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Vodafone policy shift evidence of European 3G failure

And Ofcom sanctions likely to increase operator woes

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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

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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