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Has the iPhone improved the mobile operators’ business case? Strand Consult’s revisits its groundbreaking 2009 report “The Moment of Truth – a portrait of the iPhone”
Apple announced the iPhone on January 9, 2007, and released it in the United States on June 29, 2007. In 2009, Strand Consult produced the report The Moment of Truth – a portrait of the iPhone, which detailed how the iPhone had affected the market and the operators which made agreements with Apple.
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In 2009 Strand Consult documented that the operators which were the first to enter into exclusive agreements with Apple in 2007 (AT&T USA, Telia Denmark, Mobistar Belgium, Orange Austria, Singtel Australia, Singapore and about 100 other operators) had not increased their market share, revenue and earnings. The big winners in the short term, in addition to Apple, were the MVNOs that sold SIM-only products to customers who had purchased a subsidized iPhone from a mobile network operator.
In this note, Strand Consult revisits its reports and the facts since then, how the value chain has evolved since 2009, and the actors that make up the iPhone ecosystem. The research note covers:
- Stock market evolution and share performance: telecom vs. Apple
- How has ARPU evolved: mobile ARPU vs. OTT ARPU
- How have business models evolved during the period
- How have OTT strengthened their market position 2009-2023
- Mobile telecom operators’ challenges.
Stock market evolution and share performance: Telecom vs. Apple
The telecommunications industry is regulated down to the smallest detail. Mobile operators must pay for the spectrum they use. Entrance barriers to establishing a mobile operator are high.
Over the Top (OTT) providers like Apple, Alphabet, Amazon, Meta, Microsoft, Netflix, and others are not subject to the same regulation. This means that messages and calls sent via Facetime, WhatsApp and similar platforms are not subject to the same regulation (rules, standards, taxation, licensing etc.) as mobile voice calls and SMS, if at all. Moreover, telecom providers are restricted from commercializing their traffic in the way that OTTs players do. Regulation limits the ability of telecom providers to assess their traffic for advertising, cross-sells, and other offers. Asymmetrical regulation is a known problem between the telecom industry and OTTs. These and other factors like regulatory policy, industry dynamics, growth potential etc. impact share price.
In general, the telecommunications industry has performed poorly over the last 15 years. This can be attributed to the previously mentioned factors as well as firm management, mergers & acquisitions etc. In August 2020, Strand Consult observed in its research note “Politicians like Margrethe Vestager often fail to see the side effects of the “medicine” they propose – look at share prices for Telecom vs. Media vs. FANG+ shares” how telecom stocks had developed relative to big tech stocks shares (NYSE FANG+ Index) during the first 6 years Margrethe Vestager was the European Union’s commissioner for competition. The figures showed a share of the Morgan Stanley Capital International (MSCI) World Telecom Services Index yielded a total return of -6.8 percent (or a loss); the MSCI World Media & Entertainment Index; 72.53 percent; and the NYSE FANG+ Index, 474.32 percent. The analysis is still consistent 3 years hence. Share prices have not improved for telecommunications companies. In fact, the trends from the period 2014 to 2020 have been reinforced between 2020-2023.
From 1 Jan 2009 until today, European telecom stocks overall have achieved an 85% return on investment, the European stock market has returned 295%, and Apple has returned 7200%. The main part of the return from the European operators is related to Deutsche Telekom´s success in USA with T-Mobile, Vodafone´s jumbo dividend after the sale of Verizon, tower spinoffs, and other exceptional dividends. Capital returns are very poor if looking at share price only.
Telecom shares compared to Apple in the same period show even more extreme differences. Apple Inc. has grown 84 times more than European telecom industry. Much of the growth in sales of iPhones, especially in the first years, can be attributed to the fact that operators offered massive subsidies for the iPhone. These subsidies helped make the iPhone available to more people but undermined the profitability of telecommunications companies.
Since 2007, Apple stock has been a far better investment than telecom shares.
How has ARPU evolved: Mobile ARPU vs. OTT ARPU
Strand Consult reviewed the performance of average revenue per user (ARPU) for mobile operators which made exclusive deals for the iPhone for their respective markets and the performance of mobile operators in the US, Europe, and other regions. Presumably these operators believed that the exclusive deal would confer a financial benefit to their company, for example increase ARPU and/or market share. However, few operators, if any, succeeded. Rather mobile ARPU has declined since the launch of the iPhone. The specific figures are not favorable for shareholders in mobile operators.
Consider the results for 2007 to 2021:
In Australia, ARPU dropped from $39 in 2009 to $21 in 2021. In Austria, ARPU plummeted from $42 to $15; in Belgium, from $39 to $14; in Denmark, from $38 to $17; in Germany, from $27 to $13; in Singapore, from $32 to $17; in Sweden, from $36 to $18.
In the same period (2007 to 2021), the number of mobile subscribers in Western Europe grew from 474 million to 549 million; in the USA, from 223 million customers to 461 million customers. Meanwhile in Western Europe, revenue fell from €311b in 2011, to €278b in 2023. Total revenue in the US have grown from 144b$ 2007 to 254b$ in 2021, but ARPU per use declined from $51 to $44.
A part of the ARPU decline is related to operators having stopped subsidizing mobile phones, or have at least, reduced subsidies significantly – a general shift towards SIM-only tariffs.
US mobile operators have done a better job to protect cash flow than European. European operators experienced an erosion of their cash flow, which has had major consequences for their ability to invest and return on the investments they have made.
The story is very different for the leading OTTs, which have experienced increasing ARPU over time as well as a growing their user bases and their portfolio of products and apps. Using publicly available numbers from the US market in 2022 divided by reported number of users suggests that Alphabet earns more than $45 per month per US users on its ad platforms; Microsoft Bing and Xbox more than $30 per month; Amazon Display more than $20 per month, and Meta more than $16 per month. Indeed Netflix notes in its latest quarterly earnings report that it has doubled the price of its flagship product; today it’s US ARPU is $15.77. Together Disney+ and Hulu drive more than 8 in monthly ARPU for US users, and while numbers are difficult to come by, TikTok with more than 150 million users in USA, drives more than $3 in monthly ARPU. Apple’s US revenue is divided by its customers would exceeds a whopping $241 per month. These figures only capture a handful of the largest OTTs which account for as much as 80% of the traffic on US networks, not the long tail of OTTs which is also significant, albeit smaller.
For the period 2007 to 2021, OTT players have been able to increase revenue on individual products while also being able to launch new products that have given them new revenue streams.
In practical terms, ecosystem revenue has shifted from telecommunications companies to the OTT players. It has also grown with new subscribers which have come online. This means that much of the money that consumers have saved on their mobile phone bills in Europe went to OTT players. US operators have not experienced the same decline as European operators, and indeed, the protection of these revenue streams has likely allowed US mobile operators to continue investing in next generation networks, reaching a record $39 billion in 2022.
How have business models evolved during the period
Mobile telecom industry business models have changed little from 2007 to 2023. Mobile subscriptions typically offer a data package at flat and/or uniform rate. Few, if any, new products have been launched, which can in part be attributed to regulation which constrains telecom operators’ ability to compete.
The key change in 2023 is that most operators have stopped subsidizing mobile phones, or have at least, reduced subsidies significantly. Operational costs have been cut to compensate for declining revenues.
OTT players have innovated their business models with free, freemium, ad-supported, and subscription. They make it easy for end users to access their services. OTTs also engage in commercial agreements with each other to share revenue generated from customers.
Consider the app stores operated by Google and Apple, the classic two-sided market model. Google and Apple run the app store; they earn revenue from end users and app developers. Revenue is shared between the developer and the app store on ads, in purchases, and in other transactions. End users also purchase services directly from Google and Apple. OTTs have far more opportunities to make money than the telecommunications companies have.
How OTT players strengthened their market position 2009-2023
Top OTTs have strengthened their market positions significantly since 2009. Back then, Google’s annual revenue was $23.65 billion; Alphabet (constituted in 2015) made $282.836 billion in 2022, a 12-fold improvement. In 2009, Facebook had 0.360 billion active users; in 2022, now Meta, has 2.95 billion users and has grown revenue from $0.764 billion in in 2009 to $116.6 billion in annual revenues in 2022, up 165-fold. Apple’s annual revenues grew from $42.91B billion in 2009 to $394.22 billion in 2022. The telecommunications industry’s turnover has been virtually flat for the period, if not declining.
OTT revenue growth comes in part from new users, but also in increasing revenue of each user, as well as increasing the range of services by spreading across the value chain. Apple is more than a hardware company; it earns revenue from digital services including music, movies, and payments. Similarly, Alphabet, Amazon, and Microsoft expanded into cloud services. Netflix has expanded its streaming subscription service to offer ads and games.
Apple also earns a tidy sum, some $18 billion (a 36% revenue share on ads), by making Google the default search engine on its products. This bombshell was revealed in the court proceeding in the lawsuit brought by Epic Games against Google for in-app fees the Google Play store, a case in which Epic Games, maker of Fortnite, claims the Android operating system is a monopoly and won.
Such paid placement is not uncommon across different industries, but the issue is significant because telecom companies are either discouraged, if not prohibited by net neutrality rules, to engage is such paid placement arrangements.
Simply put, OTTs have also succeeded in getting their preferred regulatory policies imposed across countries. Whether free transit, free spectrum, liberal fair use policies, and other free rides, OTTs succeed to “regulate” their competitors and win favorable business conditions. Strand Consult’s report “Follow the Money – Net Neutrality Activism Around the Globe documents Big Tech’s global campaign to regulate the telecom industry”.
Mobile Telecom operators’ challenges
Telecom operators’ attempts to compete head on with OTTs have had limited success. A series of acquisitions to build or buy OTTs like Yahoo, have not worked out. There appears to be a different set of skills from selling personal data versus connectivity. More largely, however, regulation limits operators’ ability to launch new products, notably premium and enhanced services, including the access to OTTs which would not exist if not for telecom providers’ networks.
Whereas OTTs can evade many local challenges like taxation, licensing, regulatory fees, and local employment, operators face a daunting set of obligations in addition to the local requirements to establish infrastructure, which include but are not limited to building permission, siting, rental fees, and reviews for ensure compliance with environmental, aesthetic, historical, tribal, and cultural requirements.
Today, telecommunications companies are part of the local economy and contribute large tax revenues (spectrum, income tax, telecom taxes, etc.) In many countries, the telecommunications industry is among the largest taxpayers.
It should come as little surprise that shortfalls in broadband investment and adoption have been documented at a global, national, and local levels by multiple sources. The 2021 report from the International Telecommunications Union and UNESCO suggests a global broadband network investment gap of USD $428 billion-$2 trillion and calls for broadening the base of financial contributions, particularly OTTs.
The United Nations Digital Inclusion report observes that broadband enables people to access essential services for health care, employment, education, and other essential services. The Covid pandemic increased the urgency for universal broadband as people had to learn, work, and receive healthcare from home. More largely, the internet increasingly drives the economy and productivity and is becoming the key medium for the delivery of government services. Despite broadband being more important and necessary than ever, adoption efforts have stalled at 3.7 billion people, half of the world’s population for lack of access and affordability.
The need to find solutions has led policymakers to revisit broadband cost recovery, the rational process to recuperate expense to build/run broadband infrastructure. The includes but is not limited to rebooting business models to earn revenue for network investment, whether improving the methodology of subscriptions, data usage charges, cross-sells, and advertising and ancillary services. Relatedly, nations revisit their universal service funds to see whether and how OTTs should be included. Read Strand Consult’s research note about the ground breaking bipartisan bill in USA or the promulgation of network usage fees in South Korea.
An emergent concept for broadband investment is “fair share” which refers to the equitable, proportionate distribution or allocation of resources, responsibilities, costs, or benefits among entities based on criteria or principles. Pedigrees for these models are based on economic policy or social welfare programs for funds, opportunities, or services) based on need; taxation based on the equitable distribution of tax burdens based on proportional income/wealth; corporate social responsibility in which entities contribute proportionately, equitably based on their capabilities, resources, commitments, and the environmental context which suggests that OTTs must be responsible stewards of bandwidth.
Strand Consult tracks these developments as part of its Global Project for Broadband Cost Recovery, Connectivity, and Fair Share. Strand Consult informs the policy development with evidence-based assessments, policy research, and transparency efforts. This information helps operators and policymakers understand the problem at local and global levels and compare the pros and cons of different policy solutions, whether market-based, regulated, philanthropic, or financial.
Conclusion
Since its launch in 2007, the iPhone has been a game changer. While it has transformed Apple into one of the world’s richest enterprises, it has created little value for shareholders of telecom companies.
For more than 26 years, Strand Consult has analyzed the global mobile telecommunications industry. Strand Consult describes how regulation affects the telecommunications industry and its ability to grow and compete.
Get a free copy of Strand Consult’s report The Moment of Truth – a portrait of the iPhone from 2009 here. For more information about broadband cost recovery and fair share, check out Strand Consult’s Global Project for Broadband Cost Recovery, Connectivity, and Fair Share.
