consolidation play represents a way to reengage, reenergize, and refresh these critical business relationships.

Technology Expand network and availability by combining coverage footprints; reduce overhead costs by increasing the scope of network management to incorporate all available access networks, thereby reducing redundancy.

Regulatory Communicate with regulators to head off any anticompetitive controversy when making an acquisition or agreeing to a partnership.

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Commoditization is a serious threat to most mobile operators around the world and once they are in its powerful gravitational pull they find it difficult to escape. It erodes margins and reduces the overall value of the marketplace as competitors engage in ever more destructive price wars.

However, there are ways to cope, either by escaping this gravitational pull or by making the most of it. Each plan requires business leaders to think about their markets anew, to be nimble, and to consider how they can position their companies to succeed over the long haul.

Conclusion

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Telecom markets by level of commoditization

Commoditized On the edge Differentiated Comfortable

VietnamKenyaKuwait

LaosLatvia

Saudi ArabiaFranceSlovak Republic Ecuador Spain

SenegalGhanaUAE Egypt Syria

SerbiaGuatemalaU.K. El Salvador Tajikistan

South AfricaGuinea RepublicYemen Georgia Taiwan

Sri LankaGuinea-BissauZambia Germany Tanzania

SudanIndonesiaGreece Turkey

SwedenIranIreland Ukraine

SwitzerlandIraqIsrael Uruguay

UgandaJapanItaly U.S.

UzbekistanKazakhstanKorea Zimbabwe

LuxembourgArgentinaCameroon Armenia Macedonia Algeria

MauritiusBangladeshCzech Republic Australia Malawi Bahrain

MexicoBelarusEstonia Austria Mauritania Brazil

MoldovaBeninFinland Belgium Morocco Chile

NamibiaBurundiHungary Botswana Mozambique Gabon

NigerCambodiaMadagascar Burkina Faso Netherlands India

NigeriaCanadaMalaysia Central AfricanRepublic Norway Jordan

ParaguayChinaNepal Chad Philippines Montenegro

PeruCôte d'IvoireOman Congo Qatar Pakistan

RomaniaDemocraticRepublic of CongoPoland Croatia Sierra Leone Russia

RwandaDominican RepublicPortugal Denmark Singapore Thailand

LiberiaAngolaAzerbaijan Afghanistan Lithuania Albania

Appendices

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Telecom markets by region

AfricaAsiaPacific

EuropeU.S. &Canada

MiddleEast

LithuaniaAlgeria AlbaniaAustralia CanadaAfghanistan

LuxembourgAngola ArmeniaBangladesh U.S.Bahrain

MacedoniaBenin AustriaCambodia Iran

MoldovaBotswana AzerbaijanChina Iraq

Burkina Faso BelarusIndia JordanMontenegro

Burundi BelgiumIndonesia KuwaitNetherlands

Cameroon CroatiaJapan OmanNorway

Central AfricanRepublic

CzechRepublic

Korea QatarPoland

Chad DenmarkLaos Saudi ArabiaPortugal

Congo EstoniaMalaysia SyriaRomania

Côte d'Ivoire Finland

LatinAmerica

Argentina

Brazil

Chile

DominicanRepublic

Ecuador

El Salvador

Guatemala

Mexico

Paraguay

Peru

Uruguay Nepal UAERussia

DemocraticRepublic of Congo

FrancePakistan YemenSerbia

Egypt GeorgiaPhilippines Slovak Republic

Gabon GermanySingapore Spain

Ghana GreeceSri Lanka Sweden

Guinea Republic HungaryTaiwan

Mauritania

Mauritius

Morocco

Mozambique

Namibia

Niger

Nigeria

Rwanda

Senegal

Sierra Leone

South Africa

Sudan

Tanzania

Uganda

Zambia

Zimbabwe Switzerland

Guinea-Bissau IrelandThailand Tajikistan

Kenya IsraelVietnam Turkey

Liberia Italy U.K.

Madagascar Kazakhstan Ukraine

Malawi Latvia Uzbekistan

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Endnotes

1 Over-the-top involves using the Internet to stream content directly to handheld devices, game consoles, and TV sets connected to broadband.

2 Gamification involves applying game-design principles (such as earning points or moving to the next level) to actual situations outside of games. The aim is to give participants a feeling of achievement and status, and encourage constructive competition.

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