An eye on the spectrum prize

Recent moves by Optus and Vodafone are a clear sign of the structural shift underway in the telco sector, where better data speeds, coverage and giving customers more bang for their buck has become more crucial than ever before.

Over the last two years we have seen dramatic developments in the mobile industry. The arrival of smartphones pushed the mobile operators further into the commodity corner. They had been unable to capture the power of mobile broadband through their proprietary mobile content portals and a very dramatic shift occurred from the power of the telcos to the power of the smartphones.

The enormous – and for the telcos totally unexpected – success of mobile broadband saw them scrambling for network capacity in order to satisfy their customers’ voracious appetite for services through the new smartphones and tablets. As they had missed out on the value-added services they were confronted with higher network investments and an overall flattening of ARPUs.

Telstra had the foresight to move early. Its network came out on top and it has been able to maintain that lead in the market ever since. This made it possible for Telstra to make significant inroads at the top end of the mobile market, where the margins are more interesting and the overall revenues higher.

Vodafone missed the boat rather dramatically. Still engulfed in the merger with Hutchison’s ‘3’ network it took its eye off the ball and had very significant network problems that cost the company dearly.

While Optus was able to maintain its network integrity it was more affected by the new competitive spirit that had ignited Telstra after the arrival of its new CEO. Optus had always been the most sophisticated operator in the market, with very sharp targeted campaigns to attract the right customers, and Telstra created havoc with that strategy.

But by mid-2012 Optus began to take control again. It had finetuned its strategies again – this time, of course, squarely aimed at undermining the various Telstra initiatives in the market.

However, at the same time, it also addressed other elements of its mobile market strategy.

Optus reacted to the reality of the commodity developments in the market. Because of that many customers don’t need a great deal of in-depth decision-making in relation to their mobile contracts and mobile services, and in that respect customer interfaces with the operators can be streamlined. As a utility many actions are straightforward, and, with new self-help and self-activated software features in the operator’s systems, these facilities can be made directly available to the users. Optus introduced a range of new online customer services and was able to reduce staff in this part of the business by 170 people.

It has always amazed me that while banks, for example, have had systems in place for many years that let customers do their banking online, few services of this kind are available in the telco business. Online banking in the consumer market accounts for 70 per cent  of all transactions, but telcos do only five per cent of their transactions online with their customers.

In order to become more automated sophisticated processes must be in place that can target customers who prefer this self-help system (the tech-savvy and younger demographics), while at the same time remaining responsive to those customers who need a more personal contact. Nowadays software, data collection and analytics make it possible for companies to do that.

Optus’ move to streamline its online customer services reflects its response to the reality of the competitive (utilities) nature of the business. Companies will have to become far more efficient in all of their back-office activities and will need a far higher level of automation. Look at how many people companies such as Google, Facebook and Skype need to run their businesses and compare this with the telcos. They will have to become far more efficient, and this is one of the steps in that process for Optus.

At the same time the company signed a further Memorandum of Understanding (MOU) to expand their current network joint venture agreement with Vodafone. Customers of both networks will receive wider coverage. The company indicated that the delivery of 4G services will also be strengthened by accessing additional mobile sites in Sydney, Melbourne, Perth and Brisbane.

Optus and Vodafone had already signed a similar contract back in 2004, but this had largely died over the years. However the competitive reality of the market has brought the parties closer together again.

Along with the notion of utility comes that of costs and scale. There is no longer the surplus money in the mobile business to overbuild infrastructure – mobile broadband requires an enormous increase in infrastructure and at the same time the ARPUs remain flat, or even drop. So something will have to give.

Vodafone in particular is facing very serious survival problems and this could well be the prelude to further close cooperation between the two companies, with Vodafone gradually becoming more and more a service provider rather than an infrastructure provider – something that would make total sense. We will then start to see more separation between the infrastructure and the services, and this could even develop into a more wholesale-based structure as well.

The latest initiatives from Optus and Vodafone indicate an adjustment to market reality, but it is more than likely that further structural changes will be made in this industry. Among other things ongoing spectrum scarcity – also after the release of the digital dividend – will play a role in industry realignment developments. The role of the NBN is also key to the industry infrastructure challenges – the more traffic and the quicker it can be offloaded to the fibre network the better this is for the management of the mobile infrastructure.

All of these developments are a clear indication of the wide range of dynamics in this market that will see a continuation of innovation and competition, which is good for consumers who can’t get enough of smartphones and tablets and the many other devices that no doubt will be introduced over time.

Paul Budde is the managing director oBuddeComm, an independent telecommunications research and consultancy company, which includes 45 national and international researchers in 15 countries.