Final Report for Department for Business, Innovation and Skills and Department for Culture, Media and Sport
Economic welfare benefits: public mobile communications
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- Consumer surplus
- Producer surplus
- External benefits
- Revenue and employment
- Current revenue
- Future revenue trends
- Employment
Economic welfare benefits: public mobile communicationsWe have built a new model to calculate the consumer and producer surplus from mobile voice and mobile data services. A detailed description of the modelling methodology and assumptions can be found in Annex B. Consumer surplusNew estimates of consumer surplus would ideally be based on new primary research to determine how much consumers would be willing to pay for a mobile service. However, we are unaware of any studies on willingness to pay for mobile voice published in the UK in recent years and, as we explain below, we have little new information on willingness to pay for mobile data. We have therefore considered two scenarios for consumer surplus, the results of which are presented below in Figure 4 .2. Figure 4.2: Range of consumer surplus from mobile voice services* [Source: Analysys Mason, 2012] 
* Note: the 2006 figure is sourced from the 2006 report; for 2011 to 2021 we present a range of values to reflect the different scenarios for market evolution, as described in Annex B. Our model suggests that consumer surplus from public mobile telecoms has grown from £19.0 billion in 2006 to £24.2–28.2 billion in 2011, an increase of between 27% and 48% in nominal terms and between 7% and 25% in real terms. We forecast that the consumer surplus will continue growing at a compound annual growth rate (CAGR) of between 11% and 15% over the forecast period. This is in part due to greater dependence on mobile handsets for voice calls, the availability of new value-added services, and a projected decrease in mobile tariffs.
Producer surplusSimilarly, for producer surplus, there is a wide range of potential scenarios, depending on factors such as the forecast data usage per device and the degree of Wi-Fi offloading.16 We have considered a range of scenarios which give the values for producer surplus shown in Figure 4 .3 below. Figure 4.3: Range of producer surplus from mobile voice* [Source: Analysys Mason, 2012] 
* Note: the 2006 figure is sourced from the 2006 report; for 2011 to 2021 we present a range of values to reflect the different scenarios for market evolution, as described in Annex B. The base case was chosen to demonstrate the likely evolution of producer surplus before Wi-Fi offloading is taken into account. Producer surplus rose from £2.8 billion in 2006 to £5.9 billion in 2011, an increase of 111% in nominal terms and 76% in real terms. We believe that it is reasonable to expect some increase in producer surplus since 2006 due to an increase of around 20% in mobile subscribers and the fact that operators have not had to embark on any major capital expenditure programme since 2006. However, the estimated increase may also be due, in part, to methodological differences between our study and the 2006 study. Producer surplus is projected to decrease significantly in the years 2013, 2014 and 2015, as we have assumed that mobile operators will roll out their LTE (4G) networks over this period. Producer surplus recovers slightly in 2016 due to the reduced capital expenditure once the LTE roll-out is largely completed. It will still be lower than in 2011 and 2012, as operators will have to run three network technologies simultaneously over a period of time until legacy 2G (and 3G) networks are shut down in the longer term. We forecast that producer surplus will decrease again from 2016 onwards, as operators will need to build new capacity sites to cope with increasing demand for data, while intense competition will limit their ability to increase prices. External benefitsIn addition to the direct economic welfare from public mobile services calculated above, there will be indirect or external benefits. A recent study by Capital Economics commissioned by Everything Everywhere describes a number of these benefits.17 Quantifying these benefits would be a large exercise in itself and was not the focus of the study, but they include: Network externalities from having more subscribers on the network (i.e. the more people there are on a mobile network, the greater its value to all of the subscribers) Greater social cohesion resulting from the fact that mobile communications make it easier to stay in touch with family and friends Better and easier communication with businesses and public services (e.g. the ability to summon help immediately following a traffic accident18) More efficient use of time (e.g. the ability to make calls while travelling) Improved delivery of emergency services in crisis situations (e.g. by providing a common means for different emergency services to communicate with each other and with other parties that may be involved in dealing with the crisis, such as local and national government) Mobile communications as an enabler of new products and services for consumers. For businesses, the external benefits of mobile communications are mostly associated with increases in productivity. Various studies published by the GSM Association describe these benefits in detail.19 Examples of productivity improvements include: More efficient communication among employees and with suppliers and customers Replacement of paper-based processes with electronic and online procedures, facilitated by better access to the internet Improvement in knowledge sharing within businesses, and immediate access to information (e.g. via intranets accessible using mobile devices) Ability to offer new services such as e-commerce Better supply-chain management (e.g. reduction in data-entry errors and ability to perform real-time data queries, and to identify inaccuracies more quickly) Ability to work more flexibly, e.g. remote and mobile working, meaning that staff no longer need to be in the office to access the internet or use other online business tools. NPVFinally, we have calculated the NPV of the consumer and producer surplus from public mobile over the ten-year period from 2012 to 2021. Figure 4 .4 shows the results for our base case. Our results suggest that public mobile telecoms represents the most valuable use of spectrum in the UK, and the resulting direct economic welfare is likely to have an NPV of £273–341 billion over the next ten years. A more detailed breakdown of the results from the public mobile model is presented in Annex B.
Revenue and employmentIn this subsection we estimate the revenue and employment generated in different parts of the mobile services value chain, as a further measure of the value to the UK economy resulting from the use of spectrum to provide public mobile services. For the purposes of our analysis we have considered five activity areas, illustrated in Figure 4 .5 below: Passive infrastructure: the rental of mobile base station sites and the construction of masts etc. on these sites Network equipment: the supply of the electronic hardware and software used by operators at their base stations, in their core networks and to support billing, customer service, etc. Network operations, sales, marketing and distribution: the operation of mobile networks, the recruitment and retention of subscribers and the sale of mobile services to these subscribers, i.e. the core activities of the mobile operators and mobile virtual network operators (MVNOs), plus downstream airtime sales Devices: the supply of handsets and other mobile devices to subscribers (an activity which is split between the mobile operators/MVNOs and independent retailers of mobile devices) Content: the supply of applications, content and advertising to mobile subscribers. Figure 4.5: The value chain for public mobile services [Source: Analysys Mason, 2012] 
Current revenueWe have estimated the total revenue attributable to the mobile services value chain as being the sum of mobile operator revenue, MVNO revenue, content and applications revenue earned by companies other than mobile operators. This gives a total of approximately £20.0 billion in 2011. The majority of the revenue in the mobile services value chain is earned by the mobile operators themselves from subscriptions and from call and data charges: in 2011 the four UK operators collectively earned £19.0 billion – see Figure 4 .6 below. Overall, revenue in 2011 was down around 1% compared to 2010, although the total number of subscriptions grew by around 1%. Overall revenue in 2010 was in turn down 1% on 2009, despite a 3% increase in the total number of subscriptions. These figures indicate that average spend per user (ASPU) is falling, which is almost certainly due to the competitive nature of the UK mobile market.
* Note: Everything Everywhere was formed from the merger of Orange and T-Mobile in April 2010; prior to this date, the chart shows total revenue for the constituent companies. Additional revenue is earned by MVNOs, which market mobile services under their own brand but ‘piggyback’ on another operator’s network infrastructure. The incremental revenue earned by UK MVNOs is difficult to determine accurately because some of the larger MVNOs are parts of other organisations and may not report their mobile revenue separately (e.g. Virgin Mobile is part of the Virgin Media Group and Tesco Mobile is part of Tesco plc), while the revenue reported by independent MVNOs (such as Lebara, Lycamobile and Vectone) includes wholesale payments to the mobile network operators. Our best estimate based on an analysis of reported revenue is that incremental revenue from the MVNO sector in the UK in 2011 may add around 2% to total UK mobile revenue, i.e. some £380 million. Similarly, some additional revenue is earned by independent mobile device retailers, but again the incremental amount is difficult to determine because reported revenue from such companies includes equipment subsidies paid to them by each of the mobile operators, the level of which is not routinely disclosed by either party. For this reason we have not included the revenue of mobile device retailers in our calculations. The total revenue reported by the Carphone Warehouse and Phones4U (which are the two largest independent retailers whose business is mostly mobile-related) was £2.4 billion in 2010/2011.20 Revenue is also earned from content and applications. Based on discussions with mobile operators and content suppliers, Analysys Mason Research estimates that UK revenue from content and applications amounted to around £370 million in 2011, of which around £130 million was earned by the operators and £240 million by other companies (and is thus incremental, although a significant proportion is earned by foreign companies). Games are the largest single category, accounting for an estimated 40% of total expenditure on content. Applications are the next-largest category, accounting for around 20% of total expenditure. Music is forecast to be the fastest-growing category, while revenue from personalisation (wallpapers, ringtones, etc.) is forecast to decline as smartphones make it easier for users to generate their own personalisations.
According to PricewaterhouseCoopers (PwC),21 revenue from mobile advertising in the UK was £133 million in 2011, up 60% from 2010. This represents around 3% of total internet advertising in the UK. PwC expects that mobile advertising will continue to grow at a CAGR of 36% from 2011 to 2015, although it seems reasonable to assume that the majority of mobile advertising revenue will substitute for other forms of advertising, such as web-based advertising on the fixed internet and perhaps outdoor advertising. According to Barclays Corporate,22 revenue from m-commerce in the UK was approximately £1.3 billion in 2011, equivalent to around 5% of total online spending, or 0.5% of total UK retail spending. Again, it seems likely that m-commerce is mostly a substitute for other forms of e-commerce, or conventional retail purchases, especially since Barclays reports that the largest categories in 2011 were food and groceries and electrical goods. Barclays forecasts that m-commerce revenue will increase to £19.3 billion by 2021 (at a CAGR of 30.9%), by which time it will account for 4.9% of total retail spending. Turning to the major external cost items for mobile operators (which represent revenue for their suppliers), we estimate that in 2011, the mobile operators collectively paid site rental charges of around £500 million across a portfolio of roughly 50 000 sites, and spent around £50 million on passive infrastructure for new sites. We expect the increased levels of site sharing resulting from the merger of Orange and T-Mobile and a recently expanded site-sharing agreement between O2 and Vodafone to reduce the total number of sites over the next few years, more than offsetting annual increases in individual site rental fees. There may be a small increase in expenditure on passive infrastructure for new sites over the next two to three years as 4G networks are rolled out, although we expect that the majority of 4G base stations will be co-located with existing 2G and 3G base stations. We estimate that the mobile operators collectively spent around £1.5 billion on network equipment (as defined above) in 2011, which is similar to the amount spent in 2010. Our producer surplus model indicates that there could be a significant increase in network equipment expenditure during the 4G roll-out period, but that it is then likely to fall back to a level close to the amount spent in 2011. Future revenue trendsWe predict that the number of handset subscribers will remain fairly constant over the next ten years but that there will be gradual migration from 2G connections to 3G and 4G connections, as indicated in Figure 4 .8 below. Figure 4.8: Handset subscribers and penetration – historical values and forecast [Source: Analysys Mason, 2012] 
Based on recent market trends and forecast data, we have projected that mobile broadband penetration will grow to around 20% 2021, and that the introduction of 4G services in 2013 will result in 3G mobile broadband declining from 2015 onwards, as shown in Figure 4 .9 below. Figure 4.9: Mobile broadband subscribers and penetration – historical values and forecast [Source: Analysys Mason, 2012] 
ASPU on 3G handset data is currently around £8 per month (see Figure 4 .10 below).23 Although average spend on data has grown in recent years we believe that it is now stabilising and we expect to see little significant change over the next decade. Figure 4.10: Handset ASPU – historical values and forecasts [Source: Analysys Mason, 2012] 
Based on experience in other European countries we have assumed a 30% price premium for 4G data over 3G data initially after the 4G launch in 2013, with prices eventually converging around 2017. ASPU on voice services has declined significantly over the past few years (largely, we believe, as a result of intense competition in the UK mobile market) but we forecast that this will level off at around £8 per month over the next decade as the market matures. ASPU on 3G mobile broadband services has declined from around £13 per month in 2009 to a little over £9 per month today (see Figure 4 .11). We forecast that it will level out at a little under £8 per month in the second half of the decade. As with handset data prices, we have assumed an initial 30% price premium for 4G mobile broadband over 3G mobile broadband, with the prices of the technologies converging around 2018. Figure 4.11: Mobile broadband ASPU – historical values and forecasts [Source: Analysys Mason, 2012] 
Putting our forecasts for the number of users and the ASPUs together, and considering other sources of revenue (messaging, interconnect payments from fixed operators in the UK and foreign operators, etc.), we forecast fairly consistent total service revenue (in nominal terms) of £18.3–19.8 billion for the UK mobile industry over the next decade (see Figure 4 .12 below). Figure 4.12: Total service revenue – historical values and forecast [Source: Analysys Mason, 2012] 
EmploymentIn 2010 (the most recent year for which data is available), the four mobile operators employed around 38 000 people in the UK (see Figure 4 .13) and we estimate that the MVNOs collectively employ over 1000 additional staff. In addition we estimate that at least 10 000 people are employed in the UK by suppliers of mobile network hardware and software, and that at least 25 000 people are employed in mobile equipment and accessories retailing.24 Adding these figures together suggests that the mobile industry directly supports a minimum of 75 000 jobs in the UK (around 0.25% of total employment).
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