Trial of Strength
Asia's mobile-phone companies are poised to make billion-dollar investments in 'third-generation' technology that will vastly expand services. But for some the leap may be fatal
--------------------------------------------------------------------------------
By Kathy Wilhelm/SINGAPORE
Issue cover-dated June 29, 2000
--------------------------------------------------------------------------------
UNEASY LAUGHTER RIPPLED through the ranks of mobile-phone executives and engineers at a recent conference. The joke, made by Merrill Lynch's Asia telecoms analyst Alistair Scott, was: "Put your hand up if your revenue this year will cover capital expenditures." No hands went up, nor did any wave in response to Scott's next shot: "Put your hand up if you can tell me what your 3G bill will be."
That's not surprising because no one knows exactly how much it will cost to roll out the coming "third generation"--3G for short--of mobile networks that will turn humble handsets into powerful information devices. What is preying on the minds of mobile operators in Asia is that in April fierce bidding for 3G licences in Britain ended with operators paying on average above $7 billion per licence--tripling their estimated costs of rolling out the new services.
The very mention of 3G conjures up excitement and anxiety in almost equal measure. The excitement is over the many uses to which 3G phones could be put, from mobile video-conferencing, to locating the nearest movie theatre showing Mission Impossible 2, to sending long-distance instructions to digital appliances. A homeward-bound commuter could use a 3G phone to turn on the air-conditioning in his apartment, for example.
The anxiety is over the billions of dollars that mobile operators expect to spend in getting licences for and building 3G networks--and the very real prospect that some will stumble and even go under while trying. State-run Korea Telecom's June 15 statement that it will buy a controlling 47.85% stake in fourth-ranked Korean mobile company Hansol m.com is an early example of the consolidation that 3G is expected to trigger among Asian mobile operators.
"There's a fundamental question of how many players can survive in a 3G market," says Michael Gartska, who advises Asian telecoms companies for Bain & Co. in Singapore. Even now, he notes, only the top two mobile operators in most Asian markets are making significant profits, because of heavy competition. Moving to 3G will add a new level of difficulty both because of the huge investments and because operators will have to guess what services will prove popular.
Will commuters want to use their mobile phones to turn on the air-conditioning? Will the technology deliver all that's promised? All this remains to be seen when the first 3G networks start operating next year, in Japan and a few European countries. Operators in Hong Kong, Singapore, South Korea and Australia are expected to follow in 2002 or 2003.
The anxiety level among Asian operators has climbed sharply since the British auction. In Asia, only New Zealand has said it will award licences by auction, but Hong Kong, South Korea, Singapore and Australia have all invited public debate on it. They're also weighing options such as levying a flat fee, attracted by the opportunity to replenish government coffers depleted by the Asian financial crisis.
Two CEOs from winning bidders in the British auction "sat down afterward and compared notes on how much they overpaid, and it was in the couple of billions," says Eric Nordin, a Tokyo-based consultant with Bain. Why did they go so high? In most auctions, bidders drop out when the price exceeds their budget. But mobile operators can't afford to drop out with 3G because they probably won't get another chance to enter the market, Nordin says. "You have to win, but it may cripple you because it's so expensive." This happened in the United States in the late 1990s when mobile operators got into a bidding war over licences for new transmission spectrum. Several winning bidders have since filed for bankruptcy.
Most Asian operators are lobbying hard against auctions, arguing that they will have to charge consumers more to cover the cost. If services are a lot more expensive, "it's going to really delay the take-up rate," says Peter Kaliaropoulos, senior vice-president at Star Hub, which started operating as Singapore's third mobile company on April 1. And that means Star Hub, in which British Telecom and Japan's NTT jointly hold a 40% share, would take more than its planned four to five years to reach profitability, he says.
Indeed, although much of the public debate about auctions has focused on whether they could hurt consumers, investors are more likely to be hurt. Consumers, after all, have the option of staying with their current, 2G mobile phone services.
Kaliaropoulos certainly sounds like a man faced with a dilemma, alternately saying: "We don't believe we can walk away," and "Everything has its limits." For a newcomer like Star Hub, he says, "3G is really a must play. I don't have a chance for market leadership in wiring up residential homes." But he says he does have a chance of market leadership with mobile 3G because it is "a totally new business." Opinions differ on how long operators who fail to obtain 3G licences will be able to flourish. Some think consumers will quickly migrate to the 3G services, while others predict that upgrades of 2G networks will allow them to hold on to subscribers for years to come.
In the end, industry-watchers expect most Asian governments to award 3G licences by "beauty contests," or appraising the competitors' proposals, if only because they want to ensure domestic companies are among the world's first to implement the new technology. However, they probably will levy fees or set conditions for geographical coverage and price. Japan has already started a beauty contest, with a government advisory panel recommending on June 9 that provisional licences be awarded to the three incumbents, NTT DoCoMo, J-Phone and IDO/Cellular.
The high cost of entry is only the most obvious challenge for mobile operators in moving to 3G, and even without auctions some players may be unable to recoup their start-up costs. That's because competition has driven down what carriers can charge for conversation. The only way they can cover 3G installation is by generating substantial flows of data. That means getting consumers to use their mobile phones to send and receive video, surf the Internet, buy tickets, play on-line games or enjoy a myriad other new services that have yet to be dreamed up.
Kaliaropoulos says Star Hub is betting that its average revenue per user will climb 30%-50% from current levels, including a cut of purchases and financial transactions conducted via its phones. But to capture those revenues, mobile companies will have to transform themselves from mere carriers to entertainment, information and financial-service hubs. Until now, phone companies have not had to develop Internet portals or software applications or think about consumer lifestyles.
"In 3G you have to become more like a media and content company, and that's a very different skill set," warns Bain's Gartska. "You have to build what is effectively a whole different company." While well-established telecoms companies have deeper pockets to cope with the heavy 3G network installation costs, their young challengers aren't burdened by monopoly-era habits and may find it easier to turn themselves into imaginative marketers.
Mobile operators know well how perilous the 3G transition will be, but investors are only just starting to wake up to the risk. Mobile shares in Asia generally have fallen 20%-30% in the past three months, but in most cases telecoms companies still remain stars in their respective markets.
"The investor faith is definitely there, having seen 2G work fantastically well," says Neil Juggins of Prudential Bache Securities in Singapore. Mobile-phone penetration in Singapore, Hong Kong and South Korea is likely to surpass 60% this year, a level Juggins says no one predicted. "So there's a tendency to give 3G the benefit of the doubt." |
