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Saturday, October 08, 2005

IMS primarily for cutting costs or growing revenues?

I recently asked an Operations Director and a Marketing Director from a mobile operator whether IMS would primarily be used to cut costs or grow service revenues. Below is a transcript of the exchange. Who won the argument? Email me at editor@ims-insider.com with your views. [NB: Just double-click on the embedded graphs to see them better].

Operations Director (OD): Everyone likes to focus on new revenues and new applications for business cases, because this is positive and exciting. Cost reduction tends not to be the main emphasis, yet this will probably end up being the main driver for IMS. And we are not just talking license costs or power costs.... we are talking people costs.... and not just operations people, but also support functions.

Mobile (and for some time already, fixed) operators will see revenue growth slow and stagnate (in real terms, this is happening already, with many mature markets barely growing above inflation). Operators will continue to add new services and gain share of traffic and services from other sectors, but falling prices on the core business will largely nullify this. Many new services will be bundled into existing packages to retain customers (more services for the same price). Developments in new services will need to happen in Internet time (see Google or Skype functionality release schedules).

Essentially, operators will be running harder... to innovate and respond to endless competitive challenges (both from within the mobile industry and from outside it).... running harder and harder, just to stand still. The task of securing profitability through service is being made impossible through the lack of time for services to make money.

So, yes, new services will be important, and yes, it will be important to deliver these faster, but it will be critical that this is done at a much lower cost.

Essentially is this about an Apple model or a Dell model? Both successful, but for very different reasons: Dell cuts costs, Apple creates completely new things. To do a Dell, you need IMS, to do an Apple, you probably don't.

Marketing Director (MD): I agree...but only to an extent. Yes, the IMS business case can probably be made on the basis of cost savings BUT cost savings can only be half the story for operators.

Cost savings can only provide earnings growth for a limited period - you get the gain but you can't keep getting incremental gain year on year because you can't cut costs for ever (there is always a floor below which you fail to either invest properly in business OR operations fall over). IMS certainly gives this benefit but it also opens up operators to sustained revenue growth - the only way to drive shareholder returns in the long-term. This revenue growth also has a ceiling but it is a much higher one that the equivalent floor for costs because you can (a) grow overall market and (b) win share from competitors in a multi-multi billion dollar industry.

Cost savings are probably going to be used to justify investment because it is much easier to quantify savings than revenue growth, but new revenues (even if they only offset price erosion on core voice services) are also critical.

OD: The case for revenue growth from IMS (or anywhere else!) is weak. Let me present some evidence. Vodafone recently presented a view to the analyst community of how the telephony market in core European markets will play out. Now, I buy that mobile will continue to eat into fixed but I do not believe that Mobile Data will grow so fast that it will actually increase the telecommunications market’s share of GDP! They are suggesting that Mobile Data in 2010 will equivalent to 50% of the mobile telco market today!!!

Now here is a dose of reality – this is actual ARPU performance in the major European countries and in Japan – I have added Japan because it is way more advanced than anywhere else and shows the way other countries will go:

Bottom line is that the mobile world is in for some big pain and it needs to learn how to be nimble and cost-effective from other mass-market technology companies such as PC manufacturers. Service innovation is not going to get you out of the hole.

MD: Hang about. If we look at Japan a bit more closely we can actually see that revenue growth of new services is critical. Take NTT Docomo’s cellular revenues for example (below) and you can see that new services like i-mode have offset the decline in core voice revenues:

OD: Interesting definition of healthy growth. I usually associate a growth trend when the bars get bigger over time! These ones appear to be getting smaller. Looks like these chaps are running harder but still going backwards. Perhaps they are driving costs down faster and so increasing earnings?

However, my point remains that were you to show NTT Docomo’s quarterly ARPU evolution since 2002, we would have a more valid comparison. £10 says that Docomo’s Arpu have fallen since 2002!

MD: But new services don't just drive usage & price (ARPU) they drive adoption too - new services have been one of the key reasons why Vodafone Japan has been so unsuccessful in Japan - it has lost subscribers to Docomo and KDDI. Yes, ARPU is down at Docomo since 2002, but revenues have held up quite well because the company has won market share. Revenues will always do better if you continue to invest in new services – IMS enables you do this. Without this investment in growth you may become more and more efficient, but you just cut yourself to death.

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