Mobinet 2005: Raising the Stakes

The mobile communications industry is placing the biggest bet in its short history on powerful third-generation, or 3G, networks to support multimedia data services. Equipment vendors, network operators, and software and content companies continue to raise the stakes on mobile data, investing in new service platforms, faster network technologies and major promotional campaigns. But so far, their efforts have not resulted in more robust consumer demand. Indeed, many customers continue to use their highly sophisticated mobile devices simply to make voice calls.

These are among the key findings in the 2005 A.T. Kearney Mobinet study, which is an assessment of global consumer trends in mobile usage, which we have carried out since 2000 (Click here to view entire study results). This year's research examines the degree to which consumers are adopting mobile data services (see sidebar: About the Study). The findings, based on interviews with mobile users in 21 countries, reveal increased awareness of and experimentation with mobile data services, with some very strong usage patterns. For example, more consumers across all age groups are adopting mobile data services. This confirms a trend first reported by mobile operators that were experiencing incremental revenue growth from mobile data over and above the long-established text messaging (SMS).

Similarly, penetration of data-enabled, multimedia phones has increased to 53 percent, with 56 percent of multimedia phone owners actually using it to browse their operator's portal, the internet or to access mobile email, and doing so at least once a month. This number stands in stark contrast to the 36 percent of users who used these services in 2004. And although music downloads and email are beginning to make a noticeable contribution, more recent services, such as streaming video, have still not generated meaningful revenues.

However, the study also reveals that the marketing of new data services—for example, through pricing packages or improved user experience—significantly lags technology development. Without adequate marketing strategies a large section of the market remains focused on purchasing basic voice services at the lowest price possible.

Overall, the 2005 Mobinet findings reveal a positive outlook for the mobile sector: voice calls made on mobile networks will continue to take market share from fixed networks, and more users are adopting multimedia services. What do the findings mean for operators? With the right marketing strategies, operators can tap into these trends by providing a low-cost, voice-only offering to protect their core business while maintaining a rich service offering for subscribers willing to experiment and pay more for new data services. In this way, operators can meet consumer expectations and their own business goals.

The following offers a deeper discussion of this year's study, which sought answers to  three key questions:

• What is the current level of usage and consumer interest for data services?
• What is important to consumers, both for mobile data and voice services?
• What implications can be drawn from usage differences between segments, geographies or even between the distinct customer bases of operators and device manufacturers?

Data Services: Adoption Accelerates
For the first time in our survey, more than half of consumers say they are able to access multimedia services via their mobile device. The growing penetration of new multimedia phones is the catalyst. In almost all markets studied, more than half of the handsets are less than one year old, as operators continue to promote new models (usually with built-in cameras) and the data services they support.

Although this is good news for the manufacturers and retailers, it is proving expensive for operators in markets that subsidize handsets. Still, putting new handsets into the palms of the best customers offers the best chance of success. There is a clear relationship between the average revenue per user (ARPU) and the age of the phone the customer uses. People who have recently replaced their handsets are more likely to provide a higher ARPU and to be heavier users of data services (see figure 1). In part this reflects better targeting of acquisition cost budgets by operators: customers who spend more are more likely to be rewarded with upgrades.

We have tracked data usage over five years within two main categories:
Communication. Mobile internet and email use has grown dramatically across Western Europe and the Americas, continuing the emerging upward trend first noted in 2004. Our global data shows that 56 percent of all multimedia phone owners have browsed their operator portal (such as Vodafone live! or DoCoMo's i-mode) or used mobile email service at least once a month—up from 36 percent last year. This reflects the high penetration in Japan (where users prefer it to SMS), but also shows the promise of "pull email" solutions and Blackberry-like devices. These services are moving from the fringes to provide support to core revenue streams, though the pricing of mobile email versus SMS is a challenge for many operators. One clue from our research: More than one-quarter of users would pay for services to protect them from spam and viruses.

Consumers are sending more pictures, photos and video clips. These mobile multimedia messaging services, or MMS, have grown steadily across most regions, with one-third of multimedia phone owners using them. MMS is taking off across all age groups but the highest penetration is among 19- to 24-year olds, where almost half of multimedia phone owners say they use the service regularly.

Still, these services are in their early days. Using the current penetration of short messaging services (SMS) as a benchmark, advanced messaging products such as mobile email and MMS have plenty of room to grow in terms of the frequency of use. For example, while close to 90 percent of people with multimedia phones use SMS at least once a month, usage of MMS, email or live video calling is well below this.

Entertainment. Entertainment services lag behind communication in terms of overall adoption, but younger customers are eager for both music and gaming services. In particular, 33 percent of consumers with multimedia devices download music, up from 21 percent last year. With healthy levels of repeat use emerging in most countries, music has the potential to generate substantial revenues (see figure 2). Gaming has also grown in Japan, the Americas and Scandinavia, but levels of repeat use so far remain lower.

Even as these services catch on, there is a healthy pipeline of new entertainment products, including mobile TV, which has made impressive headlines around the world. Overall, mobile TV is attractive to one-sixth of users and is especially attractive to 18- to 44-year olds in Latin America, Asia and Eastern Europe. When asked to choose categories of mobile content, two-thirds of consumers expressed a desire for time-sensitive TV content such as news and sports rather than entertainment programs (see figure 3). Younger users also showed a willingness to pay for additional music and entertainment content. Although in many markets these services do not exist beyond small-scale technical pilots, 17 percent of mobile users (and 27 percent of teenagers) say they are willing to pay for time-critical and relevant content that can be easily viewed while on the move.

Capturing the Value from Mobile Data
Converting consumer interest into revenue has been a challenge for the past few years. One reason was consumers' difficulty navigating through the services on their phones. Operators, however, have tackled this. Today, nearly two-thirds of users say that new services and functions are easy and enjoyable to use. Even in the older age groups, less than half of users complain that new functions are difficult to use. There is also a noticeable difference between operators in this area: The best operators have satisfaction ratings about 20 percent better than the worst, although different customer demographics may provide a partial explanation for this. Concerns about the security of mobile data have declined since last year, when a spate of "phone virus" scares made this a top concern.

Our findings indicate that operators still have to bring the price of data services in line with consumer expectations. One-third of mobile phone users are concerned about the cost of mobile data, and about half say they are not willing to pay more than $5 a month for it (after adjusting to U.S. purchasing power parity). In mature Western European and North American markets, consumers are especially conservative, although most investments in 3G networks have been in those markets.

Generating incremental value from mobile data also rests with the ability to convince consumers of the quality of the content, which must rival the availability of online music, news, or games on broadband internet. More than one-third of mobile users doubt the quality and availability of mobile content—a considerable increase over 2004 (see figure 4). This is unsettling for operators that have been investing heavily in proprietary portals and content. It raises the issue of whether or not operators should seek out more partnerships with established online portal brands and media companies. However, our research also shows that the situation is worse among users who do not access the services than among those who do, suggesting the problem may be more a matter of perception (marketing) than true lack of content.

Voice Services: Growth, But at What Price?
Demand for core voice services continues to be robust, despite widespread price erosion due to increased competition. Nearly 60 percent of customers expect to use their mobile phones to make the majority of their calls over the next year, which suggests they continue to see the convenience of mobile voice over fixed line. Despite the excitement about VoIP (voice over internet protocol) services such as Skype, consumers are not yet adopting them as a mainstream service: Just 4 percent of consumers expect to use VoIP for the majority of their calls in 2006.

Some operators are hedging their bets, combining fixed and mobile offerings in an attempt to either increase or at least protect revenues. Operators are exploring different business models to test what such convergence could add to their top lines. Not surprisingly, combining services from a broad range of communications platforms into bundled offerings is popular among customers.

A significant number of consumers, however, are not convinced that their mobile operator should offer anything more than basic voice service. This is likely to shift over time: As many as 80 percent of consumers who are 65 years of age or older reject data services compared to around 25 percent of the under 24-year olds. Of more concern to operators is that 70 percent of mobile phone users say that price is the primary factor in choosing an operator. There are marked differences in these findings by country (the figures range from 15 percent in Poland to 91 percent in Mexico) but the major markets all show that the majority of consumers are focused on price.

Combined, these findings reveal an important message for operators: Certain customers are more concerned about the price for voice services than the richness of data services. They are more likely to shop around, especially as mobile phones become the primary communication service in their households. This has tremendous implications for the industry in the coming years. New entrants, incumbents and existing players have started to compete head-to-head with each other on core voice service pricing. Resellers (so-called mobile virtual network operators or MVNOs) have begun targeting niche, low-cost segments and others have launched "no-frills" offerings to respond. In Finland, market leader Sonera reported a 25 percent drop in revenue per user in one year due to price cuts.

Mobile users also express preferences about the way they want to pay for their services. Some of these preferences are determined by pricing conventions set in different regional and national markets. For example, selling "big bundles" of voice minutes has been successful in the United States and is being rolled out in other markets. Although the equivalent sale of "big data traffic bundles" may be attractive for some consumers, it can threaten an operator with commoditization if the mobile device is opened up to free mobile email services or VoIP. And although 51 percent of mobile users say they would prefer bundled packages, there were strong regional differences, which means operators may still have room to shape consumer thinking on the right tariff structures.

What Do the Findings Mean for Operators?
To increase revenues and market share, operators should shift their marketing focus to encourage repeat use and service loyalty, using pricing along with improved content and customer interfaces. The central marketing challenge will be to create targeted value propositions based on effective segmentation of the customer base for voice and data services. To win over new consumers, we expect operators to perform more extensive market testing, implement easier-to-use content-rich services and offer low-price alternative packages.

To enrich their data services propositions, operators should consider forming stronger partnerships with hardware providers such as Apple, content distribution partners, and internet leaders such as Yahoo! or Google. As mentioned earlier, the most successful operators will provide a low-cost, voice-only offering to protect their core business while maintaining a rich service offering for subscribers willing to experiment and pay more for new data services.

Yet, it will be difficult to manage the complexity associated with developing multiple voice and data propositions for specific market segments. To avoid price cannibalization and channel conflicts, operators will have to become more sophisticated in marketing and sales, and significantly improve their customer relationship management systems and processes.

Meeting the Challenges
Overall, our research points to growth in data services but lays out a new set of challenges for the mobile sector. The first phase of mobile data—the battle for customer interest—has reached a successful conclusion. Now the industry must generate profits from innovative new offerings. The common challenges for established operators are clear: optimizing the marketing mix, finding the right partners and managing complexity. Although there is money on the table, not every player in this game holds a winning hand.

Sidebar: About the Study

Since 2000, A.T. Kearney and Judge Business School, Cambridge University's business school, have regularly performed the Mobinet study. The study is designed to provide insight into customer perceptions about their mobile phone use and is an independent benchmark of consumer behavior. Our research looks at all mobile services and the technologies that support them, including the evolution of handsets with enabling features for data. Findings in this most recent study are based on interviews with 4,000 randomly selected mobile phone users in 21 countries: Australia, Brazil, Canada, China, Czech Republic, Denmark, Finland, France, Germany, Italy, Japan, Korea, Mexico, New Zealand, Poland, Portugal, Russia, Spain, Sweden, the United States and the United Kingdom.

Consulting Authors

Mark Page is a vice president in A.T. Kearney's London office.

Matthew Watt is a consultant in A.T. Kearney's London office.

Naveen Menon is a consultant in A.T. Kearney's London office.

Simon Bell is a senior lecturer in marketing at Judge Business School and senior member of Hughes Hall, University of Cambridge.

Click here to contact us.

About Judge Business School
Judge Business School at the University of Cambridge was founded in 1990. It has over 300 students and 80 teaching and research staff. It offers a portfolio of undergraduate, graduate and executive management programmes, including the Cambridge MBA. Teaching and research benefit from a wide range of associate faculty in other departments within the university. The business school hosts one of the largest concentrations of interdisciplinary business and management research activity in the Europe.