re: 3G - A Viewpoint about Consolidation in GSM/UMTS World
Massive consolidation rather than healthy competition is likely to be the result of the huge amounts of cash needed for third generation networks. Bob Emmerson argues that many countries may end up with a duopoly and that the really successful mobile operators could be limited to five global players.
>> Strategy: Count Down
01 February 2001
Bob Emmerson
CI Online
In the early days of cellular telephony, the first operators were the incumbent fixed line operators. They were the only ones that could backhaul traffic from the base stations to the switching centres and then send the mobile call on its way over the public telephone network. This was a very expensive way of communicating and call charges only dropped where and when competition was introduced. But if it was that simple why do mobile tariffs vary so much? Italians for example get the best wireless deal, followed by subscribers in Germany, France and Finland. In Holland, mobile tariffs are on average 6.4 times higher than that of Italy. A cursory glance at these markets would suggest that that prices come down as more and more operators enter each market and eventually wrestle each other to the floor. Only then do profits fall to a reasonable level.
There seems to be an upper limit that competition can tolerate. Nobel Prize game theorist Reinhardt Selton argues, mathematically, that five is the figure at which tacit co-operation between competitors breaks down.
However, four is a "good" figure as this number of operators generates the "right" gross profit margin.
McKinsey and the OECD seem to concur. Countries with four or more operators have, on average, generated higher growth rates than those with three operators, who in turn have generated better figures than those with two operators, who have also exceeded the growth rate of the original monopoly operators. Few markets have accommodated six or more without self-destructing in a wave of mergers, bankruptcy or short-termist planning. Unfortunately the standard rules of competition that can describe the current mobile world may not work as third generation networks arrive. The problem is that they cost so much in the first place.
The fact that the cost of acquiring third generation licences around the world has so far been well in excess of $125 billion dollars is public knowledge, but until recently the industry has been very shy about infrastructure costs. There is an initial investment, which will be limited to services for urban areas, followed by the further cost of extending the coverage and, crucially for adding some services, increasing data rates. But try to find out exactly how much and there are a plethora of confusing and, at times, contradictory figures.
A report from the Canadian investment firm Dundee Securities, for instance, quotes figures from Motorola that predicts a relatively modest spend on third generation networks between 2002 and 2004 of about $200 billion a year. Mark Hugh Sam, a "special situations" analyst for Dundee, argues that this means just the initial cost of implementing a third generation network will average out at around $1,000 per subscriber.
The conclusion for would be operators of next generation networks are not good. "I really believe there will be a decline in revenues from mobile voice calls due to stiff competition," he says. "Revenues from data calls will not increase enough to offset that decline and offset the costs of building third generation networks."
It is predicted there will be one billion mobile subscribers by 2003 and converting all of these to third generation could well cost $1 trillion in network costs alone. Such conversion is in many operators plans. Deutsche Telekom, for example, says it intends to convert all its mobile customers to third generation by 2010. What's more, the total number of mobile customers keeps on increasing, so that by 2007, there could be 1.4 billion users.
In actual fact, nobody really knows how much this conversion will actually cost which is really scary. And it can't be calculated on the back of an envelope. Some operators will spend less in the first phase and then build out the network in line with the increased number of subscribers.
However, it is entirely possible that the cost of getting subscribers will exceed the revenues they generate. The on-going cost is also impossible to define, though Motorola estimates it as around $200 billion per annum.
Part of the reasons the cost will be so high is because the technology doesn't easily support the promises made. Third generation mobile is supposed to be a high-speed data service that will deliver two mbps to stationary users in urban environments.
This theoretical figure will never be reached because the wireless interface is a shared resource. So achieving high data rates involves a trade-off between network quality and call density. If quality is to be retained, then cell density can only be increased by splitting the sites, which increases the number of base stations by an exponential factor of two.
The most likely scenario is that a third generation network will start out delivering 144 kbps over a distance of three kilometres which equates to four base stations. Getting to the magic figure of two mbps will cut the reach down to 1.5 kilometres and require a grand total of 16 base stations.
Operators may simply run out of investment capital to take networks to these high data rates. And if, on average a developed market has four mobile operators, it is hard to see how the markets can support the capital cost of building four separate networks, particularly if they all have low data rates. The immediate future is uncertain, but it is clear that the operators will have to consolidate sometime soon. In Japan and Korea this has already taken place. Five operators have morphed into three.
Consolidation is also being driven by economies of scale and opportunities.
In Europe, for example, carriers are establishing pan-European networks and putting their marker down in other parts of the world. Telefonica, for example, is racing to be the leading carrier in Latin America. Vodafone started this trend and the company clearly wants to become the world's leading wireless carrier. And let's hope it is successful otherwise, only old incumbents will hope to compete on a global stage. Companies like British Telecom, AT&T, Deutsche Telekom or France Telecom that can offer bundled services selling everything from local to long-distance voice, internet, data and wireless.
This is not good news of course. Telecom history shows that incumbents abuse a monopoly, or near monopoly, position. Prices are high and the concept of subscribers being customers is alien. The incumbents, not the customers, dictate the terms.
Such could very well be the future when consolidation has taken place, to such an extent that certain markets will effectively have a duopoly, probably a pure wireless carrier like Vodafone with the other a former incumbent. One will be there on merit, the other by default and tacit co-operation could well take place. Cheap minutes will not be high on the agenda.
This could also have a profound knock on effect -not least for the equipment vendors. Is there enough business for Alcatel, Lucent, Ericsson, Motorola, Nokia, Nortel and Siemens to share? After all according to the Reinhardt Selton game theory model there are three too many competitors in this area.
Operators will be forced one of two ways - either to move up the value chain and seek revenues based on content rather than connectivity or to effectively retreat to a network operator's position selling capacity to competitive service providers. Although the latter promotes competition, financiers are much keener on pushing operators up the value chain as they believe it will provide a greater return for their backing. But again it is a scenario that will lead to consolidation not competition.
Either way, many operators will have to be losers. A typical prediction of the global revenues from mobile data services by 2010 is around $80 billion per year. Add a figure for voice too, and total revenues would be in the order of $300 billion. And if the real ongoing cost of running third generation networks is $200 billion per year, there is little opportunity to make any money. Something's got to give. Either predictions of global revenues will have to increase enormously or mobile operators will have to scale back their third generation plans significantly with low speed data services limited to city centres.
Certainly there will be a surplus capacity for extra voice. But by the turn of the decade most of the people who will want a mobile phone will already have one and there is a limit to how much mobile talking people can actually do. Over the next few years, new subscribers will appear but the growth rates will tail off dramatically particularly as developed markets reach their saturation point. Growth for the global carriers will need to come from untapped markets like China and India and second generation services may well be enough here for many years.
When the auctions for third generation licences started, too many operators felt they had to be in there regardless of the price. In fact those that did get left out or who stayed out may end up being the winners. It is a view that Goldman Sachs certainly agrees with. It argues that despite the hype most of the services available on existing and GPRS networks will satisfy the needs of many subscribers at a considerably lower cost.
And even where some operators can make third generation networks succeed, there will be more competition and expenditure on the way as the idea of fourth generation networks starts to take hold.
Analysts at Forrester Research are particularly downbeat. "Exploding mobile internet usage and subscriptions won't make up for a 36 per cent decline in traditional mobile operator revenues, leading the average revenue per user to fall 15 per cent in Europe by 2005," it says in a recent report.
And it predicts that mobile carriers' operating profits will disappear in 2007 and take six years to return, leading to major operator business failures and massive industry consolidation.
So who will survive? "Scale will become a key success factor as grim profitability prospects and huge capital requirements take their toll," claims the study. Winning operators will consolidate into five groups.
Vodafone, T-Mobil, France Telecom/Orange, and BT Cellnet are probables while the wild card slot goes to KPN, Telefonica, Telecom Italia, or NTT Docomo.
Unless, of course, everyone has got the figures wrong
INTERNATIONAL ROAMING
Revenues from roaming data services could prove to be a crucial source of extra cash for third generation networks. Current voice roaming within gsm is based on one-to-one agreements between carriers, but this has taken a long time to reach the ubiquity it has now. It is unlikely that this process will work so easily for GPRS and third generation networks, yet subscribers will expect global roaming for data services to be in place within a matter of months of national services starting.
At the moment there are more than 400 gsm network operators in 162 countries.
Global roaming would therefore involve too many individual agreements.
Almost 80,000 individual links are needed to interconnect 400 operators while isps and asps will increasingly have to be factored in. A new model is required for GPRS roaming, one that requires far less links and also makes better use of network capacity.
There may be answers. Sonera, for example, has come up with the idea of a hierarchical network model and GPRS Roaming Exchanges or grxs. Traffic is aggregated at a regional level and the grxs connect to a GPRS roaming backbone. Thus, operators only need one local link in order to enable global roaming. The most likely roaming scenario will be a few large international exchanges linked to others via gateways. There are analogies here to the way voice over ip traffic is handled by different carriers and commercial internet exchanges. GPRS networks are initially being launched as islands and the operators will focus on implementation, testing, marketing, customer care and billing in single markets. But international roaming will eventually become vital. <<
- Eric - |
