What does the acronym MoU mean? MoU stands for Memorandum of Understanding, of course-as in the GSM MoU Association. Any European cellular operator could tell you that. Except today, some cellular operators may give a different explanation. MoU stands for Minutes of Use, they will say, reflecting their current business preoccupation.
The minutes of use they are referring to are fixed minutes of use. Many cellular operators, particularly new entrants with access to GSM (Global System for Mobile communications) 1800 MHz spectrum, are setting their sights on stealing traffic from the fixed networks.
It may be fashionable to talk about mobile data and value-added services, but such activities stubbornly refuse to generate significant revenue. The real revenue potential lies in migrating existing minutes from the wireline environment-in substituting wireless access for wireline access.
“Fixed mobile convergence is equivalent to a mobile takeover,” said Kaj Juul Pedersen, president of Telia A/S in Denmark, predicting that the bulk of voice traffic eventually will be carried on wireless networks. “Mobile operators are luring fixed network operators into discussions, and by the time they realize what’s going on, it will be too late.”
Telia Denmark holds one of the four recently issued GSM 1800 licenses in Denmark. These new operators have to compete with two existing GSM 900 networks and two analog NMT (Nordic Mobile Telephone) networks, which already have 1.5 million subscribers, for a penetration rate of more than 30 percent. “We need a penetration rate of 70 percent. Otherwise there’s no room for all these operators,” said Pedersen.
Unless substitution can occur through fixed mobile convergence, of course.
And Denmark looks set to become a hotbed of fixed mobile convergence. The regulatory authority already has implemented national roaming and has mandated full portability between fixed and mobile numbers by the year 2001. Interconnection charges in Denmark are among the lowest in Europe, and still falling. Incumbent network operator Tele Danmark already has combined its fixed and mobile operations and recently has launched fixed mobile convergence services in both the private branch exchange (PBX) and residential environments.
Tele Danmark’s Duet service provides customers with one number covering both their fixed and mobile phones, resulting in a single bill and a common voice mail box. Using call redirection techniques triggered by the mobile terminal’s on/off button, the Duet service only works with Tele Danmark mobile phones. It would be regarded as anti-competitive and therefore not allowed by regulators in most countries.
In countries with high cellular penetrations such as Denmark, there is still almost twenty times as much traffic on the fixed networks as on the mobile networks.
It makes little sense for large numbers of mobile operators to fight among themselves for just 5 percent of the traffic, said Tim Devine, senior consultant with the PA Consulting Group in the United Kingdom. “There is massive potential in taking traffic from the PSTN (public switched telephone network). Mobile operators should compete with the fixed operators rather than with each other.”
Devine noted that total European traffic as of 1997 was worth about US$180 billion a year. With the high price of cellular services, mobile’s 5-percent share of those minutes was worth about 20 percent of the revenue, some US$36 billion a year. Over the next decade, the overall value of European telecommunications traffic is expected to reach US$520 billion, with mobile capturing about 20 percent of the total.
But cellular service is unlikely to be able to maintain its high price premium over this time scale. The competitive mobile market in Finland, which has the world’s highest mobile penetration rate of more than 50 percent, provides a good indicator of cellular price trends.
According to Timo Levoranta, director of international mobile operations at Sonera Corp. (formerly Telecom Finland), the real price level of mobile calls in Finland has fallen by a factor of two over the past decade.
This drop in price levels will probably only accelerate. “Cellular tariffs will fall faster than fixed line calls,” predicted John Jensen, wireless services analyst at Salomon Brothers in the United Kingdom. Jensen argues that inflated interconnection charges and leased line costs charged by monopoly fixed operators in certain countries are partly responsible for high cellular calling tariffs. These factors will disappear as tariffs are rebalanced following the liberalization of the European telecommunications market.
These trends support Devine’s argument that mobile operators should follow a bullish strategy and compete directly with the fixed networks.
“Given the utility of mobility, surely it is possible that by 2007 mobile could handle not just 20 percent but 70 percent of all the telecommunications traffic,” stated Devine. With no premium over fixed rates, mobile still would experience a tenfold increase in overall revenues.
Cellular operators are nervous about reducing tariffs, of course, but know that increased competition from new entrants inevitably will drive prices down. There is already evidence of price elasticity in mobile tariffs from Norway, where reduction in tariff levels of 10 percent to 15 percent increased average usage by 48 percent and drove up the average revenue per user by 20 percent.
Devine reports that recent market research by the PA Consulting Group should give confidence to operators contemplating attacking the fixed market. At a 50 percent premium over fixed, 15 percent of respondents indicated they would switch to a PSTN substitution service. If mobile prices were equal to fixed, then 70 percent would switch.
However, a PSTN substitution service is not just a question of tariffing. Services and customer support must be tailored to the requirements of specific market segments in a much more sophisticated fashion than is the norm. Messaging, information and location-based services will become an expected part of the package. Perhaps most importantly, significant improvements are needed in capacity and call quality. And in-building coverage becomes essential.
Technical improvements to most networks, therefore, are a prerequisite for successful PSTN substitution services. Enhanced full rate (EFR) to improve speech quality, microcellular solutions to improve capacity, and picocells and home base stations to supply in-building coverage are among the techniques that will need to be deployed on a much wider scale than today. It’s no surprise than that manufacturers are keen on encouraging operators to go for substitution strategies.
