PRINT THIS PAGE Mercer study on the broadband market
16/08/2005. Source:Mercer Management Consulting.
Broadband technology was introduced in the 1990s with high expectations, says Mercer Management Consulting. The information superhighways were considered synonymous with the alluring new world of the Internet and an indispensable prerequisite for enjoying the unlimited possibilities of the information age. Innovative broadband technology was also supposed to drive profitable new business models. Compared with other countries, however, Germany is in danger of missing out on the opportunities of this promising technology. One only needs to look across our borders to see how far Germany has fallen behind in the broadband race. Here in Germany, only 16 percent of households have a broadband connection, as compared to 41 percent in the Netherlands, 37 percent in Switzerland and 35 percent in Belgium. Even France and England are about two years ahead of Germany in terms of broadband development.
The international study entitled "Broadband - Prospects for this Technology of the Future" by Mercer Management Consulting reveals Germany's glaring deficit when it comes to broadband. Wolfgang Bock, the telecommunications and media expert who directed the study, warns: "If Germany does not close this gap within a few years, it will increasingly fall behind in the international innovation race and consequently forfeit economic growth opportunities." Besides opening up new business models for the telecommunications industry, a flourishing broadband market would also drive a number of new income sources and innovation cycles in related industries, such as movies, TV and music, not to mention entertainment electronics.
Low market penetration in Germany - despite low prices for broadband service
Compared with other countries, the broadband market penetration is below average in Germany, even though the prices for fast Internet access are lower here than in any other country in Western Europe. Adjusted for purchasing power disparities, broadband Internet service is about 36 percent more expensive in Austria and 50 percent more expensive in England than in Germany.
The broadband deficit in Germany has other causes. Leading broadband nations such as South Korea (76 percent household penetration), Japan (38 percent) and Switzerland (37 percent) experienced intense price and technology competition over the last few years. But this was not the case in Germany, due in particular to the absence of infrastructure competition and the lack of investment in alternative infrastructures. Competing providers were extremely cautious and did not seriously enter the broadband market until 2003. And still, there is a dearth of attractive offers and prices that would convince consumers of the added benefits of this service.
More than twice as many Dutch households have broadband because this country saw intense competition between cable network operators and DSL providers at an early stage. Despite the fact that 55 percent of German households are cable-ready, the German broadband market did not benefit from the existence of this infrastructure. Various factors were responsible for this, including the structure of the cable industry in Germany and the failure of some capital investment projects. Competition finally intensified in the second half of 2003, when the fixed-network division of Deutsche Telekom began offering DSL lines to providers such as AOL and freenet, to use in their own product offerings.
New players breathe life into the market
Nonetheless, the chances for closing the broadband gap in Germany are quite good right now. Some transregional companies like 1&1, freenet and Arcor, as well as regional cable networks like HanseNet and Versatel, have heated up competition in the broadband market. And the aggressive market entry of the Telecom Italia subsidiary HanseNet proves the point that more competition leads to greater market penetration. After this provider of broadband Internet, telephone and video services laid its own fiber-optic network in Hamburg, the percentage of households with broadband connections rose to 35 percent. Similar successes have been achieved in regional markets by cable network operators such as Kabel Baden-Württemberg.
Deutsche Telekom is facing a new source of competition from mobile network operators who want a piece of the broadband market. They are interested in broadband Internet access because more than 70 million German residents already have mobile phone subscriptions and therefore the rate of growth in their core market is slowing. Both Vodafone and O2 have announced the introduction of wireless, UMTS-based broadband Internet access for the second quarter of 2005. However, Mr. Bock does not regard such offers as the primary growth engine for broadband penetration: "Mobile Internet offerings are meant to draw customers away from the fixed-line network, because for some customer groups DSL was the only reason to keep a land line. But this move will do little to boost the overall penetration of households with broadband access."
Under current conditions, the Mercer study projects a broadband penetration rate in Germany of around 27 percent in 2007 and around 35 percent in 2009. "This rate is not fast enough to close the gap with other countries. The household penetration rate for Germany as a whole would have to be around 50 percent by the end of this decade. If this were the case, other business investment projects would have better prospects and could even be planned today," Mr. Bock explained.
Next growth spurt comes from new services and package products
The Mercer study found that the next growth spurt in the broadband market will come from more intense competition and especially a fundamental repositioning of the "broadband" product. Whereas marketing efforts have until now been focused on the connection alone or the speed of Internet access, the main selling points in the future will be attractive applications and content and the bundling of different services into package offers. "Broadband will become a mass market only when providers come out with package offers that satisfy a variety of needs that would not be fun without broadband," Mr. Bock said.
Broadband package products that bundle Internet and telephone service will allow for a significant expansion of the market. Consumers will be prepared to pay extra for package products that bundle value-added services as well as TV services. By bringing the broadband connection into the living room, providers will be in a position to offer innovative, value-added TV services that will resonate in the market. Such value-added services, such as time-shifted TV, interactive services and video-on-demand, will enhance the television experience for consumers.
Broadband package products that feature value-added services and content of this kind will also necessitate a change in the way that service providers think about their customers. They should no longer be segmented according to technical criteria, into groups like "off-liners," "narrowbanders" and "broadbanders." Instead, they should be segmented on the basis of usage habits.
"Once a market penetration of 20 percent has been achieved, it is no longer possible to attract new customer groups by pitching the technical advantages of broadband access. Consumers will be looking for concrete advantages and the connection itself will no longer suffice to win new customers", Mr. Bock said.
New customer segments need to be defined, not on the basis of whether they want fast Internet access, but with reference to their actual needs, including factors such as TV consumption, equipment on hand, interest in digital content, price sensitivity and/or demographic criteria. Possible customer segments are listed below:
- "Innovative, fun-loving families" have high household incomes and already make extensive use of the Internet, TV and DVDs. They are likely to be extremely interested in additional broadband services such as video-on-demand, TV via PC and video games.
- "Couch potatoes" can hardly be convinced to switch to broadband with the lure of PC-based services. However, they will have a strong inclination to purchase TV and entertainment services such as time-shifted television. For these customers, broadband must be brought into the living room.
- "Professionals" already use broadband in many cases. But sales to such customers could be boosted with entertainment services such as video-on-demand and PC-based video communication.
The effectiveness of such customer segmentation strategies has been demonstrated by international broadband providers that have reinvigorated their markets with "triple play" package products, bundling TV, telephone and Internet service on broadband cable. For example, FastWeb in Italy has generated strong customer growth, high revenue per customer and a low customer drop-out rate with its triple-play packages, innovative services and attractive content offerings. FastWeb's success can be attributed to its clear focus on upscale customers, a policy of offering only a few attractive packages with high-quality content for video-on-demand and TV, as well as innovative value-added services such as video communication and content cooperation models. Fixed-network operators and Internet providers in Belgium, France, Germany, Britain and Spain are also offering triple-play package products.
Market players must collaborate to unleash a wave of broadband innovation
If package offers are to be more than just a façade for a price discount, market players will have to offer content and services that are attractive to consumers. A network operator cannot pull this off on its own. A good example of a successful program of this type is Apple's iTunes/iPod, which combines the terminal device, content and technical access into a single, seamless application from the customer's point of view. In this case, simplicity, reliability and security are more important to consumers than download speeds. This example also makes it clear that a broadband innovation campaign can be mounted only through collaboration among different players in the market. "This is what successful convergence is supposed to mean: a situatiOn in which the market players understand each other and cooperate with the customers' interests in mind," Mr. Bock said. The only way that Germany can achieve the broadband breakthrough and close the gap with other countries is for the media industry, equipment manufacturers, network operators and Internet providers to collaborate in order to offer broadband products.
About Mercer Management Consulting. As one of the world's premier corporate strategy and operations firms, Mercer Management Consulting helps leading enterprises develop, build, and operate strong businesses that deliver sustained shareholder value growth. Mercer's proprietary business design techniques, combined with its specialized industry knowledge and global reach, enable companies to anticipate changes in customer priorities and the competitive environment, and then design their businesses and improve operations to seize opportunities created by those changes. The firm serves clients from 22 offices in the Americas, Europe, and Asia.
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