Price-competition at the German mobile market

Index of contents

0. Thesis

1. Introduction
1.1 The measurement of demand
1.2 Price competition as an indicator to determine the intensity of competition

2. User and provider of the mobile market
2.1 Market share
2.2 Number of users and penetration rate
2.3 Churn rates

3. Price competition within the German mobile market
3.1 Price index for the service of telecommunication in Germany
3.2 Development of prices for special services
3.3 ARPU rates

4. Tariff innovation and reaction time

5. International comparison of postpaid services
5.1 The development of subscribers and penetration rates
5.2 Comparison of prices of postpaid services

6. Degree of competition at the German mobile market

Thesis

- Especially the smaller market participants gain more and more relevancy concerning the market share over the last five years
- The increasing number of mobile subscribers since 2001 is effected by
-arket saturation
- Especially low usage mobile subscribers are gaining advantages concerning decreasing prices throughout the last years
- The Development of Churn Rates is an indicator for high competition on the German mobile market
- Prices for mobile services are declining because of a rising market share for the discounter
- The prices for SMS in Germany are comparatively high
- In terms of ARPU-rates O2 has been market leader in German mobile sector
- In terms of introducing innovative pricing schemes E-Plus has been market leader in German mobile sector
- Within an international comparison Germany’s role is getting more important

1. Introduction

1.1 The measurement of demand

The measurement of demand within the mobile market can be determined by four action parameters, which operators can use:

- price
- quality
- service
- advertising

The implementation for those action parameters depends on the product itself, the phase of the market, the type of company and the market form, including barriers the market offers.

In my homework I will focus on the criteria price and service to give a short explanation of the so called overall concept “Harvard School”. Discussing this concept, the state does not interrupt any action of the market. It includes the assumption that the market will find its equilibrium itself and does not need any interferences.

After giving some general information about the German mobile market, I want to present my results about the development of prices for mobile services. Furthermore, another focus should be the service that operators provide. Therefore especially the innovation of new tariffs and reaction time of the operators will be analysed. Afterwards the German mobile market will be evaluated by an international comparison.

Altogether each topic that is worked out should be finally interpreted towards the measurement of competition within the market for mobile services.

1.2 Price-competition as an indicator to determine the intensity of competition

As aforementioned the action parameters are divided into four main categories. This is done to isolate the effect of each action parameter concerning towards the process of competition.¹

However, for each single company and the competition on the mobile market it is important to know about the success of the combination of all action parameters, concerning the payoff of the company, as the case may be the result on competition.

Here I want to focus on the price-competition to determine the intensity of competition. Price-competition mainly guarantees the orientation of business operations, all based on the economic principal. A market with functioning price-competition can be seen as a necessary precondition to achieve all goals of competition.¹

In reality price-competition does not contain as much relevancy as in theory, which can be explained by the analysis of different market forms (e.g. homogen polypol, heterogen polypol…). Different market forms cause particular situations, where the prices for mobile services are determined. For instance, if there is a high degree of possible cost reduction, the price is influenced by that. Within other market forms the latitude of possible prices, which are generated by the operators, determine the prices of mobile services. Whereas in some cases prices can be found as a result of solidary behaviour of the operators.

Furthermore, the action parameter price is not only influenced by the product itself, the phase of the market, the type of company and the market form, including barriers the market offers. It is further influenced by the amount of using this action parameter, which depends on the objectives and the behaviour of the company.

Concerning the current situation of the mobile market there are only four main operators, which provide mobile services to the consumer. Because of that it seems to be logical, that the price-competition is not a sufficient precondition to measure the total degree of competition. The amplitude of possible prices for several mobile services is very low as we will see in the following analysis. Thus, an operator with very expensive services would be less competitive and loose business. Nevertheless, prices for mobile services can differ between the four operators because it is no perfect market and very difficult for the consumer to find the cheapest contract for themselves.

2. A short overview about the user and the provider of cellular phone network:

2.1 Market share

The market for cellular phone network is regulated by the so called “Bundesnetzagentur”. By holding an auction, it sells licences to the subscribers of the market, which have to fulfil some offered standards.

Today there are 9 licences sold (one for each member of the market concerning the GSM standard and one for each member of the market concerning the UMTS standard; moreover one licence is in possession of ‘Quam’, which is no market participant at the moment).

The so called D-network is operated by T-Mobile and Vodafone. Members of the so called E-network are E-Plus and O2. To explain the market share, we have to look at the following graphic, which shows the development of market shares throughout the last years.¹

Abbildung in dieser Leseprobe nicht enthalten

source: annual report “Bundesnetzagentur”, 2006

The figure shows that T-Mobile (D1) and Vodafone (D2) are still dominating the market for cellular phone network. Nevertheless the smaller networks (E-Plus and O2) show a growth in their market share, especially since 2002 (users summed up: 52,8 Mil.). Especially O2 doubled its market share comparing the years of 2000 and 2005, which can be interpreted as the best result by far, as far as the market share is concerned.¹

Although many users of the mobile market are customers of the four big network operators, not every user is included by this figure. There are so called ‘Independent Service Providers’ and cellular phone network discounter. These are companies, which buy rights of use from the big market participants and use a foreign infrastructure. They buy capacity in the form of hours and sell these capacities to their own conditions to the market (e.g. Debitel, Mobilcom, Talkline and simyo, Tchibo, Jamba; users summed up: 18,5 Mil., 2006).² There are also some special companies, which offer their mobile service, combined with the general terms and conditions of a higher-ranked company. Further on, these companies will not be part of the discussion because their market share is very low.

2.2 Number of user and penetration rate

Abbildung in dieser Leseprobe nicht enthalten

Source: annual report “Bundesnetzagentur”, 2006

The graph shows an exponential increase from 1999 (ca.17 Mil. users) ongoing towards 2001 (ca.55 Mil. users) as far as the summed up figure is concerned. After 2001 the graph increases more or less continuously about 5 Mil. users per year. To declare this turn of events some different reasons have to be mentioned, which determined the special effects in different years. The exponential effect starts in 1997 when Viag Intercom was introduced (today = O2). Now there were four competitors on the mobile market. Competition started to increase, so that the competitors were forced to decrease the prices for any kind of service that were offered at that time (especially some private tariffs compared to the standard tariffs). In 1999 the market establishes a record of growth as far as the users are concerned (Growth rate: + 9,7 Mil.= + 68,7%). One main reason for this was a breakthrough within the private customer sector. It was the first time that mobile phones were offered gratis when signing a months contract. Furthermore, pre paid cards were established and so called “city zones” with lower prices.¹ From 1998 ongoing to 1999 the prices decrease about 20,5%. Again a record of growth was established in 1999 (growth rate: + 25 Mil. = +105%). Especially text messaging became more and more important for younger people and the distribution of pre paid cards increased enormously (new entrant rate: 80% of all new entrants). Furthermore, WAP (Wireless Application Protocol) was implemented in 1999 but could not generate a sufficient acceptance by users in 2000 (400.000 users in the middle of 2000, 2,5 Mil. users at the end of 2000). Moreover, there were only less user which used WAP regularly. Nevertheless, WAP gained more attractiveness when GPRS (General Packet Radio service) and HSCSD (High Speed Circuit Switched Data) were implemented as a possibility of faster data transfer. Again prices decreased from 1999 ongoing to 2000 about 14%.²

In the year of 2001 the graph shows a rather slab course compared to the enormous growth of the years before. The main reason for this was that operators began to differentiate between active and inactive users. Thus, many customers who had not generated any revenues for long periods were removed from the statistics, in order that a more realistic picture could be obtained. Moreover, the pre paid offerings were less subsidised.

Since 2002 the marked signed a steady growth about ca.5 Mil. users per year (turnover), which can be explained by new and more attractive innovations (GPRS, HSCD, MMS [Multi Media Messaging], SMS, i-mode). According to the Federal Statistical Office, the prices for mobile telephony increased in 2003 by 1,1 % compared with the year 2002. In addition network operators started to establish so called “home-zones” based on low-priced calls to the traditional fixed network in 2004. Thus, mobile phones substituted traditional fixed lines. With the end of 2004 network operators started to sell and offer the UMTS- Service, which moves mainstream in 2005. UMTS gives the opportunity to download games, videos and music with a rate up to 384 kb/s today. Furthermore flatrates (such as BASE [E-Plus]) gain more and more importance because of the possibility of one fixed price for any kind of service (with some restrictions).Thus, network operators and service provider can offer a wide range of interesting services until today, which determine the continuous growth rates within the last four years.

Concerning this information it is not really possible to give a conclusion concerning the degree of competition at the German mobile market. Therefore we have to further analyse the development of the so called Churn rates and ARPU rates.

2.3 Churn rates

Churn Rates can be defined like this: “For any given period of time, the number of participants who discontinue their use of a service divided by the average number of total participants.”¹

Abbildung in dieser Leseprobe nicht enthalten

source: own research, 2006

In the graphic above the development of Churn Rates for the two largest operators T-Mobile and Vodafone are presented. As it is acknowledged by the responsible representative the data from O2 and E-Plus are not published jet. Nevertheless, an E-Plus representative approved that E-Plus offers a Churn Rate between 20% and 25%, which can be seen as typical for this branch.¹ High Churn Rates are a good indicator for high competition. From this it follows that the degree of competition at the mobile market seems to be very high. Although, it is not possible just to conclude about the development of market participants there is a significant message that can be deduced by analysing the Churn Rates. Every year a great amount of market participants changes their mobile operator. This may be explained by a high diversification of offerings that are established on the German mobile market. Thus, market participants often change their mobile operator because of changing preferences and individual solutions that are cheaper for them (e.g. high usage mobile subscriber realises that a flatrate is cheaper from him). Concerning Churn Rates the mobile market presents a high degree of competition between the acting operators.

3. Price competition within the mobile market.

3.1 Price index for the service of telecommunication in Germany

Now I want to focus on the development of prices at the German mobile market to illustrate and support the number of users.¹

At the beginning of the mobile market prices were set very high. There were only three operators (T-Mobile, Vodafone, E-Plus) which could determine the prices on a very high level. The competition in the mobile market was at that time comparatively low. However, the situation changes when Viag Interkom was established.

In 1998 the price competition leads to success concerning the development of the mobile market. After the establishment of new city tariffs the prices declined in 1998 about 8,8 %.²

Furthermore, the decrease of prices went further on (1999: -20,5 %, 2000: -9%, 2001: -4,3 %) which can be explained on the one hand by lower tariffs at the so called “city zones” and on the other hand by lower tariffs at all. High investments into new technologies (such as UMTS) increased prices in 2002about 8,6 %. Nevertheless, comparing the last four years prices are decreasing again. Because of rising market shares and total numbers of service provider and mobile discounter prices fell at least about 11% in 2006. Specialists forecast, that the prices for mobile services will decrease further because of increasing numbers of service provider and discounter.³ Some more detailed information are offered by the “Statistisches Bundesamt”, where the price index for mobile services is separated into “very low usage subscriber”, “low usage subscriber” and “average usage subscriber”. As it is shown in the following table these user profiles are determined by different characteristics. It includes national and international calls and data transfer as well.

user profile for mobile services (base year = 2000; concerning one month)

Abbildung in dieser Leseprobe nicht enthalten

source:own table, www.destatis.de, 2004

Figure 3 (Addendum, p.20) shows that especially in 2006 the high prices for “very low usage subscriber” were decreasing on an extremely high level (July 2005: 150,6; November 2006: 100,9). This can be explained by the growth of the total number of service provider in recent years that offer new and cheaper services to the consumers. Most of the “very low usage subscribers” are people, who do not want to sign a long term contract. Thus, they demand prepaid cards from the service providers where it is not compulsory to pay monthly revenues.

Moreover, the indexes of the other categories show a decline in prices too. Finally, this leads to a lower price index at all.

An international comparison shows that in Germany the prices for mobile services are comparatively high. However, not every statistic includes the subsidy of a mobile phone. This problem will be discussed within the international comparison under chapter five.

All in all the development of prices leads to the conclusion that the competition at the German mobile market is very high. Operators try to offer cheaper tariffs to the consumer to be more competitive. Thus, this leads to decreasing prices on the mobile market. Furthermore, they have to offer lower prices because of the growing relevancy of service provider and their cheap offerings. There is no indication that the degree of competition will decrease in the following years. Far from it a high degree of competition is expected throughout the next years.

[...]

¹ Cpr. Schmidt 2005, Wettbewerbspolitik und Kartellrecht, p. 63

¹ Cpr. Schmidt 2005, Wettbewerbspolitik und Kartellrecht, p. 63

¹ www.bundesnetzagentur.de, 2006

¹ www.bundesnetzagentur.de, 2006

² www.media.nrw.de, 2006

¹ Cpr. Annual Report Bundesnetzagentur, 1999

² Cpr. Annual Report Bundesnetzagentur, 2000

¹ Cpr. www.investorwords.com, 2005

¹ Guido Heitman, PR-Manager, SCM Media Relations E-Plus Mobilfunk GmbH & Co KG, 2007

¹ Cpr. Addendum, figure 2, p.19

² Cpr. Annual Report Bundesnetzagentur, 1998

³ www.teltarif.de, 2007