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Analysis After the phoney war of the operators’ launch of 3G data cards in Europe, the real battle commences for the mass 3G market, with Vodafone leading the charge. The company went live with its phone service in its native UK and 12 other countries this week, with CEO Arun Sarin saying this was "payback time" for the £7bn invested in licenses and build-out in the UK alone. He is right, but it is highly uncertain that such payback will be forthcoming. As devices and applications mature, 3G will have large measures of success in terms of uptake, but the wireless goalposts have shifted so far since the 3G auctions of the turn of the century, that it is unlikely the operators will ever be able to generate the ARPU and profits incorporated in their original business plans.

Vodafone’s initial target is to win 10m 3G customers by February 2006. Its huge market reach and purchasing power enable it to make a more aggressive launch than those of rivals such as T-Mobile, which have adopted a soft approach so far. Not only can Vodafone get handset prices – and operator subsidies – down rapidly because of its size, it can also put pressure on vendors to create attractive devices quickly. One of the biggest obstacles to early 3G plans was the limited choice of handsets, and the large size of those that were available.

Perhaps the most urgent motivation behind Vodafone’s full-on launch is to regain some lost ground in Japan, its largest revenue market but where rivals KDDI and DoCoMo have 20m 3G customers, against Vodafone Japan’s 250,000. Half of the initial roll-out of 3G handsets will go to Japan, with the launch in other territories being less aggressive.

3G tariffs

Can the operators generate the revenue they need from 3G? Vodafone is setting the pace with voice and data tariffs that are lower than for 2G. Of course, the greater spectral efficiency of UMTS compared to GSM means that it can deliver far more voice and data but Vodafone is refusing steadfastly to reveal any ARPU targets. 3, by contrast, claims ARPU of almost £43 a month, higher than any 2G service in the UK, but still far off the £80 that was estimated, at the time of the auctions, to be necessary for cellcos to meet their ROI targets.

And that ROI window has closed significantly since those forecasts were made – a fourth generation, based on broadband wireless, was once expected to be just on the horizon in 2010, but is now feasible by 2007-8; and huge pressure has been put on mobile data pricing by the availability of Wi-Fi. Hotspots may be limited in range and functionality, but they have completely shifted the expectations of what a broadband data service should deliver in terms of bandwidth and pricing.

This is already being seen in the US. According to The Yankee Group, competitive pressures from within the cellco sector and outside are driving down voice ARPU from $51.36 in 2003 to an expected $42.42 in 2007. Data will make up some of the shortfall, growing from an ARPU of $0.80 in 2003 to $5.95 in 2007, but this will not be enough to keep the ARPU from shrinking over all.

The impact of Wi-Fi

With Wi-Fi and the promise of WiMAX pressurizing operators to adopt flat rate data tariffs and to open their walled gardens – both moves that could reduce overall ARPU - a new price war is widely expected on voice. Already sparked by 3’s attempts to win UK customers for its early UMTS service with cheap voice calls, it will be accelerated by the launch of wireless voice over IP services.

So the impact of Wi-Fi and WiMAX is throwing ever larger question marks over the operators’ ability to generate the required levels of ARPU to justify their UMTS investments. Researchers forecast that by 2006, there will be 20.6m active Wi-Fi users and 831,000 WiMAX subscribers in Europe versus 21.2m 3G subscribers.

Many of these, of course, will have at least two of these subscriptions but, though the average spend on wireless data services will rise steadily, a multi-network subscriber will spend less on 3G than a 3G-only user (in other words, WiMAX will not be purely an additional spend – there will be cannibalization).

In particular, WiMAX will be in a strong position to cream off the most high value, high bandwidth applications, such as business videoconferencing or consumer interactive gaming, leaving lower ARPU services to 3G. It also has the advantage of strong prioritization capabilities and flexible network design, both of which make it well suited to segmentation of services. Unlike traditional voice service, the adoption of 3G services is segment specific – the Japanese and South Korean operators have found that targeting is vital, with some users are interested in video, others not, some in games, others in traffic updates, and so on.

On data, broadband customers are traditionally used to spending $30 to $60 per month, more in rural areas or for premium services like video on demand. While this figure will erode, the mobility aspect of WiMAX should support a similar rate in 2007, plus high value revenues from enterprises. Although there is currently strong association between adopters of broadband and of 3G, the ability of WiMAX to span both camps could make 3G data less attractive or drive its operators to low, flat pricing to compete.

Yet Analysys estimates that the monthly ARPU required for a European 3G operator to gain ROI on its network investment will be, in 2005, about $25 from voice and $30 from data, with the voice figure declining to 20 per cent by 2010 but data rising to $60. This will be difficult to achieve using flat rate pricing models in direct competition with the faster data capabilities, mobility and VoIP support possible with WiMAX.

Copyright © 2004, Wireless Watch

Wireless Watch is published by Rethink Research, a London-based IT publishing and consulting firm. This weekly newsletter delivers in-depth analysis and market research of mobile and wireless for business. Subscription details are here.

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