<The whole Tero piece>
The view from Finland
Mobile internet - where will the sales growth come from?
By Tero Kuittinen, Guest Columnist
Last Update: 10:30 AM MT May 20, 1999
The Great Work of Time
Pop quiz:
* Which operator added more than 800 000 subscribers during the first quarter of 1999, showing a torrid 200% subscriber growth rate: Sprint, the leading mobile player in USA; or Telephonica Moviles, an obscure Spanish GSM operator?
* Which country showed the slowest growth in mobile phone market penetration during the first quarter of 1998: Brunei, Portugal or USA?
* According to Strategis Group, which region will be the smallest market for mobile handsets in 2004: Western Europe, Asia Pacific or North America?
A casual investor reading the usual business rags probably won't pick the last choice for all of these questions - even though they are the correct answers. This is because one of the central questions of this decade in the mobile telecom industry has not been given the airplay it deserves. That big debate of mid-Nineties centered on which was the best approach to ensure rapid consumer acceptance of mobile phones and the optimal competitive environment. Would introducing several different digital standards into a market ensure optimal growth? Or would 3-4 competing operators using a single standard and offering interchangeable handsets be the best approach?
Even though the debate is now over there has been little investor focus on the implications. Now that the mobile telecom markets are on the verge of a new sales boost created by handsets with internet access it would be a good time to review this old "single vs. multiple standards"-debate. I've been sometimes accused of overusing platitudes like "time will tell". Guilty as charged - but on this topic the passage of time has slowly yet inevitably revealed a striking pattern. Those countries that adopted a single standard have seen cut-throat competition between operators fighting for consumers that can switch service providers easily and take their handsets with them. In those markets that chose several digital standards, most notably USA and Russia, the mobile phone market penetration rise has been slower than anticipated.
For anyone familiar with the technological development of Southern European countries the statistics have a certain hallucinogenic quality. Countries like Italy (which had a market penetration of less than half of the US level as recently as 1995) have zoomed ahead of America in mobile telephony. The US growth has possibly been held back by the fact that no standard has emerged as an overwhelming victor. CDMA is comfortably on track to reaching 50% market share. But technologically inferior TDMA has been boosted by the superior nationwide coverage and strong marketing strategy of AT&T. Leading GSM operators are turning in 100% subscriber growth rates on the back of a strong handset selection and a superior local coverage in certain areas. Nextel has kept up robust growth with their iDEN standard, specializing in targeting professional users and businesses.
The result is a state of permanent balkanization: different standards specializing in different niches, none of them reaching a truly satisfying nationwide coverage. In several markets real competition between operators is dampened by the fact that consumers can't take their handsets with them if they decide to switch. Standards like TDMA and CDMA are even further splintered by some networks operating at 800 MHz, some at 1900 MHz. Many handsets can't handle both. The overall consumer angst over patchy coverage, roaming problems and narrow handset selection has prevented digital mobile telephony from making the kind of decisive break-through it has achieved in some Asian and European countries. Whereas nobody in Sicily would be caught dead using an analog phone millions of AMPS handsets are still sold to US consumers wary of the digital confusion.
The negative impact of the endless US standard wars is perhaps best captured by comparing the poorer, considerably less high-tech Southern European markets to America. The growth in Italy, Spain and Portugal is eye-poppingly robust. We see the same kind of gap between Russia and Eastern European markets. Russia is currently a crazy-quilt of AMPS, NMT, GSM and TDMA - and the consumer view of mobile telephony is understandably exasperated. In contrast, most Eastern European countries introduced 2-3 GSM operators, reached a good national coverage early and now are seeing sales growth topping even the most optimistic estimates.
And here's where we finally get to the point: now that the internet phones are finally poised on making a splashy mass-market debut, we are likely to see the bulk of internet phone and network sales taking place in the European and Asian GSM markets. The crucially important factors will be the ability to deliver nationwide value-added services; promotion of common standards for all operators and phone manufacturers; introduction of high-volume, affordable handsets with advanced features; and the ability to draw on a large pool of existing subscribers for upgrade sales. These factors are now fueling expectations of 3-6 million unit sales for the leading GSM internet handset by next Christmas. In contrast, any single smartphone model targeted at the US market will be lucky to sell even a tenth of that by year's end.
Some US operators that haven't even offered text messaging to their customers are now attempting to leap directly into delivering internet to handsets. In contrast, data services have been available in many European and Asian markets for half a decade and have slowly been picking up increasingly sophisticated features. Even more crucially, there is a wide-spread consumer acceptance of text-messaging - the public perception of mobile handsets already encompasses data delivery. Launching internet models into these markets will be that much easier. Different North American mobile operators are predictably showing signs of backing different handsets and different data service options for customers, diluting the impact of the new models and making it hard for service providers to create truly national programs. In contrast, basically all European mobile operators backing internet phones early are supporting all of the new GSM models - the consumers can buy any model they choose regardless of which operator they are using. And European service providers that already are experienced in offering stock quotes, sports headlines, individualized weather forecasts, M-commerce solutions, etc. know that they will reach the customers of all 3-4 mobile operators in any given country with the same software.
According to Cahners In-Stat Group more than half of the nearly 400 million mobile handsets sold in 2003 will be GSM models - but when it comes to internet phones the sales are likely to skew even more heavily to this standard's favor.
Of Gorillas, Chickens & Eggs
The notoriously skittish mobile operators are loath to buy new network equipment meant for novel applications until they feel there is demand. The content providers don't want to invest much in delivering new content for mobile applications until they feel that both operators and handset manufacturers are truly committed. And the handset manufacturters want operators *and* content providers on board before they start pushing media phones seriously. It's that same vicious circle that has slowed down the introduction of many new technologies. And it's also the main reason why Motorola/Ericsson/Nokia hegemony in the global mobile equipment market will probably get a second wind from the new generation of internet handsets.
Here's how it works: new technologies at the heart of the emerging internet phone phenomenon (such as GPRS, Symbian, WAP, W-CDMA and Bluetooth) are developed by consortiums that include Motorola, Ericsson and Nokia as key members. These companies have the muscle to fund a bundle of simultaneous R&D programs with 3-5 year time horizons. They also have locked up most of the world's mobile infrastructure and mobile handset markets, giving them the leverage to guide operators into backing the standard alternatives they prefer. Since the three companies are competing in the same markets they can also guarantee that consumers will have a choice. The existence of this "triopoly" ensures falling prices and rapid technological innovation. That is something you don't get with standards dominated by one or two major players. Three-way competition is chaotic enough to ensure that covert price fixing or implicit agreements on splitting market share will not take place.
An important factor in promoting novel digital telephony standards like GPRS and W-CDMA is the nature of these three companies: they can guarantee more or less simultaneous launch of both networks and handsets. One of the factors NTT-DoCoMo weighed when they chose their third generation digital technology was consumer choice. Had they chosen cdma2000 equipment from Lucent and Nortel, NTT would not have benefited from the third generation R&D programs of Nokia and Ericsson. Since they chose W-CDMA, the Japanese can count on Ericsson, Motorola and Nokia developing simultaneously both network solutions and phones. Nortel and Lucent probably would have preferred delivering cdma2000 equipment to Japan - but since they have spun off their handset divisions they do not have the bargaining position of the triopoly companies.
With GPRS, the standard creation strength of Ericsson, Nokia and Motorola is even clearer. Ericsson has the most advanced GPRS network technology - Nokia seems likely to bring the first handsets taking advantage of the 100 kbps data transfer rate to the market. All three companies are selling both network and handset equipment for GPRS. As a result, GPRS has suddenly become the definitive data transfer technology for boosting the speed of existing GSM networks. The second-tier GSM network companies like Siemens, Alcatel, Lucent and Nortel seem to have been caught napping.
We have already witnessed how rapid technological development has increased the market position of the hard-core GSM companies. There are half a dozen companies selling GSM-900 networks with decent results. But when we look at the GSM-1800 and GSM-900/1800 dualband scorecard from 1998 the situation is dramatically different: at one point both Nokia and Ericsson had 31 customers - while Motorola, Lucent and Nortel had 22 customers *combined*. As new GSM network sales are increasingly bundled with GSM-1800 equipment and "booster" solutions like GPRS, the sales will likely continue to favor Ericsson and Nokia. Ericsson has evidently locked up 50-60% of the initial GPRS sales, depending on interpretation.
And why do GSM network sales matter so much in the mobile data context? Well - during the 18 months preceding April 1999 the global share of GSM networks leapt from 56% to 60% of all mobile infrastructure sales (compared to the 18 months preceding April 1998). Meanwhile, the share of CDMA networks sales dwindled from 26% to 21%. We are at the threshold of a new wave of infrastructure sales; much of it will be linked to GPRS offering extra speed and GSM-900/1800 dualband technology offering extra capacity - and the gap between the market leaders and the followers seems to be widening <TK>.
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