Summary: Mobile network operators (MNOs) are faced with commoditizing core revenues and they’re under pressure to find new sources of revenue to replace income from traditional voice, sms and data services. At the same time, they face continued requirements to invest heavily in network technologies as they move to 4G and 5G networks and as users’ demands for greater bandwidth, driven largely by video consumption, continue to grow.
What’s needed is a fast, low cost opportunity for MNOs to gain more revenue. One effective way of doing this would be to access new revenues through a managed service approach that can be termed Revenue-as-a-Service (RaaS).
A2P (application-to-person) messaging is currently under-exploited by MNOs but is now expected to grow for many years to come. A2P messaging provides a great opportunity for MNOs to take a managed services approach, in effect outsourcing this part of their business with no upfront capex requirements and receiving Revenue-as-aService from their provider in return.
MNO revenues are under attack as markets become saturated and traditional service revenues start to decline. Analyst firm Ovum forecasts that operators’ mobile revenues in Europe would decline by 1.7% year-on-year in 2015.
Many developed markets, and remarkably all markets in Western Europe, will begin to see year-on-year declines in revenue by 2019. In fact, more than one-third of the 67 countries tracked in Ovum’s forecast will experience some decline by 2019, and one-third – 25 markets – saw year on-year revenue declines in 2014. A decline in retail connectivity revenues in many developed markets in Europe, North America and AsiaPacific is imminent. Western Europe will see a CAGR of -1.7% between 2013 and 2019, which in absolute-value terms equates to a drop of $15.3bn. All 17 Western European markets covered by the forecast are set to experience revenue decline over the next five years.
Aside from market saturation, revenues are declining because of the emergence of over-the top (OTT) applications which has seen social, messaging and content-related applications provided by third parties replace MNOs as the service provider of these offerings to consumers. Even though they are being cut out of the value chain, MNOs still have to provide the network connectivity such services require. They’re not sharing in the service revenue; they’re only receiving revenue for providing the commodity network access.
A report from Juniper Research in 2014 claimed that voice and messaging traffic lost to OTT players such as WhatsApp, Facebook and Skype would cost network operators $14 billion in revenues globally that year, up by 26% on 2013.
Further detail on lost MNO revenues caused by OTT services has been provided by Ovum which has estimated that $52bn was lost to OTT VoIP (voice over IP) in 2014. The firm also projected that more than $40bn of SMS revenues would be lost to OTT social messaging in the same year.
Commoditization, caused by saturation and intense competition and the emergence of OTT players, represents multi-billion dollar losses in revenue per annum for MNOs but they face further revenue pressure as roaming revenues in the European Union are capped and, ultimately, phased out. In early 2016, the EU has put a cap on the amount MNOs can charge, limiting roaming surcharges significantly. Previous reductions have already seen the cost of roaming within the EU fall by 75% since they were first brought in, according to the European Commission. Consulting firm Deloitte has estimated that roaming revenues in the EU account for approximately 5-6% of MNOs’ revenues.
In order to demonstrate improved performance MNOs need to increase revenues but they are constrained in both capex and opex as they continue to invest heavily in network technologies. This means they are limited in terms of the investments they can make in new technologies and services.
The Capex Crunch
Mobile operators have spent almost $1 trillion in capital expenditure globally since 2010 on acquiring spectrum, rolling out 4G networks, extending the capabilities and coverage of legacy networks, upgrading core networks and on support systems and services to enable mobile growth, GSMA Intelligence reports. This investment peaked in 2014 at more than 18% of revenues, coinciding with a peak in Chinese 4G rollout, which extended into 2015.
Slowing revenue growth, coupled with an inelastic opex burden and sustained capex, has depressed free cash flow margins from 20% in 2010, to an average of 17% over the forecast period. This is putting pressure on MNOs to examine new growth areas to drive their top-lines, while at the same attempting to minimize costs.
This intense focus on network upgrades and the associated systems has limited MNOs in terms of investment in new services. GSMA Intelligence anticipates that global mobile capex as a percentage of revenues will contract over the forecast period as large scale 4G network rollouts near completion – with the exception of India. Markets which have already rolled out 4G networks will maintain a significant amount of capex for densifying networks and upgrading backhaul/core capacity in order to support rising data use.
The A2P Messaging Opportunity
One growth area in which MNOs can generate additional revenues is A2P messaging. It suffers from fraud and revenue leakage as grey routes are utilized and MNOs fail to maximize the opportunities and underestimate the full extent of the value A2P messaging can provide for their businesses
The market price per message ave is around $0.03 to $0.04, an operator can estimate to achieve double digit percentage growth in revenues from new A2P traffic monetization. It is challenging to create precise revenue predictions because of the differences between market price, region, data penetration and market penetration that affect individual operators.
Nevertheless, based on its experience with clients and by way of indication, some sources showing that safely estimates that an operator with ten million subscribers that is able to achieve a market price in the range described above will be able to comfortably achieve additional revenues of $450,000 to $500,000 per year.
Some operators could see higher or lower figures and emphasizes that this figure is based on real cases in which all grey routes are effectively blocked and the traffic is channeled towards the monetization route for A2P as per the operator’s strategy.
Importantly, A2P messaging is now expected to see continued strong growth well into the next decade and potentially beyond as new applications for A2P messaging emerge. Credence Research projects a compound annual growth rate (CAGR) of 4.9% for A2P messaging in the period 2015-2022, with the market expected to exceed $78bn by 2022. The use of SMS for advertising and promotional activities across a variety of verticals has gained significant interest recently, the firm reports. It sees the arrival of mobile wallets, which are resulting in increased mobile payments and mobile-based transactions through one-time passwords, as a factor that will drive the A2P SMS market forward. Importantly, Credence Research emphasizes that the reliability and ubiquity of SMS will see it continue as a carrier technology for media, utility and communication services for at least the next two years.
The projections from Credence Research are borne out by a market report into the enterprise A2P SMS market published by Future Market Insights.6 The study reveals the global enterprise A2P SMS market was valued at $23.4bn in 2014 and is expected to have a CAGR of 6.0% from 2015 to 2025. The growth of the enterprise A2P SMS market is primarily driven by the increasing number of mobile subscribers and enterprises shifting from a desktop-first strategy to a mobile first strategy. A2P SMS are currently used for
various applications such as updating end-users with campaign perks, location-based opportunities, breaking news, promoting brands, polling and transactional messages by major industry verticals.
A2P messaging is therefore set to be a longer-term revenue opportunity for MNOs than previously thought. Revenue growth is expected to continue well into the next decade.
Why a managed services approach removes barriers to entry and expansion
Even though the projections for sustained revenue growth from A2P messaging are attractive, MNOs continue to face capex constraints that make investing in the systems and personnel required to effectively manage A2P messaging services a challenge. A2P requires careful management and has suffered from substantial fraudulent activity. So-called grey routes, by which A2P messaging is carried without payment being remitted to MNOs, account for up to 66% of A2P network traffic, according to a report from research firm mobilesquared. Of further concern is that A2P messaging operates utilizing the SS7 protocol. Recently the media has focused on SS7 because of the vulnerabilities in the protocol which make it a security issue that needs to be addressed immediately.
MNOs lack the tools and personnel to effectively filter and block fraudulent messaging that traverses their networks. Such filtering and blocking needs to happen as quickly as possible in order to minimize the impact of frauds but MNOs acting in isolation cannot quickly identify frauds that originate on other networks or have whole market knowledge of emerging and current fraudulent activities.
The fraud issue has become so embedded that only one-third of MNOs are able to monetize A2P effectively, says mobile squared. However, A2P Business and Fraud Intelligence systems and services exist that are able to address and control the security issues affecting the market. In addition, there are systems and services that are on the market that enable MNOs to apportion revenues between MNOs that participate in A2P message delivery fairly and accurately. This correct revenue sharing is fundamental to the success of A2P messaging because all parties must be able to monetize their contribution to the delivery of messages proportionately.
Instead of following the traditional path of specifying technology, investing in personnel training and going through a lengthy integration process to gain the A2P messaging capabilities required to generate revenues effectively, MNOs can quickly and simply address A2P messaging by taking a managed services approach. This means they won’t need to invest capex in systems up front and they won’t need opex to put resources in the form of specialist personnel in place to manage their A2P systems and services. Further benefits include accelerated time-to-cash and the benefit of accessing a managed A2P messaging service provider’s insights into the whole market. These can provide early warnings in relation to specific fraudulent activities and significantly ease settlement between different providers.
A managed service provider will operate the entire service, abstracting the complexity away from the MNO, apportioning revenues correctly to all involved. Revenue from A2P messaging is simply delivered to the MNO as a service.
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