Smartphone Strategies: How Devices Can Revitalize the Role of Operators in the Mobile Ecosystem

Table Of Contents
Table of contents 3
Table of exhibits 5
Executive summary 7
Section 1: Introduction 10
1.1 Business context: In the land of the smartphone revolution 10
Smartphones are rapidly turning the mobile industry software-centric, with the rise of app stores having adverse effects on mobile operators' business 12
Power and revenue shifts prompt mobile operators to take action 14
1.2 Report objective, structure and definitions 16
Definitions 16
Section 2: Device strategies - key to reinventing mobile operators in an industry transfigured by smartphones 18
2.1 How the rise of OS ecosystems changed mobile operators' position in the industry and what they can rely on to fight back 18
Despite the changes, mobile operators still have strengths they can draw on to reinvent their device strategies and regain lost market relevance 23
2.2 Device strategies: realigning mobile operators' business and redefining their role in the disrupted mobile industry 28
Distribution strategy: mobile operators' role in device retail 28
An experiential sales approach is vital to deepening operators' involvement in device retail and contributes to smartphone penetration growth 31
Smartphones are leading many emerging-market operators to increase their involvement in handset distribution and expand their retail chains 32
Using device partnerships can help mobile operators influence the existing OS ecosystem duopoly that comfortably rules the industry. 33
Profit pressures stemming from smartphone subsidies suggest that mobile operators should consider alternative business models 34
Telefónica in Spain shows unsubsidized handsets combined with device financing is a viable business model 37
Some emerging market operators combine subsidies with more affordable smartphones to improve penetration and profitability 38
Mobile operators increasingly use alternative business models such as reverse subsidies, “buy-back and trade-in” and handset leasing 38
Other players can offer handset financing in place of the mobile operator 42
Own-brand device strategies help strengthen operator market influence 43
Device customization can raise the profile of operator data services, giving them an edge over OTT players 46
New devices, such as tablets, open new business opportunities for operators 47
Data sharing plans are proving effective at attracting new devices 49
To fight the threat from OS ecosystems and OTTs, operators must adopt strategies where software is vital and where devices are an important tool 50
The acquisition of software skills is important to the future of mobile operators, affecting in particular their device strategy 52
Rich communications fully integrated with devices and networks may be key in mobile operators' battle against OTT communication providers 52
Multiscreen: mobile operators' advantage over OTT service providers 55
Partnering with OTTs may also be an option when fighting the impending OTT menace, using models such as toll-free data access to apps 56
2.3 Conclusions, recommendations and emerging trends 58
Section 3: Operator case studies 62
3.1 ATandT: The first iPhone supporter rethinks its smartphone subsidy as competition weighs on revenue and profits 63
ATandT embraced iPhone exclusivity in order to become more competitive, attract new customers and create new revenue opportunities 64
The iPhone strategy had benefits but also caveats, revealed by the loss of exclusivity, which eventually prompted ATandT to take action to curb mounting profitability pressures 66
ATandT's strategy readjustments are starting to show results, but more change is to come as the market evolves toward lower subsidies - or none 69
3.2 MTS: boosts smartphone penetration without subsidies 73
A ban on device subsidies challenges MTS as it seeks to expand smartphone uptake across its footprint 74
MTS drew up a new strategy to face challenges and pursue the data opportunity 75
Increased retail presence, vendor partnerships, own-brand devices and financing options such as reverse subsidies were decisive in strategy rollout 76
New device strategy is producing good results, contributing decisively for increased smartphone uptake and revenue growth 78
3.3 Telefónica: Discontinuing subsidies in Spain and supporting Mozilla's Firefox OS to pursue data opportunity in Latin America 81
Discontinuing subsidies as a part of its New Commercial Model in Spain 83
The no-subsidy strategy has had mixed results 87
Supporting Mozilla to pursue data opportunity in Latin America 93
3.4 China Unicom: expanding value chain presence while using affordable smartphones to drive 3G and gain market share 99
Using smartphones and data services to boost its competitiveness in the market 100
Affordable handsets proved key to boosting 3G uptake in a strategy based on crucial retail and vendor partnerships 101
Strategic results for China Unicom 104
3.5 Orange: Using scale to build partnerships and develop an own-brand device ecosystem, reinforcing its value chain position 108
Orange's device strategy uses scale to build beneficial partnerships 109
A global unit coordinates handset procurement and related partnerships, supporting local operations in delivering attractive devices that drive demand 110
Valuable vendor partnerships and an own-brand device ecosystem has strengthened Orange's position in the value chain 111
Own-brand devices and customization also support the growth of Orange's data services offering, beefed up by content partnerships 114
Companies mentioned 116
Acronyms and abbreviations 117
Related resources 118
List Of Tables
Table of exhibits
Exhibit 1: Smartphone share of total handset sales - global and by region 11
Exhibit 2: Data as a share of total mobile ARPS, globally and by region 12
Exhibit 3: Comparison of EBITDA evolution among selected global mobile operators and Apple 15
Exhibit 4: Central role of mobile operators in pre-iPhone mobile services value chain 19
Exhibit 5: Partial marginalization of mobile operators in today's post-iPhone mobile services value chain 20
Exhibit 6: iOS and Android devices and app stores 21
Exhibit 7: SWOT analysis of mobile operator device strategies in developed markets 24
Exhibit 8: SWOT analysis of mobile operator device strategies in emerging markets 25
Exhibit 9: High-involvement and low-involvement distribution strategies and their pros and cons 30
Exhibit 10: Mobile churn levels in developed and emerging markets, 2012 31
Exhibit 11: Vodafone India store revamped under 'Retail of Tomorrow' initiative 32
Exhibit 12: “Windows Demo Zones” in MTS retail shops, promoting experimentation with devices 33
Exhibit 13: Evolution of average handset and smartphone prices globally, 2008-2012 35
Exhibit 14: Vodafone Red offerings allowing greater customization - UK 37
Exhibit 15: Aircel iPhone 4 reverse subsidies offered in May 2011 40
Exhibit 16: Vodafone UK handset lease 'Red Hot' offering - August 2013 42
Exhibit 17: Samsung Galaxy S4 trade-in discounts and financing in India 43
Exhibit 18: Example of ODMs working with mobile operators 44
Exhibit 19: Comparison of Vodafone own-brand smartphones with similar branded devices in the UK 45
Exhibit 20: T-Mobile Germany mobile video service, including access to football TV channels and exclusive content 47
Exhibit 21: Amazon Kindle Fire HD and promotional price comparison 48
Exhibit 22: Verizon Wireless Share Everything® data sharing plans, offering a common data allowance and unlimited voice and texting across devices 50
Exhibit 23: Firefox OS, Mozilla's new mobile OS 51
Exhibit 24: Telefónica Digital, Telefónica's innovation-focused business unit, supporting the development of Firefox OS devices 52
Exhibit 25: Standard services and potential service extensions of RCS-e communications 54
Exhibit 26: ATandT's U-verse multiscreen converged offering, including pay-TV 55
Exhibit 27: Customized smartphones with specific Facebook access 56
Exhibit 28: China Unicom's SIM-only offering, which includes a data allowance for Tencent's WeChat OTT messaging app 58
Exhibit 29: Global smartphone and feature phone sell-through projections, 2012-2018 61
Exhibit 30: Smartphone unit sell-through shares of emerging and developed markets, 2012-2018 61
Exhibit 31: Mobile operator included in the case studies, with geographic footprints, subscriber bases and device strategy experience 62
Exhibit 32: ATandT's current smartphone portfolio by vendor - August 2013 63
Exhibit 33: Total subscribers and churn evolution of ATandT, 2005-2012 65
Exhibit 34: ATandT Mobility's total ARPS, data ARPS and year-on-year change, 2005-2012 66
Exhibit 35: ATandT Mobility's total equipment revenue, and year-on-year change in equipment revenue and cost of equipment sales 68
Exhibit 36: ATandT Mobility's EBITDA margin and service revenue evolution 69
Exhibit 37: ATandT trade-in program providing cash for purchases or donations 70
Exhibit 38: ATandT Mobile Share - a bucket of data shared among multiple devices and account members 71
Exhibit 39: MTS Russia's smartphone portfolio by vendor, August 2013 73
Exhibit 40: MTS 3i strategy launched in 2009 75
Exhibit 41: MTS's flagship retail store 76
Exhibit 42: MTS own-brand devices - MTS S7 Tablet, MTS 960 and the most recent MTS 970 smartphone 78
Exhibit 43: MTS's non-messaging data ARPS and mobile Internet penetration 79
Exhibit 44: MTS's OIBDA margin evolution from 2006 to 2012 80
Exhibit 45: Telefónica Spain smartphone portfolio by vendor, August 2013 82
Exhibit 46: Telefónica Spain's New Commercial Model 84
Exhibit 47: Telefónica Spain's total ARPS, data ARPS and adjusted OIBDA margin, 2008-2011 85
Exhibit 48: Example of an online product offer by Telefónica Spain stressing the monthly installment cost of the new Samsung Galaxy 4 87
Exhibit 49: Quarterly market shares of mobile operators in Spain 88
Exhibit 50: Cost of subsidized and unsubsidized 16GB iPhone 5s with mobile services at equivalent voice and data service levels over 24 months, May 2013 88
Exhibit 51: Cost of 16GB iPhone 5 and 24 months of mobile service, subsidized and unsubsidized at cheapest available service level, May 2013 89
Exhibit 52: Telefónica Spain's quarterly mobile service and handset revenue, and mobile subscriber trends 91
Exhibit 53: Telefónica Spain's quarterly OIBDA margin evolution 92
Exhibit 54: Mozilla partner support: mobile operators and vendors 95
Exhibit 55: Mozilla partner support: content providers 96
Exhibit 56: First Firefox OS devices: ZTE Open and Alcatel One Touch Fire 97
Exhibit 57: China Unicom smartphone portfolio by vendor, August 2013 99
Exhibit 58: China Unicom launched 3G in October 2009 under the Wo brand 100
Exhibit 59: China Unicom's subsidy costs and 3G net additions, Q4 2009 to Q1 2013 102
Exhibit 60: China Unicom's customized low-cost (1,000 yuan) smartphones 103
Exhibit 61: China Unicom's 3G ARPS, total ARPS, 3G subscriptions and total subscriptions, 2009-2012 105
Exhibit 62: China Unicom's subsidy costs and EBTDA margins, 2009-2012 106
Exhibit 63: Orange's smartphone portfolios in France and Spain combined, by vendor, August 2013 108
Exhibit 64: Orange's global operational footprint 109
Exhibit 65: Examples of Orange own-brand entry-level smartphones 113
Exhibit 66: Examples of Orange own-brand advanced smartphones 113
Exhibit 67: MyOrange app, providing smartphone customization 115
List Of Figures
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