It started as a dinner-party
anecdote but now it is a full-blown market trend. More and more
people have largely abandoned the traditional fixed-line phone
in favour of their mobile phone to stay in touch.
This trend, called fixed-mobile
substitution, is great news for the mobile operators, but it
potentially threatens the very existence of fixed-line
incumbents that cannot adapt. "It may take ten years or it may
take 15 years, but the PSTN will vanish," says Mikko J
Salminen, Nokia's director of fixed-mobile substitution.
Nokia has a vested interest in
hastening the decline of fixed-line telephony, of course. But
independent analysts are equally pessimistic.
"The prospects for traditional
voice telephony look bleak," says Katja Ruud of the Gartner
According to Forrester Research,
calls from fixed phones to local and national phone numbers
have been declining year-on-year in the UK since 1999. The
analyst says fixed telcos risk losing the business of between
20% and 25% of Europe's population to mobile operators.
Not surprisingly, incumbent
fixed-line operators are really worried about fixed-mobile
substitution, or FMS as some prefer to call it.
"Substitution of mobile for
wireline is having a significant impact on all operators," says
Julio Linares, head of wireline business at Telefónica,
Spain's former monopoly operator.
In developed economies, less than
10% of users go so far as to dispense with their existing
fixed-line connection. "Very few people will disconnect unless
they move house," says Gartner's Ruud.
But that is small comfort for the
wireline operators who see more traffic shift to mobile
networks seeing and are forced into an aggressive battle for
Current evidence suggests that it
is a battle that the mobile operators are clearly winning.
estimates that Spain's overall voice market is growing at 4% a
year but says that this new traffic is being captured entirely
by mobile operators. In addition, the fixed-line operators are
slowly but inexorably losing existing voice traffic through
substitution. The net result is that the share of the overall
voice market taken by wireline operators is declining
In Spain, 2003 was a watershed year
because mobile revenues surpassed those from fixed-line
telephones for the first time. The latter declined 3% to
€8.2bn, while mobile revenues grew 18% to €8.8bn.
Measured in terms of voice traffic,
the contrast is even more marked. While Spain's mobile traffic
soared 24% to 36.2 billion voice minutes, the traffic on
fixed-line networks declined almost 11% to 113 billion voice
minutes — the first year-on-year decline.
What is happening in Spain is also
occurring in many other countries, although the speed and
extent of FMS vary considerably.
Some of the highest FMS rates come
from central European countries like Hungary, where the fixed
network has suffered from decades of under-investment. In
emerging markets such as China, which traditionally have low
teledensity of fixed lines, mobile is often the only
"Some emerging markets are going to
bypass the developed countries in FMS," says Nokia's
Overall, industry estimates suggest
that fixed operators are losing on average 3-7% of their voice
revenues to mobile operators.
The trend looks likely to gather
momentum because, as mobile usage grows, users find they make
more calls to mobile phones. As Salminen points out,
fixed-to-mobile calls are invariably more expensive than
mobile-to-mobile, so users have an economic incentive to use
their mobile rather than their fixed-line phone to make calls
to mobile numbers.
Price is an important element in
driving FMS. Intense competition between mobile operators has
driven down the cost of mobile calls in recent years. On
average, however, mobile calls still cost much more than fixed
For example, Spain's fixed
operators collect an average of €0.07 for each voice
minute while mobile operators get four times as much.
This hefty price premium for mobile
calls exists in many countries, but it is not something that
users are generally aware of, says Gartner's Ruud.
Even if they are, price may be
outweighed by other considerations. For example, there is the
convenience factor. A fixed phone may not be to hand, while the
mobile invariably is. If someone calls you on your mobile
phone, it is simpler to return the call using your mobile,
rather than having to manually dial their number on a
Convenience is particularly
important in the work environment and seems to outweighs
economic considerations. According to research conducted for BT
by Dotecon, a London-based consultancy, around 43% of those who
make mobile calls at work do so because they are unable to find
a fixed line.
The tendency for employees to reach
for their mobile rather than their desk phone has started to
According to Marcel Dridge,
European managing director for Airespace, a maker of wireless
local area network equipment, around 35% of the cost of
equipping a workforce with mobile phones goes on calls made
from the corporate campus — calls that should be made
on PBX lines rather than mobiles.
Cut off fixed
One radical solution is to abandon
fixed-line infrastructure entirely. Nokia has done just that by
cutting off thousands of fixed lines in its head office in
Helsinki and giving its workers mobile phones instead.
Nokia estimates that each PBX line
costs around €30 to €40 a month in service costs. So,
the savings made on PBX costs combined with predicted
efficiency gains should compensate for Nokia's higher mobile
phone bills. Nokia believes other enterprises should follow
"You can save around 20% [of the
telecom budget] by getting rid of a PBX and going all the way
to mobile," says Nokia's Salminen.
Of course, the incumbent wireline
operators will do their best to discourage businesses and
consumers from cutting the cord. That is because fixed-line
voice is a "cash cow" business: it may no longer be growing but
it requires little investment and throws off plenty of
For example, revenues at Telecom
Italia's wireline business rose just 1% to €17.2 billion
in 2003. Capex spending, meanwhile, fell 7% and the ebidta
margin, which measures operational cash flow, increased by 1.3
percentage points to a mouth-watering 47.9%.
Even if fixed-line customers stop
making calls entirely, carriers reason they are still worth
keeping. For one thing, there is the line rental that customers
pay each month. For another, there is an intrinsic value in
maintaining existing customer relationships: it is much cheaper
to sell to your existing customers than to find new ones.
More importantly, incumbents know
that the copper loops that reach into millions of homes and
offices also provide them with a platform for future growth as
they can be upgraded with technologies such as DSL.
"The biggest asset of a wireline
company is the access network," says Telefónica's
As new entrants have discovered to
their cost, it is much easier to offer broadband services if
you already own the copper loops — and the
accompanying customer relationships — rather than
having to wrestle access to those loops from an incumbent
The incumbent operators believe
customer inertia and the introduction of new services such as
broadband will make most users reluctant to cancel their
fixed-line service. But the inexorable loss of voice minutes to
the FMS phenomenon is more difficult to counter.
The advent of 3G will, if anything
accelerate the trend. According to consultancy Analysys, 3G is
much more technically efficient at handling voice than 2G
networks which means 3G operators can potentially offer an
access cost per minute that is one fifth that of GSM.
"The introduction of 3G will
provide the necessary capacity, performance and cost of
customers to finally cut the cord," says Mark Heath, co-author
of a recent Analysys report on FMS.
In European countries such as the
UK and Sweden, Hutchinson 3G is heavily promoting the improved
voice capabilities of its fledgling 3G networks and
aggressively undercutting the voice tariffs of incumbent GSM
Analysts say that in the next few
years, mobile tariffs are likely to continue falling faster
than fixed-line tariffs, because of intense competition between
mobile operators and the extra capacity from 3G. As the "mobile
premium" reduces, users can justify making more calls on their
mobile handset, because of the greater convenience.
To counter this remorseless erosion
of fixed voice traffic, wireline operators can act in two main
areas: pricing and service innovation. Driving prices down
aggressively would win back more call minutes, but it is a
slippery slope and incumbents are likely to encounter stiff
So, many wireline operators are
instead trying to improve their service offerings and close the
feature gap between fixed and mobile service.
The most obvious way to emulate
mobile phone is to add the vital missing element of mobility to
a fixed-line service. Cordless phones have existing for many
years but their users have to remain within range of the base
BT believes it has overcome this
drawback with its Project Bluephone, currently being developed.
Bluephone is a Bluetooth-equipped mobile phone that will save
on call charges by using the fixed-line service when inside an
office or home, but will automatically switch to Vodafone's GSM
network when the user is out of range of the Bluetooth base
The service offers users the
convenience of a single handset, with a single number and voice
mail box, a single contact directory and one bill.
"You get exactly the same services
whether you are connected by Bluetooth or wireless," says Geoff
Haigh, chief technology officer of BT Mobility.
Korea Telecom offers a similar
service. Called Du, it is based on a CDMA2000 1x EV-DO handset
and automatically switches calls from the mobile network to
Korea Telecom's wireline network whenever the use comes within
range of the Bluetooth base station.
There is also much interest in
using wifi for this application and specialist vendors like
Airespace and Proxim see a big potential market.
Unlike Bluetooth, however, wifi was
designed originally for data not voice. Proprietary solutions
to this challenge exist, but most enterprises will prefer to
wait for the new 802.16e specification, which will allow WLANs
to handle voice traffic better.
Another wifi weakness is the high
power consumption which severely reduces the battery life of
wifi-equipped mobile handsets, according to BT's Haigh.
To promote the whole concept of
fixed-mobile convergence, BT recently teamed up with Korea
Telecom and a handful of other operators, both wireline and
wireless, to form the Fixed-Mobile Convergence Alliance.
"The value proposition for FMC is
appealing because users can maintain their mobile phones and
switch between fixed and mobile networks. But the big test the
FMCA has to face is that by bringing these two previously
separate revenue streams together, they do not end up shrinking
the overall market," says Gartner's Ruud.