Quality over quantity - TIM Italy responds to market saturation - Churn-driven market share gains trigger change in strategy

With total mobile penetration reaching 154% by second-quarter 2008, Italy is one of the most highly penetrated mobile markets in the world. In Western Europe, it is second only to Greece (171%). While most markets can still expect to record strong growth at well over 100% penetration, at over 150% we can clearly see the signs of market saturation. According to our calculations, total Italian connections inched from 90 million in first-quarter 2008 to 90.3 million the following quarter, the slowest rate of connections growth for many quarters. In another sign of market saturation, the country's two largest operators - TIM Italy and Vodafone Italy - both saw a decline in total connections, while the two smaller players (3 Italia and Wind) both recorded a rise, suggesting that market-share is increasingly being determined by churn rather than new connections, a dynamic that tends to benefit smaller players.

Market-leader TIM Italy has recently communicated its strategy to handle such market conditions and its last two quarters reflect its new approach. Previously the largest operator in Western Europe by connections, the operator slipped to second at the beginning of the year (behind T-Mobile Germany) as connections growth slowed and its domestic market-share dipped below 40% for the first time. TIM Italy says it is now focused on "revenue-share rather than market-share," and has outlined a strategy for the second half of the year concentrated on mobile value-added services (VAS) revenue, the enterprise and business market segments, and mobile Internet.

The operator points to a number of metrics that suggest this strategy is already taking effect. In its latest quarter, revenues from data services such as mobile instant messaging and e-mail surpassed traditional SMS and MMS revenue for the first time, reaching €268 million or around 12.2% of all service revenue. Revenue from traditional messaging declined (quarter on quarter) from €261 million to €250 million, accounting for 11.3% of total service revenue. This trend was driven by a rise in mobile broadband usage. TIM Italy says its number of active mobile broadband users rose to 1.6 million in the quarter, up from 0.9 million in the year-earlier period. Our figures show that total TIM Italy WCDMA (Family) connections reached just under 6.5 million by the end of the quarter. TIM Italy also reported a shift in handset sales towards high-speed enabled devices: despite overall handset sales dropping 16% year-on-year (1H07 to 1H08), it reported a 500% increase in WCDMA-enabled laptop and USB dongle sales (to 351,000) and a 300% rise in smartphones (to 575,000).

Despite its loss in overall market-share, TIM Italy also claims to be successfully defending - and building - market- share in its most valuable market segments. It claims to have a 62.9% share of the enterprise segment and a 51.8% share of the SME (499 employees or less) market. In both cases, ARPU is higher and churn is lower than the market average. In the consumer space, the operator is also targeting higher-value postpaid (contract) customers in a market that is traditionally dominated by prepaid. Our data shows that TIM Italy commands a 47.83% share of the Italian postpaid market, with postpaid accounting for 16% of its total connections (its nearest competitor, Vodafone Italy, has a 34.82% share of postpaid, just over 10% of total connections).

TIM Italy points to its latest ARPU data as evidence that its 'quality not quantity' strategy is working. After more than a year of gradual decline, ARPU in the second-quarter lifted to €20.1, from €19.82 in the previous quarter. The operator aims to continue this trend for the remainder of the year, pledging to focus on the quality of gross additions and the retention of valuable customers.

Joss Gillet, Senior Analyst, GSMA Intelligence:

Italy is one of the most competitive and dynamic mobile markets in Western Europe, characterised by a high penetration rate, price sensitive demand and the fast adoption of high-speed mobile services. Operators in such markets are facing great challenges in finding the right balance between profitability and capital expenditure. In most cases, operators in such markets are focusing on: rationalising offers by introducing innovative tariffs (flat rates, fixed-mobile substitution) and bundled deals; targeted promotions and loyalty programmes to fight churn; MVNO developments; customer migration from prepaid to contract; and acceleration of VAS adoption.

Over the last two quarters, the Italian landscape seems to have changed, and by end of year, TIM Italy could find itself with a connections market-share around 39% as it switches its focus to customer retention. Vodafone in Western Europe is facing similar pressures and is taking several initiatives to stimulate revenues, reduce its cost structure and maintain capex levels. The situation is similar to the UK mobile market, which registered a negative quarterly growth in second-quarter 2008 for the first time since 2006. The combination of a slowing economy and saturated telecom markets will mean operators in such markets will face increasing challenges in speeding-up technology migrations and future deployments.