More collaboration on the value chain: a must to resist competitive pressure and to find growth... To drive ARPU (average revenue per user), European telecom operators carriers have to forge partnerships and enter win/win alliances rather than attempting to dominate the whole value chain, according to the sixth annual research report, 'Caution - work ahead', published by Exane BNP Paribas and Arthur D Little, based on 86 interviews in 13 European countries. At this stage, mobile data growth has not been strong enough to offset the accelerated decline in mobile voice ARPU - leading to decelerating revenues and decreasing margins for most European operators. The conflicting relationships between mobile operators and content owners/producers have been one of the major barriers to growth so far, creating an unfruitful ecosystem, where mobile contents & services are overpriced, have a substandard quality and do not fit with the specific needs of mobile users. In order to drive growth in mobile data, operators have to partner with Media & Internet leaders to offer preloaded handset applications, selected innovative embedded applications and interaction with existing internet applications, while launching flat fee & quadruple-play tariffs. "We believe that mobile data revenues will accelerate in the coming years, with data ARPU up from EUR5/month in 2006 to almost EUR9/month in 2010, but that the share of the market captured by operators will inevitably decline", says Antoine Pradayrol, author of the report and head of the telecom team at Exane BNP Paribas in London. Collaboration with other players on the value chain will also be used to reduce costs, a must in this industry. Operators will more and more outsource and/or share network parts. For instance, only 20% of mobile masts are being outsourced in Europe compared to 80% in the USA. According to Richard Swinford, a manager in the Arthur D. Little telecom team, "the outsourcing of passive or active infrastructures and network sharing, can increase carriers' operating free cash flow, by up to 10%". Partnerships with MVNO (mobile virtual network operator) and the development of proactive multi-branding strategies is another way to gain market share and expand in new markets without massive investment. ...but not risk free While the collaboration with new players in the value chain appears inevitable, it is not without risks in the long run. In two to three years, Internet players could become real competitors to the mobile operators. Internet giants Google and Yahoo! are not only seeking partnership with mobile operators but are also trying to develop services independently of them. The main battle fought between the mobile operators and Internet players will be over new communication services (e.g. instant messaging), content services (e.g. TV and music), and user-generated content. "If Internet majors managed in 2010 to capture 2% of voice revenues and 15% of data revenues, they would capture all the forecasted 2006-2010 revenue growth of European operators", warns Jean-Luc Cyrot, co-author of the report and director in the Telecom team of Arthur D. Little. At the same time, independent MVNOs with large subscriber bases could put increasing pressure on network operators' wholesale prices and ultimately lend a negative impact on the market. Work ahead The balance of power is presently in favour of operators as they still have considerable financial power compared to media and Internet groups. Therefore telecom operators must leverage their bargaining power to convert foes into friends, whilst they have the opportunity to do so. This situation is mostly true for leading telecom operators, which will be fighting back intensively in 2007. Incumbent operators will reinvest massively in the purchase of content, the deployment of fibre and the launch of convergent offers, with the aim to create new barriers to entry. Leading mobile operators will develop wholesale offers and build quadruple play offers, through partnerships or mergers with alternative operators. Alternative operators should benefit from the macro sector trends, providing that they take the risk of investing (in FTTx and convergence). On the contrary, challengers, fixed and mobile, which do not have critical mass, will face a great pressure in 2007 and beyond. As such, M&A activity is likely to accelerate between small fixed, mobile and Internet players. Reproduction of all or part of the research note must be preceded by "according to Arthur D. Little and Exane BNP Paribas".