A small and surprising set of national operators are delivering outstanding performance in the challenging European market. Our analysis shows how they’re achieving differentiation with smart strategies that target the hottest customer need, and the considerable ramifications for the rest of the market.
Verizon’s performance in the US
Our work on the US cellular market – for example, in the Disruptive Strategy: “Uncarrier” T-Mobile vs VZW, AT&T, and Free.fr and Free-T-Mobile: Disruptive Revolution or a Bridge Too Far? Executive Briefings – has identified that US carrier strategies are diverging. The signature of a price-disruption event we identified with regard to France was that industry-wide ARPU was falling, subscriber growth was unexpectedly strong (amounting to a substantial increase in penetration), and there was a shakeout of minor operators and MVNOs.
Although there are strong signs of a price war – for example, falling ARPU industry-wide, resumed subscriber growth, minor operators exiting, and subscriber-acquisition initiatives such as those at T-Mobile USA, worth as much as $400-600 in handset subsidy and service credit – it seems that Verizon Wireless is succeeding while staying out of the mire, while T-Mobile, Sprint, and minor operators are plunged into it, and AT&T may be going that way too. Figure 1 shows monthly ARPU, converted to Euros for comparison purposes.
Figure 1: Strategic divergence in the US
We can also look at this in terms of subscribers and in terms of profitability, bringing in the cost side. The following chart, Figure 2, plots margins against subscriber growth, with the bubbles set proportional to ARPU. The base year 2011 is set to 100 and the axes are set to the average values. We’ve named the four quadrants that result appropriately.
Figure 2: Four carriers, four fates
Clearly, you’d want to be in the top-right, top-performer quadrant, showing subscriber growth and growing profitability. Ideally, you’d also want to be growing ARPU. Verizon Wireless is achieving all three, moving steadily north-west and climbing the ARPU curve.
At the same time, AT&T is gradually being drawn into the price war, getting closer to the lower-right “volume first” quadrant. Deep within that one, we find T-Mobile, which slid from a defensive crouch in the upper-left into the hopeless lower-left zone and then escaped via its price-slashing strategy. (Note that the last lot of T-Mobile USA results were artificially improved by a one-off spectrum swap.) And Sprint is thrashing around, losing profitability and going nowhere fast.
The usual description for VZW’s success is “network differentiation”. They’re just better than the rest, and as a result they’re reaping the benefits. (ABI, for example, reckons that they’re the world’s second most profitable operator on a per-subscriber basis and the world’s most profitable in absolute terms.) We can restate this in economic terms, saying that they are the most efficient producer of mobile service capacity. This productive capacity can be used either to cut prices and gain share, or to increase quality (for example, data rates, geographic coverage, and voice mean-opinion score) at higher prices. This leads us to an important conclusion: network differentiation is primarily a cost concept, not a price concept.
If there are technical or operational choices that make network differentiation possible, they can be deployed anywhere. It’s also possible, though, that VZW is benefiting from structural factors, perhaps its ex-incumbent status, or its strong position in the market for backbone and backhaul fibre, or perhaps just its scale (although in that case, why is AT&T doing so much worse?). And another possibility often mooted is that the US is somehow a better kind of mobile market. Less competitive (although this doesn’t necessarily show up in metrics like the Herfindahl index of concentration), supposedly less regulated, and undoubtedly more profitable, it’s often held up by European operators as an example. Give us the terms, they argue, and we will catch up to the US in LTE deployment.
As a result, it is often argued in lobbying circles that European markets are “too competitive” or in need of “market repair”, and therefore, the argument runs, the regulator ought to turn a blind eye to more consolidation or at least accept a hollowing out of national operating companies. More formally, the prices (i.e. ARPUs) prevailing do not provide a sufficient margin over operators’ fixed costs to fund discretionary investment. If this was true, we would expect to find little scope for successful differentiation in Europe.
Further, if the “incumbent advantage” story was true of VZW over and above the strategic moves that it has made, we might expect to find that ex-incumbent, converged operators were pulling into the lead across Europe, benefiting from their wealth of access and backhaul assets. In this note, we will try to test these statements, and then assess what the answer might be.
How do European Operators compare?
We selected a clutch of European mobile operators and applied the same screen to identify what might be happening. In doing so we chose to review the UK, German, French, Swedish, and Italian markets jointly with the US, in an effort to avoid a purely European crisis-driven comparison.
Figure 3: Applying the screen to European carriers
Source: STL Partners
Our first observation is that the difference between European and American carriers has been more about subscriber growth than about profitability. The axes are set to the same values as in Figure 2, and the data points are concentrated to their left (showing less subscriber growth in Europe) not below them (less profitability growth).
Our second observation is that yes, there certainly are operators who are delivering differentiated performance in the EU. But they’re not the ones you might expect. Although the big converged incumbents, like T-Mobile Germany, have strong margins, they’re not increasing them and on the whole their performance is average only. Nor is scale a panacea, which brings us to our next observation.
Our third observation is that something is visible at this level that isn’t in the US: major opcos that are shrinking. Vodafone, not a company that is short of scale, gets no fewer than three of its OpCos into the lower-left quadrant. We might say that Vodafone Italy was bound to suffer in the context of the Italian macro-economy, as was TIM, but Vodafone UK is in there, and Vodafone Germany is moving steadily further left and down.
And our fourth observation is the opposite, significant growth. Hutchison OpCo 3UK shows strong performance growth, despite being a fourth operator with no fixed assets and starting with LTE after first-mover EE. Their sibling 3 Sweden is also doing well, while even 3 Italy was climbing up until the last quarter and it remains a valid price warrior. They are joined in the power quadrant with VZW by Telenor’s Swedish OpCo, Telia Mobile, and O2 UK (in the last two cases, only marginally). EE, for its part, has only marginally gained subscribers, but it has strongly increased its margins, and it may yet make it.
But if you want really dramatic success, or if you doubt that Hutchison could do it, what about Free? The answer is that they’re literally off the chart. In Figure 4, we add Free Mobile, but we can only plot the first few quarters. (Interestingly, since then, Free seems to be targeting a mobile EBITDA margin of exactly 9%.)
The distinction here is between the pure-play, T-Mobile-like price warriors in the lower right quadrant, who are sacrificing profitability for growth, and the group we’ve identified, who are improving their margins even as they gain subscribers. This is the signature of significant operational improvement, an operator that can move traffic more efficiently than its competitors. Because the data traffic keeps coming, ever growing at the typical 40% annual clip, it is necessary for any operator to keep improving in order to survive. Therefore, the pace of improvement marks operational excellence, not just improvement.
Figure 4: Free Mobile, a disruptive force that’s literally off the charts
Source: STL Partners
We can also look at this at the level of the major multinational groups. Again, Free’s very success presents a problem to clarity in this analysis – even as part of a virtual group of independents, the ‘Indies’ in Figure 5, it’s difficult to visualise. T-Mobile USA’s savage price cutting, though, gets averaged out and the inclusion of EE boosts the result for Orange and DTAG. It also becomes apparent that the “market repair” story has a problem in that there isn’t a major group committed to hard discounting. But Hutchison, Telenor, and Free’s excellence, and Vodafone’s pain, stand out.
Figure 5: The differences are if anything more pronounced within Europe at the level of the major multinationals
Source: STL Partners
In the rest of this report we analyse why and how these operators (3UK, Telenor Sweden and Free Mobile) are managing to achieve such differentiated performance, identify the common themes in their strategic approaches and the lessons from comparison to their peers, and the important wider consequences for the market.
- Executive Summary
- Applying the Screen to European Mobile
- Case study 1: Vodafone vs. 3UK
- 3UK has substantially more spectrum per subscriber than Vodafone
- 3UK has much more fibre-optic backhaul than Vodafone
- How 3UK prices its service
- Case study 2: Sweden – Telenor and its competitors
- The network sharing issue
- Telenor Sweden: heavy on the 1800MHz
- Telenor Sweden was an early adopter of Gigabit Ethernet backhaul
- How Telenor prices its service
- Case study 3: Free Mobile
- Free: a narrow sliver of spectrum, or is it?
- Free Mobile: backhaul excellence through extreme fixed-mobile integration
- Free: the ultimate in simple pricing
- IP networking metrics: not yet predictive of operator performance
- Network sharing does not obviate differentiation
- What is Vodafone’s strategy for fibre in the backhaul?
- Figure 1: Strategic divergence in the US
- Figure 2: Four carriers, four fates
- Figure 3: Applying the screen to European carriers
- Figure 4: Free Mobile, a disruptive force that’s literally off the charts
- Figure 5: The differences are if anything more pronounced within Europe at the level of the major multinationals
- Figure 6: Although Vodafone UK and O2 UK share a physical network, O2 is heading for VZW-like territory while VF UK is going nowhere fast
- Figure 7: Strategic divergence in the UK
- Figure 8: 3UK, also something of an ARPU star
- Figure 9: 3UK is very different from Hutchison in Italy or even Sweden
- Figure 10: 3UK has more spectrum on a per-subscriber basis than Vodafone
- Figure 11: Vodafone’s backhaul upgrades are essentially microwave; 3UK’s are fibre
- Figure 12: 3 Europe is more than coping with surging data traffic
- Figure 13: 3UK service pricing
- Figure 14: The Swedish market shows a clear winner…
- Figure 15: Telenor.se is leading on all measures
- Figure 16: How Swedish network sharing works
- Figure 17: Network sharing does not equal identical performance in the UK
- Figure 18: Although extensive network sharing complicates the picture, Telenor Sweden has a strong position, especially in the key 1800MHz band
- Figure 19: If the customers want more data, why not sell them more data?
- Figure 20: Free Mobile, network differentiator?
- Figure 21: Free Mobile, the price leader as always
- Figure 22: Free Mobile succeeds with remarkably little spectrum, until you look at the allocations that are actually relevant to its network
- Figure 23: Free’s fixed-line network plans
- Figure 24: Free leverages its FTTH for outstanding backhaul density
- Figure 25: Free: value on 3G, bumper bundler on 4G
- Figure 26: The carrier with the most IPv4 addresses per subscriber is…
- Figure 27: AS_PATH length – not particularly predictive either
- Figure 28: The buzzword count. “Fibre” beats “backhaul” as a concern
- Figure 29: Are Project Spring’s targets slipping?