Death Bell Tolls for (European) 3G
Aug 16 2002
Operators' capital expenditure on building and subsidising 3G services simply can't keep going as it is, according to market analyst Datamonitor
Telefonica and Sonera axed their German joint venture, Quam, writing-off over E8bn in the process. Orange in Sweden is lobbying the government to ease off on licence requirements. Several first and second tier operators look increasingly likely to delay 3G service launches. Any kind of venture funding for small content houses has all but dried up. Uptake of any mobile data services so far has been shockingly low, say Datamonitor. There are no handsets- well, none that work - and it's clear that no consumer is prepared to pay more than around E250 for any sort of advanced device. According to Datamonitor, low uptake will cause a cash-vacuum and that won't service the billions of dollars of debt in license and infrastructure costs.
Optimists in the industry say all this is a setback, but not a crisis. Recent industry announcements talk of 'the 3G sweetspot' and in the same breath state that 'it will take between three and eight years for 3G licence holders to break even'. This isn't reassuring in the slightest, and should be seriously worrying operator shareholders.
"This is hardly a 'sweetspot' - It's a 'long, drawn-out, death'," says Datamonitor mobile telecoms analyst Nick Greenway. "No financier, VC or enterprise would consider investing in something with this kind of payback period - besides, operators will not be around if it takes them any more than three years to gain some sort of return. With junk status ratings; share-prices with possibly another 10 per cent to fall; industry Rights Issues looming; massive over-expectation of potential MMS revenues and discussion of technologies capable of leapfrogging 3G altogether, it could be the beginning of the end for some."
Within the next 12 months, some licence holders may shelve 3G aspirations, possibly having to treat the cost of licences as a write-down. Despite the sunk costs of licences and infrastructure, it will still prove cheaper for them to abort 3G plans, rather than to try and foster a market by subsidising the handsets and services required. Of interest is what happens with the licences. Telefonica and Sonera have retained their licence despite pulling the plug on Quam. It still has residual value as an asset on the balance sheet. However, all it takes is a couple more shaky operators and licenses may become available at knock-down prices as part of debt-restructuring plans. Operators who decided to concentrate on advanced 2.5G services may get another bite of the cherry. But will they want it, ask Datamonitor.
Investing billions of Euros in 3G licenses and infrastructure isn't a decision that anyone would like to make in today's market, but rolling a service out on top of such giant sunk costs makes less sense than abandoning the market altogether.
It's becoming clear, say Datamonitor, that no consumer is prepared to pay more than around E499 for any sort of advanced device - most will pay no more than E250. Considering that most devices in the offing (such as Sendo's smartphone) are priced at around E1,200 at unsubsidised retail value, subsidies of between E500 and E800 look necessary. "Do the maths - if a European operator with 12m subscribers wants even half of them to have a 3G handset, the cost of subsidy will exceed E3bn. Of course in reality, around 65 per cent of those customers will be pre-pay and as such, not an initial 3G data-service target, but the point is implicit," says Greenway.
Add to that the cost of service development, deployment and marketing and it starts mounting up. "Operators' original 3G business plans had been looking to fund some of this from the increase in existing customer revenues. However, uptake of any mobile data services so far has been shockingly low. Even though GPRS handsets are being sold at a moderate rate, the percentage of those actually signing up to a GPRS tariff is abysmal," adds Greenway.
SMS continues to be a success story, so much so that demand for innovative services outstrips operator abilities in tracking, provisioning and billing. MMS however, has already suffered the same fate as other mobile acronyms - over-hype. While few doubt the value of this application, predicted uptake and revenues have been massively inflated, not least as it is likely to cannibalise existing SMS revenues. The handsets just aren't available right now, with only two camera-phones on the market and about another one or two models in the next few months. In the run-up to Christmas, consumers are far more likely to demand handsets with radios and MP3 players, according to Datamonitor. Business models with this extent of exposure to fragile consumer confidence (not only in the US, but also in Europe if interest rates start rising towards the end of the year) will come under even heavier pressure when consumer expenditure drops off.
However, while content providers lamented the lousy margins proposed by operators up until 6 months ago (especially in Europe, where these might have been as low as 20 per cent), the introduction of i-mode services has gone some way towards fostering a change. The operator industry is tending towards a margin of 15 per cent on consumer services.
Any kind of venture funding for small content houses has all but dried up, with only a few investments remaining in messaging technology. Several dedicated start-ups are on their last legs; the real-world media groups are tightening belts and cutting back anything that's online or unprofitable - especially things that are both - and the industry is looking more than expectantly to Hutchison 3G to blaze a trail out of the mire.
All this would be enough of a problem, even if anyone had made a successful 3G handset. But so far, no one has really managed to integrate the circuitry required for 2G (inc 2.5G) and 3G to exist on the same silicon wafer. In effect, all prototype 3G handsets at present comprise 'two handsets in one' under the bonnet.
Nobody has even properly managed to make these double-chip 2G/3G combinations work successfully. Hutchison 3G hopes to be the first major European 3G player to bring a service to market, hoping to launch in late 2002. It recently admitted, however, that its dual-mode handsets cannot currently hand-over calls between 2G and 3G networks, meaning that the user has to ring back. This is serious: if you pay E499 for a phone, you'll be justifiably annoyed about having to re-dial your call every time you move from one network area to another. According to Hutchison, the problem won't be fixed until mid-2003, but they are by no means the only ones.
This hybrid phone naturally incurs a correspondingly larger BOM (bill of materials) for manufacturers, but they are in no position to absorb this through additional efficiencies in production - they're sailing as close to the wind as possible already when it comes to making margin on handsets.
According to Datamonitor, some operators will follow Telefonica/Sonera and pull out; others may go bust or be acquired. Parent companies of smaller operators might have painful decisions to make, with respect to allowing a slide into receivership, the sale of a going concern (which no one will want to buy unless some debt is written off) or injecting yet more cash. One thing is clear - British Telecom's decision to divest O2 is proving to be wiser by the week.
Greenway concludes: "This is not to tar all operators with the same brush. Some show more prudence than others and have rather healthier balance sheets and some have not been subject to such massive licence costs, such as in Norway. MVNOs may yet have their day. With no revenue streams, 3G operators may have no option but to lease capacity to brands like Manchester United, AOL Time Warner or Disney. However, if governments do not revise contractual obligations, we may well see a grey market for 3G licences before 2002 is out."
thefeature.com
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RIP 3G - time to cut losses for next-generation mobile?
Friday 16th August 2002 12:43pm
Damning analyst statement pulls no punches
A leading analyst house is urging mobile operators to abandon their plans for third-generation (3G) networks.
In a note entitled 'Death bell tolls - 3G RIP', Datamonitor analyst Nick Greenway writes: "Within the next 12 months some licence holders may shelve 3G aspirations, possibly having to treat the cost of licences as a write-down."
He urges: "Give it away now - there's more sense in abandoning the market altogether than rolling out a service on top of giant sunk costs."
Greenway's argument is based on likely return on investment (ROI) for licence holders and the business viability of companies that will supply them, from big network equipment and handset makers to small content producers struggling for funding and contracts.
He told silicon.com: "I'm annoyed people are pussy-footing around. Now is not a time for banks and VCs to be delusional. People talk about an ROI 'sweet spot' of three to eight years but one-and-a-half to two years is what any decent VC would want. There will have to be debt restructuring."
Not everyone sees it the same way, however. Simon Buckingham, CEO of consultancy Mobile Streams, said: "There are many people who will take a long-term view and invest in services that have payback periods of this kind - the very nature of mobile communications network building is high upfront costs followed by relatively low marginal costs of operating the network and handling the traffic."
Datamonitor's Greenway also reckons affordable (sub-E250), reliable handsets won't be available in the right numbers soon enough and uptake of mobile data services so far hasn't been strong enough to engender any confidence in 3G. He also said the big equipment companies aren't even promising 3G will be successful.
Andrew Farrell, project manager at Trend Consulting, publisher of the '3G Market Study', said: "This is too extreme, though I agree we are likely to see operator consolidation. And sure, the equipment companies are sounding conservative but the whole industry is conservative right now. Every 3G message seems to be shot down, whether true or not."
Greenway pointed out that Sonera and Telefonica have ditched their German 3G joint venture while operators such as Orange and Vodafone are stalling in certain markets.
He added: "If you're an operator, do you launch with no handsets and a sub-standard network or wait? You're between a rock and a hard place."
We'll bring you the operators' response to this report soon...
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