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  The European mobile market is getting tougher and growth is no longer self-acting, according to a report by Arthur D Little and Exane BNP Paribas.
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Against this backdrop, mobile operators will continue to raise revenues and generate cash, but this will require a lot more effort.

The report, Mobile Operators: more effort required, forecasts a 7% increase in mobile revenues in the five largest European countries in 2005. Thereafter, revenues are likely to slow (+4.6% pa over the 2005-2007 period) but cash generation (EBITDA – investment) should continue to rise by 8% pa in 2005-2007 and the EBITDA margin remain stable on average.

Key findings

  • Voice will continue to boost sector growth. Prices are under pressure: consumer groups and regulators are pushing for tariff cuts, competition in the corporate segment is getting stiffer, unlimited fixed-line tariffs are becoming more widespread and technological breakthroughs are ongoing (WiMax, VoIP, etc.). Nevertheless, volume growth potential remains strong: in the large European countries, over half of voice traffic still travels over wireline. As summed up by Bruno Duarte, “We expect voice revenues from existing customers to rise 0.9% pa despite pricing pressure”.

  • 3G has been launched in Europe, but equipping the mass market with 3G handsets will take time: 20% of customers should have 3G handsets at end-2006. At this stage, operators are only targeting customers interested in mobile multimedia. There is still considerable uncertainty regarding the winning model for residential mobile data. Bruno Duarte raised two questions: “How will mobile operators react to the arrival of new specialist players (Yahoo!, Apple, cinema and music majors, for example)? Will they eventually agree on common pricing methods?”

  • Although mobile penetration is high, some segments remain under-exploited. Mobile penetration is under 35% for the under-15 age bracket, and under 50% for over-65s. Operators will refine their marketing segmentation and launch offers adapted to these new segments. According to Antoine Pradayrol, “ARPU dilution from these new customers is not a negative: they will spend less than average, but will be profitable customers, as operators develop low-cost offers”.

  • Cost cutting: operators will be able to save 2-3 margin percentage points. Many mobile operators have yet to make a true effort to cut costs. Over the next five years, we expect savings equal to 2-3% of revenues. The main savings should come from four areas: the network (optimisation or outsourcing), customer services (more segmented quality, self-care over the Internet), IT (optimising and centralising service platfoms to offset development costs in mobile multimedia) and administration. Commercial costs (subscriber acquisition and retention costs) should not rise significantly as a percentage of revenues in 2005 and 2006 vs 2004. “We are confident in mobile operators’ ability to maintain their EBITDA margins,” states Antoine Pradayrol.

    The report was written under the direction of Bruno Duarte, partner at Arthur D Little, and Antoine Pradayrol, head of the Telecoms team at Exane BNP Paribas. It is based on roughly 50 interviews with European mobile operator divisional and general managers as well as telecom equipment suppliers and service providers.
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