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Hands0n
19th August 2006, 07:06 PM
The following article is culled from The Register. It is quite thought provoking and raises a number of questions regarding 3G in Europe. Can this really be happening? What are we to expect in the coming months? Are these powerful handsets to be used for nothing more than making calls and sending texts? Then what is the point of them? Are we witnessing the Dot Com of the handsets? So will 2007's 3G handsets be a return to what we've seen to date on 2G?

Or is the flipside that the networks (like T-Mobile) buck Vodafone's trend - the former bundle MMS in their Flext tariffs, and that is bound to encourage use of that faciltiy as it gets easier to use on the handsets themselves, and image quality improves beyond anything we've seen to date.

Read on and say what you think.



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.

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.

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.



Continued in next post ....

Hands0n
19th August 2006, 07:07 PM
Continuing the previous post ....




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.

Source URL: http://www.theregister.co.uk/2006/08/07/3g_woes/

Hands0n
19th August 2006, 07:46 PM
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.


Perhaps this is where Nokia are coming from with the launch of their online store for SIM-free handsets. At the moment these "unsubsidised" handsets are very expensive from the perspective of someone who generally gets a handset given with each and every contract or upgrade.

So is our future really going to be one where we buy our airtime and handsets from different suppliers? If that is to come about then the cost of handsets will have to come down significantly. I really cannot see the average person buying a £400+ handset, even if it has the capabilities of the N80. We don't even pay that much for a full blown PC these days.

No, such handset prices will have to drop to the sub-£100 level to become mainstream method of supply. But then that may not be such an unreasonable expectation. Once any technology becomes commoditised the retail price plummets. We have seen this with the humble PC which not many years ago would have cost £4,000+ for one based around an i286 processor with 64Mbytes memory! Now we are talking about sub-£400 for multi-GHz processors with half a Gig or more of memory and 40 and 60 GB disk drives.

So the expectation of an N80-like for £99.99 may not be quite so far fetched in a few years time. But can the mobile network operators wait that long for the manufacturers to have such technology available at that price?

crowfield99
20th August 2006, 08:24 PM
I remember when the first MMS Phones came out, people said "Oh im not going to use that" "Oh its so complicated to use" MMS has been around for a number of years now and networks are now starting to report growth in this. Give people chance to get used to the technology, the advantages it has and no doubt better coverage in the years to come and we will be laughing at 2.5 G.

getti
20th August 2006, 11:22 PM
I remember getting a 7650 sim free from phones 4 u when it came out and was amazed by the camera in it. Then i walked into Vodafone who had a demo Sharp GX10 handset in and was showing off a service Vodafone were about to launch on the market called Vodafone Live!.

Sold off the Nokia and as soon as i got the phone call saying it was out on PAYG and they had 1 in i was straight down there. £349.99 it cost which at the time was the most i ever paid for PAYG but i was blown away by the screen and the handset.

Free content (including tones and games) and free MMS for about 6 months to get interest. I ended up sending more MMS than texts.

Problem i have now is technology is changing so quick its hard to get too excited by anything now. I mean the day i stood in Vodafone and handed over £349.99 for a GX10 i would not wait to get to use it and see what it could do but now its like 'Well thats another nice phone'

3g-g
21st August 2006, 12:47 AM
So am I right in thinking then, if the operators just started doing SIM only deals where you brought your own handset to the party we'd all get much cheaper tariffs and call costs?! Pull the other one, I'll tell the jokes here I think! What abosolute tosh. So, why Mr. Operators do you spend so much time and effort branding those handsets to high heavens when that initial cost you're trying to claw back on the handset is the reason I don't get cheap calls / data / roaming.

Look it's simple, I've said it before. The UMTS networks you all own have countless capacity for voice, it's sitting there unused, wasted, and you're all scratching your heads thinking, "what are we going to do to get customers using it and make those billions of quids back?". Easy, every person that takes out a contract or upgrades etc and have use of a 3G handset, when they make calls on 3G they're half the price, if not more, than the GSM counterpart. Soon enough you'll have folk banging on the door wanting to use the UMTS network only, GSM will be swiftly forgotten about.