Original URL: http://www.theregister.co.uk/2006/08/07/3g_woes/
Vodafone policy shift evidence of European 3G failure
And Ofcom sanctions likely to increase operator woes
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.
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.
Subsidies are a strong tactic in a new market where the operator needs to build the user base without the barrier to uptake of an expensive upfront gadget. They make little sense to the carrier in a mature market such as Europe or Japan.
"Subsidy drove penetration. Now pre-pay subsidy is subsidising low cost competitors. And it's making tariffs too high," said T-Mobile CEO Obermann at 2005's 3GSM conference.
"We are at the crossroads between device cost and usage cost. Drop subsidy and we can cut tariffs. Customers want lower tariffs. They drive usage and loyalty. Subsidy needs to be cut, then removed."
However, subsidies still make sense to many of the consumers. Obermann, like his fellow CEOs, argued that without the burden of subsidies, operators would lower tariffs or invest more in new services.
But the argument is hollow. For most users, adding a few hundred dollars to the upfront investment in a network would still be less welcome than a few cents off the tariff, even if the saving over the space of the contract were greater. And competing by cutting tariffs aggressively is as dangerous to the operator as subsidies, since there is no going back once customer expectations of a certain rate of charges are set.
The main counterbalance to the subsidy in the operator's spreadsheets should be customer loyalty, not high tariffs. The longer a user can be retained, the less significant the upfront investment in that customer – yet, for all their talk of reducing churn, mobile carriers remain weak in many of the key areas that would achieve it, notably customer service.
Ironically, the loss of subsidies should actually improve that experience for phone users, since operators would lose their control over the customer. In an unsubsidised world, people would buy handsets at retail prices and roam on to any network they chose using multiple SIM cards. The trend would only be accelerated by the introduction of reasonably priced Wi-Fi/cellular handsets.
Then the operators really would have to offer excellent service and applications in order to keep the newly liberated users on their networks, and that would mean more investment in customer response, content and software, and probably tariff rate wars as well.
Low uptake of 3G
In statistics that are concerning for all broadband wireless operators, not just UMTS providers, a new survey from research company Enders shows that 63 per cent of over-24s have no intention ever of using 3G, and a further 18 per cent have a "slight interest", but would only take on a 3G contract if they can be convinced of clear benefits by the operators.
Even in the early adopter base, 70 per cent of those with 3G phones have never engaged in the activities that were supposed to be key to the ROI argument - such as making video calls or downloading music. Most cite expense and over-complexity of these services.
In addition, 78 per cent of the respondents to this survey said they would be unwilling to pay £5 a month for mobile television, which is assuming the role of the 3G cellcos' saviour for the later years of the decade.
And another UK study, by BMRB, claims that the only 3G-only operator in the country, Hutchison's 3, has a likely churn rate of 66 per cent, double that of the other majors (O2 has the lowest rate, followed by MVNO Virgin Mobile).
To increase the woes of the UK operators, regulator Ofcom is currently consulting on potential penalties should they fail to meet the roll-out targets associated with their 3G licenses.
They are committed to making 3G services available to 80 per cent of the population by 31 January, 2007, a target that seems almost unreachable from their current position, and which could not possibly generate them a profit or do anything but harm their financial results further in 2007-8.
Ofcom is discussing possible sanctions, though is unwilling to revoke licenses except as a last resort.
Copyright © 2006, Wireless Watch 
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