At the beginning of the year, large white banners appeared on skyscrapers across London. They read: “2003.” The city’s residents could be forgiven for their bewilderment at the statement of the obvious. They didn’t know that the flame-like pattern on the last digit (3) was the logo of a company about to introduce the most advanced mobile-phone device in the UK.
Things were to get a bit clearer by the end of January; as then 3, backed by Hong Kong’s Hutchison Whampoa, released a series of TV ads demonstrating latest innovations in telecom. The commercials promised something unique: giving people the ability to view moving images of their interlocutor; in real time. This was one of various services third-generation (3G) wireless technology made possible.
The mobile industry in western Europe needed such services to elevate revenues after a subdued 2002. The region added around 20 million customers that year, compared to 45 million in 2001, which was still lower than the previous two years. The region is highly saturated in cellular services, with market penetration of about 80%. Eastern Europe, by contrast, is still in its growth phase. Last year, it gained 17 million new subscribers, increasing its market penetration to 30%. It had previously added 15 million customers in 2001.
Switching Focus
It is expected that Western Europe could add as little as 10 million customers in the current year. Seeking to buck the trend, mobile operators have switched their focus- from pursuing aggressive customer acquisition techniques to prioritizing retention of their customer base. They are trying to get the existing subscribers to spend more on newer, non-voice services.
Central to this approach is to persuade the customers who are buying advance call-credit- to shift to contract packages. These packages require them to pay a minimal fixed monthly amount in addition to the regular call costs. Such ‘contract customers’ generate higher average revenue per user (ARPU-a key industry performance measure), than their prepaid counterparts.
However, the multimedia offerings of contract packages present their own problems. Operators face difficulties in striking deals with diverse entities- ranging from media giants to game developers. They experience content-pricing and payment issues while conducting negotiations.
“The mobile industry will have to work hard to integrate a host of new players into the existing value chain,” says John Strand of Strand Consult- a Copenhagen-based technology and telecoms consultancy. Others point towards the impracticality of charging per-minute (or second) for downloading news bulletins, games or music. Voice call pricing can’t be applied in other multimedia features. Charging differently for dissimilar content creates a “billing hell”, as per an analyst.
Mr. Strand foresees consolidation in the industry, as new 3G companies enter a marketplace that is already crowded. “We’ll see the number of operators in each country diminish as companies discover there are too many operators for the number of available customers,” he says. But the challenges are not just strategic in nature, as in the ongoing year, telecoms across the world will encounter regulatory issues- anticipated to be especially stringent in western Europe. “Regulators are determined to hound the mobile industry,” says Stephen Pentland of London-based Spectrum Strategy Consultants, “despite the fact that operators are demonstrating more commercial independence and innovation than ever.”
Regulations are expected to become more exacting as EU countries plan to include European Commission’s directives in their respective national laws. The directives, to be implemented by July 25 are called the EU communications package. The regulatory obligations of dominant operators (classified in terms of their overall market share) like allowing third parties to resell services on their networks, will be modified.
Relevant Markets
Under the new package, individual mobile (as well as fixed-line) operators will be scrutinized on a range of “relevant markets” recommended by the European Commission.
This, for example, will include call-termination and international roaming, and then operators would find themselves subjected to variable regulation in those specific markets after painstaking analyses carried out by each country’s telecoms regulator.
In other words, mobile operators could start to face drastic price curbs over the next few years.
U.K. operators received a foretaste of this new regulatory environment last month when the Competition Commission ordered a hefty termination rate cut of 15% on all operators even before the EU package is transposed into national law.
Europe’s regulators have long been concerned about the fees mobile operators charge for terminating fixed-line calls on their networks — a cost which is normally passed on to the consumer — although they are broadly satisfied with operators’ progress in most other areas.
The challenges ahead are also severe for equipment vendors.
Now that so many people in the world own at least one mobile phone — there are around one billion cellular subscribers worldwide, according to the London-based Baskerville Publishing Group — the emphasis among handset manufacturers has shifted toward speeding up the replacement cycle (the rate as which users upgrade to newer models).
This is no easy task and some handset makers have devised novel strategies to try and boost demand.
Last month, Siemens of Germany unveiled four cell-phone models with rudimentary voice and texting capabilities designed to appeal to the fashion-conscious — bucking the industry trend toward phones with ever-greater functionality.
Vendors also face financial difficulties caused by weaker than anticipated demand for 3G services due to growing doubts about the business case for 3G among some operators.
A number of 3G players, including Orange Sweden, have already pulled out of the 3G market and even more are looking to slow down, and even scale back, their rollout plans.
But there is plenty of cause for hope amid the dangers and dilemmas the industry faces this year.
Indeed, many observers anticipate something resembling a recovery as multimedia-type services finally begin to take root. Recent ARPU figures support this optimism, and suggest that mobile data is finally making an impact in Western Europe.
Last year, average quarterly ARPU growth in the region was often flat — an astonishing achievement considering it was falling by as much as 20% a year in the late 1990s.
Analysts say this year could actually see year-on-year average quarterly ARPU moving upward as operators succeed in improving their customer mix — the balance of prepaid and contract subscribers — and rolling out exciting new multiservice portals like Vodafone live!, which the U.K.-based Vodafone Group launched last October.
A big factor in last year’s ARPU improvement was the success of text messaging, or SMS, the most basic type of mobile-data service.
This has proved a treasure trove for many of Europe’s operators, and the widespread availability now of premium SMS services — higher priced text alerts sent to users by the operator or third parties — brought in around €1.2 billion worth of revenues for Western European operators last year.
The total SMS market in Western Europe in 2002 was closer to €13 billion, according to the London-based Yankee Group Europe consultancy, and is expected to reach €19 billion in 2007.
Last year, in the U.K. alone, mobile subscribers sent nearly 17 billion chargeable person-to-person text messages, according to the UK.’s Mobile Data Association.
Fewer solid statistics are available for photo-messaging, or MMS, which European operators began rolling out last year.
However, the U.K.-based Vodafone Group claims to have sold more than 90,000 of its MMS-enabled, Vodafone live!-embedded handsets in the U.K. and more than 200,000 elsewhere in the two months since they were launched.
And operators in South Korea, where cameraphones and mobile multimedia services have been around a lot longer, are proving beyond doubt that it is possible to make money from MMS and other 3G-type services.
All this should help convince a doubtful investment community of the potential of next-generation mobile services.
But it will take a lot more to persuade the most die-hard of those skeptics that the dark clouds of the past two years have finally begun to leave the horizon.
Comments