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Third Generation Mobile: From Perception to Fact
As many operators in Europe and Asia work on finalising licence bids for third generation mobile services, few appear to be making the move with any clear idea of the reason why. Although pushed along by government regulatory initiatives and the international standards making process, solid, clear-cut business cases for 3G have yet to emerge. Instead, most operators believe that a 3G licence is simply necessary to keep up with their competitors or to enable them to meet a potentially massive, but as yet unproven demand for high-speed data services.
Dan Gardiner
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Third generation (3G) is a hugely expensive and complex issue, and operators should have a clear understanding and set of objectives in place before committing to the lengthy process. In an increasingly competitive environment, a successful 3G strategy will come from an appreciation of the demand for services, rather than from the technology itself. It is this required shift in emphasis to services that will form a key part of the wider transformation of telecom operators, away from network ownership to service provision in order to achieve their revenues.
Analysis of the likely short to medium term demand shows that 3G networks may be more significant in the provision of extra voice capacity and enhancing the operation of low-speed data than in providing high-speed services. Experimentation with enhancements to existing networks will therefore play a very important role in understanding which services will be successful for 3G. This is also likely to mean that a lower cost, more gradual rollout strategy for 3G, that does not fully enable the high-speed data component immediately, will be the most cost-effective.
What is 3G?
3G promises a range of mobile network technologies theoretically capable of delivering up to 2 Mbps through the air between handset and receiver. However, 3G is more fully understood in terms of the ambitious vision behind it which is to provide mobile multimedia services, delivered over a variety of mobile network types, to people anywhere in the world. It seeks to achieve this by providing a leap forward in the transmission speeds (likely to be nearer to 384 kbps in commercial deployment than the theoretical maximum), enhancements to call capacity, and harmonised operation between existing different network standards. This vision aims to ensure that the momentum the mobile industry has gained through the success of current second generation mobile systems is not lost. Using 3G, mobile operators will, for the first time, be able to compete with the fixed network for carrying data traffic.
However, the large scale provision of data services is a very different environment from the current position occupied by mobile operators. The much heralded success of second generation systems has relied entirely on voice services. It remains unclear how well suited mobile networks are to the provision of data: price per bit is higher (capacity is more limited); there is a greater risk of transmission suffering interference; and the majority of terminals have limited provision for the display of data. In addition, the level of demand for mobile data services has not been established.
The cost and complexity of 3G means that it is the most significant upgrade for operators since the deployment of digital networks began in 1992. It requires new base stations as well as changes to the core network. For most operators the total cost (including the licence) will be greater than their entire investment to date. So how can they be sure that 3G will be worth the investment?
Although very few operators will rule out investing in 3G, many are still unsure of how to justify it. The licence process in Europe and Asia is forcing some players to commit themselves to 3G before they have had the chance to assess all the business implications. Essentially, the principal reason for deploying 3G should be to attain competitive advantage. However, Ovum a UK based research consultancy has shown there are three, not mutually exclusive, ways operators believe 3G will help them to do this (Figure 1).
Competition
For many operators, the mere possibility of competitive advantage being handed to their rivals in deploying 3G is the primary motivation for moving to 3G. The consensus building that has been part of the standardisation process, often gives the impression that the move to 3G is an inevitable, rather than imposed, evolution of the market. One example of the way 3G may be perceived to offer competitive advantage has been the commercial success of IS-95B networks in Japan. Both IDO and DDI launched IS-95B offering data speeds of upto 64 kbps, much higher than that available on the NTT DoCoMo service. This resulted in a migration of subscribers away from NTT DoCoMo which was forced to respond with the launch of its i-mode service. A strong motivation behind opting for a 3G licence is also the impact that spectrum licences have on share price. Despite its potentially huge cost, the licence to own 3G spectrum is still regarded as an asset by investors, and failure to win or bid for a licence would have an impact in the confidence of investors as to the long term viability of an operator. A falling share price would in turn impact on the competitive strength of that operator in the market and make it a weakened target for the consolidation that is currently taking place in the industry.
The fact that a perceived competitive threat is currently the most popular reason for deploying 3G is because few operators have firmly established the relative merits of operational improvements or the demand for data. Its principle weakness is that, as a reactive approach, and based more on perception than fact, it does not lead to a coherent strategy for the deployment of 3G.
Demand
The most widespread view in the industry is that demand for data services in the future will create a whole new revenue stream for operators and so drive the deployment of 3G networks. This view is based on the huge volume of data traffic on fixed networks generated by the Internet and, to a lesser extent, the recent rise in the use of short message service (SMS) on mobile networks.
The rapid rise in the number of users accessing the Internet is well documented; the growth of SMS, which has largely taken place over the past 18 months in countries such as Germany, the UK, Italy, Portugal, the Philippines and Hong Kong, less so. In Finland, the increase in both the number of SMS users and the number of messages per user, led to a 10-fold increase in SMS traffic in 1998. Over the same period, four per cent of Sonera?s revenues came from SMS messaging and nearly 10 per cent of its profits.
What lessons can be learnt from these success stories to help operators understand how the market for data services over mobile will grow, and how that growth will impact on 3G? How well the type of services found on the Internet will translate to mobile networks is difficult to judge. Customers used to the Internet will not tolerate the higher charges of mobile networks for the same information crammed on to a tiny screen. In this way the Internet, while driving consumer demand for data services, is simultaneously setting expectations for mobile services which may be difficult to achieve. Successful services for mobile will not compete directly with fixed access Internet by simply repackaging Internet content, but will have to deliver smaller amounts of targeted information.
Evidence from the growth in SMS shows that it is possible to provide popular consumer data services without a high-speed network -- the limitations of the input capability means there is no need for SMS to run quickly. Enhancements to existing networks, which cost much less but have the capability to deliver all but video-based services, may therefore be the most economical choice for supporting data services. Building a business case for 3G on the basis of revenue from video services alone, is a far more risky proposition. Another consideration is that the growth in SMS reflects the fact that in most countries it is often the cheapest way to contact other mobile users. Its strong growth in the prepaid sector in Germany, the UK and the Philippines, where for a limited time SMS was free across networks, is testament to that. In the Netherlands and Sweden, where the price of SMS is relatively expensive, growth has been much slower. SMS traffic can also be a substitute for voice services -- on Mannesmann?s network, for example, 100,000 subscribers already spend more on SMS messages than on voice calls. While the Internet and SMS give cause for much optimism for the potential demand for mobile data services, these examples highlight some of the potential problems with citing data services as a revenue earner and the basis of the business case for 3G. There will be a small minority, mainly business users, that will be prepared to pay extra for high-speed data services, but it will be difficult to make the investment 3G requires on their needs alone.
Network Costs
3G will bring network operational improvements leading to cost savings. Paradoxically (considering the industry focus on high-speed data) it is demand for the most fundamental service -- connectivity -- that is likely to be the most important for 3G. Continued growth in subscribers generating an increasing number of call minutes is straining the capacity of existing networks.
The extra spectrum provided by a 3G licence combined with the increased efficiency of CDMA technology will mean that 3G is the only way increases in traffic can be supported. In comparison, to existing technology, 3G will be the cheapest way in the long term to support subscribers where capacity is constrained. This is because for most operators the cost of planning and configuring the existing network as each new base station is added to meet subscriber growth, is significant. Because W-CDMA networks will not have to be reconfigured to the same extent, operators can avoid this expense. The deployment of 3G in this situation will therefore be very similar to the early deployment of GSM 1800. Increased capacity will also mean that for a 3G operator, fewer additional base stations will be needed as traffic volumes rise. To provide a large cost saving, and therefore an important basis for deploying 3G, this operational improvements argument relies on having established a large cost base on an existing network. But the advantage it has over the demand for data services argument is that it is premised on the much more predictable growth in overall traffic.
Note: Enhanced second-generation subscribers also use 2G, and 3G subscribers also use 2G+ and 2G.
Operator Strategies: Services First
So the decision by operators to deploy 3G is based on evaluating several different and complex motivations. Yet for many this evaluation phase is far from complete. As competition in most markets increases, operators tend to focus on retaining and enlarging market share under the spotlight of competitive threat. This necessarily results in a shift in emphasis to short term planning. It also sees movement away from backroom activities such as network deployment and management to those areas which have a direct impact on customer perceptions such as marketing, customer care and service management.
As services become more important, operators should be asking, ?what services do we need to provide?? before ?what network should we build?? This has a significant impact on the way operators should approach 3G. 3G is, after all, simply a technology providing mobile networks with greater capacity and higher data rates. And the availability of higher data rates and greater capacity is no longer enough to guarantee revenues -- it is services that people pay money for.
Mobile operators do have some distinct advantages in the provision of services. The essence of mobility is still able to command a premium over fixed telephony and combined with perception of the mobile phone as a very personal device, mobile operators are clearly in a position to offer a number of unique services.
It is important to play to the personal nature of mobile -- making information highly relevant to the individual will be key to the success of mobile services among the consumer population. There are several ways to achieve this. For example, through ?personalised services? that allow customers to access and manipulate information that they themselves own such as diaries, bank accounts and address books. These have the advantage of offering subscribers immediate access anywhere to a range of personal details; and for operators, these services will lock customers in. Studies of personal services in the UK suggest that churn is reduced by 50 per cent among subscribers with this type of service.
Another way to make information more relevant to users is to ally it with knowledge of a subscriber?s location or by making information easy to access quickly. The fact that mobile users often find themselves in situations where they have limited knowledge of their local area because they are travelling, often dictates that any information they require has to be relevant to both their position and immediate for the time during which they are there. A significant element of the attraction of these ?personal services? is that they do not rely on the availability of a high-speed, 3G network. Indeed many of the mobile services that are currently successful have been discovered only through experimentation with existing SMS services. The availability of enhancements to existing networks (such as HSCSD and GPRS rollout) within the next six months will give a still greater scope for experimentation. Operators cannot therefore rely on 3G to transform the market for data services. The only way demand will increase is through the continual experimentation and enhancements of existing services.
Is 3G Deployment Justified?
An accurate assessment of what services are important now and what services will be popular during the early years of 3G network deployment makes a cautious approach to 3G seem sensible. Because these services will continue to be predominantly voice and low-speed data based, the business case will be largely founded on meeting capacity requirements and cost savings. Rollout strategy will see only gradual expansion from urban centres and implementation of multimedia capability of the network.
A slow rollout strategy has two advantages. Firstly a slow deployment minimises operators? expenditure during the early period when equipment costs will be at their highest. Secondly, because by not relying on revenue from high-speed data, it will also be the least risky, showing a positive EBITDA after six years.
As the mobile industry shifts from being infrastructure-driven to service-led, deployment of 3G should be reconsidered in terms of the services it is able to provide rather than the technology it is based on. Only this will ensure that the complex decisions of whether, when and how to implement 3G will be made correctly. It is those operators with the best services that will be most competitive; not those with the best technology.
Dan Gardiner is a consultant at Ovum. |
