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It will take more than zero-rating to neutralize new entrant MNOs

Unlimited, zero-rate and free data – most MNOs don’t currently seem to be able to think more creatively than that in the battle to win consumers. The US market has been shaken up by the return of unlimited plans as Verizon and AT&T respond to T-Mobile’s Uncarrier and Binge On deals (Sprint always had unlimited in some deals), while TMO’s influence is being felt further afield too, with copycat launches in the UK and elsewhere.

So marked is the fall in data prices for consumers that one CEO, Andrew Penn of Telstra, is even predicting this will reach zero in the next 5-10 years. He told the recent Mobile World Congress Shanghai conference that operators must diversify away from connectivity as their only revenue stream and avoid falling down the value chain.

“There is a real possibility the price for data to the customer will go to zero in the next 5-10 years,” he said in his keynote address, and called for operators to think less about “cool technology” and more about innovation in consumer services, providing intuitive experiences and transparent pricing.

Some MNOs are already thinking beyond connectivity, some by merging or partnering with providers of other services – content, like Verizon and AT&T; Internet and IoT, like Softbank; TV or fixed broadband, to create multiplay bundles, like AT&T, EE and many others.

Some are developing new service platforms inhouse, with SK Telecom of Korea being an outstanding example. Some are upping their investment in business mobile offerings, with their longer contract periods and higher ARPUs – Orange France is a good example. And still others are developing platforms in areas like security, device management or mobile cloud services.

However, despite all this activity, the consumer remains the heart of most MNO business models, and most consumers just want to use more data, especially video, more cheaply. So operators are having to invest in more efficient networks, come up with flexible tariffs, and even merge with competitors to be able to lure users with cheap, unlimited or free data.

The US has had the highest profile shift to unlimited data, and may provide a classic example of a disruptor, TMO, which sets a chain of events in motion, only to be consumed by it down the road. Once Verizon and AT&T moved reluctantly into the unlimited and zero-rated games, TMO’s differentiation started to fade. Last month, it hiked the price of its premium unlimited data plan add-on, One Plus, by $5, making the total monthly cost of a single line $80. This does bring HD video play and mobile hotspot access into the unlimited plan, as well as inflight WiFi and faster international speeds. And it is still cheaper than AT&T’s premium single line deal at $90, and includes taxes. However, every time Verizon or AT&T improves its offering, TMO has had to respond, including more in the bundle, and then trying to increase the price somewhere else to compensate. It is questionable how long that can continue and still please shareholders.

Scale matters in price wars, and though AT&T and Verizon have returned to unlimited data fairly recently, they are doing better in ARPU terms because of their larger customer bases and the higher value of their typical customers. According to Jefferies analyst Mike McCormack, the two leading telcos have not had to be as aggressive with special promotions as Sprint and TMO. “We find that, at the average of three lines per account, the more rational pricing of AT&T and Verizon would suggest the plans are accretive,” McCormack wrote. While TMO’s basic single line deal, at $70, is “relatively neutral” to its overall ARPU, AT&T’s (between $60 and $90 per line) and Verizon’s (at $80) are still boosting ARPU.

Not that Verizon CEO Lowell McAdam sees these tactics as more than short term necessity. He has previously said that unlimited economics do not work over time and told investors in May: “Unlimited is not the end state, it’s a step along the way.”

In the UK, Hutchison’s Three has unveiled Go Binge, which brings the practice of zero-rating certain types of content – popular in the US – to the UK for the first time. The first services available on the new plans are streaming services Netflix, TVPlayer, SoundCloud and Deezer. The option is available to users with advanced plans with a data allowance of 4GB or more.

The MNO said the launch of Go Binge was in response to consumer research, which revealed the “UK’s obsession” with streaming the latest TV series. CEO David Dyson said in a statement that it was his “ambition to unlock restrictions that stop consumers from enjoying their mobiles”, adding: “With Go Binge, we are the first network in the UK to give people the freedom to use their data to stream their favourite shows and music without any boundaries and without worrying about restrictive data allowances and charges.”

In other countries, established MNOs are trying to avoid the trap of responding to new entrants with kneejerk price cuts. Starhub of Singapore is facing new competition on two fronts – from a fourth operator, TPG Telecom, and from plans by MyRepublic to become an MVNO.

Starhub’s solution is to ramp up its business-to-business data analytics services, looking to tap into an MNO’s in-depth knowledge of consumer usage and behaviour to sell information to corporates. TPG, which already operates in Australia, won spectrum in the recent auction and plans to enter the market as a fourth MNO, threatening to bring Iliad-style low cost and unlimited data plans with it. Starhub has said this is the worst case scenario – that TPG bundles unlimited mobile data with fixed broadband (StarHub also offers broadband and pay-TV services).

“The margin in that segment is already under pretty intense competition, and that will remain a highly contested space,” StarHub CEO Tan Tong Hai told Bloomberg. “As consumers use their mobile phones, the broadband and the TV, the analytics generate a lot of interesting data, and we’ve realised that such information is very useful for our corporate clients.”

Corporate customers accounted for 42% of StarHub’s revenue last year, more than doubled since 2008. The segment’s revenue grew at a CAGR of 5-6% over the past six years, while the consumer sector saw a slight decline. Tan expects growth in the corporate segment to accelerate, though the competition from SingTel will be fierce, as it is the dominant player in B2B telco data analytics.

Some analysts believed B2B growth will not be enough to cancel out the impact of a new entrant in this saturated market. “This could be a growth area for StarHub, but we don’t think it will grow at a pace fast enough to offset the impact of TPG’s entry,” Eugene Chua, an analyst at OCBC Investment Research, told Bloomberg. StarHub’s share price has fallen by over 30% since the Singapore government announced it planned to open the way to a further MNO. But it could improve its enterprise position through acquisition and has already announced plans to buy a 51% stake in cybersecurity solutions firm Accel Systems & Technologies plus a stake in media content provider mm2 Asia.

“A lot of people don’t understand our enterprise strategy, they look at us and think the fourth player is going to cannibalize your business,” Tan said. “The hidden asset is actually the data analytics, and we’ve been using this now to complement our enterprise business.”

Meanwhile broadband provider MyRepublic, which also bid for the fourth licence but failed, now says it plans to enter the fray as an MVNO, saying it could break even with just 1.5% of the market, giving it the flexibility to introduce low cost data plans and fixed/mobile bundles. Analysts at RHB said in a client note: “We expect MyRepublic to initially tap the low hanging fruits or its current base of around 70,000 fiber broadband customers. MyRepublic’s entry into the mobile business could serve to ‘defect’ competition from TPG on the incumbent mobile network operators as MyRepublic could pose more of a threat to TPG, in our view.”

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