Richard Windsor, senior telecom analyst at Nomura Securities in London, says: “So far growth has come from new subscribers coming onto the network and that’s all over now. Future growth of a substantive nature is depending on coming up with compelling new services which are unclear at present.”
Service like downloadable music and video clips, games, multi-media messaging and mobile commerce initiatives, where operators hoped to earn lucrative commissions from selling products like CD’s to Europe’s army of mobile phone users, were seen as a way to entice those users to spend more on their mobile phone service. This would boost the cash rolling into the operators coffers and keep their share prices rocketing skywards. But things have changed.
The incremental revenue opportunity for these new mobile data services will be a fraction of the size first envisaged. Morgan Stanley projections made in 2000 for European mobile commerce revenues for 2002 were $6.7 billion. Analysts now project about $1 billion by year-end.
That’s partly due to flashy marketing launches of new data services like weather reporting that have flopped because consumers found them clunky and unimportant to their lives. And what market there is will take a lot longer to develop than first thought. Technical glitches with new dual-mode handsets and interoperability problems between rival networks plus in-fighting between operators, handset makers, infrastructure vendors and content providers about brand positioning, business models, revenue sharing and other thorny issues like digital rights management have slowed things up considerably.
These difficulties have led many investors to conclude that much of the $120 billion European operators shelled out for 3G licenses may have to be written off. This process has already begun in some markets like Germany where Spain’s Telefonica and Sonera of Finland have withdrawn from the 3G market. In Sweden, both Orange and Vodafone have applied to the regulator PTS in an effort to relax the deadline by which they have to roll out their 3G networks.
In Finland, the country that first commercialised mobile telephony, Sonera is playing down the introduction of its 3G service which it now says will proceed in an evolutionary manner’ and that’s in a market where licenses were allocated free of charge.
The hard-chargers of the mobile Internet, Japans NTT DoCoMo, which has so far spent $16 billion trying to export its domestically successful i-mode technology to the US, The Netherlands, the UK and Hong Kong are in the process of taking write-downs. Lack of strong demand for i-mode outside of Japan, where the service has notched up 35 million subscribers, and a disappointing launch of its version of 3G in Japan, which has attracted just 135,000 subscribers, have made the Japanese giant think again. In October, NTT DoCoMo wrote off $1.2 billion of its investment in the UK’s fifth 3G licensee, Hutchinson 3G, bringing the total write-off in its i-mode and 3G investments since March last year to $12.4 billion.
Capacity is a problem for Europe’s network operators, but an opportunity for investors. Across Europe, operators cellular networks are becoming increasingly choked with voice calls a problem that will sooner or later impact on customer service. There are two strategies to solving this problem deploy 3G or make do with a series of technology gizmos that some think will keep the existing 2G networks ticking over for some time.
Ben Wood, senior analyst at Gartner Dataquest in London, says: “You’ve only got to look at cities like London, Frankfurt and Paris to realise that capacity is a major problem for the operators and you could argue that capacity alone justifies the need for 3G. We think that 3G will happen in every market and believe the industry will take a cautious but committed approach to 3G.”
Vesa Jormakka, partner at Argo Global Capital, says: “Look at the optical space it’s clear that the problems in that industry have been caused by an over supply of capacity. There’s too much capacity. But in wireless we have the opposite problem not enough capacity.” Jormakka says Argo see many deals that aim to address this problem and acknowledges this is an area that they are interested in.
But while agreeing that capacity is a problem, Stephen Pentland, partner and wireless guru at Spectrum Strategy Consulting, is less sure that the answer lies with 3G “We think that the existing 2G spectrum allocation still has a long way to go. Picocells, like those supplied by IPAccess use a GSM handset as a starting point to achieve low cost and can be deployed where you need them, up to a limit. There’s also a lot of effort going into capacity enhancement techniques like soft sectoring. Then you’ve got EDGE which is a modulation upgrade to GSM, although this does require new handsets, and also initiatives like half-rate voice. All these will increase capacity in an evolutionary manner and will take GSM a long way.”