Operators must develop products that combine the best aspects of fixed and mobile services into offerings that are more than just price plans. Current offerings will become less attractive as the cost of mobile services drops.
Operators that are now testing and launching fixed/mobile voice services must recognize that current converged offerings are merely a form of price plan. In the short term, they may help to reverse or slow declines in revenue by retaining customers, although we are skeptical that many will be attracted by the cumbersome handsets offered with such packages. Operators will have to work much harder to develop converged services for data and voice communications.
More and More Attention
Fixed/mobile convergence is receiving considerable attention from telecom industry. It describes the paradox of bringing together two opposite characteristics. Fixed communications are tied to one location; mobile communications can be carried out on the move. Most uses of the term refer to operators' attempts to combine the best aspects of both into one product.
The industry is still working out how best to combine voice, Internet and value-added services, such as music or video. Operators of fixed and mobile services intend to play a major role in delivering this content. Each operator is hoping that all traffic for these services will converge onto its network.
There are many methods of connecting to networks for voice and data services, few of which are fully interoperable. In this research note, fixed/mobile convergence describes seamless connectivity for both voice and data across fixed and mobile networks. Fixed-line-to-mobile substitution for voice incorporates any event or action that results in a proportionate increase in minutes on a mobile network in comparison with those on a fixed-line network. This includes the preferential use of a mobile phone over a fixed-line alternative, or a choice by users to rely on a mobile alternative. Fixed/mobile substitution is driven by purely mobile operators. For example,O2 in Germany has, for many years, offered a mobile service, Genion, which gives users a single number with a reduced tariff at home and normal Global System for Mobile Communications(GSM) charges outside a "home" cell. Users can also move their fixed-line number to the Genion service.
Users are starting to demand that services such as voice or a VPN (Virtual Private Network) can be accessed through a high-quality network that is always connected. People have different profiles depending on where they are:
- At home, residential users and teleworkers use fixed lines for voice (over PSTN), broadband (DSL) for Internet and VPN access, wireless LAN (mostly 802.11b) for wireless connectivity and mobile services for voice and data.
- At an office or on a campus, employees use the corporate PBX for voice communications, the corporate LAN and WAN (which uses a variety of technologies), wireless LAN (802.11b and g), as well as mobile and remote access services, such as those used at home.
Convergence and Commercial Bundling
Gartner differentiates between real converged services and commercial bundles that are simply marketed as convergent offerings.
Real convergence is when an operator offers services or applications that are integrated, such as voice mail or a presence and directory system that embraces fixed lines, VoIP and cellular connections. One example would be a common voice mail service for both fixed and mobile numbers. Another would be a voice service that detects and uses the network with the lowest cost to the customer, regardless of whether it is mobile, WiFi or DSL. Those services should be managed through a single-user portal that offers single sign-on procedures, as well as common authentication, authorization and accounting (known as "triple A").
Operators should evaluate convergence as a way to create service-oriented offerings that will set them apart from rivals that offer less-expensive stand-alone services. These offerings should provide enhanced convenience, support for personal identity and community, as well as entertainment for nonbusiness customers. Fixed-line operators looking to stem the flow of customers replacing their fixed-line voice service with a mobile connection should consider value-added services. BT Fusion is an example of a purely voice-convergent service. In contrast to commercial bundles, convergent services that deliver additional value don't need to be discounted.
Commercial bundling is when a single provider offers multiple communications services as a package - for example, when an operator offers DSL, remote WiFi access and cellular services in a single contract. There is little or no functional integration between the individual services, but there may be some economies in procurement. Operators aim to be the single provider of all communications service and so derive the maximum share of total spending. By offering a fixed and mobile bundle, providers can differentiate themselves from providers offering only fixed or mobile services. The disadvantage for operators offering a commercial bundle is that users expect a discount in return for their loyalty. This means about 25 percent less revenue than that generated by the purchase of two separate services from the same operator.
Operators must look carefully at the level of discount applied to a package and be aware that bundles could spark a price war. They should evaluate the level of outside competition, whether bundles would erode the operator's own revenue, how much opportunity bundles offer to limit churn, and how much it would cost to acquire customers.
Both bundling and convergence let residential users, teleworkers and corporations save money, but there are risks. Few operators will be best in class for all converged or bundled services. Service bundling and convergence may be used by service providers to drive users to subscribe to services that they do not need. For the bundled options, many offers are on the market for so-called Triple-Play services. Providers range from former monopolies, such as TeliaSonera and France Telecom, to cable providers and Tier-2 players. Their target market is mainly residential users.
Operators with both fixed and mobile networks can reduce their internal cost structure because of fixed/mobile network convergence and achieve a lower cost of production. This may lead to higher margins or larger market share if the benefit is passed to users.
Voice Convergence Across Networks
This type of solution provides a single wireless phone and a personal number. In the home, it uses WiFi or Bluetooth to connect to a DSL service and sometimes seamlessly hands over to GSM networks outside. Examples of this type of service are BT's Fusion, a converged offering from Korea's KT, and the fixed/mobile product being tested by TeliaSonera in Denmark.
From a consumer perspective, the need for such services in handsets will remain less attractive than standard phones through 2008. Furthermore, the first handsets with WiFi technology will address the needs of business users, not those of consumers. Uptake in the lower end of the consumer segment will be limited, and operators should consider marketing them to business users.
Converged voice services appeal to users because there is a possible reduction in the cost of calls made at home or at identified locations. In their current forms, these services offer an opportunity to bypass high mobile charges as an arbitrage offering. But they are not a long-term convergence play, although they may serve as an initial converged platform upon which other services can reside. There's also the convenience of a single device with single directory and voice mail. Where indoor mobile network coverage is unsatisfactorily, a converged solution using WiFi to supplement it may be an option as dual-mode terminals become more available and the price of those terminals comes down.
Voice converged services are driven mainly by fixed-line operators and those with fixed and mobile networks. They are trying to compensate for the erosion of revenue from traditional voice services by enriching home broadband connections. By offering lower tariffs to home users, thanks to VoIP over WiFi or Bluetooth transmitted via DSL, they hope to gain a larger share of users' spending. These services need a fixed line in the home (that is, PSTN + DSL or, in some places, DSL only). Therefore, this concept of a converged service can be seen as a commercial bundle by fixed carriers of a DSL connection plus mobile voice service. It's a defensive strategy.
We predict that the price differential between fixed-to-fixed termination and fixed-to-mobile termination will diminish and become less important as a rationale for customers buying these services. This is the result of price reductions stimulating further fixed-to-mobile substitution and of pressure by regulatory groups, especially the European Regulators Group. The combination of these two forces has left operators little choice but to reduce termination costs in the long term.
Many countries have already started to lessen this differential, and in Austria fixed-to-mobile termination costs are the same as fixed-to-fixed. In areas with extensive mobile network coverage, like countries in Western Europe, poor indoor reception is generally not a problem, even though there are pockets where the mobile coverage does not provide a good substitute for the fixed network. Therefore, in the longer term, purely voice-based converged services will remain niche offerings in most of Western Europe, but might be successful in countries or locations with unsatisfactory indoor coverage.
IP VPN Convergence Across Networks
Fixed/mobile converged services are also increasingly offered for data connectivity. Many service providers have added these offerings to their portfolios to better meet the requirements for constant connectivity to corporate networks, regardless of location. Similar to voice services, a selection of network technologies is combined to offer connectivity, and sometimes also seamless hand-over between these alternatives.
One such offering comes from Nordic operator TeliaSonera. Its Connect Pro service offers continuous VPN connectivity through a combination of GSM and 3G networks, Telia's WiFi "hot spots" ,corporate wireless LANs and ADSL (in combination with wireless LAN) for home use. The service normally selects the highest transmission speed based on the networks available. The pricing model is built on data traffic transmitted and received. A monthly charge of 895 kronor includes 1GB of data, and unrestricted Internet access from Telia Home Run hot spots. Unlike many other services, Connect Pro handles seamless handover while maintaining a session, although the service is restricted to portable devices that run Windows. France Telecom and Vodafone offer similar services without a seamless hand-over (and hence maintenance of the session).
Alternative Providers Aiming to Introduce Convergence
As well as fixed/mobile convergence driven by traditional telecommunications providers, new players are trying to extend their value chain and deliver some form of converged services into the mass market.
Yahoo is introducing a service with SBC Communications that will link cell phone services to Yahoo users' accounts, address books and preferences. In 2004, Google began letting U.S. consumers obtain search results by sending text messages from cell phones. In June, it started to provide users with search results from an index of Web sites optimized for cell phones.
To accelerate the uptake of mobile Internet enabled by greater bandwidth on cellular networks, several operators, such as Verizon, Sprint Nextel, Cingular and T-Mobile, signed deals with Google and Yahoo to encourage customers to use their phones as a device to surf the Web.
Recommendations
Current converged offerings are purely voice-centric, and operators' integration plans focus on discounts rather than gaining revenue. To differentiate themselves from competitors and to grow revenue, all service providers need to do the following:
- Develop value-added services with the same features and presentation across multiple interfaces, for example, on mobile and fixed terminals, desktop and laptop PCs. The services should also be geographically independent when weaving in technologies such as IP and WiFi.
- Develop entertainment offerings for consumer segments to compensate for the declines in the price of voice and pure data access.
- Enable all services with a single sign-on, help desk and after-sale support across multiple access channels. This will provide a seamless access experience to customers.
- Hybrid operators with fixed and mobile networks might obtain a cost advantage over those with one type of network by delivering to multiple access channels. They should consider using the immediate cost savings made from fixed-mobile network convergence to gain more market share.
- Fixed-service providers should ensure their offerings include mobility in some form and carefully balance investment in mass-market converged voice products with development of converged services for business users on- and off-site. A first step for pure-play fixed operators is to consider forming partnerships with mobile operators or mobile virtual network operators.
- Mobile-only providers should consider how to exploit the emergence of fixed/mobile convergence in light of accelerating fixed/mobile substitution. In some markets, the launch of a fixed/mobile converged offering from a fixed provider may offer wholesale opportunities, such as those offered to Vodafone by BT's Fusion.
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