27 Feb 04

A new report from Arthur D. Little (ADL) and independent brokerage firm Exane, predicts a revenue increase of 7.5% for European mobile operators in 2004.

The report also states that mobile operators' revenue growth will continue at an average of 6.6% per annum (pa) until 2006, with the majority of this growth substituting traffic currently carried on fixed networks.

According to the ADL and Exane report, voice traffic on mobile networks is expected to rise an average 7% pa from 2003 to 2010.

Despite an estimate that MMS handsets accounted for 40% of all handsets sold in 2003, this report states that SMS will represent the bulk of operators' data revenues until 2006. In 2003, SMS generated three quarters of ARPU growth and it is likely to continue to show strong growth in 2004.

"The outlook for the European mobile industry is positive as we believe significant potential exists for operators to increase revenue from both voice and data services," comments Philip Shepherd, Director at Arthur D. Little:"Voice traffic and SMS still remain the key drivers of revenue growth. Despite strong handset sales, use of MMS services remains sluggish and it is not likely to make a significant contribution to ARPU until customers become more comfortable and familiar with the full potential of MMS."

Elsewhere, operators are now increasingly focussing on driving topline growth through investment in services designed to drive usage and migrate prepaid customers to contracts. ADL and Exane believe that in 2004 the major operators will start pushing larger or even unlimited packages by minimising the need for additional capacity thanks to yield management and offerings limited to specific timeslots or locations.

This could have a significant impact on the UK market, where 69% of residential subscribers use prepaid cards.

Shepherd also describes other trends that are likely to effect the UK mobile market in 2004, "The UK is exposed to increasing competitive pressure from the recent launch of 3 and our forecasts factor in steeper reductions in outgoing call rates in the UK, to take account of the additional presence of new Mobile Virtual Network Operators (i.e. BT Mobile and Tesco). But despite this increased competition, fundamentally the UK market remains attractive for mobile operators."

The report states that 3G rollout continues across Europe and that 3G services are set to become more widely available from autumn 2004. Although 3G infrastructure rollout poses significant strategic, financial and operational dilemmas for operators, ADL and Exane believe that apart from the new entrant 3, the impact of 3G will primarily be in providing additional capacity enabling network optimisation for the existing operators. In recent years, the 2G networks of the major operators have hit saturation point but with the advent of 3G, network capacity will be significantly increased, enabling the larger operators to 'hit back' against the smaller operators, which have traditionally enjoyed a capacity advantage.

The conclusions of 'Leaders hit back' are the result of detailed analysis, involving fifty interviews with senior management of mobile operators, equipment manufacturers and content and service providers.