End of the fixed line as mobiles rule the world

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You know it, but if you're in the fixed-line business you hardly dare admit it. People are dropping their fixed phone lines and just using their mobiles. It's even happening at work — in Nokia, anyway. Geoff Nairn looks at this growing trend

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.

Bleak prospects

"The prospects for traditional voice telephony look bleak," says Katja Ruud of the Gartner Group.

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 voice minutes.

Current evidence suggests that it is a battle that the mobile operators are clearly winning.

Telefónica's Linares 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 sharply.

Fixed revenues decline

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.

Emerging markets

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 choice.

"Some emerging markets are going to bypass the developed countries in FMS," says Nokia's Salminen.

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 line calls.

For example, Spain's fixed operators collect an average of €0.07 for each voice minute while mobile operators get four times as much.

Price premium

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 fixed-line phone.

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 worry corporations.

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 lines

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 suit.

"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 cash.

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%.

Line rental

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 Linares.

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 operator.

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.

Undercut tariffs

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 operators.

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 regulatory opposition.

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 station.

Project Bluephone

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 station.

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. GTB