EXECUTIVE SUMMARY
LIST OF ABBREVIATIONS
TABLE OF CONTENTS
INTRODUCTION / MOTIVATION
1 THE GERMAN MOBILE COMMUNICATION MARKET
1.1 HlSTORY
1.2 Market Characteristics and Determinants
1.2.1 Demand Side
1.2.1.1 Segments
1.2.1.2 Total Market
1.2.1.3 Consumer Expectations
1.2.2 0fferside
1.2.2.1 Mobile Service Portfolio
1.2.2.2 DevicePortfolio
1.2.2.3 Customer Services
1.2.3 Competitors
1.2.3.1 Network Operators
1.2.3.2 Service Provider (MVNO)
1.2.3.3 Mobile Phone Retailer
1.2.4 Regulation
1.3 Mobile Network Operator Telefonica O2 Germany
1.3.1 Company Vision and Mission
1.3.2 Company Positioning and CustomerSegments
1.3.3 SW0T-Analysis
2 INCREASING PRESSURE ON THE GERMAN MOBILE COMMUNICATION MARKET - NEED FOR CHANGE
2.1 Revenue Loss
2.2 Migration Effect
2.3 Regulatory Impact
2.4 Flatrate Trendand Impact
2.5 Outlook
2.6 The Margin/Acquisition Dilemma
3 PROACTIVE APPROACHES TOWARDS FUTURE COMPETITION
3.1 Generic Requirements for the Subsidy Substitution
3.2 Approaches for Subsidy Substitution
3.2.1 The Cash 0nlyApproach
3.2.2 The RentalApproach
3.2.3 The Leasing Approach
3.2.4 The Financing Approach
3.2.5 The InstalmentApproach
3.3 Approach Selection - Instalment Model
4 CHALLENGES TO TAKE FOR THE NEW APPROACH
4.1 Marketing View
4.1.1 ProductDefinition
4.1.1.1 PricingConditions
4.1.1.2 Proposition
4.2 Operational View
4.3 Legal View
5 CONCLUSION AND OUTLOOK
6 CLOSING REMARK
BIBLIOGRAPHY
The German Mobile Telecommunication Market has already reached and exceeded market saturation in terms of addressable mobile subscriber far above 100%. New, “virgin” customers only move up from next generations and organic growth can only be reached through biologic or immigrating growth of population. Predatory competition takes place and as a consequence, revenues per user and profit margins continue to fall year on year.
The 10 years practice to spend high acquisition costs for each new customer starts losing its financial feasibility. Payback periods in the range of contract durations force Mobile Service Provider and Mobile Network Operator to rethink and change their acquisition strategy. Telefonica O2 Germany, as the first competitor in the German Mobile Telecommunication Market, rethought its strategy and decided in May 2009 to change its acquisition model from high spending, upfront based commissioning to a revenue shared, bill size based and subsidy free incentive concept.
The main barrier to break down for such a revolutionary change was the accustomed expectation of the market to get mobile phones “for free”. Even if the mobile phone itself only acts as a high valued acquisition carrier with equivalent present value, the related costs must be absorbed by the customer before the provider earns the first Euro - a fact that the customer is not aware of.
The present thesis describes the history and the current situation in the German Mobile Communication Market, and analyses different approaches to get away from the consolidated mobile phone subsidy model, to rise to the acquisition cost challenge. Backgrounds for different concepts are described and their meaning in terms of market acceptance and financial impact are evaluated. The main reasons for Telefonica O2 Germany to chose the “O2 My Handy” concept and the main challenges to take before launch are described, and illustrate why the approach is likely to be successful for Telefonica O2 Germany.
But the thesis also reveals, that the separation of service contracts from handy purchasing, only serves for the half of the battle to reduce acquisition cost. The second, more important part of the approach is to reduce the ultrahigh acquisition costs for service contract formation. Those costs are mainly caused by high sales commissions, paid to trade partners for each service contract sold. A new kind of tariff, easy to explain and thereby easy to sell, must be created and promoted. For this purpose Telefonica O2 Germany has created the obligations and runtime free new tariff O2o, and ushered in a new era of competition in the market.
Up to now, the approach to launch the two complementary products O2o and O2 My Handy has proved to be very successful. Telefonica O2 Germany acquired more than 1.5 million services customers, and more than 700 thousand My Handy customers within 10 months after launch. In the same period of time, Telefonica O2 Germany’s three competitors lost customers from their customer base. But for all of that, until now, Telefonica O2 Germany is still the one and only provider who made a consequent step in this direction.
On the other hand, Telefonica O2 Germany makes them self more vulnerable against competitive attacks, the more deductible customers they have in their customer base, this is for sure. Furthermore, the end of subsidised handys has not come yet and will never completely be achieved. Attractive but expensive handsets like the iPhone form Apple will always open a market niche for high profitable service contracts, which will always easily account for high acquisition costs invested. So Telefonica O2 Germany has to watch narrowly to the market and competition, while in the same breath, competition will have a close look at Telefonica O2 Germany and their success with the new approach in the market.
List of Figures
Figure 1 - 02 ConsumerMarketing Segmentation (Source: 02 Marketing 2009)
Figure 2 -Subscriber developmentand penetration in German Mobile Communication networks (Source: Federal NetworkAgency 2009, p.78)
Figure 3 - ARPU-Distribution Initial vs. Inlife Customers (Source: Gimber et al. 2009, p.7)
Figure 4 - MarketSaturation and ARPU Germany (Source: Geib 2009, p. 7)
Figure 5 - Total Revenue Market (Source: Geib 2009, p 30)
Figure 6 - CSI Criteria (Source: selfcreated)
Figure 7 - Generic tariffvariants (Source: selfcreated)
Figure 8 - Consumer Tariffs offered by 02 in Q1/2009 (Source: selfcreated)
Figure 9 - Total handsetvolume by region (Source: McKinsey&Company2008, p. 13)
Figure 10 - Mobile Phone Manufacturer (Source: selfcreated)
Figure 11 - German mobile subscriber marketshare (Source: Merrill Lynch 2009a, p. 53)
Figure 12 - Network Coverage 02 Germany (Source: Derivedfrom www.o2online.de)
Figure 13 - MN0 Overview (Source: Derivedfrom UBS Ltd. 2009 and Merrill Lynch 2009a,b)
Figure 14 - Selected MVN0 in Germany (Source: Extractfrom Jotischky2009, Fig. 8.2. p. 140)
Figure 15 - MarketShares by MN0 and Reseller (Source: Geib 2009, p. 28)
Figure 16- German MN0 revenues vs. subscribers in 4Q/2007 (Source Yu 2009, p. 5)
Figure 17 -02 SW0T before launch of02o and My Handy (Source: selfcreated)
Figure 18 - Service Revenue by 0perator (Source: Geib 2009, p.32)
Figure 19 - Service revenuegrowthfor the market by operator (Source: UBS Limited 2009)
Figure 20 - Migration Potentialfrom 02 (Source: Stoll 2009c, p. 33)
Figure 21 - Net-Migration 02 (Source: Stoll 2009c, p. 35)
Figure 22 - MarketARPM (Source: derivedfrom Geib 2008, p.14 and Geib 2009, p.14.)
Figure 23 - EBITDA Margins ofGerman MN0 (Source Yu 2009, p. 9)
Figure 24 - SAC and SRC Definition (Source: selfcreated)
Figure 25 - SAC Germany (Source: Geib 2009, p. 58)
Figure 26- Payback Period by SAC and ARPU (Source: selfcreated)
Figure27- Generic requirements to a new approach (Source: selfcreated)
Figure 28 - Competitive Approach Strength Analysis (Source: selfcreated)
Figure 29 - My Handy Financial KPI - Year 0 (Source: selfcreated)
Figure 30 - My Handy Financial KPI - Year 1 (Source: selfcreated)
Figure 31 - My Handy Financial KPI - Year2 (Source: selfcreated)
Figure 32 - My Handy Financial KPI - Year3 (Source: selfcreated)
Figure 33 - Marketing Routefor 02 My Handy (Source: selfcreated)
Figure 34 - 02 ASW0T after launch of02o and My Handy (Source: selfcreated)
Figure 35 - Change in 0perators' Performance Metrics after Introduction ofApple iPhone (Source: Spektor2009,p. 7)
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From the beginning of the German Digital Mobile Telecommunication Market in the early 1990s until today, competition between the 2 to 4 main Mobile Network Operators (MNO) was and is driven by gaining customers without any limitation of acquisition costs per customer. The so-called SAC (Subscriber Acquisition Costs) reached unforeseen heights over time and has become an indispensable incentive measure for sales and consumer.
The outstanding, extraordinary service to initiate and receive phone calls at every time and every place, became more and more attractive and affordable to almost everybody who was willing to pay for this new kind of civilian freedom. In a consequence of the unregulated mobile telecommunication service market at that time, service charges where solely determined by competition between rare touting providers in a strong and seemingly endless expanding market.
The customer acquisition model, in which mobile phones with a market value of more than 200 Euro are offered for a symbolic price of 1 Euro, paid and partly still pays off for MNO and Service Provider. The payback period for SAC payments was limited to 3-9 month after contract formation, while the contract continues to run for further 15-21 month with guaranteed monthly minimum turnover.
With the foundation of the „Regulierungsbehörde für Telekommunikation und Post (RegTP)1 “ in 1998 and rising competition in an increasingly saturated market, the service charges achievable per month and customer have decreased year by year. Even today in an already oversaturated German Telecommunication Market, the minimum of average revenue to be generated per contract still has not been reached.
MNO, Service Provider and finally the customers have to change their thinking about acquisition models and price sensitivity for mobile phones. The end of the mobile phone subsidy is about to happen but what comes next?
The present Thesis is about the revolutionary approach of Telefonica O2 Germany to change the market and customer expectations by introducing the so-called „My Handy“ mobile phone payment concept.
Background analysis for the need of change, approaches to go, pitfalls to be avoided and obstacles to take will be part of this thesis. Finally the expected and realized impact on Telefonica O2 Germany’s business and an outlook to future evolutions of the German Mobile Communication Market will generically be discussed.
Regardless of the controversial international debates about the costs and benefits of deregulation of the telecommunication market, in Germany a new law was released on July, 1st 1989, restructuring the traditional Deutsche Bundespost into three independent enterprises. With this reform the move of the German Telecommunication Market from a singular state owned, towards a private driven market with usual senses and laws of a free market system has been initialized (Knieps 2001, p. 2)2.
Two years later, in 1991, when the first private licence for driving a mobile communication network was assigned to the first non-public Network Operator in Germany, Mannesmann Mobilfunk, can be considered as the beginning of the free competitive German Mobile Telecommunication Market (Kaas 2004, pp. 5-8). From this time on the competition in the market got started, since Deutsche Telekom, as the one and only (state-operated) Network Operator, dominated the monopolistic German Market for Telecommunication Services so far.
Later in 1993, E-Plus, the second non-public private Mobile Network Operator, got its licence and started commercial operation in 1994. Four years before the today’s Telefonica O2 Germany started its business in 1998 - at that time under the VIAG Intercom Brand, a joint venture between VIAG3 AG and British Telecom.
From the beginning of privatisation, the German Mobile Communication Market was determined by a very strong increasing competition, inextricably linked with strong price war in terms of fixed monthly charges, usage depending charges, and also the prices for required devices. As Kaas (2004, pp.19) describes, the German Mobile Communication Market was in the state of a „young market“ with the characteristic „take-off“ phase after a slow growing starting-phase. Today the German Mobile Communication Market is a technology driven, oligopolistic saturated market, served by four Network Operators: T-Mobile, D2- Vodafone, E-Plus and Telefönica O2 Germany and fiercely contested by many more Service Provider4.
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Abbildung in dieser Leseprobe nicht enthalten
Figure 1 - O2 Consumer Marketing Segmentation (Source: O2 Marketing 2009)
As usual in the marketing field, markets are described by consumer segments and their specific characteristics. Beside general applicable segmentations, e.g. from GfK, Telefonica O2 Germany applies their own specific picture about the German Mobile Communication Market. Figure 1 shows the 6 segments of the German Mobile Communication Market from Telefonica O2 Germany’s perspective.
The six identified segments and their short definition along their values can be taken from the picture. In chapter 1.3.2 some more information about the segments and Telefonica O2 Germany’s target groups will be explained. For this thesis, a short sketch about the segmentation will be sufficient; a profound analysis would not give any helpful information for the main objective and would deflect from the main purpose.
Considering the total German Telecommunication Market in terms of mobile subscribers, Germany has already reached a mobile penetration5 of more than 130% in 2009 (see also Schmid 2009).
How fast the German Telecommunication Market has been developed during the past 10 to 12 years, starting in the late 1990s when the market got started to be allocated to the four main incumbents, shows Figure 2 on the next page.
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Figure 2 - Subscriber development and penetration in German Mobile Communication networks (Source: Federal Network Agency 2009, p.78)
Obviously the customer base has already exceeded the total German population in 2006. The remaining growth is only caused by multiple SIM-Card usage for data applications, separation between business and private, cost optimization, contract overlap and other non-organic reasons.
Even though effects like unused SIM cards, counted as inactive subscribers, must be considered, a strong negative ARPU trend in the effective active subscriber base can be observed. According to a Goldmedia analysis (Schmid 2009), the average revenue per customer has been decreased by nearly 50% between 2002 (30€ per month) and the second quarter of 2009 (16€ per month), taking also the inactive SIM cards into account.
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Figure 3 - ARPU-Distribution Initial vs. Inlife Customers (Source: Gimber et al. 2009, p.7)
Figure 3, taken from an O2 internal analysis from 2009, shows the ARPU distribution of initial in comparison to inlife customers using the example of O2o customers: 22,6€ (initial) vs. 14€ (inlife) assorts well with the above statement of 16€ in average6. The chosen base of 102.431 customers, only considers post paid customers within this single obligations free tariff, and is therefore ideally qualified to represent the average „voluntary“ spending for Mobile Communication Services.
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Figure 4 - Market Saturation and ARPU Germany (Source: Geib 2009, p. 7)
Figure 4 as an excerpt from an O2 internal strategy report Q1/2009 confirms the figures: 15.2€ blended7 ARPU in Q1/2009 vs. 16.5€ in Q1/2008 while penetration went up from 121% to 130%.
The German Mobile Communication Market has shrunk by 4.5 billion Euros since 2005 (Schmid 2009). This leads to decreasing revenues for Operators and Service Provider, while the number of SIM-Cards in the market still increases.
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Figure 5 - Total Revenue Market (Source: Geib 2009, p 30)
The revenue trend in the German Mobile Communication Market during the past two years for Pre- and Post paid customers is shown in Figure 5.
Mobile communication services, and increasingly mobile data services8, have become part of the German’s daily life. Accessibility everywhere and at every time on the one hand, affordable services combined with low to no invest willingness on the other hand, are the major factors challenging German Network Operators and Service Provider.
Particularly for the acquisition purpose, MNO and Service Provider are facing high expectations from customers. Spoiled and accustomed by the high acquisition spending during the last 10 years of fight for market shares in the unsaturated German Mobile Communication Market, customers still expect to be paid court by contractors: Mobile devices with high market values as a gift for signing a contract, flat-rate tariffs and retention gifts. Even if not named, German customers still know what they can expect and they punish those providers, who miss to offer something adequate (please refer also to Figure 20, Figure 21).
For measuring the fulfilment of customer’s expectations, a so-called Customer Satisfaction Index (CSI) has been designed, and according benchmark surveys are performed year by year. The survey at Telefönica O2 Germany takes place quarterly and is managed by internal market researchers.
The aim of the CSI is to differentiate from competition on the one hand side. To focus on weak points, in order to optimize CRM measures and to gain new customers in the most efficient way, is the second purpose.
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Figure 6 - CSI Criteria (Source: self created)
The major satisfaction criteria, measured in the CSI survey, are listed in Figure 6 above. Very interesting in the context of this thesis is the „price/performance ratio of mobile phones on offer“. Within these criteria, the customer should objectively score the price/performance of mobile phones offers. Manipulated and habituated by the past 10 years of Mobile Communication Market acquisition methods, unsurprisingly, customers tend to describe their subjective sense. The results of such indicators must be taken very seriously and treated accordingly. The CSI will be a matter of interest in further chapters, especially in the competition field.
Beside, but not independent from the corporate CSI, customers expectations are captured in independent surveys from market research agencies, and can also be derived from day by day customer contacts at the Customer Care hotlines.
The most often perceived and stated customer feelings can be summarized to: Customers...
... perceive mobile communication offers as confusing and always to customer’s disadvantage
... see the difference between different provider’s offers only by reading and interpreting the footnotes
... only accept contract formation since it is inevitable but not appreciated
... do not want to stay in touch with their Provider after contract formation
... dislike long contract durations
... want to feel treated fair by their provider
... do not want to optimize their bill size by monitoring, studying and controlling their contract details
... want to gain benefit from long-term bindings
Each of the four MNO and also all the Service Provider offer a huge set of services: the so-called mobile service tariff portfolio. Sometimes differentiating, tailored to customer needs, but mainly unclear and confusing - either unconscious or by intent.
Generally, the tariff portfolio of each provider differs in terms of the applied acquisition method, the monthly charges, runtime and payment terms. Either the customer has to pay a kind of acquisition fee, which in almost all cases will be refunded in form of free services, or - in vast majority - paying an acquisition benefit in form of subsidised handsets, laptops or cash money9. Figure 7 gives an overview of the generic criteria and the different variants. Not visible, but implicitly included, are the different possible combinations of those variants. Each provider offers different compositions with different charges and specific rules - far away from 1.2.1.3 Consumer Expectation.
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Figure 7 - Generic tariff variants (Source: self created)
The complete tariff portfolio offered by Telefönica O2 Germany in Q1/2009 without consideration of the different variants, resulting from the optional combination of Internet and SMS packages, is shown in Figure 8 below.
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Figure 8 - Consumer Tariffs offered by O2 in Q1/2009 (Source: self created)
Even though the O2 portfolio has significantly been reduced with the introduction of the S,M,L and XL offer logic in 2007, which follows the system of 10 clothing sizes in the fashion industry, the consumer portfolio10 still consists of 34 different base tariffs. The associated complexity to calculate and find the best individual fitting service is still on a very high standard, and certainly overcharges the most customers in the market or exceeds their willingness to analyse.
Given by the nature of a mobile communication market and its purpose to provide mobile communication services, devices, or more precise terminal devices, have their indispensable role in the business11.
But furthermore devices serve another very important purpose: the subscriber acquisition. Since the early beginning of the German Mobile Communication Market, operator and provider realized that the pure service itself couldn’t be communicated and transferred to the customer easily. Services suffer from their lack of tangibility. Customers - especially in Germany, but also in other different countries in the world - have not been and are still not familiar with services to pay for. Therefore mobile phones and increasingly other terminals, as the tangible part of the offer, have played and still play a significant role in the customer acquisition process.
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Figure 9 - Total handset Volume by region (Source: McKinsey&Company 2008, p. 13)
The worldwide trend for handset sales still grows and will continue to grow in the next years. The expected CAGR is about 6%, as Figure 9 shows. Even in Germany, although the market saturation for mobile services has reached 130%, a growth rate of 1% per anno is still predicted. The graphic is taken out of a complete mobile broadband market analysis performed in fall 2008 by McKinsey&Company.
Many different manufacturers, most of them autonomous, even though not independent from local Network Operator and Service Provider, serve the global hardware market12.
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Figure 10 - Mobile Phone Manufacturer (Source: self created)
The main manufacturers for the German market13 in the decade from 1997 to 2008 are listed in Figure 10. Worldwide and all together, the above listed manufacturers usually launch much more than 200 new devices per year. Therefore Telefönica O2 Germany, and most of the competitors as well, drive their own device portfolio management, where the best fitting devices in terms of market fit, segment fit, price conditions, scaling effects with partnered countries (e.g. within the O2 Group) and fit to services are preselected and launched. Partly unperceived by the customer, the described preselection also got part of each operator/providers proposition in terms of customer acquisition14.
A further significant role, determining the German Mobile Communication Market, is the customer care or customer service area, where the different providers show their willingness and skills to care for their customers after contract formation.
Customer services deal with all kind of customer complaints. They manage and provide required information and try to satisfy customers’ needs - ideally before raised by the customer. All providers in Germany offer their own hotline service, where the customer can get information, support or care. Differences can be perceived in the way in which customers are treated, either by IVR or human contact, how fast support can be expected and if the service is free of charge.
Beside the pure reactive services as a reaction on customer needs, the proactive marketing services as a part of the CRM strategy are very common in Germany. Customers with high monthly bills get special attention and treatment through premium programs; Customers with soon terminating contracts get special retention offers to stay with the provider for another period of time (usually 24 month).
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Figure 11 - German mobile subscriber market share (Source: Merrill Lynch 2009a, p. 53)
Since 1998, the German Market for Mobile Communication Services is contested by four Network Operators (MNO): Vodafone, T-Mobile, E-Plus and Telefonica O2 Germany15. As Figure 11 shows, T-Mobile and Vodafone dominated the German Mobile Communication Market in 2009: together they serve more than two-thirds of the total mobile subscriber market. E-Plus and Telefönica O2 Germany share the remaining 31%, whereas Telefönica O2 Germany serves 14%, vs. 17% served by E-Plus.
After 12 years of strong invests in the physical network infrastructure and required licences, all four MNO provide almost 100% population coverage, and wide area coverage for standard mobile services like voice and SMS (via GSM Network). Differences can be found in the broadband coverage capabilities of each operator. Figure 12 shows Telefönica O2 Germany’s coverage for GSM, UMTS and EDGE network technology in 02/2010.
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Figure 12 - Network Coverage O2 Germany (Source: Derived from www.o2online.de16 )
For each of the four MNO, the main characteristics in terms of actual facts17 are collected in Figure 13. Very interesting in the context of this thesis are the figures for ARPU and EBITDA margin: while the ARPU for all operator lies in the same range of approximately 15€, the EBITDA margin of Telefönica O2 Germany lies with 21.4% far behind competition. Their EBITDA margins range at about 40% in average .18
[...]
1 Renamed to Bundesnetzagentur on July, 13th 2005
2 Refer to chapter 1.2.4 for further background information of regulatory activties in Germany
3 VIAG - Vereinigte Industrieunternehmungen. In 2000 merged with VEBA - Vereinigte Elektrizitäts- und Bergwerks AG - to E.ON AG
4 In the following text, „Service Provider“ will be distinguished from „provider“; provider cover both groups, Service Provider (MVNO) like Fonic, Congstar, etc. (please refer to chapter 1.2.3.2) and Mobile Network Operator (MNO) at a glance; MNO also act and count as provider.
5 Subscribers per population
6 O2o - a tariff without any obligations or commitments introduced in May 2009 by Telefonica O2 Germany as the complementary part of the „My Handy“ offer (further information later on in this thesis). To account for the fact that consumer behaviour changes over lifetime, the calculation differentiates between initial and inlife ARPU after 3 month contract runtime.
7 The weighted ARPU of Pre- and Postpaid customers on average
8 e.g. Mobile Internet, MMS-Exchange, Filetransfer, Community-Liveconnections, Knowledge Databases, Online Shopping
9 In periods of strong Mobile Communication Market growth, cash premium (50DM) was paid to each customer acquainted at PoS.
10
The portfolio for business partner differs from consumer portfolio since the devisions within O2 operate on own P&L and also consist of almost the same number of tariffs
11 In the previous and following text, the terms „device“, „mobile device“, „handy“ and „hardware“ equally stay for terminal equipement needed for Mobile Communication Services. All of them are potentially objects to be subsidised in the context of subsrciber acquisition purpose.
12 In the past, MNO multiply tried to access the mobile phone business, but all attempts without the promissed success. So the O2 Group failed to be successful with their Exclusive Line in the years 2005 to 2007. O2 Germany decided in 2007 to abandon this trial and to focus on the core business again.
13 Further brands like Acer, Dell and ASUS play an increasing role in the market for Smartphones and Netbooks. The figure just gives an overview about the past, it is not intended to be exhaustive.
14 E.g. Nokia as the market leader plays a significant role also in Germany, but the device portfolio offered by O2 Germany is very strong dominated by Sony-Ericsson, since the strong overlapping fit to the O2 brand and adressed customer segments.
15 See also Chapter 1.1 History on Page 12
16 http://www.o2online.de/nw/support/mobilfunk/netz/netzabdeckung.html?o2_type=goto&o2_la bel=netzabdeckung
17 Minor deviations between different figures can be ascribed to different sources, none- standardised counting methods and active subscriber definitions.
18 The comparatively low EBITDA margin might also be a driving reason for Telefónica O2 Germany to introduce the My Handy concept but the main view in this analysis is taken from a general Mobile Communication Market perspective.
