One of the big questions being asked today is what is the impact of 3G / 4G data substituting traditional communication technologies – Voice and SMS on operators’ bottomlines. The data growth story is widely regarded as positive for operators where the growth of data can help support higher profitability, but we do not have enough data to quantify this statement.
While data substitution occurs over a period of time, for the purposes of our analysis we take an extreme scenario, and assume a scenario where all voice and all SMS are substituted by data (VOIP and IM). It is important to note that the impact of data substitution will vary by market and how price plans are structured as well as the different starting points and mixes of services (voice/SMS/data). How carriers price data will make all the difference on the ultimate profit impact ?
Voice call to be substituted by VOIP and SMS by Instant Messenger Apps. Voice is a major revenue contributor for most mobile operators and is as high as 75% of its overall revenues followed by SMS and in some cases Data Services.
Voice/SMS to VOIP/IM substitution turns these minutes and messages into MB – a common unit that allows a like for like comparison. Voice calls are analog based, versus digital data. To convert analog waves into digital data a CODEC (coder-decoder) is used. There are different codecs available for VOIP. The data consumption over VOIP is a function of the codec used and duration. Bit rate is based on the codec and the number of bits per second that need to be transmitted to deliver a voice call. In the context of Indian Market, it’ll approximately cost just Rs 0.25 / MB for a Skype Voice Call.
SMS Vs IM Apps – IM App usage will be much cheaper than SMS which are still regulated and are charged a hefty sum despite urging TRAI to cut tariffs on the same.
Thus in our view data substitution is negative for revenue. However, one of the biggest benefits that is often cited about the move to data is the spectral efficiency leading to network cost savings. This means that the decline in topline revenue could be compensated for on the cost side.
The following Figure illustrates the cost saved by Telcos from move to 3G/4G as illustrated by Nathan Ramler in Climbing the data staircase. 
Moving from UMTS to HSPA reduces the cost of delivery per MB by 50%. This results in lower network maintenance expenses.
We note that the decline in topline revenue would take significant cost savings to see a net positive for Mobile on the bottom line. To put this decline in perspective, the total opex would have to decline by 50% – a significant structural shift in opex structure for the company to remain profitable.
Note: This is just a theoretical study on what will happen if everybody migrated to High Speed Data Networks which is not going to happen immediately but shows that Data will Cannibalize Telcos Revenue over the next few years.
Hi Chetan,
Interesting article. Few comments:
1. You have rightly pointed out that data substitution is negative for the scenario where voice/SMS is no longer handled by operator but by OTT player with operator only getting revenue for Data (bit) carriage irrespective of application.
2. It is therefore important for operator to “own” voice as an integrated service on its LTE service and not allow it to be cannibalized by OTT voice like Skype. It may be noted that LTE provides for VoLTE service that is native application on the handset and gets well defined QoS. Compared to this VoIP through Skype will be treated as any other data flow getting Best Effort QoS.
3. With VoLTE the number of simultaneous call per BTS is significantly higher compared to a 3G BTS thereby providing significant capacity gains to the operator.
4. Bottomline from my perspective is that LTE technology provides various nuts bolts to the operators to compete against OTT voice. It is upto them to exploit it in their favor through right strategies.
Thanks.
Just wondering why is the Calls per BTS Higher with LTE and Lower for 3G ? Is it because of the spectrum distribution in India 5MHz for 3G and 20MHz for LTE or if something else, kindly elaborate?
Thanks.