Intelligence Brief: What next for pay-TV?

Pay-TV has been the most popular medium to deliver entertainment to households for decades. But when was the last time you sat down with the family to watch good old-fashioned programming on your pay-TV subscription? OTT apps just fit perfectly with the way we live and consume media today, don’t they?

And why not? They give us flexibility, mobility, AI-based recommendations, original as well as aggregated content and, maybe more importantly, a wire-free, (sometimes) hardware-free, and hassle-free experience at a very reasonable cost per month.

All of this combines to have some pundits predicting the end of pay-TV.

[1]In some markets, this might be premature: think APAC, where the Informitv Multiscreen Index showed considerable net new connections were added during Q3 2018 (see chart, right, click to enlarge). But, regions like North America and Europe have seen the trend kick in with 877,000 net cord-cutters for the top ten players alone in the US during the quarter. As per some market watchers, globally there will be more than 400 million OTT video subscriptions by 2022. And what might be driving this growth beyond the dynamics (ease and cost) highlighted above? In a word: value.

1: The successful OTT players are competing on service innovation backed by improved infrastructure and changed viewership dynamics;
2: Pay-TV players kept on adding channels and increasing carriage fees which made money for the networks and cable companies, but eventually resulted in a costly bill for consumers, inviting OTT disruption.

What has been the operator strategy so far?
For operators, the response so far has been straightforward. Consolidate the customer base and converge TV, broadband, voice and wireless services to manage churn through compelling bundled offers with OTT subscriptions.

It is simple economics: operators with the bigger share of pie gain negotiating power against the content providers and can pass that benefit on to the end customer. That’s what operators have done alongside exploring possibilities like acquisition/partnership with content producers, developing their own OTT app, or playing role of an aggregator for other OTT services in order to retain their subscriber base and revitalise their growth.

Let us look at few of our favourite examples from the industry where the operators applied some of the above strategies:

Partnership with OTT players
By partnering with OTT services and bundling their subscription fee with post-paid and prepaid plans, the operators can provide additional convenience which will help in reducing customer churn. In Germany, Deutsche Telekom has started giving its customers direct access to Netflix. In 2018, the operator added 200,000 new TV customers thanks to the pseudo-convergent offering including attractive TV content across all screens and on any device. In South Korea, SK Telecom and LG U+ are soon to provide exclusive Netflix services on IPTV. This strategy will help the operators to expand their client base through a diversified content offering.

Acquisition to reduce time to market
Acquiring budding or established players in the market can be a good strategy to derive direct and indirect benefits for scaling the services while still reduce time to market. For example, Reliance Jio’s acquisitions of Den and Hathway are good examples of how it gained a massive share of the Cable-TV pie in India to use it for content distribution and price negotiations. Icing on the cake, it helps them with quick proliferation of its cable network, leveraging it for broadband service provision as well. India’s Airtel TV is also in talks with Dish-TV to explore a potential merger, in order to acquire a collective market share of more than 60 per cent in the DTH space and then provide its enhanced content offerings to a wider audience.

Partnership with local content producers
This allows telecom operators to tap into the deepest layers of demography by offering local or regional content. For example, in the US, Televisa’s audio-visual content is distributed through subsidiary Univision, the leading media company serving the Hispanic market. Televisa’s content and convergence strategy has helped the operator to generate value for its shareholders: its content revenue contributed approximately 37 per cent and 35.1 per cent of total revenue for 2018 and 2017, respectively.

Own OTT App and content
For operators with deeper pockets, this move can help to command a strong control over the long-term content monetisation strategy. Jio Prime membership from Reliance Jio in India is a great example through which it is providing a host of OTT apps offering extensive content services to the customers. While initially they were provided for free to incubate a sense of loyalty and penetrate the market, Jio is now charging INR99 per year ($1.42) for these services, adding an additional source of income. Telefonica’s content strategy in Spain and LatAm specifically stands out in this regards: it started producing its own content and launched 12 original series in more than 13 countries during 2018. To add to the convenience, it bundled this product and other premium content services (Netflix, Fox premium et cetera) along with its core mobile and fixed line offering into a single bill. Due to this strategy, there was a noticeable impact on customer retention with 1.5 million registered users of the service as of August 2018, 78 per cent of which were active users.

Playing a role of content aggregator
Operators are well-placed to aggregate content/services by providing one-stop access and bundled billing. A great example of this is EE in UK offering its mobile customers access to Amazon prime video, MTV play, BT sport and Apple music in a single bill. Telefonica in Spain and LatAm (illustrated above) also sets a good example as a content aggregator providing a unified service offering with single billing.

In a changed media and entertainment landscape, end customers yearn for on-demand content, customised to their taste with enhanced convenience. While the big media houses and operators are cognisant of this and willing to come together to provide seamless distribution of content, the models of collaboration vary across markets. It is about tapping the right arrangement to penetrate the opportunity.

– Aryan Jain – research manager; Ashish Singhla – senior research analyst; and Deepti Agrawal – research analyst, Strategy, GSMA Intelligence

The editorial views expressed in this article are solely those of the authors and will not necessarily reflect the views of the GSMA, its Members or Associate Members.


Intelligence Brief: How much will 5G cost?

The year is 2019 and 5G is finally here. Or is it?

At MWC19 Barcelona, there were so many 5G announcements that it seemed the technology’s arrival was clearly upon us, or at least imminent. And, in fact, we now have two countries with commercial consumer 5G launches: the US [1] and South Korea [2]. Of course, in both cases the launches are limited in terms of coverage as well as the number of supported devices. And with services aimed at mass market consumers, the enterprise opportunity has yet to prove itself.

As we move further into 2019 (and then 2020), we’ll get more 5G devices and more operators ramping their 5G plans.

China Mobile is set to launch 5G in the second half of 2019, with China Telecom and China Unicom to follow in 2020. Japanese operators are also set to launch 5G in 2020, including the new operator Rakuten, which will undoubtedly disrupt the market and try to use the technology to grow its market share.

Combined, these early launches will generate significant knowledge and give more courage to other operators to follow the 5G pioneers. At the same time, new devices and spectrum should boost adoption of the technology and accelerate deployments…and therefore 5G spend.

That’s right, 5G will require more than just spectrum and devices. It will take capex spend.

So how much are we talking about?
In our newly expanded 2025 capex forecasts (to be released this week), we predict operators will spend over $1.3 trillion over the next seven years on networks. The bulk of that (75 per cent, or a little less than $1 trillion), will be allocated to 5G. The rest will primarily go into upgrading and expanding 4G networks, which will continue to coexist alongside 5G past the end of our forecast period. With 4G, the monetisation strategy was more or less clear: charging more for data, either per MB, or by increasing the size of data bundle. In reality, this strategy didn’t pan out and generate an ARPU uplift in all markets. By contrast, 5G, offers a more complex system, where the combination of multiple technologies serves a set of diverse, varied, complex monetisation scenarios: that fact will weigh on capex.

What’s the catch?
To its credit, the industry has concluded there will be no single killer app for 5G and operators will have to find an individual approach to revenue generation. This means 5G networks will have to be built in a modular way, to offer customised services, along with scalability. At the same time, operators will have to maintain a capex-to-revenue ratio low enough to keep investors happy. With all this factored in, it would be fair to say the global 5G investment cycle will be more gradual than the 4G one: capex will be spread out, with the global capex-to-revenue ratio not exceeding 18.5 per cent.

So what should the money be spent on?
One thing is for sure: 5G will require more network densification, which means a lot of investment will go into RAN. In fact, we forecast the share of RAN in total capex will grow from 62 per cent in 2018 to 86 per cent in 2025 (see chart, below, click to enlarge). In part, this is a function of densification. In part, it’s because many operators in the early 5G launch markets already have fibre in place to support the upgraded RAN, and many of the rest should also have sufficient backhaul already given that global 5G adoption will still only be around 16 per cent in 2025.

That said, it is important to mention that the distribution of core and RAN investments will vary regionally, depending on the core network development level in each country and individual operator. While we do not expect the share of sites connected via fibre backhaul to grow significantly before 2025, once 5G networks are up and running operators will have to think about investing into their transport networks to be able to increase their capacity.

[3]Are there any ways to spend less?
NFV, SDN and Cloud RAN offer a way to roll out and upgrade equipment faster, with fewer people needed to maintain it and less physical space to deploy it. They promise easier and cheaper ways of switching between vendors, without the need to replace hardware supplied by one vendor to install the other. Meanwhile, network sharing can be a solution to costly RAN densification, especially in rural areas, where RoI is usually lower.

Some countries are even discussing the option of having one neutral host deploy 5G and wholesale it to other mobile operators. A neutral host could be a particularly viable option for countries with low ARPU and where operators already have a high net debt-to-EBITDA ratio.

Weighing on all 5G capex considerations is the fact that the overall business case for 5G is still unclear. And while multiple use cases present opportunities for operator revenue growth, the risks of failing to realise that growth remain significant. Ultimately operators will need to build their 5G networks according to the specific opportunities and constraints in the markets where they operate.

To that end, the number of different models for deploying and therefore financing 5G could run as high as that of the services it will eventually support.

– Alla Shabelnikova – senior analyst, Financial Data, GSMA Intelligence

The editorial views expressed in this article are solely those of the author and will not necessarily reflect the views of the GSMA, its Members or Associate Members.


Press Release: New GSMA study – Mobile powering economic growth and job creation across West Africa

West Africa’s mobile ecosystem generated more than $50 billion in economic value last year – equivalent to 8.7 per cent of the region’s GDP1, according to a new GSMA study. The 2019 West Africa edition of the GSMA’s Mobile Economy report series is published at the ‘Mobile 360 – West Africa’ event being held in Abidjan this week. The study finds that rising mobile phone ownership and the ongoing migration to mobile broadband networks and services across the region will see the mobile ecosystem’s economic contribution continue to increase over the coming years, forecast to reach almost $70 billion (9.5 per cent of GDP) by 2023.

Full Press Release

Intelligence Brief: Is it time to change mobile tax track?

April heralds the start of the new fiscal year in many countries around the world, when various new tax rules come into place.

One example of a country that has been grappling with new taxes is Romania, where the so-called greed tax ordinance was implemented earlier in the year: it targets bank assets, energy companies and mobile operators. Romanian mobile subscribers will see bills go up as a result of the 3 per cent tax on all telecom operators’ turnover.

This is just the latest in a longer-term trend on mobile sector taxation.

The mobile sector continues to see further taxes added on by governments in an effort to maximise fiscal revenues. Governments across the world have introduced or increased 120 taxes specific to the sector since 2011. As of 2017, 1.5 billion mobile subscribers in 60 countries were subject to some form of additional taxation on top of general VAT or sales tax: that’s almost 30 per cent of mobile subscribers worldwide.

While this might seem like abstract data, there are real consequences. Here are some of the more worrying developments in mobile taxation (you can find more in our recent Rethinking Mobile Taxation to Improve Connectivity report [1]).

Uganda: social media tax
In 2018, the government introduced a tax of UGX200 ($0.05) to use many online platforms including WhatsApp and Facebook. The Ugandan regulator recently reported that, as a result, internet subscriptions fell by 2.5 million in the three months after the tax was introduced.
Sri Lanka: tower tax
Original plans for a tower tax in late 2017 included an LKR200,000 ($1,144) tax per tower every month. These plans were watered down by the time the tax was implemented in January 2019: the monthly rate became the yearly rate. Nevertheless, taxing towers will no doubt reduce incentives to roll out networks.
Turkey: activation taxes
Getting access to a new phone connection has been difficult for a while now: consumers in Turkey pay three different charges before the first MB of data is downloaded. But these charges, the special communication tax, wireless licence fee and wireless usage fee, are inflation-linked and now add up to TRY98 ($17.22) just to get started for the year. It’s no wonder consumer taxes account for more than 60 per cent of the cost of owning a mobile in Turkey (and on top of that there’s a number of operator taxes there including a 15 per cent revenue share).

These additional (and complicated) taxes aren’t good for developing a mobile market. Need proof?

Since taxes increase the price of owning and using a mobile phone, fewer people are able to afford and use mobile internet services. Charting out the results, we see that consumers in high-tax countries (with red dots in the chart, below, click to enlarge) are charged more than 3.5 per cent of their income in taxes on mobile. In these same countries, mobile internet penetration never exceeds 30 per cent.

[2]Of course, there is a reason many developing countries impose high tax burdens on the mobile sector.

Where debt levels are higher, governments reach for additional tax payments on the mobile sector to try and fill the fiscal gap. Where that debt is due to be paid back soon, governments’ requirements are even more pressing. And mobile transactions of all types are tempting to tax: the International Labour Organisation estimates 2 billion of the world’s employed population are in the informal economy, with 93 per cent of these workers in emerging and developing countries. Collecting taxes from a significant informal economy is difficult. On the other hand, mobile transactions such as buying SIM cards, handsets, and prepaid top-ups can be identified fairly easily, and therefore are easier to tax.

But, as much as this strategy might be popular or easy, it’s a mistake for two key reasons.

Taxable base decreases
Higher taxes means lower take-up and therefore a decrease in the taxable base, the number of people you are able to tax. So gains by governments in terms of increasing tax rates can be eroded by the lower number of people using mobile.
Mobile services can help in formalising the overall economy
Person-to-government (P2G) payments using mobile money can be used to collect general taxes from citizens; school fees; health payments; and other official payments, and therefore increase the taxable base. P2G payments are now available in over 30 markets.

Inevitably, the debate on mobile taxation will continue with the short-term fiscal requirements of governments being pitted against longer-term sector and economic development.

At the same time, governments are developing ambitious digital economy plans. Mobile operators are being asked to simultaneously take on the burden of generating significant tax revenues and invest heavily in infrastructure. Maintaining both roles might turn out to be unsustainable.

– Mayuran Sivakumaran – senior economist, GSMA Intelligence

The editorial views expressed in this article are solely those of the author and will not necessarily reflect the views of the GSMA, its Members or Associate Members.


Press Release: GSMA report reveals Pacific Islands on the cusp of a digital revolution

The GSMA today presented ‘The Mobile Economy Pacific Islands 2019’ report, at the Pacific Islands Telecommunications Association (PITA) 23rd AGM and annual conference. In the report the GSMA highlighted the region’s potential and outlined that the Pacific Islands are about to embark on a digital revolution with the support of mobile technology. Additionally the findings showed that this revolution could only be realised through collaboration between governments and the mobile ecosystem.

Full Press Release

Webinar recording: The changing face of the content ecosystem

This GSMA Intelligence webinar discusses the evolution of the content ecosystem and what it means for companies in the value chain, including operators.

The content ecosystem is quickly evolving – reshaping competitive and market dynamics. Millennials are leading a shift in usage patterns. The mobile internet is the new channel for content delivery. New players are disrupting established media houses. Investment in producing original content has reached unprecedented levels.

This GSMA Intelligence webinar discusses the evolution of the content ecosystem and what it means for companies in the value chain, including operators.  

Intelligence Brief: Why does Huawei matter?

In just about a week, I’ll be headed to China. It will be my second trip to the country this year, with one more planned in June. You might ask why I’m headed there so much? It’s a fair question, one I’ve asked myself on more than one occasion even though the answer is fairly straightforward.

Let’s start with the specific events I’m headed to. June brings MWC19 Shanghai and last month was a quick trip to Beijing to talk up what happened at MWC19 Barcelona along with launching our latest research on the Chinese market.

I talked a bit about the trip in one of our Data Point videos [1] last month and you can find the Mobile Economy China report here [2].

Both of these point to a very simple reason for all the 12-hour flights: China is an important mobile market. This is so patently obvious that it feels silly writing it out. But, whether we’re talking about 5G launches, IoT scale or the innovation that comes from a society with 1.1 billion smartphone subscribers, the importance of China as key to understanding the direction of mobility is clear.

And the trip that’s coming up? That’s my annual visit to Huawei’s analyst conference. I’ve been to every one of these for more than a decade. Skipping out on the chance to catch up with the vendor (or any of its major competitors) never feels like a wise decision. But, if “China is important” explains the other trips, a visit to Shenzhen raises an obvious question. Why is Huawei important?

This, too, might seem blatantly obvious. Given the amount of news circulating around the vendor lately and a plea for “fact-based” judgements on it, it’s still worth highlighting some basics.

Operator market share
We don’t model network infrastructure market share at GSMA Intelligence. That’s okay, there are plenty of other people who do. My friends at Dell’Oro Group have Huawei capturing 29 per cent of the telecom equipment market in 2018, the top position, with Nokia and Ericsson taking a distant second and third, respectively. In other words, you can’t talk about the state of telecom networks in 2019 without talking about Huawei.

Mobile market presence
Of course, telecom networks market share and mobile infrastructure market share aren’t the same thing. So, let’s look at this a different way. How many mobile networks is Huawei present in?

The company claims to have supported 5G tests with 182 carriers. Does that seem high? It shouldn’t. Our own analysis of network launch announcements has Huawei touching more than one-third of operator 4G launches, over-indexing in some markets like Europe. That means you or someone you know is likely touching a Huawei-powered wireless network on a regular basis (US readers excepted).

Operator revenues
Over the past five years, Huawei’s carrier business revenues have grown by almost 80 per cent. The figures for key competitors? Let’s just say they’re not quite that solid.

I’m not sold on the idea that revenue success points to product superiority. However, it does support R&D scale and the financial stability operators like to see when making an investment that needs to live for ten or more years.

End-to-end capabilities
Another idea I’m not sold on? That end-to-end capabilities always help to win deals. Maybe for smaller operators which need a one-stop shop or a bundle of base stations and mobile devices. But Ericsson does pretty well for itself without smartphones to sell and Cisco manages to sell into mobile operators without a base station portfolio.

So why does end-to-end (in this case network infrastructure, consumer devices, and enterprise gear) matter? In part, because diversification helps with financial stability. In part, because these disparate spaces are converging as operators look to build networks on IT technologies and build services that more directly touch the consumer (think smart home, gaming or AR/VR). Know-how that touches all three spaces is an inherent advantage.

So, is there anything else I’m forgetting?

Oh yeah, that security thing and Huawei’s recently released 2018 annual report.

As we said in our MWC19 Barcelona wrap-up [3], “5G is increasingly positioned as ‘critical infrastructure’ given its potential for societal digital transformation. The critical nature means that 5G security is paramount”.

In other words, while mobile network security has always been top of mind, nobody should have been surprised by the elevated focus on 5G network security. And, as we talked up the possibilities the technology brings, and the scale benefits of a single ecosystem, we should have all been able to predict the stakes at hand and the potential impact of banning any major network vendor from 5G deployments: delayed service rollouts; the cost of replacing existing network assets; potential global R&D contraction due to constrained competition; and potential global technology scale impacts.

It’s a doom and gloom scenario, for sure. But Huawei’s latest annual report provides some important context. Among all the data in it, a few points stand out.

After years of double-digit growth, Huawei’s carrier business had a tepid 2017 (growing 2.5 per cent) and a worse 2018 (shrinking 1.3 per cent). As a result, the company’s consumer business suddenly became its biggest money maker [4], accounting for 48 per cent of revenues.

Meanwhile, the Chinese market has steadily grown in importance for Huawei: where it was 35 per cent of revenue in 2013, it’s now almost 52 per cent. Combined with EMEA, the markets generate 80 per cent of Huawei’s sales.

What’s the story here? That the ascending importance of consumer and Chinese markets will impact how Huawei looks at its business strategy and how best to deal with security concerns? Retrenching on the easier wins?

To date, there’s been no indication of a pullback. And, here, another highlight of its 2018 annual report is worth noting

In 2016 and 2017, Huawei kicked off its report by answering three questions: who is Huawei; what do we offer the world; and what do we stand for? In the latest document, it added a few new questions: who owns Huawei; who controls and manages Huawei; and who does Huawei work with?

The additions send a clear message: Huawei wants to signal that it operates around the world, as a private company with “no government agency or outside organisation” holding shares. A pullback wouldn’t benefit anyone. Not Huawei. Not its carrier customers with “1,500 networks in more than 170 countries”. Not the global standards organisations it supports.

Of course, this is a message it’s been sending for some time now. How that message evolves in the face of commercial and political progress on 5G is the key question. And it’s why I’ll be in Shenzhen later this month.

– Peter Jarich – head of GSMA Intelligence

The editorial views expressed in this article are solely those of the author and will not necessarily reflect the views of the GSMA, its Members or Associate Members.