Wireless Intelligence

Analysis: The effect of mobile broadband on operator revenue

Is mobile broadband ARPU making up for the decline in voice?
Calum Dewar
Analyst, Wireless Intelligence February 2012

Executive summary
Although mobile broadband ARPU (average revenue per user) has not completely offset declines in voice revenue for mobile operators at the global level, it has gone some way to stabilise falling blended ARPUs for those operators who have deployed mobile broadband networks and built up a high level of smartphone penetration within their customer base. A global study of the difference in blended ARPU between mobile broadband operators and those operators that do not provide mobile broadband services shows that the latter group have seen their average blended ARPU decrease at twice the rate of that of the former over the past five years. While a lack of reported data on the subject means that it is not possible at this time to identify a direct relationship between mobile broadband ARPU and blended ARPU, the findings above are reinforced by case studies of selected operators who, despite seeing falling voice ARPU, have all maintained stable blended ARPU since launching mobile broadband networks in 2005. Operators have been increasingly looking to mobile broadband technologies which comprise CDMA2000 1xEV-DO, WCDMA, WCDMA HSPA, TD-SCDMA, WiMAX and now LTE - for revenue generation as global cellular ARPU continues its long term downward trend. Voice prices hit rock-bottom in parts of the developing world in 2011, while multiple device ownership and competition from MVNOs is diluting operators ARPU in the developed world. Although the gap is narrowing, voice ARPU is still falling faster than total ARPU, suggesting that some operators have been able to effectively monetise mobile broadband networks to compensate for declining voice revenues. This has been possible as a result of these new networks gaining traction at a record rate of growth, currently accounting for more than 20% of global connections compared to just 3% in 2005. The greater availability of high-speed networks has in turn generated a significant rise in smartphone ownership, with global smartphone penetration now at around 10%. As smartphone ARPU is typically double that of non-smartphone users, this phenomenon has subsequently played a significant role in stabilising blended ARPU.

Definitions for technical terminology are provided in the glossary

The effect of mobile broadband on operator revenue

Global context: the long term decline in ARPU

Total worldwide revenue for the cellular industry passed the US$1 trillion mark in 2009 and continues to grow steadily indeed we expect the figure to reach US$1.1 trillion this year. However, the rapidly increasing number of global mobile connections combined with intensifying competition in the industry has, over time, inevitably forced down ARPU. There are now more than 800 mobile operators worldwide, an increase of more than 40% over the last ten years, and the race by operators to build market share in some developing countries (such as those in the Indian subcontinent or East Africa) caused call prices to drop as low as US$0.01 per minute in 2011. The fact that these rates are generally only available for on-net calls has also led to an abundance of multiple SIM users in some markets, thereby driving ARPU down further. The multiple SIM effect has also impacted negatively on ARPU in high-penetration markets in the developed world, albeit in a different way, as people acquire second and third devices/connections which they then tend to use less than their primary one. Another feature of these mature markets is the establishment of mobile virtual network operators (MVNOs), which can further lower ARPU by expanding the market into lower-spending segments. As a result of all these factors, blended ARPU, that is the average of all service revenue across the customer base expressed monthly, has declined at the worldwide level from around US$44 in 2001 to approximately US$16 ten years later or by 10% each year on average (see Figure 1).

Figure 1: Global voice and blended ARPU, 200111 Source: Wireless Intelligence

Despite positive trends in global data revenues, voice services remain the core revenue generator for most operators and still represent 70% of the cellular industrys total revenue. Figure 1 also shows how global voice ARPU has changed since 2001, when the use of messaging and other services was still at a relatively low level. Subsequently, voice ARPU at that time was higher than blended ARPU at around US$46, yet voice has since declined at a rate of 13% per annum somewhat faster than blended ARPU and currently stands at around US$12. The widening gap between voice and blended ARPU has come about largely as a result of the increasing popularity of messaging and data services, which have both cannibalised voice revenue to some extent while providing new revenue streams of their own.

The effect of mobile broadband on operator revenue

The commoditisation of messaging services, mainly through unlimited tariffs and bundled packages, has limited their potential as a revenue generator, leaving data - and particularly the promotion of smartphones and mobile broadband services - to form the core of most major operators revenue growth strategies. For example, voice accounted for 59% of Vodafone Groups recurring revenue in 2011 , down from 63% at the end of 2010, while data-only revenue jumped from 12% to 15% over the same period. Subsequently, data revenue now makes up a greater proportion of Vodafones recurring revenue than messaging, which currently stands at 13% of total.

The rise of mobile broadband technologies

Mobile broadband technologies, which include CDMA2000 1xEV-DO, WCDMA, WCDMA HSPA, TD-SCDMA, WiMAX and now LTE, have seen an extremely rapid adoption rate and now make up more than 20% of total global connections (see Figure 2), up from around 3% in 2005 the launch year for WCDMA HSPA, which now accounts for the majority of mobile broadband networks. WCDMA HSPA is the fastest growing wireless technology ever, with a rate of adoption in its first six years some ten times greater than the take up of GSM mobile phones when they were first introduced in the mid-1990s. This has in turn contributed to a rapid rise in the popularity of smartphones, the penetration of which now stands at around 10% globally, and in at least one country (Singapore) is now greater than 50%.

Figure 2: Connections, mobile broadband technologies, 200815 (% share of total) Source: Wireless Intelligence

The effect of mobile broadband on operator revenue

As would be expected, there is considerable regional variation in mobile broadband penetration. Figure 3 shows mobile broadband connections as a percentage of total cellular connections at the regional level, and illustrates how 2G networks are still dominant across large parts of the world. USA/Canada is the clear leader in terms of mobile broadband penetration, with a subscriber base of 238 million split roughly halfway between the CDMA2000 1XEV-DO family of technologies and WCDMA HSPA, save for an increasing proportion of LTE. Western Europe is the only other region with a mobile broadband share of more than 25%, and has the highest absolute total of connections with 248 million, around two-thirds of which are WCDMA HSPA and just under a third WCDMA (the remainder being LTE). Some way behind, the Middle East is exactly in line with the world average with a mobile broadband proportion of 21.4%, while Eastern Europe, Asia Pacific, and the Americas currently stand at around the 15% mark and Africa has just 8.8% mobile broadband penetration.

Figure 3: Regional splits of mobile broadband connections, 2011 Source: Wireless Intelligence

The effect of mobile broadband on blended ARPU

Very few operators report mobile broadband ARPU, so at this time there is not sufficient data available to identify a direct relationship between mobile broadband ARPU and blended ARPU. However, by comparing blended ARPU levels for operators that have mobile broadband networks to those of operators that do not, we can make an assessment of whether mobile broadband revenue is contributing to offset the decline in global mobile voice revenue. Figure 4 shows weighted average blended ARPU for the 495 operators who currently offer mobile broadband, compared to the equivalent values for the 387 operators active in Q4 2011 that do not have mobile broadband networks. The start year for the analysis is 2005, the launch year for WCDMA HSPA, when the difference in blended ARPU between mobile broadband operators and nonmobile broadband operators was relatively small the level for mobile broadband operators was around US$30, 10% greater than the non-mobile broadband equivalent of US$27.

The effect of mobile broadband on operator revenue

Figure 4: Blended ARPU, mobile broadband operators and non-mobile broadband operators, 200511 Source: Wireless Intelligence

Since that time, it can be seen that despite the rapid rise in mobile broadband connections shown in Figure 2, blended ARPU for mobile broadband operators has still declined at a rate of 9.7% per annum on average only marginally slower than the average decline in overall blended ARPU of 10.4% over the same period (see Figure 1). However, the level of blended ARPU for non-mobile broadband operators has dropped considerably during the same period, decreasing at an annual average of 20.9% per annum. Subsequently, in 2011 average blended ARPU for non-mobile broadband operators stood at around US$7, while the corresponding figure for mobile broadband operators was around US$16 - some 2.4 times greater. Hence we can say that while increasing mobile broadband ARPU has not been wholly sufficient to compensate for declining voice ARPU for mobile broadband operators, it has invariably contributed to stabilisation of their blended ARPU when compared to that of non-mobile broadband operators. Other indicators that are reported by certain operators can be used to corroborate this hypothesis and explain the underlying trends behind it. For example, AT&T Mobility in the USA launched a WCDMA network in 2004 and HSPA a year later. In the period 2000-2004, the operators blended ARPU declined by an average of 1.8% per annum from around US$53 to US$49. While blended ARPU has continued to fall in the seven years since AT&T began offering mobile broadband services, the rate of decrease has slowed to 0.5% per annum. The operator has reported their split of voice and non-voice ARPU since 2006, as shown in Figure 5. It can be seen from the graph that while voice ARPU has recorded a significant decline since then, falling by 7.2% per year on average from around $43 to $29, total blended ARPU (i.e. voice ARPU plus non-voice ARPU) for the operator has been quite stable, dropping from around US$49 in 2006 to US$47 in 2011. Thus the shortfall in voice at AT&T has been almost entirely made up by non-voice ARPU, the value of which has increased by 23.4% per annum on average since 2006, and which now accounts for 41% of the operators total revenue.

The effect of mobile broadband on operator revenue

Figure 5: Blended ARPU split by voice and non-voice, AT&T Mobility, USA, 200611 Source: Wireless Intelligence

Non-voice ARPU incorporates messaging and other value added services (VAS) as well as data and hence mobile broadband components, and therefore is not a direct representation of mobile broadband ARPU itself. However, with messaging revenues becoming increasingly marginal as a result of unlimited tariffs, we can assume that growth trends for non-voice revenues are a reasonable approximation of what is happening in terms of mobile broadband revenue. Hence with non-voice ARPU rising from 15% of total in 2006 to 41% in 2011, we can infer that AT&Ts mobile broadband ARPU is increasing at a similar rapid pace. Similarly, the operators smartphone penetration level also gives an indication of its potential to generate mobile broadband revenue, as alongside dongle subscribers, smartphone users are the largest consumers of mobile broadband services. Indeed, AT&T noted in its Q4 2011 earnings report that the average ARPU for smartphones on its network was 1.9 times that of the companys non-smartphone devices. AT&T has invested heavily in a smartphone-based strategy and was the launch operator for the Apple iPhone in the US in 2007, having exclusivity rights to selling the device until last year. Subsequently, at the end of 2011, 56.8% of AT&Ts 69.3 million contract subscribers had smartphones, up from 42.7% a year earlier and 32.8% two years ago. This is considerably higher than the global average of 10%, and the higher ARPUs generated by these subscribers will largely be derived from mobile broadband usage. So while smartphone ARPU cannot be considered to be the same as mobile broadband ARPU, we can say that smartphone adoption is a key driver in increasing mobile broadband ARPU and in turn stabilising the decline in operator revenues.

The effect of mobile broadband on operator revenue

Mobile broadband ARPU: selected operator case studies

The findings in the previous section are reinforced by the results for mobile broadband ARPU, voice ARPU and blended ARPU presented for three selected operators below. These operators have been chosen on the basis that they have reported sufficient mobile broadband, voice and blended ARPU data to make meaningful comparisons. Maxis, Malaysia Maxis launched WCDMA in 2005 and HSPA a year later, and in Q3 2011 had 12.7 million connections - of which we estimate 24.5% or 3.1 million were on mobile broadband networks. Figure 6 shows that while the operators blended ARPU level has dropped by an average of 4% per annum since the launch of its mobile broadband network, voice ARPU has fallen at a much faster rate (11%). Mobile broadband ARPU has also decreased since launch (by 9% per annum on average since the first figures were available in 2006), but has typically remained above blended ARPU and some way above voice ARPU mobile broadband ARPU stood at US$20 in 2011, compared to US$17 for blended ARPU and US$9 for voice. Indeed in its Q3 2011 results, Maxis observed that the breadth of (its) wireless broadband footprint and pricing levels contributed to ARPU stability, having announced a 24% annual increase in mobile broadband revenue to US$ 41.6 million, or 6.4% of service revenue.

Figure 6: Mobile broadband, voice and blended ARPU, Maxis, Malaysia, 200511 Source: Wireless Intelligence

Taiwan Mobile, Taiwan Taiwan Mobile launched WCDMA 2005 and HSPA 2007, and in Q3 2011 reported 6.6 million connections - of which 4.9 million were supported by mobile broadband networks (74.6% of the operators total connections base). Taiwan Mobiles ARPU results for the past six years are shown in Figure 7, which illustrates a more stable situation than for Maxis. While the operators blended ARPU has also decreased since the launch of its mobile broadband network, the rate of decline has been slow (2% per annum compared to the global average of 10%) on the back of relatively stable voice ARPU, which was down an average of 5% per annum
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The effect of mobile broadband on operator revenue

over the same period. Since it was first reported in 2008, mobile broadband ARPU has been lower than blended ARPU but has been steady at US$23 to 2011, compared to US$24 for blended and US$19 for voice. Taiwan Mobile reported in Q4 2011 that smartphones made up 64% of all handsets sold (up from 48% in Q4 2010), and that in 2011 smartphone customers generated ARPU of US$54 compared to US$26 for other contract subscribers. Mobile broadband made up 5.0% of service revenue.

Figure 7: Mobile broadband, voice and blended ARPU, Taiwan Mobile, Taiwan, 200511 Source: Wireless Intelligence

Telstra, Australia Telstra is an interesting example of how mobile broadband ARPU has evolved in a developed nation, as shown in Figure 8. Telstra launched WCDMA in 2005 (since phased out in 2009), HSPA in 2006 and then LTE in 2011. The operator reported 13.2 million total connections in Q4 2011, and in its November 2011 Investors Presentation stated that over 85% of its customers were using its 3G network i.e. HSPA. Since the WCDMA launch, the operators blended ARPU has increased by 4% per annum on average despite voice ARPU declining at the same rate (up to 2009, latest data available). Mobile broadband revenue figures for Telstra are available from 2007 onwards, and at that time the operator was able to generate a mobile broadband ARPU of US$81, some 1.7 times greater than blended ARPU at the time (US$49) and more than twice the voice equivalent of US$36. Mobile broadband revenue continues to grow and was up 9.1% year-on-year in Q4 2011 to US$493 million, but the operator notes in its Q4 2011 half-year report that mobile broadband ARPU declined by 25.2% as a result of increased penetration of lower value prepaid plans including the increased popularity of tablets on these plans, together with lower priced postpaid offers. Indeed Telstras mobile broadband ARPU has fallen by an average of 20% per annum since 2007 as mobile broadband has moved from being an expensive niche product to a truly mass market offering, but has still contributed to an increasing level of blended ARPU. However, mobile broadband revenue as percentage of service revenue has risen from 9.4% in 2008 to 13.2% in 2011, a considerably higher proportion than that of Maxis and Taiwan Mobile.

The effect of mobile broadband on operator revenue

Figure 8: Mobile broadband, voice and blended ARPU, Telstra, Australia, 200511 Source: Wireless Intelligence

The effect of mobile broadband on operator revenue

Glossary
Mobile broadband Wireless internet access through a mobile device using any of the following network technologies: CDMA2000 1X EV-DO (including EV-DO Rev. A and Rev. B), WCDMA, WCDMA HSPA (including HSDPA, HSUPA and HSPA+), TDSCDMA, WiMAX and LTE (including FDD-LTE and TD-LTE). 3G Third-generation 3G networks as defined by the ITU (International Telecommunication Union) include all of those listed under Mobile broadband as well as CDMA2000 1X. Notably includes LTE and WiMAX which are not classed as 4G, unlike their planned successors, LTE Advanced and WiMAX 2. MVNO A mobile virtual network operator (MVNO) provides a cellular service through an agreement with a mobile network operator (MNO) to purchase wholesale network access but does not have its own licensed spectrum or own all of the infrastructure required to provide a cellular service.

ARPU Average revenue per user: recurring service revenue divided by weighted average number of customers during the same period, expressed monthly. Blended ARPU Recurring service revenue divided by average number of total subscribers for the period. Voice ARPU Revenue from voice services divided by average number of voice subscribers for the period. Non-voice ARPU Non-voice revenue divided by average number of subscribers for the period. Non-voice ARPU includes the following three subsets: Data ARPU Data revenue divided by average number of data subscribers. Messaging ARPU SMS and MMS revenue divided by average number of subscribers with access to these services. VAS ARPU Value added services ARPU: revenue from value added services (e.g. ringtones, caller tunes, wallpapers and screensavers) divided by average number of subscribers to these services.

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The effect of mobile broadband on operator revenue

About the author Calum Dewar Analyst calum.dewar@wirelessintelligence.com

Calum is responsible for operator forecasting within the database, focusing on the modeling of connections trends. Prior to Wireless Intelligence, Calum worked for WSP Group and BAA Ltd in the aviation sector. He holds an MSc (Hons) in Air Transport Management from Cranfield University and an MEng (Hons) in Aerospace Engineering from the University of Manchester.

About Wireless Intelligence Wireless Intelligence is the definitive source of mobile operator data, analysis and forecasts, delivering the most accurate and complete set of industry metrics available. Relied on by a customer base of over 700 of the worlds mobile operators, device vendors, equipment manufacturers and leading financial and consultancy firms, the data set is the most scrutinised in the industry. With 8 million individual data points updated daily the service provides coverage of the performance of all 950 operators and 780 MVNOs across 3,500 networks, 55 groups and 236 countries worldwide.

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