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Mobile-Only Option Drivers

25th August ,2004

Europe : The volume of fixed-line voice traffic has been decreasing for the past couple of years as usage of mobile minutes continues to gather pace. The cost savings gained from discarding fixed lines, combined with declining mobile price premiums, are driving further fixed-mobile substitution in the voice market.

The rapidly falling mobile premium has, in particular, been instrumental in narrowing the price gap between mobile and fixed minutes. In 2003, the price premium for mobile usage was 100 per cent or double the price of fixed-line services, but this is expected to decline to 42 per cent in 2007.
"The subscriber saturation in the mobile voice market is compelling service providers to follow aggressive price policies that would allow them to shift a significant portion of the local and international fixed minutes onto their network," says Frost & Sullivan Research Analyst Jan ten Sythoff.

In 2007, 49 per cent of revenues are expected to come from the mobile network - an increase from 38 per cent in 2000. The total value of substituted minutes is estimated to increase from GBP0.9 billion in 2003 to GBP1.36 billion in 2007.

Pricing is becoming more complex as mobile service providers move from per minute billing toward bundled minutes and location-based billing. They are also hoping that the shift from prepay to contract packages will materialise to allow them to lock in value and strengthen customer relationships. Though both options are popular, new subscribers are likely to favour prepay packages.

Intensifying competition from new entrants and mobile virtual network operators is exerting further downward pressure on mobile minute prices. Though falling prices are likely to attract marginal subscribers and stabilise the average revenue per user, service providers also need to take adequate precautions against price erosion.
For now, declining prices - combined with the increasing fixed-line rentals - are driving the mobile-only option. With fixed-line rentals reaching almost 60 per cent of the total bill value, customers tend to prefer mobile voice services.

"Though the fixed-line operators' voice business is under pressure as their minutes decline, they are fighting back by targeting some of the same areas as their mobile competitors, such as flat-fee bundles through implementation of wholesale line rentals," says Mr. ten Sythoff.

Apart from pricing issues, fixed-line operators are finding it increasingly challenging to combat the improved coverage and capacity of mobile services and the enhanced functionality of personalised and easy-to-handle handsets. In addition, the roll-out of 3G networks is also spurring the fixed-mobile substitution.

The emergence of wireless broadband has caused a significant decline in the number of households with two fixed lines and is also downsizing the market coverage of fixed minutes. As digital subscriber lines (DSL) become operable for both voice and Internet, households with two fixed lines are expected to decrease by 40 per cent from 1.2 million in 2003 to 0.72 million in 2007.

However, fixed-line operators are still hopeful since there is little evidence of a trend toward complete substitution - wherein users surrender their landline phones altogether. Intensifying competition among fixed-line operators and deregulations in the voice market are also creating affordable services to attract and retain customers.

Since mobile international calls are five times more expensive than the fixed options, there is likely to be limited substitution of fixed international minutes. Additionally, increasing percentage of pensioner households - currently a quarter of the total households - tend to favour the fixed-voice services due to the ease-of-use and convenience it provides.

With most of the fixed-mobile substitution occurring in the consumer market, fixed-line operators are expected to retain their share in the business segment, where end-users prefer free and low-cost internal calls. Business lines are forecast to decline by just over 2 per cent between 2003 and 2007 as opposed to the 5 per cent projection for the consumer segment.

The overall scene in the voice market, therefore, favours the mutual co-existence of both fixed and mobile services. Moreover, the increasing proliferation of complementary voice over IP and non-voice communications such as E-mail, instant messaging and video telephony initiate the integration of mobile capabilities such as push-to-talk and ring tones into fixed lines.

"Rather than competing and eating into each others shares, a synergy between fixed and mobile markets seems to offer a perfect fit," notes Mr. ten Sythoff. "There is a lot of opportunity for video calls on fixed lines, as well as the convergence of other services such as sending an SMS from mobile to a fixed line and vice versa."

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