opinion


KPN says IP-based messaging cannibalised SMS traffic in Q1 but consumer KPIs show overall SMS growth

KPN has stated in its 1Q11 results that accelerated changing customer behaviour became visible in the cellco’s home market, the Netherlands, during the quarter. Specifically, KPN saw its SMS revenues fall ‘dramatically’ in 1Q11, according to CEO Eelco Blok, who told Reuters that SMS traffic declined 10% year-on-year in March 2011.

KPN is attributing the fall in SMS and voice traffic and revenues to the increased use of messaging applications on smart-phones, including BlackBerry Messenger and WhatsApp, among others. These messaging applications enable services which are quite similar to mobile instant messaging, allowing mobile users to message other users of the same application, using their data-enabled devices.

The operator said that ‘early adopters show high smart-phone penetration, strong data usage growth and substantially less SMS usage’, and that this changing customer behaviour contributed about 2% of the total 8.1% reduction in KPN Netherlands’ service revenues for 1Q11. KPN has not disclosed its total SMS traffic volumes or its service revenues for 1Q11, which makes it difficult to calculate exactly what value this 2% decline represents. However the company’s Netherlands operations generated €1.7 billion in revenues in total in 1Q11, a decline of 3.1% from €1.76 billion in 1Q10, with revenues from the consumer business falling from €969 million in 1Q10 to €941 million in 1Q11.

But KPN Netherlands’ own consumer KPIs for 1Q11 do not support its argument that the adoption and use of IP-based messaging applications have significantly cannibalized SMS traffic (and therefore revenues); the mobile operator actually reported that its SMSes sent per subscriber per month increased 14.3% year-on-year to 56 SMSes per subscriber per month in 1Q11, up from 49 SMSes per subscriber per month in 1Q10. Quarter-on-quarter growth was weaker, up 3.7% from 54 SMSes per subscriber per month in 4Q10.

According to Informa Telecoms & Media, KPN Netherlands experienced an 18.5% increase year-on-year in its SMS traffic  in 3Q10 (the latest quarter for which Informa has data) to 1.7 billion messages, up from 1.4 billion SMS in 3Q09.  However, based on KPN’s statement that its subscribers sent 56 SMSes a month in 1Q11, Informa calculates that KPN Netherlands’ 1Q11 SMS traffic was in the area of 1.55 billion SMSes, which represents a small decline of about 1.3% year-on-year, down from 1.57 billion SMSes in 1Q10.

KPN Netherlands has also seen some fluctuation in its quarterly SMS traffic volumes over the past two years. For instance, in 2Q10 the mobile operator reported SMS traffic of just 1.1 billion messages, down 18% year-on-year from an estimated 1.4 billion SMSes in 2Q09, according to Informa.

In addition, KPN Netherland’s subscriber base has declined 3.7% year-on-year to an estimated 9.2 million subscribers in 1Q11, down from 9.5 million subscribers in 1Q10, according to Informa. Declining subscribers will also have contributed to declining SMS traffic and revenues.

KPN’s Mobile International operations, which include e-Plus Germany (now Base) and Base Belgium, do not appear to be experiencing a similar level of cannibalization from IP-based messaging applications, with no mention in KPN’s results announcement of the uptake and use of these applications negatively impacting SMS traffic and revenues.

The appeal of IP-based messaging applications, which are being referred to as ‘ping’ messaging applications, is that they provide the illusion of ‘free’ messaging, as opposed to mobile users paying to send an SMS, whether on a per-message basis or by using the SMSes included in their messaging bundle. The ‘free’ messaging is by virtue of mobile users being able to use their Internet-capable smart-phones to send messages to other mobile users who are members of the same community, using the data connection on their devices. Mobile operators generate revenues from the data traffic associated with the messaging.

Essentially, ping messaging is a form of instant messaging. Instead of mobile subscribers using Yahoo Messenger, Windows Live Messenger or Google Talk on their devices, they are using Research in Motion’s BlackBerry Messenger, or applications such as WhatsApp, Kik and Nimbuzz, among others. In addition, some of these applications also enable mobile users to aggregate access to their traditional IM communities.

However, some of the market characteristics that have so far hampered the take-up and use of the traditional instant messaging communities on the mobile will likely also apply to the take-up and use of ping messaging:

  • Smart-phone ownership: Mobile users will need to own a smart-phone and to subscribe to a mobile data plan. They will also need to download and install the ping messaging application onto their device. While the penetration of smart-phones and mobile applications is increasing, especially in the developed world, in the short-term these requirements will be a barrier to entry to segments other than the early adopters.
  • Fragmentation: The ping messaging provider community is as fragmented as the instant messaging community, in that BlackBerry Messenger users can only ping other BBM users, and WhatsApp users can only ping other WhatsApp users – at least for ‘free’. Unlike BBM however, WhatsApp, Nimbuzz, Kik and others are cross-platform applications, meaning that they are available on more than one of the following platforms: BlackBerry, iPhone, Android, Symbian and Windows Mobile/Windows Phone.
  • Market reach: This has not been a problem for Research in Motion with its very popular BlackBerry Messenger, which has about 40 million users, representing 76.5% penetration of its 52.3 million subscribers. Other ping messaging providers have created mechanisms by which their users can invite other contacts to join, and clearly the ‘free’ angle is a compelling message to non-users to do so.
  • Platform stability: A number of the ping messaging providers have had problems with ensuring quality of service, WhatsApp and Kik among them. To their credit, however, the companies have been relatively transparent in acknowledging and resolving these problems, using their blogs to communicate with their users.

KPN has stated that it is putting in place a number of measures which are aimed at mitigating the voice and SMS revenue substitution it has highlighted in its 1Q11 results. The measures include the introduction of plans that include voice, SMS and data, and also the introduction of mobile data tariffs that are based on quality of service and speed. Specifically, the mobile operator intends to introduce separate tariffs for IP-based services such as voice-over-IP, instant messaging and streaming video, according to local media reports.

While the Netherlands’ regulator, OPTA, is reportedly unconcerned about KPN’s plans to charge different mobile data prices for selected IP-based services, the European Commission may take a different view. The EC has not gone so far as to define ‘net neutrality’ in telecoms legislation to come into force 25 May 2011 – which will govern transparency, quality of service and the ability to switch operator – but it has stated that net neutrality will be a key requirement under the legislation. Further, European telecoms regulators will be required to “promote the ability of Internet users to access and distribute information or run applications and services of their choice”. The Commission also stated that it needs to gather more information with regards to the de facto blocking of certain services by operators as a result of charging their subscribers more to access these services.

Consequently if KPN Netherlands does introduce separate tariffs for IP-based services – and it intends to provide more detail on its plans at its Investor Day on May 10, 2011 – it may well find itself at loggerheads with the EC. In its bid to shore up declining revenues, the mobile operator is clearly hoping that it will be able to generate more traffic and revenues from SMS by discouraging subscribers from using IP-based messaging alternatives, or that it will be able to generate more mobile data traffic and revenues because smart-phone owners will be prepared to pay extra for the privilege of using IP-based messaging. Whether KPN Netherlands succeeds in this endeavour depends on whether and to what extent the operator is found to transgress the EC’s new rules.


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