In a speech in Cape Town, South Africa, on 07 June 1966, Robert Kennedy said:
“There is a Chinese curse which says, 'May he live in interesting times'. Like it or not, we live in interesting times...”
A number of journalists picked up on the phrase and it has since become well known, although there continues to be debate about the origin of the phrase, because it somehow escaped mention in all ancient Chinese literature that survives today.
Cursed or not, these are certainly interesting times for the mobile industry. After years of unremitting growth and success, both in the UK and internationally, the global number of mobile phone subscribers has now passed the one billion mark and some experts have predicted that this number will double before 2010. OFCOM’s Communications Market Quarterly Update in January 2005 noted that mobile revenues from retail customers were up 14% year on year.
But the industry is also now facing challenges that potentially undermine its business models and long term profit forecasts. This article looks at some of the major issues confronting mobile operators in the UK, although similar issues are also arising throughout the rest of Europe and further afield.
It was in 2000 that the Government announced the winners of the 3G auctions in the UK, with Vodafone, One2One (now T-Mobile), BT Cellnet (now O2), Orange and TIW (now 3) bidding a combined total of £22.476 billion to be granted the five 3rd Generation mobile phone licences. Experts were predicting that within two years more people would be connecting to the internet via their mobile phones instead of their old-fashioned and out-moded PCs at home or in the office.
Five years on and we have yet to see the full benefit of the video on demand and other services that were promised. Most operators only began to offer limited 3G services towards the end of 2004. In an industry where technology is developing on a daily basis, this is a long time for a new service to reach market.
Unless subscriber take-up increases dramatically, there is a grave risk that 3G will be superseded, either by 4G (expected to be introduced first in Japan, as early as 2006 - four years ahead of the previous target date, with enhanced multimedia, smooth streaming video, universal access, and portability across all types of devices) or an alternative technology.
As we await the full impact of 3G, however, increasing traffic on the 2G networks as a result of both the growth in the number of subscribers and the amount of use the average subscriber makes of his or her mobile phone has led to a need for more capacity on existing networks. Improving network coverage and quality of service is extremely capital intensive, even if it pales in comparison with the costs of building out the new 3G networks.
3G technologies tend to use smaller cell sizes than 2G technologies. Consequently, each 3G base station has a much shorter range and smaller associated coverage area. 3G networks require approximately four to five times as many base stations to get the same coverage as 2G networks. Also, for greater numbers of subscribers and higher average data rates, additional base stations are needed to cover the same geographical area, even with recent advances in signal compression. As the cost of building the new network increases, so does the importance of the question of what the operator should do with its old 2G network.
Conversely, for the larger mobile operators, especially those that have experienced a number of mergers or acquisitions, the move to a 3G network will actually make network architecture management a simpler process. They now have the opportunity to replace a patchwork of networks running off multiple standards and multi-vendor equipment with a single coherent network, enabling operational efficiencies and revenue savings.
Both 2G and 3G networks also require backhaul facilities, which can be the most expensive component in radio access network costs. In the past, operators have probably not focussed fully on how best to reduce their backhaul transmission costs, but the move to the next generation of technology requires them to do so now.
Voice is the killer application
A further issue facing the mobile operators is that, in the telecoms world, voice remains king. Despite all the press articles on data and text and video, voice traffic still accounts for something in the region of 80% of all mobile operators’ revenue. Until the mobile phone companies can convince their subscribers to pay for additional value-add services, be it watching Premier League highlights, gambling or other adult content, voice traffic will continue to underpin the development and expansion plans of the operators. Other than SMS, mobile operators have not been very successful in selling mobile data services. 3G may be the answer, but early indications suggest that it will not be as popular as the operators would like it to be. In the view of some analysts, 3G simply provides vastly more capacity for voice, with a technology that dramatically reduces the costs of providing it.
And if voice traffic remains so dominant, the next question to be faced by the operators is how do they increase or (given the ever-increasing competition) maintain ARPU? Prices for voice calls are dropping, as a result of increasing competition and regulatory controls imposed by OFCOM. Data and video applications are not taking off. The January 2005 OFCOM Quarterly Update reported that average use and revenue per subscriber remains flat. Unless the mobile companies can develop new forms of content, and take them to market in a short space of time, there are some very real risks, not least because the operators can no longer rely on voice business remaining the foundation stone for the industry’s growth. New technology is threatening to undermine every assumption on which the operators have based their business models.
VOIP and new technologies
There have been many articles in the press recently in respect of Voice Over IP (or “VOIP”), but a large number of them have focussed on the threat VOIP poses to fixed line telecoms companies. In many ways, the threat is even greater for mobile operators because fixed line operators do not rely so heavily on voice revenue. Other new services and intermediate technologies may combine with VOIP to eliminate a substantial percentage of voice calls from mobile networks.
For example, 3G and WAP phones offer access to the world wide web. Unless the mobile phone companies introduce new software to their phones, it may be possible for subscribers to bypass the mobile operators’ billing systems altogether. In addition, if as threatened competitors issue Wi-Fi-enabled handsets to their customers to complement VOIP services, both public and private hotspots will increase in demand and mobile subscriber revenues will drop still further. It may be true, as some have suggested, that the lack of cell to cell mobility and inability to accept incoming calls will result in subscribers having to carry two handsets. As Wi-Max is deployed, however, offering greater range and broadband speeds, such concerns will start to become redundant.
Another example is BT’s bluephone offering, providing customers with mobile phones that will prevent users from making GSM calls in the office by diverting the traffic automatically across Bluetooth to the fixed network. Fixed line operators will also be adversely affected by VOIP, and fixed-mobile convergence solutions, attacking the mobile market share, is an obvious tactic to adopt to mitigate the impact of VOIP.
Unless the mobile operators can counter the growth of VOIP and other new technology, a substantial percentage of their subscriber revenues may disappear.
OFCOM spent a lot of time in 2004 looking at spectrum liberalisation and spectrum trading and issuing a number of consultation papers. It currently proposes to remove restrictions from licences that prevent the use of spectrum for mobile services other than 3G and to allow changes of use from non-2G services to 3G services after 2007. It is also understood to be intending to release further spectrum, in the 2.6GHz band, for 3G use, as from 2008.
There is a strong argument that, if OFCOM does allow changes of use under existing licences in favour of 3G operations, this would involve inconsistent and discriminatory treatment on the terms of market entry, as between those operators who have entered the market pursuant to the auction process in 2000 and operators entering the market pursuant to a change of use. OFCOM’s caveats in its 3G-related proposals in its current Implementation Plan do not appear to address the legitimate expectations and concerns of existing 3G operators, who need to convince the regulator that its current approach is unworkable. The existing operators also need to give thought to how they will approach the release of the 2.6HGz spectrum band.
The outlook for mobile operators is by no means all gloomy. Fixed-mobile substitution is increasing and offers new opportunities, new technologies are being developed that will attract additional subscribers, and 3G may yet surprise its detractors and prove to be enormously successful.
There are plenty of challenges the operators must face, however, and the sooner they do so, the better.
Like it or not, we do live in interesting times.
First published in E-commerce Law & Policy.