Networks Battle Internet Messaging Rivals

KPN’s Disclosure of Substitution Prompts Operators to Review Tariffs

After KPN’s revelation in its 1Q11 results that SMS and voice revenue had dipped, largely because of greater use of IP-based services, I kept a keen eye out during the 2Q11 reporting season. I wanted to see to what extent, if any, other operators had also been affected by this phenomenon.

In April, KPN reported that communications services such as WhatsApp and BlackBerry Messenger were behind customers’ lower usage of out-of-bundle text messages and voice minutes. This contributed to a 3 percent decline in revenue for its domestic business.

Unlike in Germany and Belgium, where KPN’s E-Plus and Base brands offer more bundled texts and minutes, the company’s less-generous tariff structure in the Netherlands encouraged savvy customers to seek better-value alternatives.

Almost as soon as KPN identified the problem, it brought in new tariffs and upgraded customers to bigger bundles. For its KPN brand, new packages range from €20 a month for 100 inclusive texts and voice minutes to €152.50 a month for 1,500 texts and minutes and 2GB of data. New tariffs in its Hi brand, aimed at the youth market, range from €17.50 to €157.50, with some including unlimited texts.

Swiftly implemented tariff redesigns should help prevent further defections, but it’ll be harder for KPN to win back subscribers who have embraced the new messaging services and established their own communities. If these users are already a part of groups with friends, family or colleagues, what reason is there for them to return?

With the emergence of disruptive services such as Facebook’s new messaging application, it comes as no surprise that many operators made such services a major feature of their results in 2Q11. Some claimed to have been unaffected so far, but all are sure to have carefully reviewed their tariff structure. Those with higher out-of-bundle figures reacted swiftest in a bid to protect these traditional sources of revenue by restructuring tariff plans.

Once again, all operators reported strong sales of smartphones. While smartphones have undeniably boosted sales of data plans, their prevalence is arguably threatening the future of the humble text message, for so long an important contributor to revenue.

Vodafone said that it had seen minimal impact from other message services on its results. It reported messaging revenue grew 6.9 percent in Europe in the year to 2Q11. However, CEO Vittorio Colao referred many times to Vodafone’s strategy to move to integrated voice, text and data plans. He was clearly concerned about a potential dip, as he highlighted how 18 percent of Vodafone’s mobile revenue in Europe is currently out-of-bundle or from incoming communications, and therefore exposed to substitution.

T-Mobile has taken a similar position. It said that 15 percent of service revenue in Germany is accounted for by contract out-of-bundle sources, and it’s introducing new bundled tariffs in an effort to safeguard text messaging revenue.

In France, Orange said that its existing tariff structure has largely protected it from harm and it sees no reason to change plans. Like the other French operators, Orange includes a large numbers of texts and voice minutes in its tariffs. Average revenue per user from messaging grew by more than 13 percent in France in 2Q11, excluding the impact of regulation. In its other markets, Orange believes that its position as a premium brand, offering high-end tariffs, should ensure it’s protected from a switch to alternative services.

Telefonica said that it’s been largely unaffected thanks to existing tiered pricing, with text messaging growing in “single digits” year-on-year. TIM also said that it has not seen any substitution, although its messaging revenue has been hit by reduced prices.

As for KPN, CEO Eelco Blok told investors that its initial measures to contain the trend had been “successful”, but a worrying 22 percent of service revenue is still being generated out-of-bundle. A further challenge for KPN is a recent law in the Netherlands that prevents operators from blocking or charging extra for Skype and other Internet-based communications services.

As voice revenue across Europe continues to be hit by the tough economic conditions and by cuts in mobile termination rates, a surge in data revenue has been one of the brighter spots in operators’ reports this year. Moves to safeguard income from out-of-bundle texts and calls will remain a central strategic focus in the coming quarters.