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Summary

How can disruptors, including smaller players and new entrants, take market share without competing on price alone? Tele2 Netherlands, a 4G-only new entrant, and US market challenger T-Mobile US each this week provided answers to this question. Although not entirely new, their latest pricing approaches seek to offer innovative ways to compete in the fastest growing market for mobile operators: data.

Coverage and pricing: Tele2 lays a solid foundation to build on

To meet license obligations, Tele2 had to launch 4G in the Netherlands by January 2015 (although this was kept low key as Tele2 continued to build its network and migrate its MVNO users). Tele2 now has widespread coverage and pricing focused on value rather than just being the cheapest.

Unusually for many new-entrant network operators, Tele2 can compete head-on with the incumbents for the entire market’s user base. Tele2 is targeting a 20% revenue market share within five years of launch, although it will need to be extremely effective in capturing high-value users if it is to succeed. Tele2 has laid a solid foundation with its network and pricing strategy.

Tele2’s LTE network now covers 92% 4G population outdoors, with nationwide population coverage expected by end-1Q16. Tele2’s strong coverage means it can market its services nationwide, allowing it to compete with major MNO rivals for market share. Key to Tele2’s success are its spectrum holdings, in particular its capex-efficient 800MHz spectrum. The operator has 2×10MHz in the 800MHz band and 2×20MHz at 2.6GHz. It also paid significantly less than Vodafone and KPN for its spectrum. This means it can invest aggressively in network rollout and enjoy better 4G ROI with a lower amount of invested capital to pay back.

Tele2 believes that there is untapped demand for mobile broadband in the Netherlands, a market with very high mobile tariffs, which Tele2’s pricing strategy will address. Tele2’s data-only 4G service will offer higher data bundles at a lower cost than rivals. Although low prices are clearly central to Tele2’s strategy, equally important are its higher value tariffs which are focused on the amount of data offered. The largest data bundle offers a 24GB monthly allowance with unlimited voice/SMS for a monthly cost of €35 ($38). By comparison, Vodafone – the second-largest Dutch operator – offers 7GB of data and unlimited voice and SMS for €36 per month as its highest monthly GB package. KPN’s highest monthly 10GB SIM-only package is priced at €42.50 ($45.70), including Spotify access and unlimited SMS and calls.

Tele2 – which launched MVNO services in 2001 using T-Mobile’s network – is not only looking to compete on price. The operator’s LTE-A network offers download speeds up to 225Mbps – a clear play for the high-end of the market where quality of mobile broadband experience is increasingly important. LTE-A is not a unique differentiator for Tele2 because Vodafone and KPN have each launched it. However, Tele2 can compete to offer the best mobile broadband experience. The operator hasn’t disclosed how widespread LTE-A is, but it should try to enable it across as much of its network as possible, as quickly as possible, to maximize its ability to compete with rivals (providing it has the financial ability to do so). Because the majority of operators rolled out 4G networks in 2014, Tele2’s will feature the most up-to-date technology standards, enabling a direct path to LTE-A as well as VoLTE.

Tele2 will launch VoLTE services next year. The industry is still facing significant technical challenges in enabling VoLTE interoperability, and the ecosystem remains small. This means VoLTE-to-VoLTE calls will only happen between Tele2 users with certain high-end smartphones. Although this clearly limits the appeal of VoLTE in the near term, a wider range of VoLTE devices will come to market, along with more widely available solutions to current interoperability problems.

Next year the global VoLTE market will gather momentum, and Tele2 must position itself to take advantage of VoLTE interoperability and a growing ecosystem to offer 4G voice. VoLTE will enable Tele2 to improve its margins because it will rely less on MVNO voice services – a strong near-term driver for Tele2 to launch VoLTE. Tele2’s launch timing puts it in a strong position to capture consumers’ interests, if it markets the benefits of VoLTE’s enhanced services effectively.

Zero-rating content: T-Mobile US plays the market

T-Mobile US – the second smallest cellco in the US and self-styled disruptor with its “Un-carrier” challenger strategy – has zero-rated a wide range of premium content for its LTE data users. This means that subscribers to many popular content services will not need to use their data allowances to stream services over 4G. Given that T-Mobile already zero-rates music-streaming content, the move is nothing more than a natural progression. But the wide-ranging content partners T-Mobile had at launch (including HBO, Hulu, and Netflix) means that it has a good chance of making an impact on the market. T-Mobile is also zero-rating access to Verizon’s Go90 and AT&T’s DirecTV streaming service to T-Mobile 4G subscribers.

Given the importance of TV and music, 4G operators are looking to differentiate with exclusive access to content. Although T-Mobile isn’t offering access to content on an exclusive basis, it is the only operator in the US currently offering zero-rated access to it. This gives it a clear platform to differentiate from and is an approach that other cellcos, not just new entrants, should consider.

Like Tele2, T-Mobile has invested in its network to be able to offer zero-rated video streaming while minimizing the impact it has on overall network quality. The technology underpinning T-Mobile’s zero-rated video content optimizes video for mobile screens, minimizing data consumption while still delivering DVD-or-better quality (i.e. 480p or better, according to the operator).

If T-Mobile continues to innovate on pricing and services and continues to market effectively, it can expect to take market share from its larger rivals. The operator’s net revenue grew by 27.1% year on year in 3Q15 to €7.1bn ($7.7bn). Its latest zero-rating initiative reinforces its ability to compete in the US 4G market. Using optimization significantly improves the commercial viability of T-Mobile’s zero-rating strategy because without this it would place too much of a burden on the network. Other players looking to disrupt should consider using optimization to enable new business models by utilizing the reduced cost of traffic.

Appendix

Further reading

VoLTE: Bringing Voice Back Into the Spotlight,TE0009-001414 (October 2015)

T-Mobile's Un-carrier Strategy: Assessing the Impact,TE0009-001404 (April 2015)

LTE Launch Case Study: Tele2 Netherlands,TE011-001360 (March 2014)

Author

Paul Lambert, Senior Analyst, Service Providers & Markets

paul.lambert@ovum.com

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