The new incumbents
By Valerie Thompson And Ian Scales.
Mobile is at the top of the telecoms pile, and every player wants to forge a mobile services strategy. But why are European mobile network operators prepared to pay so much just to run an access network?
The fact that Europe's mobile network operators are apparently prepared to shell out billions to win third-generation mobile licenses has this summer caused a sharp intake of collective breath across the rest of the telecoms industry. The United Kingdom set the ball rolling with licenses in its auction process going for a collective #22.5 billion (euros 37.3bn), while the German authorities last month netted a staggering DM 98.8bn (euros 50.5bn) for its auction.
Those big numbers are, or should be, telling fixed network new carriers two things. Firstly, they re-emphasize just how powerful the mobile sector has become within the telecoms firmament. Rocketing growth and palpable profitability have given mobile operators financial multiples most fixed operators can now only dream about; so much multiple that they can clearly cough up billions when asked. And the growth that is driving those multiples is now becoming substitutional: gobbling minutes that would otherwise have been placed across the fixed network in the most mobile-embracing of the European markets, and due to start doing the same to the rest.
As a result, it's clear to most European fixed telecoms operators that they need to start, if they haven't already done so, adding mobile to their packages for both voice and data services. And to do that they face the daunting prospect of dealing with mobile entities at the peak of their financial and negotiating power.
Which brings us to the second significance of those big sums. It's clear that mobile operators are aiming at a GSM re-run for third-generation mobile, adding tightly controlled - and by definition highly priced - data services to today's tightly controlled and highly priced voice ones.
Despite the hype, the advanced marketing of the so-called mobile Internet looks like a slight misnomer - which could be why we're hearing so much of it. In the same way that dictatorships have often been styled People's Democratic - which meant they weren't democratic and the people didn't get a look in - the mobile Internet doesn't appear to be moving towards open, non-discriminatory access, which if Internet means anything at all, surely means at least that.
Instead, operators are, in the words of one observer, "determined to avoid a re-run of the fixed Internet" where the value of services run across it tended to accrue to the service, rather than the infrastructure, provider. This time around, one objective is to ensure that the 'mobile Internet' will either be run by the mobile access network operator, or, where services are run by a third party, the network operator will expect a major cut of the revenue.
Some participants think the relationships between service providers and mobile network operators (MNOs) will evolve to achieve some kind of balance.
Rhett Ryder, director of service provisioning and mediation system specialist, Tertio (London), thinks that ultimately the customers will decide. "We don't know exactly how the structure is going to work, but as far as we're concerned we're providing solutions for both mobile network operators and service providers. I think that whatever services I get from my PC, I want to get on my mobile service; ubiquitous access is the key thing."
To this extent, Ryder thinks customers will ultimately drive the MNOs to providing open, non-discriminatory access to whatever service they want, at the price they're prepared to bear. Put simply, market forces will do the work.
If this is the case, the battle is going to be an interesting one. Without a business plan which envisaged the network operator winning most of the service revenues, it is difficult to see how the spectrum owners could afford to pay back those multi-billion license costs, with the small matter of network build, operation and marketing costs piled on top.
Expect to hear the details of this economic argument elaborated forcefully by the mobile operators from here on in, whenever there is a suggestion that pro-competitive regulation is introduced to open up access between mobile users and independent, Internet-based service providers.
So where does this leave new carriers - at least those without parents involved in 3G mobile? The answer is negotiating, but perhaps more in hope than conviction.
The hope is that mobile network operators' requirement to race the devil to the 3G market, with the interest rate clock ticking, will require third party involvement. There is much talk of the mobile virtual network operator (MVNO), which will act as another channel to market, bringing traffic and business fast to 3G and in the process discovering the best business models and applications to do it.
But it will probably be the strugglers which will really want to foster these kinds of relationships, according to John Matthews, principal consultant at Ovum Ltd. (London).
"MNO market leaders (market dominant MNOs) have cost and marketing advantages," says Matthews, but new service providers and fixed telephony carriers represent additional channels to market for non-dominant MNOs. Matthews says that enhanced service providers (ESPs) and MVNOs, for example, will enable other mobile operators to compete against the market leaders and encourage more traffic.
According to Ovum, MVNO and ESP revenues in Europe will rise from around $450m today to around $800m in 2002.
"Non-dominant MNOs should develop marketable offerings for enhanced service providers, begin to establish a relationship with brand managers and begin planning to support commercially negotiated MVNO agreements," says Matthews, adding that other mobile operators should oppose mandated access for MVNOs.
Clearly, one strand of thought sees the MVNO as a neccessary evil for some players, rather than a critical component part for successful ones.
But other operators seem, at least at this stage of the game, to have a less proprietorial outlook.
For example, Swedish broadband operator Tele1 Europe NV's strategy - it's applying for a UMTS license in Sweden and Norway - will be to own the infrastructure but open the network completely to other service providers, with priority going to the other companies in its consortium. Tele1 (Stockholm) jointly owns Broadwave together with U.S. mobile operator Western Wireless International Corp., Finnish GSM/UMTS mobile company 2G/3P Group, Swedish fixed line operator Rix Telecom AB and Norwegian mobile service provider You Communication AS.
"The status quo is for mobile network operators to have complete vertical integration, from network to retail distribution channels,"says Christer Palmgren, director of mobile services at Tele1 Europe. "We will change this paradigm by offering a service framework, not only to the owners of Broadwave, but also to virtual network operators and service providers to sustain the open network philosophy."
The problem facing the service providers and new carriers anxious to partner in this role is the 'Faustian' pact such a relationship might involve. Hit the jackpot with a compelling service or portal, and your senior partner can either squeeze you out with its own, similar service, or snap you up, or a combination of both.
Too strongly stated? Perhaps, but there are worrrying signs. New carriers are currently negotiating a range of partnership agreements with mobile network operators, for both second- and third-generation services, and some are privately expressing their alarm at the terms and conditions on the table.
Getting a meeting with one of France's mobile network operators was no problem for alternative fixed line provider Western Telecom S.A. (Paris).
"Sure the operators will meet with us, but when it came down to negotiating a price for interconnection, the result was discouraging," says Pierre Billote, vice president of marketing and communications.
And after protracted negotiations, RSL Communications Ltd. (Hamilton, Bermuda) eventually negotiated its first European mobile agreement, with Sonera in Finland, where it now offers wholesale mobile to its Finnish business and corporate subscribers. Now it has a reselling airtime business in the United Kingdom; resells airtime in Germany and Australia; and in countries such as Sweden and Austria it is negotiating with MNOs.
"Mobile is only really interesting if you can get a virtual mobile network operator (MVNO) status," says Ian Duncan, head of U.K. marketing at RSL COM. "The regulator needs to look at this situation closely and push network operators to give MVNO access to third parties. The only way to give customers choice is to have a tough regulator."
But other observers believe the UMTS environment will push license owners into meaningful, sustained partnering.
"High UMTS license costs provide incumbents and new entrants alike with an incentive to fill their networks more quickly," says Upin Dattami, analyst at Morgan Stanley Dean Witter, in a report entitled Virtual Reality.
"We believe that, in addition to financial benefits, network operators can gain greater reach through MVNO agreements. But ultimately, MVNOs could end up competing with MNOs."
It's the last point that has non-license-holding players worried. Off-the-record comments reveal that MNOs are seen to be prone to 'incumbent-like' behavior, with many of the older, established mobile operators in fact business units of the former monopoly holders, and as such still dominating their national markets.
Those fixed-line operators which attempted to enter the mobile market early have had difficulties getting access to the mobile networks run by the GSM license holders. Moreover, say new many carriers, hefty prices for call termination mean that the market remains anti-competitive.
"In the past, mobile networks have been run as cartels, first with roaming and now with interconnect, call termination," says Iain Osborne, director of regulatory policy at Global TeleSystems Ltd. (London). "We are lobbying for benchmarks set by the regulator," says Osborne.
Indeed, MNOs across Europe have put up significant barriers. For example, in Switzerland, even if regulator OFCOM made it possible for service providers to have open access to mobile networks, it will not enable mobile carrier pre-selection until an ETSI standard is issued, which according to OFCOM will take "a few years".
Where there's significant competition between MNOs, though, interconnection rates seem to be less of a problem. The German mobile market is more equally divided among incumbent MNOs, and interconnection rates have decreased dramatically without the intervention of the regulator, according to Ovum.
"Our estimate for the average mobile termination charge (in Germany) has decreased by 53% over the last year. Even allowing for a generous error margin (up to 30%), the decrease is substantial," says Serafino Abate, Ovum's interconnection specialist.
The experience of U.K. newcomer Energis Mobile, which last month announced that it would launch mobile service later this year as a branded, integrated mobile-fixed offering, is encouraging. According to the company there are opportunities for commercial agreements, especially with non-dominant MNOs, such as Orange plc and One2One in the United Kingdom.
Nick Sharples, spokesperson for Energis plc (London), said it chose to parter with Orange plc (Bristol, England) because it gave Energis access to its billing system and call center services, enabling it to get up and running faster. "We are developing GPRS and UMTS services in conjunction with Orange. They might end up offering our services to their customers.
Anything we develop, Orange would have access to," says Sharples.
But other new carriers may have to jump through hoops to close commercial agreements. So far, contracts are non-exclusive, but newcomers have had to convince, and in some cases have been forced to guarantee, the "new incumbents" that they would not be marketing to the same customers and distribution channels. In one example, say industry sources, fixed network service providers may only be allowed to offer mobile services to their own existing customers.
Nevertheless, service providers say that compared to a year ago there is more room for negotiation. "We are talking to operators about a range of creative solutions for our customers," says Osborne at GTS. "We help the mobile operator increase subscribers on their network to compete more strongly against their peers and we can offer a range of services from reselling airtime, to bundles, to indirect access.
Tele1 has signed agreements with MNOs in all Nordic countries. And Sense Communications (Norway), is not far behind with agreements in Sweden and Norway and has letters of intent in Finland and Denmark. With its own SIM card, support center, and a deal that lets it take a share of incoming and outgoing call revenues, Sense is one of a new breed of MVNO.
Its entry into the mobile market is putting new momentum into one of the most saturated mobile markets in the world.
"Some of the users we are signing onto our mobile service have never subscribed to mobile before," says Detlef Stueb, international relations director at Sense. It helps that the company is also the owner of a free Internet access provider, with a popular portal that also supports the mobile business. "We use cross selling on the fixed Internet portal," says Stueb.
Where beauty contest, rather than auctions, are the basis for license allocation, operators also have an immediate requirement for partners, but for different reasons. "Operators vying for new UMTS licenses are keen to sign partnerships with us," claims Stueb. "They are interested in getting traffic volume and we have a strong-brand, fast-growing subscriber base which carries sway for regulators when they consider allocating spectrum."
While Sense might be tapping new markets, other service providers which target business customers, for example, are definitely going to be taking some of the MNOs' market share at the same time as price competition intensifies - on the face of it, not a comfortable long-term arrangement.
The other threat to MNOs is that new carriers or service providers will capture market share through innovative services, perhaps hosted on handheld computers instead of mobile handsets. "The risk is that independent 'service providers' or 'content owners' capture a disproportionate share of the value from the new services. This would be analogous to what AOL, Yahoo!
and Amazon.com have done in the fixed Internet market in the U.S.," say analysts in Unwiring The Net, a report published by Credit Suisse First Boston's telecoms researchers in London.
The question is, behind the soothing talk and eagerness to partner, how are UMTS license holders planning to prevent that potential value erosion taking place?
Will control of portals, superior marketing muscle and a relationship with the ultimate mobile end user be enough? Or does the logic of a mobile Internet which, by definition, allows access at high speed to other providers' content and services out on the Internet leave a gaping hole in their commercial defenses.
After all, third-generation wireless operators have just bet billions on their ability to win a substantial proportion of revenues which observers believe will be available from a mobile Internet. If I were them, I would be thinking of ways to make sure my partners don't leech it away.
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