Mobile Operators Face Longer-Term Profit Decline - Tellabs

Mobile operators risk turning unprofitable over the next few years as data revenue declines and data traffic costs rise, U.S.-based telecom equipment vendor Tellabs Inc. (TLAB) said in a research report Thursday.

Because of increasing competition in the sector, revenue per gigabyte of data is likely to fall, while rising data traffic makes the networks more expensive to operate, the company said.

To be sure, even though every single gigabyte of data may become less profitable, operators' total data revenue is growing sharply.

U.K.-based operator Vodafone Group PLC (VOD) earlier Thursday said third-quarter sales rose sharply as data revenue surged 27% from a year earlier, driven by strong smartphone and mobile connectivity sales.

The spread of smartphones such as Apple Inc's (AAPL) iPhone and handsets based on Google Inc's (GOOG) Android platform, and more recently Internet-connected tablets, has boosted data traffic over the past few years.

Global smartphone sales almost doubled in the third quarter 2010 from a year earlier to 81 million units according to research firm Gartner's latest figures.

Still, unless mobile carriers offset the falling profitability trend, by 2013-2015 their data revenue in the U.S., Asia Pacific and Western Europe, may fall below what it costs to handle the data traffic, Tellabs said.

The competitive U.S. market is likely to see the quickest decline while operators in Western Europe, where operating expenses tend to be lower, should stay profitable a little longer, Tellabs' director of mobile strategy, Ben McCahill, said.

Although the introduction of variable data price rates and new more efficient network technology such as Long Term Evolution can help operators to some extent, this won't be enough in itself to keep them profitable, McCahill said.

Rather than just providing bandwidth, operators would benefit from offering additional content to boost revenue, such as location-based services, he said.

Operators need to make their networks smarter by using technology to support applications and app stores, track and manage the devices in the networks, and optimize traffic for varying radio spectrum conditions, Tellabs said.

-By Gustav Sandstrom, Dow Jones Newswires; [phone]; [e-mail]