Vodafone policy shift evidence of European 3G failure

Subsidies

On the subsidies front, these price competitive approaches cannot justify the high costs of stimulating the market by providing handsets at low cost.

Large operators have long bewailed the impact on their business models of the expectation of subsidies - especially in Europe - and now the new pressure on margins may drive them to drastic action, even at the cost of lower uptake rates.

While Japan's DoCoMo is determined to move all its user base to 3G within two years, this goal may prove far longer term for its European counterparts, and this presents a new dilemma around 3G.

One of the cellcos' top priorities is to reduce opex, since they are lumbered with the high capex budgets arising from an accelerated network upgrade path. Cutting operating costs will clearly be easier once they are supporting just one network, preferably with modern efficiency techniques such as IP Multimedia Subsystem to reduce the cost of launching and supporting services.

But the only way to encourage consumers to move to 3G currently seems to be to offer them low cost (and attractive) handsets combined with appealing tariffs on basic services.

Vodafone is just one operator now privately admitting that it will need to wait several more years for the mass consumer base to take up advanced, high margin multimedia services, and to prevent them buying such applications from broadband wireless providers, the cellcos will need to upgrade their networks and terminals rapidly to support full broadband with more usable web access and user interfaces, and to plug other gaps in the user experience of 3G.

For now at least, Vodafone is opting for short term expenses reduction, at the cost of market share growth in 3G, by slashing subsidies on 3G terminals. According to analyst figures, 3G handsets now account for just 12 per cent of Vodafone's mobile device sales, since the Q2 cuts, compared with the 20 per cent in Q1.

Vodafone said these estimates were "reasonably accurate" though stressed that, while video calling has not been a success, it saw high interest in mobile TV and other premium packages.

Vodafone has often been criticised for jumping the gun on 3G, taking an Asian-style approach despite an unresponsive European customer base by promoting the new network and services ahead of GSM. But now the tide is turning, and a Vodafone spokesperson told reporters that "3G is being de-emphasised. What you are seeing is a commercial re-evaluation" - despite some revenue uptick from the early adopter base, this base has clearly been too small and cautious to make the difference for which Vodafone had hoped.

Now it will rethink how to gain some short term ROI from its 3G networks - and low cost, VoIP-killing voice does seem the most obvious, if least lucrative, option - and how quickly it may be able to attract users to 3G-plus services, a vital calculation if it is to justify its currently ongoing rollout of HSDPA.

Operators may still need subsidies

Subsidising of the subscriber equipment is often the factor with the single biggest impact on return on investment and profitability for a consumer service – hence the race in the WiMAX world to get customer terminals down below the $100 mark.

The problem, as with any form of consumer pricing deal, is that as long as one carrier does it, they all have to. Some consumers are prepared to pay high prices for the most fashionable brand or the most attractive services, but these are a small minority.

Generally, what attracts customers to the network is gaining a decent phone for a nominal cost. The operator then has to try to recoup the cost of that subsidy – usually several hundred dollars – by persuading the customer to take up as many premium services as possible, at high margin, and by keeping them loyal to maximise the payback period.

But both these depend on activities that require high investment – constantly turning out new applications and services, ensuring excellent quality of service to reduce churn. And the former, at least, is still lost on a large proportion of the user base, which is really only interested in voice minutes, whose cost is falling all the time.