Replacing declining legacy revenues with new sources is a key strategic challenge for service providers. So a key practical issue is whether new broadband access, video entertainment or managed services will grow fast enough to match voice revenue diminution.
In fact, Rupert Wood, Analysys Mason principal analyst, warns “there were already signs two years ago that the shifting balance between smart phone and mobile broadband would result in lower growth of mobile data traffic.”
Wood predicts mobile data revenue growth in Western Europe, for mobile service providers, will drop in 2012, for example. And though it might have seemed an improbable development, Wi-Fi has become a virtual default network for most smart phone and tablet traffic.
That doesn’t mean untethered mobile devices are best served by Wi-Fi when users are on the go, but the most data-intensive traffic will tend to get consumed indoors, because that’s the natural place to consume it, not because it is the only place with good enough connectivity, says Analysys Mason.
To be sure, mobile network unit costs (cost per byte) have been declining about 30 percent every year, and Analysys Mason fully expects the trend to continue. The actual impact of those economies depends on overall consumption rates and the state of competition in particular markets.
If volume growth is higher than 30 percent, then, roughly speaking, overall costs still will rise, since the per-unit cost reductions will be outstripped by even-higher volume growth. If demand growth is lower than 30 percent, costs fall. Our forecasts indicate that growth will be lower than this in developed regions.
In an uncompetitive market, falling costs would mean rising margins, but in a mature, competitive market such as Western Europe they mean a contracting business, Analysys Mason argues.
The problem, in other words, is demand growth, not the cost of supplying that demand. Not even falling costs to supply a unit of demand will matter if volume growth slows.
Perhaps oddly, mobile service providers might well become the victims, not the perpetrators, of disruptive substitution, Analysys Mason argues. Increasingly, fixed connections and untethered Wi-Fi access can do most of what mobile does, with the exception of mobility, at a fraction of the price to the end user.
So people are going to be rational. They will continue to substitute untethered access for mobile access, especially when consuming video. It is possible that the biggest problem mobile service providers might face, somewhat ironically, is a lack of demand growth for mobile data services, not too much growth.
A decade and a half ago, most executives and analysts might have suggested growth of 100 percent, or more, each year.
For a couple of reasons, those forecasts proved too high. There is a “law of large numbers” effect, for starters. Any new development or trend that is very popular, but starting from a low installed base, will show “big growth” numbers on a percentage basis.
Just as certainly, growth slows over time as the installed base becomes very large. So it is that annual year over year bandwidth growth now is more on the order of 40 percent than 100 percent. That’s still a big percentage, meaning that, in the aggregate, bandwidth consumption doubles about every two and a half years or so.
But user behavior is highly responsive to pricing signals. People already have learned how to offload much traffic from their mobile devices to fixed networks (untethered use), since the per-biut prices of mobile bandwidth are significantly higher than rates for fixed network bandwidth.
There are other ways to shape demand, though. A higher use of unicast video (people watching YouTube video, for example) creates more demand, compared to any multicast method. That is why point to multipoint delivery of audio and video traditionally has been in “broadcast” mode.
So, over time, suppliers or users can shape demand by consuming more video in multicast mode than in unicast mode. One might argue that consumption is shifting to on-demand modes, but store and forward is a very efficient way of meeting much of that demand.
In other words, suppliers can broadcast content, but users can use DVRs to capture and store that content for later on-demand, or “near on demand” viewing. Users can choose to time shift their consumption as well, delaying “watching video” sessions from full mobile scenarios to offloaded sessions on their home Wi-Fi (untethered) connections.
Over time, one should not discount the amount of behavior change possible when price signals are sent about consumption modes. In other words, people will behave rationally if they know it makes a price difference when consuming video on a mobile, using the mobile network, compared to consuming that same video when at home, with demand shifted to the fixed network.
The point is that there is nothing “inexorable” about bandwidth demand. It can be shaped by suppliers or users, using price mechanisms, and will be shaped in such ways. Analysys Mason projects that mobile data in Western Europe will grow at a compound annual growth rate of just 29 per cent from 2012 to 2017, for example.