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Vodafone policy shift evidence of European 3G failure

And Ofcom sanctions likely to increase operator woes

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Comment Since the euphoria of the late 1990s, it has become increasingly clear that there will be no short term gains from 3G investment, and after operator write-downs, delays and frustrated performance expectations, UMTS is surely a failed platform, at least without the HSxPA upgrades.

It was misguidedly promoted largely on the basis of "killer applications", which either failed to excite the consumer base, or could not be delivered adequately by the first generation technology.

The concentration on multimedia applications, however, led operators - especially in Europe - radically to overestimate the expected ARPU from 3G services, and so to overpay for their spectrum and build-out, leading to a wave of write-downs earlier in this decade.

Cellcos have had to refocus on services that are genuinely wanted, such as low cost voice, but which carry low margins; and they are having to upgrade their networks more rapidly than they had planned in order to support more advanced offerings in a way that appeals to users, hence the wave of HSxPA investment.

Meanwhile, they are facing new competition that was not foreseen when they paid billions for their 3G licenses, from flat rate wireless VoIP, Wi-Fi, converged services pushed by non-mobile operators, and the threat of mobile broadband based on WiMAX.

Shift to low cost voice

Nothing could highlight this dire situation more strongly than a cooling of enthusiasm for 3G from its greatest backer, Vodafone - the cellco that has refused to write down its UMTS investments, or, publicly at least, to consider alternatives to 3G such as WiMAX.

Vodafone has made two key changes of policy in its core European territories - reducing handset subsidies to the extent that 3G phone sales have nosedived, and planning to defocus its marketing efforts on advanced video-driven applications like MMS (Multimedia Messaging) in favour of using its more efficient 3G networks to compete on pricing in traditional services.

This latter shift was presaged last year in Germany, where Vodafone launched its Zu Hause homezone offering, which provides low cost, flat rate calls on the cellular network when the user is within a certain distance of the home. This was clearly designed to pre-empt the wave of flat rate VoIP tariffs being offered by start-up and wireline providers, by using the spectral efficiency of the 3G network to deliver very low cost voice and still make a profit.

Now, this tariff has been extended to Italy, and is likely to go Europe-wide, while Vodafone is also talking about using its UK network to undercut BT and stimulate the shift from fixed to mobile lines.

All this will be attempted by presenting a competitive offering for consumers in what remains the cellular "killer app" - voice - but clearly represents a far cry from the margins levels that Vodafone and others had dreamed of from 3G services.

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