Against the tide: How mobile operators can resist the pull of commoditization

Creeping commoditization is an overlooked challenge facing the global mobile communications industry. Operators must work against commoditization at all times to elevate themselves above the competition. Our research indicates that over half of mobile markets worldwide are either already commoditized, or in imminent danger of becoming so.

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Against the tide How mobile operators can resist the pull of commoditization

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Contacts

About the authors

Dubai David Tusa Partner +971-4-390-0260 david.tusa @strategyand.pwc.com Milind Singh Principal +971-4-390-0260 milind.singh @strategyand.pwc.com

David Tusa is a partner with Strategy& in Dubai in the firm’s communication, media, and technology practice. He specializes in operational improvement and operations strategies in fixed, mobile, and space communications in emerging markets. Milind Singh is a principal with Strategy& in Dubai in the firm’s communication, media, and technology practice. He works with policymakers, regulators, and operators across emerging markets, helping them navigate change and maximize their returns from digitization. Ming-Chyuan Chan is an associate with Strategy& in Dubai in the firm’s communications, media, and technology practice. He focuses on marketing, sales, and innovation strategies for the communications and technology industries in emerging markets.

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Executive summary

Creeping commoditization is one of the most overlooked challenges facing the global mobile communications industry. Like gravity, commoditization is a constant, invisible force that operators must work against at all times if they are to elevate themselves above the competition — and many are failing to do so. Our research indicates that over half of mobile markets worldwide are either already commoditized, or in imminent danger of becoming so. To measure and better understand the scope of commoditization within the mobile industry, we have conducted research to understand the issue in greater detail. We have developed a score to understand the level of commoditization by country and by region. According to our methodology, mobile markets fall into four categories: “commoditized,” “on the edge,” “differentiated,” and “comfortable.” Most countries (52 percent) are either commoditized or on the edge. Although around 39 percent are classified as comfortable, we expect many of these to move down the ladder of commoditization in short order — unless operators in these markets take immediate steps to escape the gravitational pull of commoditization. We have identified three escape plans that have already been put to use by a few operators around the world. Some operators have chosen to differentiate themselves by investing in a high-performance operating model and developing new revenue streams through sophisticated customer segmentation, others have sought to create the lowest possible cost operating model through outsourcing business processes and slashing other costs. A third group has pursued scale-driven benefits through consolidation and growth. Those companies that do not respond in some manner to the gravitational pull of commoditization will most likely experience a slow and steady decline.

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Quantifying telecoms commoditization
Commoditization manifests itself differently from one industry to the next, but the bottom line is that — branding aside — when commoditization exists the consumer cannot fundamentally distinguish the source of one product from that of another. This is a trivial issue for traditional commodities such as sacks of soy beans and barrels of crude oil. However, when commoditization occurs in industries where differentiation is vital, such as the mobile industry, turmoil ensues. Individual companies scramble to create competitive responses, usually cutting prices, which can drain tens of billions of dollars of value from the market. To measure and better understand the scope of commoditization within the mobile industry, we have developed a commoditization score based on the comparison of two independent variables at the national level: market share and average revenue per user (ARPU). For the first variable, we compared the difference between the market shares of the highest and the lowest players. A large delta indicates substantial differences between operators, pointing to a low level of commoditization. For the second variable, we compared the difference in the value captured by all players in a market. A large difference in ARPU indicates operators address the market with substantially different price propositions, also pointing to a low level of commoditization. Conversely, a small difference in ARPU indicates very similar pricing and therefore a quite commoditized market.

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Commoditization zones By scoring a country on these two measures, we can place each country into one of four commoditization zones. Each zone exhibits distinct traits (see Exhibit 1). Zone 1: Commoditized Countries within this zone have less than 25 percent difference in market share between the highest and lowest players in the market and less than 25 percent difference in ARPU. Operators in these countries are fully in the grip of commoditization’s gravitational force.

Exhibit 1 Commoditization is a convergence of market share and ARPU spread in a telecom market
Commoditization Measurement Framework

Differentiated ARPU delta %

Comfortable

50 On the edge 25 Commoditized 25 50 Market share spread %

Source: Strategy&

Zone 2: On the edge Countries in this zone have no more than a 50 percent difference in market share and ARPU between highest and lowest. Operators in these countries have some differentiation but are feeling commoditization’s gravitational pull.

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Zone 3: Differentiated There is a large spread in the ARPU between operators in this zone and no more than a 25 percent spread in market share. Operators in these countries are largely free from commoditization. Zone 4: Comfortable In this zone, there is a greater than 50 percent spread in market share and ARPU between highest and lowest market players indicating that commoditization is far off — at least for the moment. However, this can change quickly if new competitors enter the picture or a competitor launches a highly aggressive pricing strategy. Mapping commoditization by country When we mapped 122 of the world’s mobile markets into these commoditization zones, three features of the map were notable (see Exhibit 2, page 7). First, only a handful of countries have both very large and very small operators (i.e., the spread in market share between the largest and smallest is greater than 50 percent), including Namibia, China, and Kenya. This indicates that the majority of countries have created evenly balanced mobile markets. Second, a number of countries have operators whose difference in ARPU is greater than 50 percent. In India, Mexico, and Thailand, for instance, the difference in ARPU between the highest and lowest in the market is greater than 70 percent. These are relatively mature markets, in which a greater degree of price-level-setting could be expected as operators gradually activate pricing levers over time to compete for subscribers. Third, the sheer number of countries whose mobile markets are either commoditized (17), or on the edge of commoditization (46), is striking. These two categories account for 52 percent of the total. Moreover, we believe that many of the 47 markets that we classified as comfortable will likely be pulled into the on-the-edge zone within the next couple of years. In other countries, however, operators enjoyed a more entrenched advantage. Mexico, Namibia, and Senegal, for example, demonstrated the widest difference between large and small, created both by regulatory imbalances and the benefits of self-reinforcing scale. These examples neatly illustrate how, in the absence of tough regulation, the largest operators tend to get larger and larger, enjoying pricing power to support the investment needed to maintain a dominant market share.

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Exhibit 2 Most telecom markets are commoditized or on the edge
Selected Telecom Markets Commoditization Map, 2012

100 95 90 85 80 75 70 65 Brazil India Albania Thailand DIFFERENTIATED Democratic Republic of Congo Guinea Republic Côte d’Ivoire Vietnam Sudan Niger Mexico COMFORTABLE

ARPU delta %

60 55 50 45 40 35 30 25 20 15 10 5 0

Burundi Benin Cambodia South Africa Argentina Senegal Montenegro Romania Russia Moldova Chile Pakistan Paraguay Indonesia Canada Jordan Sri Lanka France Japan Iraq Nigeria Bahrain Gabon Laos Bangladesh Algeria Sweden On the edge Saudi Arabia Luxembourg Belgium Peru Ghana Tanzania Denmark Angola Germany Egypt Austria Kuwait Norway Uganda Morocco Switzerland Burkina Faso Syria Spain China Netherlands UAE Poland Estonia Zambia Sierra Leone Qatar Botswana U.S. Yemen Congo Zimbabwe U.K. Madagascar Finland Ireland Central African Republic Azerbaijan Malaysia Australia Mauritania Israel Cameroon Oman Chad Portugal Ecuador Turkey COMMODITIZED Czech Republic Armenia Liberia Nepal 0 5 10 15 20 25 30 35 40 45 50 55

Kenya Namibia Iran

60

65

70

75

80

85

90

95

100

Market share spread %

Source: World Cellular Information Service; Strategy& analysis

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The speed of commoditization’s pull
Commoditization is a common threat, but the speed and drivers of commoditization vary from market to market. To illustrate this, we have chosen three markets: the U.K., the Netherlands, and the United Arab Emirates (UAE). The U.K. In 2007, the U.K. market’s four main operators (EE, Vodafone, Orange, and 3) enjoyed broadly similar market share. Yet the relentless competition among these four to offer the lowest prices drove the ARPU delta score from 50 percent to 12 percent as prices converged to a more or less even level between the operators (see Exhibit 3).

Exhibit 3 The U.K. market underwent rapid commoditization
ARPU Delta, Market Share Spread, U.K.

ARPU delta %

2007

2012 Market share spread %

Source: World Cellular Information Service; Strategy& analysis

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The Netherlands The Netherlands shows a similar dynamic but with some important differences. Consolidation in 2007 and 2008 between small players Orange and Ben (owned by T-Mobile) created a larger-scale operator and narrowed the gap between the largest and smallest in the market. Price competition followed, with the ARPU delta narrowing from 48 percent in 2007 to 13 percent in 2010. Interestingly, however, the ARPU delta then began to widen, reaching 24 percent in 2012, indicating that one operator was successfully creating a value premium, escaping the gravitational pull of commoditization (see Exhibit 4).

Exhibit 4 The Netherlands market escaped from commoditization
ARPU Delta, Market Share Spread, the Netherlands

ARPU delta %

2007

2012

Market share spread %

Source: World Cellular Information Service; Strategy& analysis

The UAE The UAE tells the story of a five-year journey to commoditization. In 2007, the incumbent, Etisalat, enjoyed a commanding market share lead against its sole challenger, du, although with broadly similar prices. Since then, du has successfully eroded this advantage. Today, the two operators have equal market share at still similar prices. Interestingly, in 2009 Etisalat drove up ARPU, increasing the overall value of the market. If allowed to continue, this would have benefitted both operators by returning some value to the market. Instead, the challenger reacted in haste, driving prices down and forcing the incumbent to follow suit. The
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result was a price war. Loss of market value inevitably followed, with the ARPU delta narrowing to 15 percent in 2012 as Etisalat and du converged their offerings toward low common denominators such as per-second billing (see Exhibit 5).

Exhibit 5 The UAE market had dramatic market share loss
ARPU Delta, Market Share Spread, UAE

ARPU delta %

2007 2012 Market share spread %

Source: World Cellular Information Service; Strategy& analysis

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Regional commoditization trends
After examining commoditization in 122 countries, we used the national commoditization scores to develop a Commoditization Index (CI) that allows us to measure the level of commoditization at the regional level (see “Commoditization Index methodology”).

Commoditization Index methodology
The CI measures the level of commoditization of regional groups of markets. For each region the CI is an equal-weighted average of ARPU delta and market share spread, with 1.0 being most commoditized. Equal weights were derived from correlation analysis of the resultant index with market performance, with regional and global indices calculated using weighted averages of market indices. Revenue market size is used for weight calculation. Commoditization Index = 1 − (0.5 x % ARPU Delta + 0.5 x Market Share Spread)

Commoditization in the U.S. and Canada appears to be holding steady, with a few consolidated players focused on adding value to products and services rather than stoking price competition (see Exhibit 6, page 12). The Asia Pacific region shares this dynamic; stable competitive environments exist in the largest markets: Japan, China, India, and Indonesia. However, price competition is fiercer and commoditization a greater threat in smaller markets, which is why the region scored lower than the U.S. and Canada. Commoditization in the Middle East advanced rapidly up to 2011, although it receded in 2012. After a three-year annual growth rate of 7 percent in the CI, the index rose to 0.73 in 2011, higher than any other region. Fragmented markets and relentless price competition explains
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In 2013 and 2014 operators have taken a much-needed step back from pricing convergence to emphasize product-based innovation, which now dominates the market agenda.

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much of this dynamic. The CI for the Middle East dropped back to 0.66 in 2012. In 2013 and 2014 operators have taken a much-needed step back from pricing convergence to emphasize product-based innovation, which now dominates the market agenda. Europe, meanwhile, saw little movement in its CI score between 2009 and 2012. However, certain operators are driving ARPUs higher to escape commoditization, particularly in Germany. If this dynamic is sustained, the CI should fall in the coming years. Latin America has the lowest CI at 0.51. The index is dominated by Argentina, Brazil, and Mexico, all of which are safely in either the differentiated or comfortable zones thanks to limited competition. Africa has the second lowest CI score, but perhaps not for long. CI grew at an alarming 18 percent compound annual rate from 2009 to 2012 with a 42 percent jump in the index between 2011 and 2012 alone. Africa is, however, something of a special case given the wide disparity among its national markets. At one extreme is Namibia, which ranks with Mexico as the least commoditized markets globally. At the other extreme, Cameroon and Madagascar are close to perfect commoditization.

Exhibit 6 The pace of commoditization varies across regions
Commoditization Indices, Compound Annual Growth Rate
U.S. & Canada +1% 0.71 0.70 0.72 0.73 0.60 Asia Pacific +2% 0.61 0.61 0.63 0.64 Middle East +1% 0.73 0.73 0.66

2009

2010

2011

2012

2009

2010

2011

2012

2009

2010

2011

2012

Europe 0% 0.70 0.73 0.71 0.71 0.43 2009

Latin America +6% 0.39 2010 0.43 2011

Africa +18% 0.51 0.36 2009 0.31 2010 0.42 2011 0.60

2009

2010

2011

2012

2012

2012

Note: Lists of markets in each region and by level of commoditization are in the appendices. Source: Strategy&

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Escaping the pull

We have identified three plays that operators around the world have used to drive sustained differentiation. We call these “commoditization escape plans,” and they can help operators to elude the gravitational pull of commoditization. Play #1: Escape and challenge The first involves investing constantly, such as in 4G (Long Term Evolution, or LTE, a high-speed data technology), customer engagement platforms, and in media and entertainment propositions. Coupled with building a high-performance operating model, this approach puts the operator on the front foot in the market, building the variety of different platforms needed to engage more closely with customers from different segments. Operators such as T-Mobile in Germany, SingTel in Singapore, and Vodacom in South Africa have used this play to develop new revenues from different market segments, boosting segment ARPUs, and driving engagement. Market facing Conceptually, an operator must separate its network resources from its market-facing positioning. Draw focus away from bandwidth propositions to applications, services, and segment-specific messages. Relentlessly pursue the micro-clusters that advanced segmentation can yield, linking an ever-deeper understanding of customer needs back to specific propositions. Use gamification techniques to take these preferences to the market, as appropriate alongside carefully selected partners. Actively engage with over-the-top (OTT)1 players to seek winwin solutions, alliances, and situations in which the operator — as the ultimate owner of quality of service (QoS) and the arbitrator of customer identity — can bring value to the market. Technology Invest in market-leading LTE commitments, Wi-Fi offloading (in which voice calls are transmitted over Wi-Fi networks, where available, to free up bandwidth and boost mobile data speeds), and gamification techniques to engage customers and encourage self-service solutions.2
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Operating model Develop an operating model that designs with speed, flexibility, agility, and a willingness to take risks in the market. Realign decision rights, incentives, and organization structures to accept and embrace measured risk-taking, looking at the Internet community to learn from mistakes. Develop core capabilities around partnerships, double-sided business models, and approaches that yield value from relationships, rather than traffic. Play #2: Accept and adapt This second approach accepts commoditization and tries to make the best of a poor situation. Operators using “accept and adapt” focus on gaining scale, boosting volume but not value. Having the lowest possible cost operating model is, of course, essential, and anchors the ability to drive prices lower and lower. Business strategy Executing against this play requires a fundamental and unwavering commitment to driving costs out of the business at all possible opportunities. As such, it is not for the faint-hearted, and requires exceptional management leadership. Successful execution requires exceptional capabilities in managing outsourced service providers and trimming head count, as well as careful investment in productivityenhancing customer execution capabilities. Stakeholders must also buy in fully to this model, accepting the impact that the volume versus value trade-off can bring to returns. Technology Use self-service technologies, aggressive business process outsourcing, network asset securitization, and contracted network maintenance constantly to drive the lowest-cost operating model. Regulatory Engage with regulators on issues such as active and passive radio access network (RAN) sharing, rights of way simplification, and simplified ownership transfer procedures for base station sites. Operating model Streamline the operating model through extensive outsourcing that is supported by smart business processes that maintain adequate control of costs.

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Play #3: Consolidate to scale up The third plan is to consolidate and grow, using economies of scale from a considerably larger customer base to lower unit costs and preserve price competitiveness. Business strategy Executing this play requires firstly in-market consolidation, then an excellent post-merger integration process to capture the scale synergies on which this play depends. Synergy value will flow from consolidation at the network level, intelligently managing capacity to make the absolute most of combined network resources while attacking the fixed costs of operating a much larger network. Customer experience synergies will flow from pruning superfluous brands and customer engagement processes (i.e., consolidating call centers, customer relationship management, known as CRM, and segmentation infrastructures, etc.). Downstream synergies will flow from consolidating distribution and market-level structures. Market facing Consolidation plays often present good opportunities to alter brand positions, consolidate and strengthen value messages to customers, and start the process of reengagement. Successful consolidators use the process to refresh how, and in which way, they talk to customers, often explaining directly “what’s in it for them” and “why they should stay with the new company.” It is the same for distribution and upstream partners — the consolidation play represents a way to reengage, reenergize, and refresh these critical business relationships. Technology Expand network and availability by combining coverage footprints; reduce overhead costs by increasing the scope of network management to incorporate all available access networks, thereby reducing redundancy. Regulatory Communicate with regulators to head off any anticompetitive controversy when making an acquisition or agreeing to a partnership.

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Conclusion

Commoditization is a serious threat to most mobile operators around the world and once they are in its powerful gravitational pull they find it difficult to escape. It erodes margins and reduces the overall value of the marketplace as competitors engage in ever more destructive price wars. However, there are ways to cope, either by escaping this gravitational pull or by making the most of it. Each plan requires business leaders to think about their markets anew, to be nimble, and to consider how they can position their companies to succeed over the long haul.

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Appendices
Telecom markets by level of commoditization

Commoditized
Azerbaijan Cameroon Czech Republic Estonia Finland Hungary Madagascar Malaysia Nepal Oman Poland Portugal Slovak Republic UAE U.K. Yemen Zambia

On the edge
Afghanistan Armenia Australia Austria Belgium Botswana Burkina Faso Central African Republic Chad Congo Croatia Denmark Ecuador Egypt El Salvador Georgia Germany Greece Ireland Israel Italy Korea Kuwait Latvia Lithuania Macedonia Malawi Mauritania Morocco Mozambique Netherlands Norway Philippines Qatar Sierra Leone Singapore Spain Syria Tajikistan Taiwan Tanzania Turkey Ukraine Uruguay U.S. Zimbabwe

Differentiated
Albania Algeria Bahrain Brazil Chile Gabon India Jordan Montenegro Pakistan Russia Thailand

Comfortable
Angola Argentina Bangladesh Belarus Benin Burundi Cambodia Canada China Côte d'Ivoire Democratic Republic of Congo Dominican Republic France Ghana Guatemala Guinea Republic Guinea-Bissau Indonesia Iran Iraq Japan Kazakhstan Kenya Laos Liberia Luxembourg Mauritius Mexico Moldova Namibia Niger Nigeria Paraguay Peru Romania Rwanda Saudi Arabia Senegal Serbia South Africa Sri Lanka Sudan Sweden Switzerland Uganda Uzbekistan Vietnam

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Telecom markets by region

Africa
Algeria Angola Benin Botswana Burkina Faso Burundi Cameroon Central African Republic Chad Congo Côte d'Ivoire Democratic Republic of Congo Egypt Gabon Ghana Guinea Republic Guinea-Bissau Kenya Liberia Madagascar Malawi Mauritania Mauritius Morocco Mozambique Namibia Niger Nigeria Rwanda Senegal Sierra Leone South Africa Sudan Tanzania Uganda Zambia Zimbabwe

Latin America
Argentina Brazil Chile Dominican Republic Ecuador El Salvador Guatemala Mexico Paraguay Peru Uruguay

Asia Pacific
Australia Bangladesh Cambodia China India Indonesia Japan Korea Laos Malaysia Nepal Pakistan Philippines Singapore Sri Lanka Taiwan Thailand Vietnam

Europe
Albania Armenia Austria Azerbaijan Belarus Belgium Croatia Czech Republic Denmark Estonia Finland France Georgia Germany Greece Hungary Ireland Israel Italy Kazakhstan Latvia Lithuania Luxembourg Macedonia Moldova Montenegro Netherlands Norway Poland Portugal Romania Russia Serbia Slovak Republic Spain Sweden Switzerland Tajikistan Turkey U.K. Ukraine Uzbekistan

Middle East
Afghanistan Bahrain Iran Iraq Jordan Kuwait Oman Qatar Saudi Arabia Syria UAE Yemen

U.S. & Canada
Canada U.S.

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Endnotes

Over-the-top involves using the Internet to stream content directly to handheld devices, game consoles, and TV sets connected to broadband.
1

Gamification involves applying game-design principles (such as earning points or moving to the next level) to actual situations outside of games. The aim is to give participants a feeling of achievement and status, and encourage constructive competition.
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