Business Watch: Service revenue struggles to shake recession

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First the good news. Mobile industry service revenue growth improved across Europe in the Christmas quarter, according to industry experts Enders Analysis.

Now the bad news. By “improved growth”, Enders only means that revenues fell less than in the previous quarter the same year.

Worse still, things are going to get tougher this year as enforced price cuts by regulators start to kick in.

Enders’ work study of revenue growth trends for mobile operators in the top five European markets – the UK, Germany, France, Italy and Spain – shows that service revenue growth improved in Q4 2010, but only by a little, improving by 0.1 per cent on a reported basis and 0.2 per cent on an underlying basis.

According to Enders’ James Barford: “The post-recession recovery is still very slow; before (and during) the recession underlying mobile service revenue grew at an average of 3.5 percentage points faster than gross domestic product, but now its growth is equal to GDP.

“Only the UK now enjoys a significant growth premium to GDP (three per cent), with Italy and Spain at minus-three per cent and minus-four per cent respectively.

This is, hopefully, a delayed reaction rather than a permanent change, but when this delay might be caught up with is very uncertain.”

Smartphone sales are ballooning as a proportion of overall handset sales, which should catapult data usage higher but, worryingly for operators such as Vodafone, O2, Orange, T-Mobile and Three, “Their impact on revenue growth is much harder to see, with substantially all of the improvement in revenue growth over the last year coming from old fashioned voice and text.”

Three’s radical move

And the grimmer news is voice revenues are set to take a kick from the latest round of mobile termination rate cuts. Severe cuts in Germany and the UK are likely to hit revenue growth hard over the next few quarters.

“The short-term outlook is therefore bleak,” concludes a grim-sounding Barford.

In its drive to steal customers from larger rivals, Three is doing its bit for lower industry growth by offering “all you can eat” PAYG data tariffs to pre-paid punters.

The radical move is totally against the trend, which has seen O2, Vodafone and Everything Everywhere (owner of T-Mobile and Orange) now starting to penalise very heavy downloaders.

For just £15 a month, Three’s PAYG customers can download as much data as they like – the company said it would enable customers to “set their smartphones free and still stay in control of their spending”.

Three, which launched similar data plans for its contract customers a couple of months ago, claims its network is better able to cope with data surges than those of its rivals.

It’s true that networks such as that of 02 have struggled to deal with the explosion of data usage on iPhones.

But it’s also true that Three has fewer customers, so its network is far less full than its rivals, giving it a unique selling point.

The question is, can it make the new pricing model into a profitable one?

One man who’s developed a profitable pricing model for himself is Stephen Elop.

It’s emerged that the new Nokia chief executive received a £3.7 million “golden hello” when he left Microsoft last year to try to turn around the world’s largest mobile phone company.

On top of the £1.85 million-plus he got on his appointment, the Canadian is due another £1.85 million next October “as compensation for lost income” from the Seattle-based software giant, where he was head of the business division.

Elop, the first non-Finnish national to run the mobile phone giant, also got more than £437,000 to reimburse fees he was obliged to repay Microsoft, and £272,860 to cover legal expenses.

Meanwhile, the man he replaced, Olli-Pekka Kallasvuo – who was ousted due to poor share price and Nokia’s market share losses – got a payout of £4.04 million but had to give up nearly £12.2 million in pension payments, stock and options because of his departure.

Daunting task

Nokia’s annual filing with the US Securities and Exchange Commission also does a rather good job at spelling out the scale of the task facing his successor.

It admits that Elop’s plans to get into bed with Microsoft and use his former employer’s operating system for Nokia’s mobile phones is a risky venture.

Nokia, you will remember, has been shedding market share like nobody’s business to Apple and Google in the smartphone operating system market.

The SEC filing says that: “The Windows Phone is a very recent, largely unproven addition to the market.” It also says Windows Phone currently has “very low adoption and consumer awareness relative to the Android and Apple platforms”.

It even admits that Nokia’s partnership with Microsoft may not become a “sufficiently broad competitive smartphone platform”.

Not only that, but Nokia said the Microsoft alliance could erode its brand identity in markets where it is dominant, and may not add to the brand identity in a market where it is already weak.

Of course, these are the kind of legal warnings companies insert into their US filings these days: in the wake of the scandals of the global financial crisis, corporates are ultra-wary of exposing themselves to class-action law suits from investors who claim they weren’t warned of the full risks associated with the companies they lost money on.

So they should be taken with a pinch of salt. But it’s clear Elop will be worth his golden hello, his million-pound salary and his potentially huge bonuses, if he can make this strategy pay off and transform Nokia’s fortunes.

The company’s long-suffering shareholders would finally have something to smile about, too.

Meanwhile, a tiny Finnish company has shown where some of the best growth is in mobile these days: games.

Rovio, the company that created the addictive iPhone game Angry Birds, has raised £26 million from investors to expand and develop more games.

More than 40 million people have started playing the game since it was launched just 15 months ago: it’s the kind of growth Nokia would kill for.

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