Report on the Mobile Industry

contents
introduction 3

3G: Markets and Technology Beyond 3G: Alternative Wireless Broadband

8 12

Mobile content Services and applications Mobile Games Messaging Mobile Music Mobile TV & Video The Enterprise Market

16 16 20 24 28 31 33

BSS/OSS and Telecoms IT Consolidation: Mergers and Acquisitions Roaming: International roaming regulation Handsets: Software and Devices Fixed-Mobile Convergence

37 42 46 49 54

Developing markets Middle East and Africa Asia Pacific Latin America and the Caribbean Eastern Europe

58 58 62 67 71

Mature markets Western Europe North America Asia Pacific

75 75 78 81

• MOBILE INDUSTRY OUTLOOK 2005/06 •

1

• MOBILE INDUSTRY OUTLOOK 2005/06 •

2

introduction

Back to the future: ARPU disappoints, subscriber growth rebounds
By Mark Newman

Mobile operators have been reporting record subscriber growth. First it was Vodafone – 5.4 million net adds in 4Q 2004. Then Verizon, a record 1.7 million net adds in the same quarter. Other operators including Cingular and T-Mobile have also reported a strong end to 2004. In developing countries growth has been even more impressive. There were a colossal eight million net additions in Russia in December alone. This even outpaced China where China Mobile and China Unicom continue to drive growth globally. In 2005 analysts are – once Global subscribers and net additions 1997-2004 (mils.) more – predicting a Yearly net adds Cumulative subscribers slowdown in growth in all 350 2,000 regions of the world. Has there been a single year when 300 they have actually over1,500 250 estimated net additions? But you cannot argue with their 200 1,000 logic. The number of countries with 100% 150 penetration or more has now 500 gone into double figures. 100 Can there really be any 50 growth left? And in many 0 1997 1998 1999 2000 2001 2002 2003 2004 developing markets Source: Informa Telecoms & Media penetration rates are reaching 40%-50% – a figure that seems barely possible given the average income of most of the population. ARPU figures, meanwhile, remain distinctly unimpressive. Whatever happened to the upturn that 2.5G services was going to engineer? Where’s the evidence that 3G is going to create meaningful new revenue streams? And what’s become of i-mode and the Japanese mobile data phenomenon that gave inspiration and a working business model to mobile operators throughout Europe and North America? Looking at subscriber growth trends on the one hand and ARPU on the other – and throw in a strong dose of unease created by the rise and rise of Wi-Fi – the overall picture of the health of the mobile phone sector globally is a confusing one. On the one hand, subscriber growth is confounding all previous expectations. Five years ago the accepted wisdom was that cellular penetration would peak at 70%-80% in developed markets and at 20%-30% in developing countries. Having reached 100% in many countries, where can it realistically be expected to stop? And in the case of ARPU, will there ever be the uplift promised by 3G?

• MOBILE INDUSTRY OUTLOOK 2005/06 •

3

introduction

Precious little research has been undertaken into the factors behind 100% penetration rates. The reality is that no more than 70% – or at a real push – 80% of the population of a single country own mobile phones. In Taiwan, mobile operator TCC surveyed the market and found that everyone between the ages of 16 and 65 had a phone but that only 65-70% of the total population were mobile phone owners. Operators’ slowness to disconnect lapsed or non-paying customers – many of who have switched to another Top 10 countries by net additions forecast in 2005 operator – is the main reason behind the high penetration 60 figures. Dual-SIM or dual50 phone ownership is another. Many international business 40 travellers have got wise to high 30 roaming charges and are, instead, buying prepaid SIM 20 cards in those countries where 10 they are heavy users. In some cases mobile users buy SIM cards 0 from more than one operator in the same country because they Source: Informa Telecoms & Media charge different prices for different services. The popularity of the Blackberry is also starting to have an impact on subscriber numbers. Most of the three million or so Blackberry users worldwide have separate mobile phones. As more and more countries go beyond the upper limit for ‘people’ penetration of 70%-80%, we need to reconsider the value and meaning of tracking subscriber growth on the one hand and ARPU on the other. The problem that we have is that we’re all using the wrong terminology. We should be talking about mobile subscriptions, not mobile subscribers. And what we’re measuring today is average revenue per subscription rather than average revenue per subscriber. Let’s think for a moment about Blackberry users. Or people who use wireless data cards for their laptops. Their ‘ARPU’ levels have gone up massively since they bought their Blackberry or data card but this is not shown up in the figures generated today by mobile operators. Is there a case for saying, therefore, that ARPU figures today underestimate how much people are actually spending on mobile services? Similarly, are we underestimating subscriber (or rather subscription) growth potential? The incidence of dual SIM/subscription is probably too low today to make a strong case. But it is something that we need to bear in mind as we make snapshot evaluations about the current status and prospects for the mobile business. Much will hinge on whether consumers accept the Swiss army-knife ‘all-in-one’ mobile device concept. The evidence so far is that they will not. A good test will be the nextgeneration i-pod. Apple has already partnered with Motorola to manufacture an i-pod that can download music tracks over the air from a mobile network. Will people use this same device as a mobile phone?
Net add (mils.)
Ru a ss ia U SA Br In azi do l n Ph esi ilip a So pin ut es h Af ric a U kr ai ne N ig er ia a in Ch In di

• MOBILE INDUSTRY OUTLOOK 2005/06 •

4

introduction

As cellular operators embrace Wi-Fi technologies the ARPU KPI measurement comes under evenº greater pressure. Wireless broadband is a term that covers a broad spectrum of network technologies – including 3G. Wireless broadband users will demand seamless services that travel over different networks. Mobile operators will count wireless broadband users as ‘mobile subscribers’ even if most of the traffic that they generate is on different networks. Similarly, operators appear not to distinguish between subscribers connected directly to their networks and those who are customers to an MVNO offering services over their networks. As the MVNO model gains momentum – in Europe principally via discount online MVNOs and in the U.S. via a wide range of new service providers, this will almost certainly have a negative impact on ARPU levels. This is principally because mobile operators sell capacity, or connections, to MVNOs at wholesale rates and it is these, rather than the retail level, that goes into their ARPU calculations. Where will the inspiration come from in 2005 and 2006? For three to four years now Japan – or to be more precise, NTT DoCoMo – has provided the basic model for mobile operators in 2.5G and 3G. While revenue-share deals may vary, with most operators retaining more than the 9% share of content revenues retained by DoCoMo, the basic approach has been adopted by many of the leading operators worldwide. But over the last 12 months DoCoMo’s star has begun to fade. i-mode never did enable DoCoMo to increase ARPU levels. It merely enabled DoCoMo to stabilize ARPU levels at a time when voice prices and revenues were in sharp decline. For the last one to two years, however, total ARPU levels have been in steady decline. DoCoMo has been forced to respond to strong competition from KDDI, which, in late 2003 launched flat-rate pricing for mobile data services on its 1XRTT network. DoCoMo responded in March last year with a similar offering which has had the effect of severely restricting any potential to grow revenues. The downturn in ARPU has also come as a direct consequence of DoCoMo’s anxiety to migrate customers to its FOMA 3G network. As a carrot to persuade i-mode 2.5G customers to move to 3G, DoCoMo offers much lower data transmission prices on the newer network. South Korea, arguably, offers a better model for mobile operators. South Korean operators retain a higher share of content revenues – close to 30% rather than Japan’s 9%. 3G is now well established in Korea and, unlike Japan, operators have been able to offer their customers integrated 2.5G/3G devices. In terms of new services, music (ring tones and downloading MP3 files), games and video clips are all proving popular. Globally, there are huge discrepancies between mobile data’s share of total ARPU. The highest figures are in the Philippines where Globe and Smart, receive 38% and 45% of revenues respectively from mobile data services. The European average is in the region of 18%, behind Japan and Korea at 25% but way ahead of the U.S. at only 6%. In the GSM world (Europe and Asia minus Japan and Korea), SMS accounts for close to 80% of total data ARPU. 2.5G – MMS, GPRS and WAP – have proved a huge disappointment because of high prices, a lack of compelling services, interoperability difficulties and poor marketing and customer education. Countries with 1XRTT and EV-DO have much lower SMS (or mobile email) revenues but operators have been much

• MOBILE INDUSTRY OUTLOOK 2005/06 •

5

introduction

more successful in generating revenues from other services. This is a big concern for the GSM world. SMS prices are already falling and regulatory intervention to force operators to offer lower wholesale prices seems inevitable. If operators cannot grow their non-SMS revenues significantly it is hard to see how data revenues overall will continue to grow. During the second half of 2004, the improving fortunes of Hutchison Telecom’s ‘3’ businesses in the UK, Italy, Sweden and Austria caught the eye. Cheap voice services have proved the biggest lure for customers but 3’s impressive ARPU figures indicate that there is reasonably strong usage of its mobile multimedia services. 3 reported ARPU of €44.25 (US$57.68) in November against a European average of $31. Data accounted for 21% of this ARPU, up from just 15% four months previously. Football and news clips, music downloads are all cited as services that have proved popular. Vodafone became the first of Europe’s leading operators to launch 3G in November. It has positioned 3G as a high-end consumer offering, pushing the benefits of music downloads, games and video clips. Orange responded in December with a more subdued launch and a limited choice of handsets. 3’s experience has shown that until operators can offer slick, compact 3G devices they will struggle to get 3G off the ground. 3’s improving fortunes will also give food for thought to its rivals who – almost without exception – are offering an open-access approach in terms of mobile content. 3 operates a walled garden and has made the sourcing of exclusive content – such as football clips – a key part of its offering. 3G network and service roll-out will be one of the key issues for mobile operators in 2005 and 2006. There is nothing today to suggest that they will do anything other than take a slowly-slowly approach, positioning 3G at the top end of the consumer market and associating it with some of the more advanced services. Whether this will be enough to attract customers is a different matter. Business models and eco-systems In the fixed telecoms market data communications now accounts for the lion’s share of total traffic. Incumbent operators have seen their revenues from voice – and in particular long distance voice – services fall sharply but are seeing rapid growth in their broadband businesses. The advent of VOIP is a new threat and risks cannibalizing voice revenues further. Will the mobile business go the same way? Operators are making every effort to prevent a repeat. Voice prices and revenues remain remarkably healthy. And despite their best efforts, operators still see mobile data as a long-term opportunity rather than one that will turn their business upside down – as was the case with the PC-based Internet. But herein lies the dilemma. If mobile voice prices fall to close to the same level as fixed network calls, mobile operators could steal a huge amount of traffic and wreak untold damage on fixed operators. The question is, do they want to? France Telecom, Telefonica Moviles, Deutsche Telekom, Telecom Italia, NTT DoCoMo, SingTel and Cingular are some of the largest integrated fixed and mobile operators in the world. Do they really have it in them to run down one half – the fixed half – of their businesses? A number of them have started talking in recent months about the potential for developing converged fixed-mobile networks and services. By bringing their two businesses together they believe they can develop services and strategies to out-manoeuvre mobile-only players such as Vodafone, O2, ‘3’ and Sprint/Nextel.

• MOBILE INDUSTRY OUTLOOK 2005/06 •

6

introduction

In developing markets, mobile communications is emerging as the de facto telecommunications infrastructure. Mobile operators in these countries are under pressure from governments to offer affordable services to extend telephony into lower-income groups. The mobile phone has a key role in the development of these economies. Five years ago the standard approach to building a successful mobile business would have been to offer limited coverage and to offer high-priced services to only the wealthiest business and government communities. Sharp falls in the cost of network infrastructure and of handsets means that operators can now offer affordable services to large parts of the population. This is evidenced in some of the startling subscriber growth figures of 2004. Only one of the largest mobile operators Top 10 operators by net additions in 2004 (ranked in terms of net additions) in 2004 was Net additions (mil.) from Western Europe, the 5 10 15 20 25 30 35 40 China Mobile U.S. or developed Asia. China Unicom If mobile operators in Verizon Wireless Europe or North America Smart Communications are not prepared to VimpelCom-R AVEA I.H.A.S compete head-on with MTS fixed operators they will TIM Celular have little choice but to Radiomóvil Dipsa base their strategy around Turkcell the building of new Source: Informa Telecoms & Media mobile data businesses. Mobile entertainment shows some promise but there is no evidence that it will generate the kind of revenues needed to compensate for the inevitable fall of voice and SMS prices. This also seems to be the conclusion of NTT DoCoMo, which is now looking for a new phase in its development beyond i-mode and FOMA. ‘Wallet (FeliCa) phones’ is a concept that DoCoMo launched last summer. A wallet phone is a micro-payment mechanism that allows consumers to pay for goods and services in outlets across Japan. DoCoMo does not charge for transactions and its short-term strategy is for the wallet phone to become a commonly accepted payment device. So far DoCoMo has sold more than a million FeliCa wallet phones and the service has won the support of major retailers and transport companies. The attraction of the FeliCa approach is that it reduces the reliance on the end-user – the consumer – to up their mobile phone spend. If the mobile phone becomes a preferred payment mechanism, operators have the potential to develop new revenue streams from any retailer or financial institution that wants to conduct commerce over the phone. Is now the time for mobile commerce? Back to the future.
Mark Newman is the Chief Research Officer of Informa Telecoms & Media. Mark has been commenting on the mobile and fixed telecoms sector since 1988. He is a regular speaker and moderator at international conferences in Europe and Asia and conducts regular briefing sessions with major banks, telecoms and IT vendors and operators.

• MOBILE INDUSTRY OUTLOOK 2005/06 •

7

3G

3G markets and technology
Until the end of 2003, the failure to launch 3G networks by operators around the world was met with disappointment and a great deal of consternation, chiefly from industry commentators and the press. As 2005 gets underway the perception of the industry seems to have changed. Here, NICK LANE and DEVINE KOFILOTO look at what the industry now expects from 3G and the performance of pioneers, such as Hutchison Telecom.

Q: Surely 2005 will be the year of 3G?

Nick Lane: With so many operators entering commercial 3G launches in 2004, you would expect 2005 to be the year when 3G hits the mass market on a global scale. At the end of 2004, the number of 3G subscribers topped 26 million, with a breakdown revealing that WCDMA had 16 million subscribers surpassing 1xEV-DO on 12 million. However, NTT DoCoMo ended the year with 8.5 million WCDMA subscribers and 3 with an Global 3G subscribers (mil.) estimated 7 million, while 1xEV-DO subs mainly came 4Q04 3Q04 from SKT and KTF in South UMTS Forum WCDMA 16 10 Korea and KDDI in Japan. CDG 1xEV-DO 12 10 The question is whether 2005 will be the year for 3G in other regions. In the U.S. Selected 3G subscribers Verizon Wireless has launched 3* WCDMA 5900759^^ 3256323^ its 3G service commercially. NTT DoCoMo WCDMA 8,499,200 6,487,600 While Sprint PCS is not O2 Germany WCDMA n/a 9,000 expected to be too far behind Orange France WCDMA 16,000 n/a its fierce rival, Cingular Wireless is expected to launch TIM WCDMA 25,000 in 2006. Depending on the T-Mobile** WCDMA n/a 36,000 success of Verizon, 3G will Vodafone*** WCDMA n/a 458,800 most likely become mass market in the U.S. in 2006. KDDI 1xEV-DO n/a 1,200,000 There are also mixed signs for Europe. Orange is SK Telecom 1xEV-DO n/a 5,962,000 targeting 2 million 3G KTF 1xEV-DO n/a 2,760,000 subscribers maximum by the ^ results release 18 Aug. ^^ results release 14 Dec. end of 2006, while Vodafone * includes Australia, Austria, Denmark, Hong Kong, Ireland, Israel, Italy, Norway, Sweden and the UK. ** includes Germany and the UK. *** includes Germany, Italy, Japan (366,400 is expecting 10 million by 3G subscribers) the Netherlands, Portugal, Spain and the UK March 2006. Conflicting Source: Company data, 3G Mobile expectations from two of Europe’s leading operators suggests mass market take-up is an unknown. Analysing growth potential, Orange’s figures indicate a greater sense of reality for the market, which is yet to see the widespread commercial launches from T-Mobile and O2.

• MOBILE INDUSTRY OUTLOOK 2005/06 •

8

3G

Q: Almost two years after the launch of the first 3G network in Europe, how are 3G services now faring among consumers?

Devine Kofiloto: With the exception of Japan and South Korea, a mass market for advanced 3G services such as video telephony, music downloads, 3D games and video streaming does not currently exist. Outside Japan and South Korea, 55 operators worldwide had launched 3G services by end-2004, but consumers are yet to be lured to this new world of multimedia service offerings. Though we are now beginning to see some traction where Hutchison 3G’s 3G subscriber numbers are concerned, there is still little evidence to suggest subscribers are beginning to warm up to these services. The approach of Hutchison 3G, the 3G pioneer, of focusing its subscriber acquisition strategy on cheap handsets and voice calls has not benefited the 3G market as a whole. This strategy has largely led to the attraction of users of traditional voice services and in general failed to stimulate massive awareness in the market. Nick Lane: For the first couple of months in 2004 3’s performance across Europe continued to be blighted by lack of handsets. Having addressed that situation with handsets from Motorola and LG, the company ramped up its subscriber figures from 2.5 million in June to an estimated 7 million by early 2005. Handsets have helped the operator, but its turnaround in fortunes is mainly due to its ability to offer cheap voice calls. Granted, it can boast some of the industry’s highest ARPU rates of £43.22 (US$80.58) in the UK and €50.47 (US$65.39) in Italy, but data services contribute only a nominal percentage. The operator says this is changing, with data services such as soccer and music video download. That said, the operator sees video telephony as the killer application for 3G, even though the service is only successful in pockets for its various divisions. Until it can harness its 3G network above and beyond its reliance upon voice, the fortune of 3 is not guaranteed.

Q: But are data ARPUs really a key performance indicator for the industry?

Nick Lane: Data revenues to a large extent reveal the performance of an operator’s data strategy for a nascent service in the short term. As fully-operational 3G operators are now discovering, maintaining a high data ARPU is an almost impossible task. In South Korea, the average data revenue per user from 1xEV-DO services dropped more than 55% in the year to end-June as SK Telecom and KTF migrated their massmarkets customers to the high-speed data service. The average data revenue for both operators was Won19,597 (US$17) in 2Q 2003 but had fallen to Won12,555 (US$11) by the end of 2Q 2004. Similarly in Japan, NTT DoCoMo has seen data ARPU for its WCDMA FOMA service drop as more of the low-spending, massmarket customers migrate over from 2G. Concern for the operators should, however, only be short lived. For example, DoCoMo is sitting on a potential 3G subscriber base of 46 million 2G customers. The main issue for DoCoMo – and all 2G operators – will be to ensure they can guard against churn and keep their customers when they migrate to 3G. Only then will the data revenues flourish. Nick Lane: The case for HSDPA is already well underway with the technology on the roadmap of every WCDMA operator. The operators can all see the benefit of the speed upgrade, which will enable users to download services at speeds approaching

Q: What technological developments can we expect to see in 2005?

• MOBILE INDUSTRY OUTLOOK 2005/06 •

9

3G

2-3Mbps compared with the existing 384Kbps on WCDMA. Two strategies for the HSDPA upgrade are prevalent: one is the obvious speed boost, while operators less focused on the data market can use the software upgrade to bolster capacity for superior voice services. The vendor community expect trials to begin 1H 2005 with commercial launches expected in the latter half of 2005 by the more aggressive operators. Reports emanating from South Korea suggest that LG Telecom has become the first operator to trial 1xEV-DV. And with progress expected to be made on EV-DO Rev. A during the course of the year, advances are being made by both existing 3G technologies. However, the evolution path for 3G beyond 2008 remains unclear in what has effectively become a void in the 3G roadmap until the advent of 4G. At recent 3GPP members’ meetings, leading companies presented their notion for the future. The one that caught the media’s imagination was Super 3G from NTT DoCoMo, which was effectively the most commercialized presentation of the industry’s recommendations for the future. To evolve UMTS, the wireless industry is about to embark on work for speeds approaching 100Mbps in the downlink and 50Mbps in the uplink using a variety of bandwidths ranging from 1.25MHz to 20MHz for existing and new frequency bands. One of the technologies that has the backing of the majority of the industry is OFDM. Already touted to be the technology of choice for 4G, the emergence of mobile broadband alternatives to wireless such as WiMAX, could force the earlierthan-expected inclusion of OFDM into the wireless arena.
Nick Lane is Editor of 3G Mobile Nick has been a telecoms journalist for eight years and joined Informa in October 2000 as launch editor for IP-Core Network Analyst. Prior to that, Nick worked for Phillips where he launched a number of titles, including Capacity Wholesale Magazine, Telecoms Deal Report and Telecoms Pricing Bulletin. Nick became editor of 3G Mobile in August 2004 and now specializes in covering networks, technology and standardization. He was also lead author of the 3G Network Planning report, published by Informa in June 2003, and author of IP-Core Networks report, published by Informa in April 2001. Devine Kofiloto is a Principal Analyst with Informa Telecoms & Media’s Data division Devine is responsible for co-managing the research analyst team. His area of expertise covers an indepth understanding of the mobile industry with a focus on the Nordic markets. Devine’s research focus has also included the mobile data space, where he has done extensive work on messaging and PTT within the European market area, examining key market drivers, market trends, as well as analysing technological developments within this space. Informa Telecoms & Media provides business intelligence and strategic services to the global telecoms and media markets. We specialise in working with organisations to help them achieve strategic advantage. Our technology coverage includes: • Infrastructure and networks, hardware and software • Handsets and devices.

• MOBILE INDUSTRY OUTLOOK 2005/06 •

10

3G

Find out more about our complete product portfolio at: www.informatm.com 3G Mobile – newsletter and continuous research service 3G Mobile has been published fortnightly since 1999 and is the industry's most trusted source of vital news, accurate data and in-depth analysis on the technology and market place for next-generation mobile communications development From licensing, to network infrastructure, network rollout, standards, terminal development, application development, new revenue streams and business models, 3G Mobile covers the major issues affecting the mobile communications industry today and in the future. Key coverage includes: • Accurate and concise data from primary research • In-depth company profiling and financial data • Intelligent sector profiles • Independent coverage of new product launches and network implementation • 3G Mobile Evolution. 3G Mobile continuous research service is available online for multiple users and includes a fully searchable online archive of back issues to enable powerful market tracking. Find out more at www.telecoms.com/3gmobile

• MOBILE INDUSTRY OUTLOOK 2005/06 •

11

Beyond 3G

Alternative wireless broadband
Developments such as WiMAX, Wi-Fi and Ultrawideband could be a major threat to the 3G community. The 802.16e mobile version of WiMAX is based on OFDM, which can deliver speeds of at least 1Mbps. OFDM will also play a role in the development of next-generation cellular standards, including NTT DoCoMo’s recent proposal for Super 3G, which aims to add OFDM and MIMO to 3G to boost data rates to 30-100Mbps. Here, MIKE ROBERTS looks at how the 3G and the broader mobile industry could be disrupted by emerging wireless broadband technologies.

Q. When will we see mobile WiMAX deployed?

Mike Roberts: The 802.16e standard is not finalized. The WiMAX Forum says this should happen in 1Q 2005, which means vendors could ship 802.16e products next year. But keep in mind that the WiMAX Forum is running about a year behind its initial schedule for bringing the 802.16-2004 fixed-wireless version of WiMAX to market. The IEEE finalized the standard on schedule in mid-2004 but the WiMAX Forum missed its initial target of launching interoperability certification in 4Q 2004, so delayed it to 1Q 2005. However, it has just conceded that it will miss that deadline as well, so has delayed certification to 3Q 2005. South Korean operators KT, SK Telecom and Hanaro are likely to be the first out of the gate with services based on WiBro, the Korean wireless broadband standard that is in the process of merging with 802.16e mobile WiMAX, following an agreement between Samsung and Intel. In January the Korean Ministry of Information and Communication awarded the country’s three WiBro licenses to SKT, KT and Hanaro. Each operator will pay Won117 billion (US$114 million) in several instalments for their seven-year license for 2.3GHz spectrum, and will have to invest at least Won1 trillion (US$973 million) to roll out WiBro services, which should deliver data speeds up to 1Mbps and mobility up to 60km/hour. Samsung, which was instrumental in developing WiBro and has also been involved in creating 802.16e, says it is developing 802.16e products for commercialization in Korea by the first half of 2006. Samsung has also recently joined the WiMAX Forum, which some observers have taken as a sign that the vendor sees WiMAX rather than cellularheritage technologies as the best platform for the next generation of mobile broadband services beyond 3G. Mike Roberts: The PWLAN market has exploded in the last year, particularly coverage. Our research shows that the global public WLAN market more than doubled from 33,944 hotspots at the end of 2003 to 69,759 at end-04. Mobile operators played a major role in the increased coverage, notably Orange France, which leaped from 839 hotspots at end-2003 to 6,500 by end-2004 (see fig.). Not all mobile operators are deploying hotspots, however. In the UK, two top operators - Vodafone and O2 - recently introduced PWLAN services based on networks owned by other operators. Vodafone is using the network of BT Openzone, and O2 has teamed

Q. How is the public WLAN market developing, and what role are mobile operators playing?

• MOBILE INDUSTRY OUTLOOK 2005/06 •

12

Beyond 3G

with both BT Openzone and The Cloud. Both mobile operators have bundled PWLAN services with their new 3G/GPRS data services.
Public WLAN hotspot coverage in France by operator and quarter
Operator Orange France Swisscom Eurospot Meteor Networks SFR All Telecom HotCafe ADP Telecom Wifix Type Mobile Startup Startup Mobile Startup Startup Startup Startup Launch Feb-03 Mar-03 Jul-03 Feb-03 Aug-03 Jul-03 Apr-03 Nov-02 Total
Source: Wireless Broadband Analyst Database

1Q04 2,200 110 87 90 115 57 40 34 2,733

2Q04 3,578 141 165 165 130 63 40 45 4,327

3Q04 5,300 141 212 179 150 42 40 38 6,102

4Q04 6,500 266 240 179 171 42 41 38 7,477

4Q05e 10,000 400 350 200 250 42 41 38 11,321

Q. Will the introduction of HSDPA impact the public WLAN market?

Mike Roberts: Yes, or at least that’s the view of some major UMTS vendors. They argue that HSDPA will be deployed this year as a way to boost UMTS data speeds in hotspots such as airports, conference centers and hotels - which is of course exactly where public WLAN hotspots are available. Certainly HSDPA could turn UMTS into a true wireless broadband service, increasing speeds to an average of 800Kbps and peaks of 1.5Mbps, compared with peak rates of 384Kbps on today’s UMTS networks. That may not be as fast as PWLAN services, which can deliver 5Mbps or more, but HSDPA has the advantage of being fully integrated into UMTS, so all UMTS services will work over HSDPA. Although mobile operators are already offering PWLAN services alongside their 3G/GPRS data services, subscribers can only use PWLAN access for basic Internet access, not for 3G services such as video calls. However, it’s unlikely that HSDPA will displace a substantial number of PWLAN hotspots, for the simple reason that PWLAN hotspots are a very cost-effective way to provide basic in-building wireless broadband services. Mobile operators will no doubt deploy HSDPA in some major hotspots such as airports as a way of improving their basic 3G services, but 3G economics mean that tariffs are likely to be significantly higher than those for PWLAN services. That would give operators an incentive to run the networks side by side, so customers willing to pay for advanced services could use HSDPA, while those wanting low-cost, basic Internet access would still have the option to use PWLAN. Mike Roberts: Major VoIP operators in the US are just coming to market with Wi-Fi voice handsets, and they have taken a leaf out of mobile operators’ playbooks in that they plan to subsidize the handsets to grow the market. Wi-Fi handsets offer the prospect of low-cost calls from anywhere in the world where there’s a public or private Wi-Fi network, but it will be a while before that prospect threatens mobile operators. Vonage says it will sell a new Wi-Fi handset from UTStarcom for US$100 from the

Q. When will we start to see VoIP over Wi-Fi services?

• MOBILE INDUSTRY OUTLOOK 2005/06 •

13

Beyond 3G

second quarter as the first of several planned Wi-Fi products, and Net2Phone has released a Wi-Fi phone at US$160 from an unspecified manufacturer. Vonage has even said that it may subsidize Wi-Fi handsets to get the price closer to US$50. By comparison, a number of analysts predicted that Wi-Fi phones would hit the market this year priced at near US$270. Proprietary VoWi-Fi services have been used for years in niche segments like warehouses, but in the last year vendors have started to ship more standards-based VoWiFi products designed for mainstream enterprise and consumer use. For example Motorola has teamed with Proxim and Avaya to launch a converged cellular and VoWi-Fi service for enterprises, and RIM recently detailed plans to launch its first Blackberry supporting WLAN voice and data services.

Q. How is the Ultrawideband market developing, and when will we see the first UWB-enabled mobile phones?

Mike Roberts: The UWB standardization process is still well and truly stalled, to the extent that the two rival camps have decided to go to market with their own flavor of UWB. The direct-sequence UWB camp, led by Freescale Semiconductor, says consumer products using DS-UWB will ship in the U.S. this year, which is a delay on earlier predictions of shipments by 4Q 2004. Freescale started commercial production of its first UWB chipset last year. The other camp, led by Texas Instruments and others in the Multiband OFDM Alliance, says MBOA members will start sampling silicon in 1Q 2005, leading to commercial production in 2Q 2005 and consumer products with MB-UWB by end2005. In November the MBOA-SIG announced that it had finished the physical layer element of its specification, and was confident that it would finish the MAC layer – and thus complete the 1.0 version of its specification – in 4Q 2004. However the group missed that deadline and is now aiming to finalize its MAC layer and full UWB standard in 1Q 2005. Both camps are very focused on getting UWB into mobile phones, since that’s when they’ll start to ship huge volumes. Major vendors say they expect to see UWB-enabled handsets as early as 2006, which means they are likely to actually hit the market around 2007-08. Freescale and former parent company Motorola conducted one of the first public demonstrations of an UWB-enabled mobile phone at the recent Consumer Electronics Show in January, but did not detail when they planned to ship commercial handsets. Mike Roberts: All the hype about UWB has tended to obscure the fact that it currently only legal in one major market worldwide, the U.S., and the technology will certainly not debut in mobile phones until it is legal in most of the world. That process alone could take at least two years, given that many regulators in Europe and Asia are in the early stages of evaluating whether to legalize UWB. However, in January UK telecoms regulator Ofcom announced proposals to become the first major market outside the U.S. to legalize UWB for use in consumer devices. Ofcom’s consultation on UWB closes on March 24, a few weeks before the European Commission is scheduled to decide whether it should try to adopt a harmonized approach to UWB across the EU.

Q. How big is the market for UWB?

• MOBILE INDUSTRY OUTLOOK 2005/06 •

14

Beyond 3G

Mike Roberts is Editor of Wireless Broadband Analyst and 3G Mobile Evolution Mike has over 15 years’ experience covering the telecoms, information technology and other industries and is a frequent chair and speaker at industry events such as 3GSM World Congress, Public WLAN Hotspots and Wireless Connectivity. He also authors strategic market reports for Informa Telecoms & Media, most recently Wi-Fi Hotspot Operator Case Studies and Bluetooth Status Report: Devices, Applications & Case Studies. Mike graduated with a BA in economic history from the University of Virginia in 1989 and researched international economic relations at the London School of Economics in 1991-92. Informa Telecoms & Media provides business intelligence and strategic services to the global telecoms and media markets. We specialise in working with organisations to help them achieve strategic advantage. Our technology coverage includes: • Infrastructure and networks, hardware and software • Handsets and devices. Find out more about our complete product portfolio at: www.informatm.com Wireless Broadband Analyst – newsletter and continuous research service Every month Wireless Broadband Analyst subscribers benefit from 28 pages of primary data, rigorous news analysis and editorial comment focusing on the most dynamic segments of the market, including Wi-Fi, WiMAX/802.20, UWB/Bluetooth, fixed-mobile convergence, wireless enterprise and the connected home. Every issue of Wireless Broadband Analyst includes: • Detailed market analysis • Exclusive data analysis and primary data • Exclusive news analysis • In-depth sector and company profiles • Unique views on industry threats and opportunities • Concise news comment. Wireless Broadband Analyst continuous research service is available online for multiple users and includes a fully searchable online archive of back issues to enable powerful market tracking. Find out more at www.telecoms.com/wirelessbroadbandanalyst

• MOBILE INDUSTRY OUTLOOK 2005/06 •

15

Mobile Content

Services and applications
SMS still rules the roost in terms of mobile data revenues in Europe and most of Asia. But signs are finally increasing that there is reason to be optimistic about non-SMS data services growth such as the download of ring tones, logos and games. Here, JESSICA SANDIN and RICHARD JESTY identify the leading trends in the mobile entertainment world today.

Q: How big is the download business?

Jessica Sandin: According to the second edition of Informa Telecoms & Media Group’s Mobile Music report, global ringtone sales reached US$4 billion in 2004. Ringtone growth has very rapidly switched from monophonic to polyphonic tones, with real-music ring tones also starting to show promise as devices enabling these become more widespread. In Europe over the past year, we have seen the market for downloadable mobile games starting to grow substantially. Anecdotal evidence from operators suggests that there are still relatively few mobile gamers spending money – although some of these players buy a lot of mobile games. This means we’re seeing early adopters in this particular segment. The challenge for the mobile games industry will now be to ensure it is releasing games that are intuitive and compelling enough to be suitable for a much wider mass market. As they get ready to embrace new technologies such as multiplayer or 3D games, there is a risk that the industry could lose sight of the ‘casual gamers’ that are expected to bring in the big bucks in gaming. Another encouraging sign is the quiet but steady rise in WAP usage. The much-derided technology now works – by and large – and features color and pictures. Not surprisingly, this is driving more users to check out the mobile Internet. For example, figures from the UK’s Mobile Data Association clearly show significant increases in WAP page impressions month-on-month. But while these developments show mobile data usage moving in the right direction, there is still a lot of work to be done to turn the broad mass-market into mobile media consumers. Jessica Sandin: Both music services and mobile video and TV are addressed in separate sections – and there are very interesting developments in both these sectors. While games downloads are also growing, there is another very interesting aspect of Java content development, as we’re finally starting to see the emergence of non-gaming Java applications. It’s still early days for this area, but some brands are launching Java applets that they market directly to consumers, independently of operators. Directory company Yell.com has, for example, rolled out a J2ME applet as part of its service in the UK. Interestingly, the application and basic search functions are provided for free – users only pay for premium services such as maps showing the location of a business, or directions. Charges are still low, at £0.25 (US$0.47) per service. In Sweden, tabloid Expressen offers a J2ME sports results service. Users download the application and can then select the sports and teams they want to receive details on.

Q: What are the services and applications to watch in 2005?

• MOBILE INDUSTRY OUTLOOK 2005/06 •

16

Mobile Content

While usage of Expressen’s sports service is still limited, an increasing number of these services available directly from brands could both help introduce new users to mobile data and also shift the balance in the mobile content market further away from operator portals towards more of a direct-to-consumer dialogue from brands. Mobile payments and commerce is also seeing increased activity. This area was much hyped a couple of years ago – now it looks like it may finally be on the verge of taking off.

Q: What other developments can be seen in this direct-to-consumer drive?

Jessica Sandin: This is a very interesting area. While operators are seeking to satisfy a range of service needs on their portals, it’s impossible for them to offer the full scope of services their wide range of customers will be looking for. Furthermore, there are some services – such as adult content – that operators are keen to monetize but may not necessarily want to have on their portals in many markets due to a fear of damaging their brands. If operators act as the billing conduit, they can still make money off these services. To take advantage of this, operators clearly must not operate walled gardens but allow off-portal content. They are concerned, however, about issues such as how content control – such as age verification - for off-portal services will work. On the content side of the mobile media coin, content owners – both large brands such as Disney or record labels and the smaller players – are keen to complement any offer they have on operators’ portals with a direct-to-consumer service. A D2C offer enables them to offer cross-network services, use their own sales and marketing channels to market content and also allows them to keep a greater share of the revenue pie. For content owners, this model nevertheless remains problematic for any company that doesn’t already have some sort of channel – be it marketing or retail – to their customers. These companies will need to invest in marketing to ensure customers can discover the service. The D2C model is already proven through Premium SMS. We’ll see a growth in WAP billing alternatives, and the launch of Simpay, the cross-network billing enabler, will open up further opportunities for content owners to bill for content and operators to get a slice of the revenue by billing for it. Furthermore, there are other options, such as retail sales of content, being tried out. The whole D2C area is definitely one to watch in 2005. Richard Jesty: The first thing to say is that with mobile content, as with any digital product, there are a few key differences compared with distribution of hardware products like mobile phones and accessories. One is the importance of the direct route to market – for example via premium SMS, direct response via a call centre or access via a mobile or web portal. We estimate around 95% of mobile content is currently distributed direct in this way. To reach mass market audience, mobile value chain players need to get a balance between this kind of direct delivery and indirect delivery via distributors and retailers. Mobile phone specialists and operator-owned stores are fine for high value items which need a lot of advice and support, but the key issue that content providers, operators and brand owners are all facing is how to put lower priced items such as games or music in front of a mass audience on the high street or in a shopping mall. We’re seeing a few different approaches to this issue of developing new channels – one way is to set up multimedia kiosks in retail stores so that consumers can ‘browse and buy’

Q: How do you see mobile content being delivered to the massmarket consumer in future?

• MOBILE INDUSTRY OUTLOOK 2005/06 •

17

Mobile Content

online by using a touchscreen and downloading content to their phone via a Bluetooth link. This approach also allows distribution outside the normal type of retail environment, for example at a sports stadium. This has already been piloted with good results at an ice hockey stadium in Finland, where fans were able to download team details and update information using a special Bluetooth-enabled kiosk. Another way is to distribute mobile content in a pre-packaged form so that consumers can pick it up in a self-service environment from a supermarket or consumer electronic store. There are various possible formats, but one which is worth watching is the emerging trend for music and games to be offered on SD cards and targeted at mobile phones equipped with the appropriate card reader. With all of these developments going on, the issue of managing channel conflict is one of the most complex areas of the entire mobile distribution arena, because it deals on the one hand with the convergence of the pure mobile specialist channel and the mass market retailer, and on the other with the integration of both the direct and indirect routes to market.
Jessica Sandin is Head of Portfolio and Principal Analyst, Mobile Content & Applications Jessica currently manages Informa Telecoms & Media’s portfolio of premium products covering mobile content & applications. Tracking the mobile data industry on a daily basis since 2000, she has built up unrivalled expertise in all aspects of the mobile entertainment, content & services space. Richard Jesty is a Senior Consultant at Informa Telecoms & Media Richard focuses on mobile content and services worldwide. Over the past four years, he has built up an in-depth knowledge of the market, developing in-house original online research and carrying out a number of consultancy assignments in Europe and the U.S. Richard is the lead author of a range of strategic reports focusing on the global mobile services market, including Mobile Distribution and Retail, Mobile Payments, Mobile Content and Applications and Mobile Enterprise. Informa Telecoms & Media provides business intelligence and strategic services to the global telecoms and media markets. We specialise in working with organisations to help them achieve strategic advantage. Our content coverage includes: • TV, Film, Music, Games • Mobile content and applications, including consumer and enterprise markets. Find out more about our complete product portfolio at: www.informatm.com Mobile Entertainment Market 05 London, June 2005 MEM05 is the flagship mobile content event of Informa Telecoms & Media and the Official event of the Mobile Entertainment Federation. Over 750 participants gathered for MEM04 MEM proved itself as the

• MOBILE INDUSTRY OUTLOOK 2005/06 •

18

Mobile Content

place to do business for the mobile entertainment industry, with a teeming market-floor and several of the conference tracks being reduced to standing-room only. MEM05 has two major developments, the move to a larger venue enables the event to accommodate a far larger audience, and a more extensive exhibition. MEM05 will also run alongside Informa Telecoms & Media Global Messaging Congress. Running for eight years, this conference regularly attracts those at the cutting edge of mobile MMS and SMS Value Added Services. Find out more at www.mem05.com

• MOBILE INDUSTRY OUTLOOK 2005/06 •

19

Mobile Content

Mobile Games
Mobile operators do not generally release detailed information about their mobile games downloads or revenues. Likewise, distribution channels do not share such data while mobile games publishers and developers are prevented from doing so under the terms of their commercial agreements with the operators or portals. Here, PAMELA CLARK-DICKSON examines the importance of mobile games to all the companies in the value chain.

Q: Are mobile games generating sufficient revenues to provide a viable business for all concerned?

Pamela Clark-Dickson: There is a lack of transparency that suggests that revenues are relatively low. What information has been made publicly available also suggests this, despite analyst reports to the contrary.
Mobile games, selected operators
Country W.Europe Austria Spain UK N. America U.S. Asia-Pacific India BPL Airtel Hutchison Essar Hutchison Essar 1Q04 Apr-04 May-04 Nov-03 2,502,754 1,370,203 712,967 482,317 2,000 games downloads per month 40,000 games downloads per month. User base: 5,000 75,000-80,000 games downloads per month. 17,500 users Two free games launched in November holiday season generated 25,000 downloads from 12,000 unique users in seven days. Sprint PCS Jan-May 04 16,281,000 3.5 million games downloads One Jan-Apr 04 1,415,000 19,939,000 12,907,000 50,000 Java games downloads 600,000 games downloads per month Est. 50,000 games downloads per week Operator Time period Subscribers (at end-period) Usage

Telefonica Moviles 1Q04 Vodafone 2Q04

Sources: Company data, Mobile Media

Yann Mondon, brand and communications senior manager at France-based mobile games outfit In-Fusio, recently estimated that mobile games generated global revenues of US$1.34 billion in 2004 – an increase of more than 100% on the 2003 revenues of US$350-500 million. The bulk of these revenues – US$300 million in 2003 – will have been generated in Japan and South Korea. In-Fusio bases these figures on the data that it is able to collect using the games delivery platform it provides to a number of operators, and also in its discussions with competitors. What is clear, however, is that mobile games are an important contributor to most operators’ mobile data growth. Vodafone UK’s live! portal is reportedly generating £1 million (US$1.8 million) per month in revenues for the operator, sources say. Meanwhile Spanish operator Telefonica Moviles Espana is attracting 600,000 games downloads per

• MOBILE INDUSTRY OUTLOOK 2005/06 •

20

Mobile Content

month. Publishers are also talking about downloads in the region of thousands per day per operator for a branded title.

Q: How easy is it for games developers to obtain operator distribution for their portfolios?

Pamela Clark-Dickson: Larger, more established games developers with portfolios that include branded titles – such as Germany’s Elkware, U.S.-based Jamdat, and France-based Gameloft – have reached the point where they can routinely deal directly with Tier 1 operators such as Vodafone, T-Mobile, Orange and O2. However most operators’ games departments do not have large teams of people so it is becoming more difficult for smaller games studios to establish direct relationships with the larger mobile operators. Operators’ heads of games are now advising the smaller studios to approach the publishers – such as UK-based Digital Bridges and U.S. outfit Mforma – that the mobile operator deals with instead. The smaller games developers may also make better inroads by dealing directly with the Tier 2 or Tier 3 operators, which may be overlooked by the larger developers or publishers. Obtaining global distribution has also become a business opportunity for companies like the UK-based Telcogames, which acts as a kind of super-publisher for developers and publishers that want to distribute their games broadly within a short timeframe, through channels that they themselves cannot service. Pamela Clark-Dickson: Even though mobile games are generating revenues, and the industry could be said to be viable by virtue of the fact that it is growing both organically and through investment, the revenues are still not significant enough that mobile operators, publishers and developers can afford to conduct large-scale marketing campaigns for mobile games. Instead, mobile games publishers and developers license IP, which they expect will have a level of brand awareness that will make it easier to sell a game with very little marketing. Brand awareness also tends to engender a perception of quality on the part of the mobile subscriber. It has become increasingly clear that this perception bears no resemblance to reality. It is still the case, for the most part, that a publisher will spend an inordinate amount of money licensing the IP, and substantially less on producing a quality mobile game. This is changing, slowly, as the brands themselves increase their knowledge of the mobile games space – particularly with regards to determining those games developers who produce quality games. Operators are also increasingly focusing on quality, and are culling their games catalogs of titles that are of poor quality or that are not generating enough downloads. Pamela Clark-Dickson: Multiplayer gaming appeals to mobile operators because it will be a means for them to generate recurring traffic revenues and establish alternative billing models such as subscriptions. Operators are also keen to build communities around multiplayer games in order to drive consumer awareness and uptake. This is a business model that will be further progressed throughout 2005. Graham Thomas, vice president of content and services at T-Mobile International told delegates at the Games Developer Conference in London in September that T-Mobile needs online games in order to not only increase its mobile data revenues, but also to provide more advanced services for its more active mobile gamers.

Q: Why is there so much interest in licensing branded intellectual property?

Q: Is there more to multiplayer gaming than hype?

• MOBILE INDUSTRY OUTLOOK 2005/06 •

21

Mobile Content

However, many mobile operators remain reluctant to launch multiplayer games, simply because the business models remain unclear. Many are also still trying to establish their single-player downloadable games business. Pamela Clark-Dickson: The business model for 3D mobile games is even less clear than that for multiplayer gaming. As with multiplayer games, a key industry concern is that there is not yet mass-market uptake of 2D games. However, a number of operators did launch 3D games by end-2004 – most notably Vodafone - in conjunction with the launch of their 3G consumer services and handsets. 3D games – while visually more compelling – will be more expensive to produce, will have larger file sizes and will require more processing power from mobile phones. Estimates are that a 3D Java game will cost on average US$150,000 to produce compared with US$50,000 for 2D game – which means that not only will fewer games studios be able to afford to develop 3D games, but that those games that are developed and offered at retail will likely be more expensive to purchase than 2D games. The higher file sizes of 3D mobile games – which may be up to 16MB – could also be a problem for network operators, which will have to determine whether they offer 3D games as over-the-air downloads, embedded into devices or on memory cards. The playing of 3D games on mobile phones may also run down the battery of the device more quickly, which will not please mobile operators since the bulk of their revenues are still derived from voice calls. Pamela Clark-Dickson: The jury is also still out as to whether there is a market for mobilegames-centric, wireless-connected devices. The reception for Nokia’s N-Gage has been lukewarm, with just one million devices shipped since launch in late 2003 – although it’s unclear how many N-Gages are actually in consumers’ hands. Initially, the device’s poor design limited take-up – users had to remove the phone’s battery to install a games memory card, and making phone calls using the device was ungainly. These shortcomings were remedied in the N-Gage QD. Nokia’s retail strategy for the N-Gage also proved to be difficult to realize, since it is trying to sell the device through mobile phone retailers – which are generally not familiar with selling software titles – and through games outlets, which tend to know very little about selling activation plans. The vendor is also working to address these issues. On the one hand, the N-Gage’s poor performance could bode ill for devices such as Tiger Telematics’ Gizmondo and the Tapwave Zodiac. These devices have limited wireless connectivity – primarily Bluetooth and wireless LAN – but not voice, which means it is unlikely that operators will generate revenues from them. However, the Gizmondo should prove more attractive, since it will also include wireless data capabilities such as GPS, GPRS, MMS and SMS.
Pamela Clark-Dickson is Editor of Mobile Games Analyst and Associate Editor of Mobile Media Pamela analyses mobile data developments every fortnight in Mobile Media & Mobile Games Analyst. She has extensive expertise in the mobile games sector as well as thorough expertise in all aspects of the mobile content and applications industry.

Q: What about 3D mobile games?

Q: Is there a place in the market for mobile-games-centric, wireless -connected devices?

• MOBILE INDUSTRY OUTLOOK 2005/06 •

22

Mobile Content

Informa Telecoms & Media provides business intelligence and strategic services to the global telecoms and media markets. We specialise in working with organisations to help them achieve strategic advantage. Our content coverage includes: • TV, Film, Music, Games • Mobile content and applications, including consumer and enterprise markets. Find out more about our complete product portfolio at: www.informatm.com Mobile Games – Management Report Mobile Games presents an in-depth analysis of the mobile games sector, providing forecasts and market intelligence. The report includes coverage of the leading players in the industry and takes a detailed look at the mobile games value chain and business models. It also examines device issues such as Java fragmentation, and investigates emerging markets including multiplayer and 3D gaming. Published: April 2005 Find out more at www.telecoms.com/mobilegames

• MOBILE INDUSTRY OUTLOOK 2005/06 •

23

Mobile Content

Messaging
SMS is continuing to boom in markets such as the UK where 25 billion messages were sent in 2004. MMS has experienced a difficult start and is not generating much excitement from the end-user while operators are now busy promoting Push To Talk as the ‘Next Big Thing’. Here, STEVE MAYALL takes an in-depth look at the latest developments that are driving the messaging industry including fixed-line SMS and Mobile IM.

Q: Is SMS growth levelling off in Europe?

Steve Mayall: We have been seeing slow and steady SMS growth in many European territories, for example in areas across Eastern Europe as well as in previously sluggish markets like France. This is only to be expected. While those who use SMS are maintaining a constant level, the demographic of SMS users is slowly expanding. Territories where there is room for expansion in mobile penetration show a relative curve upwards in SMS use as well. We have not seen rival messaging bearers have an impact on SMS traffic in any European territory. Interestingly, even within single territories there are differences emerging between the SMS growth patterns of rival operators. Some have been more successful in marketing SMS to their subscribers and therefore have discernibly higher usage rates. Given that SMS can represent between 15- 20% of an operator’s revenue it should be a key strategic focal point for operators. Application messaging is also steadily increasing, primarily driven by the use of premium SMS as a billing mechanism for mobile content including ringtones. However, as operator portals become more of a base for traffic, and as WAP billing is extended to billing aggregators, we expect this traffic to drop. In addition content services like horoscopes will be replaced over time by A2P MMS. Therefore we expect P2P messaging to show slow growth but A2P messaging will begin to drop off in parallel with the introduction of WAP billing and MMS growth. Steve Mayall: Not in the short term - at the moment fixed line SMS traffic volumes are very low. The service was first launched by Telecom Italia and Deutsche Telekom late in 2002 and the latter has still only managed to gain around 500,000 subscribers. Part of the reason is that there are two competing services in Germany and, as with mobile SMS, significant penetration only occurs when there is full interoperability. The early signs are that Eastern European countries may see healthier growth for fixed line SMS before Western Europe. One reason is that there is still room for growth in fixed line penetration so as more households buy new fixed handsets they are likely to choose DECT handsets with SMS functionality. In the West more people are choosing to replace their fixed lines with mobile phones. However, in general, European fixed line SMS will lead the U.S. market, where SMS has so far failed to match the rest of the world, and also the Asian market where fixed line penetration is not as high. Steve Mayall: This is the billion dollar question. Operators and vendors around the world disagree on whether MMS will be driven by A2P or P2P content. At the moment, though, most agree that traffic is disappointing (see fig.).

Q: Will the emergence of fixed line SMS help to grow traffic?

Q: Is MMS likely to take off & if so when?

• MOBILE INDUSTRY OUTLOOK 2005/06 •

24

Mobile Content

MMS traffic
Country Operator Traffic - millions of messages Q1 2004 Western Europe Austria Austria Belgium Denmark Croatia Denmark Denmark Denmark Finland Greece Italy Norway Norway Sweden Eastern Europe Lithuania Lithuania Romania Russia Slovenia Estonia Middle East and Africa Jordan Kuwait South Africa Americas USA Bolivia Mexico Asia Pacific
Source: Mobile Media

Q2 2004 0.80 0.75 3.40 0.70 0.80 0.43 0.69 0.70 0.67 2.90 13.70 7.10 7.00 2.60 0.16 0.16 0.13 0.27 0.37 0.05 1.09 3.53 1.86 21.00 0.02 45.00 23.00

Q3 2004 0.90 0.80 4.50 0.90 1.00 0.53 1.00 0.90 0.80 3.40 27.20 8.20 13.00 3.90 0.24 0.19 0.16 1.00 0.83 0.07 1.11 3.50 1.86 25.50 0.02 63.00 27.00

Mobilkom Connect Mobistar Orange VIPNet Sonofon TDC Telia Sonera Cosmote TIM Netcom Telenor Telia Omnitel Bité Orange KB Impuls Mobitel Radiolinja JMTS Wataniya Vodacom Verizon movil de Entel Telcel KTF

0.70 0.70 2.80 0.50 0.60 0.43 0.40 0.47 0.65 2.37 15.30 1.59 3.40 2.11 0.12 0.14 0.12 0.24 0.32 0.04 1.20 n/a 1.05 21.00 0.01 36.00 17.00

South Korea

Interoperability issues are beginning to be resolved but transcoding and interface issues are still contributing to a poor user experience. In addition pricing models are seen as confusing and the prices themselves are generally too high for mass market use. On top of this, because operators still do not know what to expect from user behavior, they are not sure how to dimension their MMS systems. But since traffic is still low this has created a market opportunity for vendors looking to enhance the capacity of operators’ MMSCs to handle A2P traffic.

• MOBILE INDUSTRY OUTLOOK 2005/06 •

25

Mobile Content

Operators are focussing on ways to generate revenue from the MMS channel. And while P2P traffic is not showing huge growth, brands may be interested in the marketing opportunities in A2P MMS which could have the advantage of stimulating traffic and also generating interest and awareness in MMS. Also the penetration rate of MMS-enabled handsets is expected to hit 30% after the Christmas season in Europe and the U.S. When this happens, P2P traffic may pick up – although operators still need to resolve critical transcoding and pricing issues in Europe and interoperability issues in the U.S. If MMS becomes more affordable for consumers, then P2P traffic will inevitably rise. Otherwise operators will have to hope that A2P marketing and content services become successful.

Q: What are the opportunities for mobile instant messaging?

Steve Mayall: Mobile IM has remained on the starting blocks for several years now, but the U.S. is finally looking like it may lead the way. It is now possible to buy handsets in the U.S. with pre-installed messaging clients that can connect to all four IM communities (Yahoo! ICQ, AOL and MSN). The fixed IM community of 140 million users is the same as the base of mobile phone users in North America and the combination of the two is therefore instantly compelling. Yet obstacles remain. The user interface is still clunky. Users need to open a client and log in to send and receive messages and current applications will log out if a call comes in. Also commercial agreements between operators and the big four IM communities are not settled. Cellcos are not clear whether to adopt subscription models for IM or bill per event. And fixed IM providers have experimented with mobile functionality as a premium service, but so far this has been met with resistance from the IM community. Nevertheless, there is demonstrable IM traffic in North America at last and European operators are starting to scale back their ambitions to build their own IM communities and may embrace the fixed line communities instead. Steve Mayall: Not immediately. Nextel has 35% higher ARPU than its rivals and a lower churn rate, which is largely attributed to it being the only U.S. network to offer PTT until recently. However, although PTT has now become the hot topic in messaging, it will take a while before services start to take off. This is because many operators are looking to deploy PTT over their data network, as opposed to using the voice channel. This requires investment in more sophisticated architecture, and many operators are rolling out PTT in tandem with the upgrade of the network IP Multimedia Subsystem. As a result PTT won’t become available overnight, and since most operators believe that interoperability is crucial for its take-up in the consumer market, rollouts will only happen as fast as the slowest operator. Nevertheless, there is much momentum in PTT. There will be many deployments before the end of this year and next year. Perhaps a bigger issue is whether consumers will be interested in something as apparently retrograde as walkie-talkie technology on their mobile phones. Nextel’s PTT users have largely been business users and some operators – including Orange and T-Mobile – have launched or announced PTT services for these segments.

Q: Will push to talk have a significant effect on operators’ ARPU?

• MOBILE INDUSTRY OUTLOOK 2005/06 •

26

Mobile Content

Steve Mayall is Assistant Editor of Mobile Messaging Analyst and Senior Reporter on Mobile Media Steve is a mobile and music analyst, commanding extensive expertise in the areas of mobile music and mobile messaging. He follows the general mobile content & apps business on a daily basis and was also a co-author of both editions of Informa’s Mobile Music report and contributed to Operator Strategies for Messaging and Mobile Data, a report examining five European Tier 1 operators, also published by Informa. Informa Telecoms & Media provides business intelligence and strategic services to the global telecoms and media markets. We specialise in working with organisations to help them achieve strategic advantage. Our content coverage includes: • TV, Film, Music, Games • Mobile content and applications, including consumer and enterprise markets. Find out more about our complete product portfolio at: www.informatm.com Global Messaging Congress London, June 2005 This year’s event builds on the great success of 2004, where Informa Telecoms & Media brought together their world leading SMS Congress and Mobile Multimedia Messaging Conference to create the Global Messaging Congress & Expo. The 2005 Congress consists of an opening keynote session and two concurrent streams, looking at maximising current messaging technologies & analysing developing new technologies, including MMS. This leading 2-day Congress also provides key company case studies, invaluable for benchmarking your company’s performance in the industry. The exhibition will provide delegates and exhibition visitors with the perfect showcase to learn about all the latest messaging products and understand how messaging can benefit their business. Attendees to last year’s Global Messaging Congress included 33% board level executives and 24% product managers with companies attending ranging from major operators and messaging vendors to content providers, application developers and enterprise users. Find out more at www.globalmessagingcongress.com

• MOBILE INDUSTRY OUTLOOK 2005/06 •

27

Mobile Content

Mobile Music
Informa estimates that the global value of the ring tone market in 2004 was US$4 billion and will continue to grow over the next few years, particularly as the North American ring tone market is beginning to pick up. However, the use of real music ring tones is seeing more and more disputes between the record labels, music publishers, operators and WASPs. Here, STEVE MAYALL and JESSICA SANDIN look at the future of the market as well as the likely impact that ringback tones will have.

Q: Has the value of the ring tone market peaked around the world?

Steve Mayall: We believe 2005 will be a strong year for growth in North America, and globally the market for real music ring tones (real tones) – as opposed to monophonic or polyphonic tones – will continue to drive growth. However, in more established markets like western Europe the market may have peaked for a number of reasons – consumers only have limited disposable income for mobile content and penetration of ring tone capable handsets is hitting saturation. Revenue growth is likely to slow over 2005, and the industry is moving to curb the new rogue elements in the ring tone area offering subscription-based mobile content services. Recent guidelines issued by the Mobile Entertainment Forum in collaboration with the operator community aim to curb the practice of misleading subscription services. Many ring tone subscription services offer the consumer one free tone and then continue to charge the consumer every week on a subscription basis for tones that the user may not want, or may not be aware they are paying for. While this practice may generate revenue, it is more damaging in the long term if consumers begin to feel they are being ripped off. In addition, some handsets are coming onto the market that allow consumers to record or make their own ring tone. Many mobile operators do not want this type of functionality in the handsets that they specify, so the proliferation of such devices is still limited, but consumer demand might cause the market to open up so that more of these kinds of devices are available. Also some companies, for example U.S. software outfit Xingtone, provide software which enables consumers to upload ring tones directly from the PC to the mobile. Disputes over revenue shares for real tones may also hold up the growth of ring tones, as record labels, music publishers, operators and WASPs struggle to find a revenue share which is acceptable for all parties. Monophonic and polyphonic tones do not use recordings, so the ringtone industry evolved without having to deal with record labels. Now with real music ring tones the labels are involved and are demanding a high royalty rate. As a result many WASPs offer soundalike tones to avoid paying labels, but this has caused friction within the industry as labels are now starting to refuse to deal with companies that offer such tones. Nevertheless, there is still momentum and enormous revenues in the ring tone industry, and income from the sector is not likely to subside anytime soon. Steve Mayall: In South Korea, where ringback tone services were first launched, they now generate more revenue than ringtones, leading to high expectations around the world.

Q: Will ringback tones be as successful as ring tones?

• MOBILE INDUSTRY OUTLOOK 2005/06 •

28

Mobile Content

There have been a number of deployments in 2004 with many more due in 2005 but there are already signs that ringback tones must be marketed successfully or their success is far from guaranteed. T-Mobile was the first operator to launch a ringback tone service in Europe starting with the UK in December 2003 and reaching five territories within a year. But while the early signs were promising, with 500,000 subscribers by June 2004, the takeup seemed to slow down in the second half of the year. By end-2004, the operator had reached more than 700,000 subscribers, but this still represents a very modest increase in spite of two extra launches in Austria and Hungary since June. Elsewhere, operators in Japan and Singapore have failed to reach their ringback service targets. And in the Philippines one operator has quietly stopped charging fees for its ringback service as consumers have been failing to renew their subscriptions. Part of the challenge facing operators is the fact that ringback tones are an invisible service, in that consumers don’t ring their own phone so won’t hear the music they are paying. The service also needs to be explained to consumers and a wide range of music should be made available to ensure that songs are changed on a regular basis. However, operators who can launch and market the service successfully stand to gain sizeable new revenues. Ringback tones are network-based and so work on all legacy handsets, which means every subscriber is a potential customer. Also, because the ringback platform is integrated deep in the mobile network, operators are looking to build larger content management platforms on top of their ringback service and will be able to offer bundles of music. For example, ringbacks could be bought with ring tones and real song downloads for fans of a particular artist who might want to totally customize their handset with the artist’s music. Also these kinds of marketing opportunities should be attractive to music labels, which could also publicise the service.

Q: Will consumers want to download full tracks to their mobile?

Jessica Sandin: This remains to be seen. Mobile full-track music downloads is still a very new service, the penetration of handsets able to download music is limited and operators are keeping fairly quiet about results. Vodafone did announce that its 3G full-track download service, run by French company Musiwave, had delivered 600,000 tracks to end-users between November 2004 and January 2005. That’s an encouraging figure, but should it should be noted both that Vodafone has bundled some free music downloads with its 3G offer – this will make up a good portion of the tracks downloaded – and current 3G users are typically early adopters. Some voices in the mobile music industry expect the phone to replace MP3 players and iPods in the not-too-distant future. If storage capacity and battery life permits it, there may be some chance of this, but we’re sceptical about music downloading occurring primarily over the mobile network. While mobile network bandwidth is increasing, it’s still a finite resource compared with fixed-line downloads. There’s merit in being able to acquire some music instantly, on-the-go. But if consumers want to use phones as their primary music players, they’re more likely to download the occasional song over-the-air and upload most songs via their PCs, or perhaps at upload stations in retail outlets. Furthermore, one area that is frequently overlooked in the full-track discussion is streaming. On the video side, 3G greenfield operator 3 has noted that streaming video is

• MOBILE INDUSTRY OUTLOOK 2005/06 •

29

Mobile Content

more popular than downloads on its network, despite the fact that the pricepoint is the same. Users may well be happy to listen to streamed music on their mobiles without necessarily downloading it. A streaming service does require a flat-rate offer, however, and business models around it are complex.

Q: Is the music industry ready to embrace mobile – and does the mobile industry fully understand music?

Jessica Sandin: Some companies in the music industry are certainly moving aggressively into mobile. However there’s a lot of work still to be done to educate the music industry about what mobile content services can do and how services can be deployed. Currently, perhaps too much emphasis is being put on ring tones and full-track downloads, while there are a lot of opportunities around artist promotion and marketing, for example, that remain untapped. Conversely, the mobile industry is certainly not always on the ball and able to deliver the services and concepts that the music industry needs. While the two have come closer and ironed out some differences in the past year, more work remains to be done.
Jessica Sandin is Head of Portfolio and Principal Analyst, Mobile Content & Applications Jessica currently manages Informa Telecoms & Media’s portfolio of premium products covering mobile content & applications. Tracking the mobile data industry on a daily basis since 2000, she has built up unrivalled expertise in all aspects of the mobile entertainment, content & services space. Steve Mayall is Assistant Editor of Mobile Messaging Analyst and Senior Reporter on Mobile Media Steve is a mobile and music analyst, commanding extensive expertise in the areas of mobile music and mobile messaging. He follows the general mobile content & apps business on a daily basis and was also a co-author of both editions of Informa’s Mobile Music report and contributed to Operator Strategies for Messaging and Mobile Data, a report examining five European Tier 1 operators, also published by Informa. Informa Telecoms & Media provides business intelligence and strategic services to the global telecoms and media markets. We specialise in working with organisations to help them achieve strategic advantage. Our content coverage includes: • TV, Film, Music, Games • Mobile content and applications, including consumer and enterprise markets. Find out more about our complete product portfolio at: www.informatm.com Mobile Music- Management Report Mobile music is rapidly evolving to a rich and varied marketplace, which is forecast to take a significant share of consumer spending by 2010. Now in its 3rd edition, Mobile Music management report looks at the evolving business models which will underpin this growth, and highlights issues such as digital rights management (DRM) which will become increasingly important in the future. Find out more: www.telecoms.com/mobilemusic

• MOBILE INDUSTRY OUTLOOK 2005/06 •

30

Mobile Content

Mobile TV & Video
It is still early days for mobile TV services, and the jury is still out as to whether or not there is a viable business model, but plenty of operators seem to be jumping on the bandwagon. Here, JESSICA SANDIN says that main interest tends to be around mobile broadcast using technologies such as DVB-H or DMB.

Q: Have there been any notable success yet for mobile TV?

Jessica Sandin: U.S. operator Sprint PCS has managed to build a fairly decent revenue stream for its first mobile TV service – MobiTV, run by Idetic – which simply runs TV channels over the mobile network. Despite quality issues, by October 2004 more than 170,000 subscribers, sources say, were paying US$10 per month for that feed, which is not optimized for mobile. Sprint has since added another TV service, featuring madefor-mobile and edited-for-mobile TV content, serving up short clips rather than straight TV feeds. However, Sprint’s services are running over the regular network, rather than being broadcast over a separate network. Jessica Sandin: South Korea and Japan have launched a satellite enabling mobile broadcast services and vendor Nokia is enthusiastically pushing DVB-H. Even if the DVB-H technology works – which trial feedback suggests it does – the business case is more questionable. A separate network requires significant investment, and to get ROI on deployments operators need significant penetration of DVB-H handsets. To get consumers interested in the mobile broadcast channels, media companies also have to be incentivized to produce good programming for the medium. Over 3G, operators have often had to pay content providers to produce content specifically for mobile, since handset penetration is not substantial enough to enable media companies to make enough money through revenue share. This will all add up to quite an investment and require a lot of confidence in the future success of DVB-H. Having said that, operators are not the only ones looking at potentially building DVBH networks – media companies, cable - or satellite operators could also get involved or even go it alone. However, media players we have spoken to see only one reason why they’d invest in DVB-H and that’s to reach mobile users directly without needing to go through the operator. That’s hardly a scenario mobile operators would like to see happen. In South Korea, a consortium of media companies and mobile operators is running the mobile broadcast services and that may be the best way forward for other markets. Nevertheless, all players in the potential mobile broadcasting value chain have to see the potential for ROI on whatever money they put into it. Currently, most links in that chain seem to be curious but far from certain that they can make that return. On top, there are issues around mobile TV broadcast spectrum that remain to be resolved in many markets. Jessica Sandin: Since the success of mobile TV will depend on a fundamental change in customer behavior – from using the phone as a communication device to using it as a device for media consumption – results of mobile video services can help indicate whether there will be a market for mobile TV broadcasting. Here, indications are fairly encouraging, although as usual hard statistics are difficult to come by in an early market.

Q: What is happening with DVB-H and DMB?

Q: Is mobile video performance so far providing any clues to potential mobile TV success?

• MOBILE INDUSTRY OUTLOOK 2005/06 •

31

Mobile Content

But according to our sources, frequently services that do relatively well are branded and linked to ‘regular’ TV content in some fashion. In South Korea, normal TV content is doing better than that made for mobile, say sources. In the UK, reality talent contest X-factor featured video feeds for subscribers of 3, and FreemantleMedia, the production company behind the show, say the most popular clips were outtakes from the show that were exclusively available on mobile. Orange says video content from reality talent shows in France and reality show ‘I’m a Celebrity Get Me Out of Here!’ in the UK is doing better than expected. Vodafone and Twentieth Century Fox are clearly also banking on this sort of model with the ‘Mobisodes’ series 24: Conspiracy, which is linked to the TV series through a parallel plot with peripheral characters.
Jessica Sandin is Head of Portfolio and Principal Analyst, Mobile Content & Applications Jessica currently manages Informa Telecoms & Media’s portfolio of premium products covering mobile content & applications. Tracking the mobile data industry on a daily basis since 2000, she has built up unrivalled expertise in all aspects of the mobile entertainment, content & services space. Informa Telecoms & Media provides business intelligence and strategic services to the global telecoms and media markets. We specialise in working with organisations to help them achieve strategic advantage. Our content coverage includes: • TV, Film, Music, Games • Mobile content and applications, including consumer and enterprise markets. Find out more about our complete product portfolio at: www.informatm.com Mobile TV: Broadcast and Multimedia – Strategic Research Report Mobile TV: Broadcast and Mobile Multimedia, a unique strategic research report provides a detailed, thorough analysis of the likely factors affecting the success of this sector, the major players in the mobile TV value chain and the huge revenue opportunities for all involved. This 150-page report supplies a detailed overview of the potential market for mobile-TV, within the context of mobile devices, networked entertainment and non-mobile factors. Also evaluated are key factors including the penetration of digital broadcast technologies and the fixed-line broadcasting chain. Published: March 2005 Find out more at: www.telecoms.com/mtv

• MOBILE INDUSTRY OUTLOOK 2005/06 •

32

Mobile Content

The enterprise market
The market for mobile enterprise solutions is certainly picking up and most market players agree that the conditions for take off are now in place. Here, GUILLERMO ESCOFET wonders whether the enterprise market is finally ramping up for that all elusive lift-off that analysts have been heralding for years.

Q: Has the mobile enterprise market taken off?

Guillermo Escofet: It’s too early yet to talk of takeoff, but cash is beginning to flow back into IT budgets. At the same time, the wireless technology market has become more mature while mobile networks and devices have become more powerful. Solutions are more robust and many security issues have been ironed out so things are certainly looking up. Suppliers have had time to shake out some of the flakiest solutions out there and understand what the technology can do and cannot do. The industry has wised up since the peak of the thin-client services hype of the late nineties, for example, when wireless solutions were expected to run permanently online off remote servers. The persistent unreliability of mobile networks has put paid to that, with most providers now opting for thick-client based solutions. Technologies such as wireless handheld computers have become more standardised and mass-produced, driving costs down. There are also application development tools that fit in with applications built on other platforms.
Strategic objectives behind deployments
Mobilize static workers by: allowing them to roam around more in the office; allowing them to work from home Enable existing mobile workers by: Cut costs by: giving them access to corporate data and apps whilst out in the field or on the move reducing property footprint; cutting out paperwork / administrative staff; reduce inventory thru faster parts ordering Increase productivity by: reducing time spent by workers ordering parts, producing quotes, receiving job assingments, etc; reducing human error Barriers to deployment Security concerns over: people hacking into wireless networks thru the Internet or by “sniffing” the airwaves; loss or theft of mobile devices containing sensitive commercial information Cost concerns over: cost of supporting and maintaining mobile devices; cost of mobile data Employee resistance based on: fear of intrusive technology that could be exploited by overbearing bosses; fear of technology that means more work rather than make things better for them
Source: MEA

• MOBILE INDUSTRY OUTLOOK 2005/06 •

33

Mobile Content

But this is not to say that no barriers remain to adoption. One of the biggest obstacles is proving a return on investment. This is made all the harder by the high costs of mobile device management and mobile data transmission. Many companies are still holding back on deployments, waiting for early adopters to do all the hard learning and pave the way.

Q: How strategic is the implementation of mobile enterprise technology?

Guillermo Escofet: It’s surprising how disengaged IT heads have been from the deployment of wireless data technology in organizations. Until a year or so ago, most mobile enterprise deployments were happening largely independently from CIOs and IT departments, spearheaded by departmental heads or the whims of individual employees acting on their own initiative. Very little of it was centrally managed or aligned with the enterprise’s core business strategy. Many organizations have, as a result, ended up with a jumble of wireless devices and access points haphazardly hooked up to corporate IT systems. This has left them dangerously exposed to security breaches. It has also left them facing huge support and resource management headaches. IT heads have begun to wake up to all this and are trying to take the reins. They’re imposing rules on which mobile devices should be deployed and how they should be used. The deployment of wireless solutions is becoming more formal, with decisions being made at boardroom level. Solutions must meet organizations’ core business aims, have a provable return on investment, and be scalable, manageable and secure. Guillermo Escofet: The mobile enterprise market is still young, and the picture of who will become its dominant suppliers is still unclear. There is a confusing array of players in the market from different walks of life: mobile operators, device vendors, application providers, middleware suppliers, IT outsourcers and systems integrators. While mobile operators have a stranglehold on voice services, the market for wireless enterprise data services is more exposed to players from outside the mobile realm. IT players look much more likely to take a dominant role, adding a wireless dimension to their existing solutions and acting as project leaders in mobile enterprise deployments. They are keen to grab a slice of the wireless market in the face of decreasing margins on their own turf. Although most IT companies have no previous knowledge of wireless, they already are trusted, well-known names in the enterprise world. They have the clout to easily buy a wireless solution and resell and repackage it as part of a broader IT solution. However, it’s surprising how much systems integration is still being done in-house by enterprises. Despite the growing trend towards IT outsourcing, many, if not most, cuttingedge mobile enterprise solutions are being built in-house. Most components are sourced externally, but the systems integration is often carried out by internal IT staff or independent consultants. Many enterprises complain of not being able to find providers offering exactly what they need. Some feel that there are very few players out there, if any, that can provide total solutions that are robust enough. Some also complain that consultants and systems integrators charge far too much for their services. These can be prohibitive even before they’ve gone beyond the proof of concept stage, they say.

Q: Who are becoming the dominant players in this space?

• MOBILE INDUSTRY OUTLOOK 2005/06 •

34

Mobile Content

Outsourced wireless data services normally involve several suppliers. The more vertically targeted the application, the longer and more complex the value chain. As is typical of embryonic markets, there is a lot of partnering happening in the wireless enterprise space at the moment. Everyone is jumping into bed with everyone else to broaden product portfolios, share risks and leverage greater market strength. Much of this has been encouraged by the adverse economic climate of the past few years and the realization that it is not practical to try to do everything in-house.

Q: What role are operators playing in this market?

Guillermo Escofet: Enterprise mobility is by and large alien territory for mobile operators. In as much as mobility is about extending corporate IT into the wireless sphere, it’s something that enterprises are more likely to entrust to IT consultants and systems integrators than to operators, who are essentially just seen as mobile telephony providers. In the complex supply chain that goes into making a mobile enterprise solution, operators often end up playing the role of “dumb pipes” – i.e. providing the means for data transmission – and doing quite a dumb job of it at that. Their service is generally seen as bad and overpriced. Mobile networks are not providing the data transmission speeds and reliability that businesses need for seamless remote access to backend systems. The prevailing feeling is that the delivery of enterprise data is still low down in the operators’ list of priorities, with precedence given to voice in the allocation of often-limited network resources. Having to pay for data per kilobytes, rather than on a flat-rate basis, puts off businesses. And data roaming charges are often quite simply outrageous, with rates of between US$10-50 per megabyte quite typical – and this on GPRS, never mind 3G! All this is likely to drive travelling businesspeople towards Wi-Fi hotspots, cyber cafes and hotel broadband facilities instead. This does not mean that operators don’t give a damn about the mobile enterprise space. They are fully aware of how key corporate customers can be in driving up ARPU, and that they need to do a lot more to successfully capture a significant slice of this market. The best strategy for carriers is to recognize their limitations in the corporate IT sphere and partner with specialists in this field, such as systems integrators, software houses and technology vendors. Many operators have begun to do that, using third parties as their main route to market. Operators will also have direct links to corporates as telephony suppliers – something they can exploit to sell handset-based applications such as mobile e-mail and PIM. But they’re out of their depth when it comes to the mobilization of backend systems and deployment of vertical solutions. Nor is there much of a business case for them to try to compete in this space, since most of these applications generate relatively small amounts of traffic while requiring significant development and support work. Where operators play a more prominent role is in the sphere of off-the-shelf, horizontal applications such as wireless e-mail or GPRS data cards.
Guillermo Escofet is Associate Editor of Mobile Enterprise Analyst Guillermo has built up significant expertise in the areas of mobile location and enterprise services since joining Informa Telecoms & Media in 2003. Guillermo has previously worked in business and current affairs journalism in Europe and Latin America and has written for a wide variety of publications, including Newsweek and The Miami Herald.

• MOBILE INDUSTRY OUTLOOK 2005/06 •

35

Mobile Content

Informa Telecoms & Media provides business intelligence and strategic services to the global telecoms and media markets. We specialise in working with organisations to help them achieve strategic advantage. Our content coverage includes: • TV, Film, Music, Games • Mobile content and applications, including consumer and enterprise markets. Find out more about our complete product portfolio at: www.informatm.com Mobile Enterprise Analyst – newsletter and continuous research service The mobile industry is gearing up to target the enterprise space with value added solutions, and businesses are finally ready to deploy mobile data services. Mobile Enterprise Analyst, an insightful monthly analytical research service, comprehensively addresses mobile value added services for enterprise, public sector and government markets globally. Coverage includes: • Mobile data enterprise deployments – discover which companies and organizations are investing in mobile data • Operator, vendor and systems integrator strategies for targeting enterprises – revealing who is winning enterprise customers and how • Cost, ROI, security and related mobile enterprise concerns – discover which factors are limiting takeup • The key drivers of mobile enterprise solution take-up – revealing the user benefits and highlighting what enterprises are looking for in a mobile data solution. Mobile Enterprise Analyst continuous research service is available online for multiple users and includes a fully searchable online archive of back issues to enable powerful market tracking. Find out more at: www.telecoms.com/mea

• MOBILE INDUSTRY OUTLOOK 2005/06 •

36

BSS/OSS

BSS/OSS and Telecoms IT
The BSS/OSS market is slowly recovering from the bleak situation most vendors found themselves in 12-24 months ago. The number of new contract announcements in 2004 may still be down on the previous year but plenty of large contracts are being awarded and some vendors, such as Amdocs or Convergys, are doing very nicely. Here, KRIS SZANIAWSKI, ANDY BAIRSTO and ANN SWALLOW highlight the developing trends across the sector.

Q: Are any new trends developing in the BSS/OSS market?

Kris Szaniawski: Firstly, we are beginning to see some instances of large-scale investment. The OSS sector in particular is notoriously fragmented and operators have tended to spend on a more piecemeal basis with multiple vendors. But an increasing number of large service providers such as BT and Telecom Italia are looking to revolutionise their OSS architecture and large international groups such as Vodafone, Orange and Telefonica Moviles are seeking to rationalize their back-office systems. Large multi-solution deals may become more typical in the future. Secondly, developing markets are contributing much more to BSS/OSS spend. Most remarkably, we are seeing increasing numbers of deals with African and Latin American cellcos as these regions plays catch-up to more developed markets and new operators enter the fray (see fig.). Meanwhile, rapid growth in large developing markets like China, India and Indonesia is stimulating 2004 contracts by region infrastructure spend but just as Africa important is an increasing 6% Global/ unspec. willingness by Asian cellcos to West Europe 7% 22% spend on bought-in solutions Middle-East 3% rather than relying on in-house resources as they have in the past. It is not surprising that we have East Europe N.America 13% 24% seen a spate of announcements from European and North American based-vendors over Caribbean/ Latin America 11% the last twelve months opening Asia-Pacific 14% up new regional offices in Source: Informa Telecoms & Media developing markets. Kris Szaniawski: While BSS/OSS contract announcements may not be setting the world on fire we are nevertheless seeing pockets of strong growth. Vendors such as MetaSolv and Intec have fared well off the back of rising demand for technologies outside the core billing and customer-care market. Service/network management, inventory management, service provisioning and activation are all OSS areas stimulating operator interest. Inventory management continues to attract investment if only because cellcos need to have a good grasp of what they are using and how, they need a strong platform in this area before investing in other OSS.

Q: What are cellcos spending on to improve operational efficiency?

• MOBILE INDUSTRY OUTLOOK 2005/06 •

37

BSS/OSS

Service management is also showing promise, to a large extent because operators are placing more importance on network performance as a service differentiator. The recent purchase by WatchMark-Comnitel of ADC’s Metrica OSS business goes some way towards consolidating this particular market. In the billing sector, prepaid/postpaid convergent solutions are attracting a lot of attention if not big contracts as yet. Competition is heating up as IN-based vendors such as Comverse, Ericsson and Siemens vie with more traditional postpaid billing vendors such as Amdocs, CSG and Convergys.

Q: Billing vendors have been talking about converged prepaid /postpaid mobile billing but how eager are the operators?

Ann Swallow: We have just carried out an operator survey – the results might not delight the vendors. Less than 10% of operators said they had a convergent system – not surprising as they are only just coming onto the market. Well over 30% had no plans move to a convergent system, and only a quarter of those who had plans intended to replace their system. The rest intended to modify their existing system. Less than half of those planning to upgrade intended to make changes during 2005 and about 40% had not yet set a timescale. So what conclusions do we draw? The first is that not many truly converged systems are actually available – most working solutions have been achieved by a close integration of traditional postpaid and prepaid systems. The second is that, whether or not the systems are available, operators are not rushing to change. They have huge amounts invested in their present arrangements and are not going to throw out what ‘ain’t broke’. Fixes such as modifying mediation to help with billing for content and CRM for customer management may well be enough for now. Andy Bairsto: It’s not surprising that the term revenue assurance (RA) has different meanings for different people – after all it is not about a single function, rather it is about underpinning many of the existing back and front office processes. While RA is, by definition, about revenues and making sure that as a business you collect all the monies due for the services you provide, it is also concerned with the checking and ratification of the data that is drawn from a wide variety of different network elements and which result from millions of customer transactions. RA is often seen as the solution to the problem of revenue leakage, which can occur at any point in the revenue chain, from provisioning of the service, through data collection and mediation, rating and billing to presentment and collection of money. Therefore each of the departments concerned with these processes should be informed about and actively engaged in the practice of RA. There is of course a multitude of consultants and vendors in the market place with their own flavours of methodologies and solutions aimed at assisting with RA. They cut across the entire service/support systems spectrum from usage and rating validation through to fraud management and service validation. With this in mind, and returning to the initial question, RA should primarily be of concern to all those departments whose IT systems handle data relating to customer transactions. In fact, if RA is done correctly, it shouldn’t become a ‘problem’ for the finance department except when it results in bad debt.

Q: Why should I be concerned about revenue assurance – isn’t that a problem for our finance department?

• MOBILE INDUSTRY OUTLOOK 2005/06 •

38

BSS/OSS

Having said all that, a certain piece of U.S. legislation, commonly referred to as Sarbanes Oxley, has brought the issue back to finance department in terms of having best practice for auditing, compliance etc. That’s a whole other can of worms that doesn’t need to be spilt onto these pages!

Q: How should operators be addressing the issues of churn and customer retention? Is CRM dead or should this still be an area of investment?

Andy Bairsto: The last couple of years has shown that a lot of operators are heading down the right path when it comes to customer retention and there are a number of success stories. What has certainly become apparent is that churn needs to be addressed from two standpoints. Firstly the operator needs to look at the type of customer-centric processes that it needs to put in place – these might include such things as customer loyalty schemes, personalisation of customer service, web services and customer segmentation techniques. Secondly the business needs to consider what types of technology need to be implemented in order to bring about the kinds of processes mentioned above. Within the vendor market this might be termed as CRM software – although there is a trend to move away from this label and encompass data mining technologies. The criticism levelled at many failed or failing ‘CRM’ projects is that they are either too broad in their objectives or that they are simply not strategic enough. The reason for this is often that the company is trying to do too much too soon – such as transforming the entire organisation into a mass of customer-centric activity using every available touchpoint to glean even more information about its customers and feed it all back into one giant analytical pot which will improve retention, reduce churn and increase profitability. This is not a bad objective in itself but practically it is highly unachievable unless it is approached in bite-sized chunks. CRM strategy also needs to be business-specific and that means taking a tailored approach that reflects the operator’s own unique processes and requirements. One of the biggest mistakes in any CRM implementation is to let the technology features drive the project and impact too heavily on the outcome. Customer relationship management – and there is a purposeful distinction here in using its full title rather than its acronym – is certainly not about technology and adapting your focus to incorporate the software. It should primarily be about the business processes that support your customer relationships and then applying technologies to automate those processes. This is also a fundamental reason why CRM, in most circumstances, needs to be customised. Kris Szaniawski: If only! There may be growing consensus about what the more innovative cellcos would like to offer - content and service bundles, cross-service discounts and simple transparent content-based pricing that doesn’t involve a confusing mix of content and traffic charges - but there is still plenty of confusion about how best to implement new charging and billing solutions to support this. Ironically the ability to deliver simple, flexible pricing requires complex solutions to underpin it. Legacy billing systems are not equipped to deal with content billing and operators are increasingly aware that the addition of adjunct solutions to address individual services or service groups creates as many problems as it solves.

Q: Is there a consensus emerging on how to bill for content?

• MOBILE INDUSTRY OUTLOOK 2005/06 •

39

BSS/OSS

The lack of certainty about the appropriate architecture, however, means that many operators are still holding back from investing or find themselves issuing overlapping RFPs. Various aspects of content charging can be implemented in different ways, and the different approaches being proposed by mainstream billing and mediation vendors, niche players like VoluBill, network vendors and content-delivery platform providers are adding to operator confusion. It is perhaps not surprising that the number of serious contentbilling implementations is still relatively small. On the positive side, some large operators, such as Vodafone, have made a strategic decision to invest in and overhaul their billing systems. Meanwhile, organisations like the TeleManagement Forum are making concerted efforts to standardize business-process and system-architectural frameworks – these kinds of standards-based activities don’t always make the headlines but it is probably advances in these areas that will most help to eliminate confusion and spur a new round of investment.
Kris Szaniawski is Editor of Billing Plus Kris has over 10 years’ experience in the communications industry both as a journalist and analyst. He has worked on a wide range of advisory services, reports and research programs, and has written for Telecom Markets, Mobile Communications, New Media Markets, Mobile Communications International, Financial Times, The Guardian. Prior to joining Informa Telecoms & Media he was a senior analyst at Ovum providing strategic advice to the mobile industry. His current expertise is in billing, customer care, revenue assurance, OSS and telecoms IT. Andy Bairsto is a Principal Analyst with Informa Telecoms & Media Andy is responsible for managing the BSS/OSS sector reports and publication programme. He is the author of several analytical reports, including Minimising Churn and Building Customer Profitability, Competitor Analysis of the Top Global BCC Vendors and the latest edition of Fraud and Revenue Assurance. He was also a contributing author for Global Mobile Prepaid Strategies. Prior to this, Andy was editor of Billing Plus, a fortnightly newsletter that reports on and analyses business issues within the telecoms industry. Andy holds an MSc in Information Technology from Loughborough University, with a specialism in human factors and ergonomics. He has also published work on implementing user-centered IT systems. Ann Swallow is Markets Group Manager for Informa Telecoms & Media Ann is manager of the Markets Group, with responsibility for the Global Target Locator database, a research project that analyses the business and operational support systems used by operators worldwide. She is the author of the associated series of reports Global Trends in Telecoms BSS and BCC Market Forecasts. She is also a regular contributor to Billing Plus and is author of a range of strategic reports. Ann began her telecoms career with what is now BT, then spent a number of years in an independent telecom consultancy during and after telecom privatisation and liberalisation in the UK. Informa Telecoms & Media provides business intelligence and strategic services to the global telecoms and media markets. We specialise in working with organisations to help them achieve strategic advantage. Our technology coverage includes: • Infrastructure and networks, hardware and software • Handsets and devices.

• MOBILE INDUSTRY OUTLOOK 2005/06 •

40

BSS/OSS

Find out more about our complete product portfolio at: www.informatm.com Forthcoming Reports OSS Strategies for Achieving Revenue Assurance will examine the causes of revenue loss among operators and the methods available to plug the leakage. Email [email protected] for advance information on this report Convergent Mobile Billing will examine the current status of the prepaid and post-paid charging market. This report will include an exclusive operator survey, market forecasts and detailed profiles of leading vendors. Email [email protected] for advance information on this report

• MOBILE INDUSTRY OUTLOOK 2005/06 •

41

Consolidation

Mergers and Acquisitions
The ‘irrational exuberance’ that drove the high prices paid during the telecoms boom in the late nineties is unlikely to return in the near future, but market evaluations remain strong. M&A activity is now principally seen for one of two reasons. Either an operator needs to bolster flagging revenues at home by expanding into emerging markets, or it needs to consolidate its position at home. Here, PAUL LAMBERT and GAVIN PATTERSON look at how recent activity highlights the premium attached to harnessing exponential growth.

Q: The U.S. market has changed a lot in recent months – what’s happened?

Paul Lambert: The deals that have grabbed most headlines recently were, of course, those that have seen the U.S. market consolidate from five to four national players, while the deal announced in January between Alltel and Western Wireless has created a strong challenger to fourth-placed T-Mobile USA. Indeed, moves toward consolidation are seeing the U.S. market undergo a period of dramatic change. November saw the Federal Communication Commission give regulatory approval to Cingular Wireless’s US$44.1 billion acquisition of AT&T Wireless and in January Cingular strengthened its hold on top spot, announcing its first ever quarter of combined operations since it completed the merger. The operator reported 49.1 million total subscribers end-December after delivering nearly 1.8 million net adds on a pro forma basis during the quarter. At end-2004, Verizon Wireless, in second place, had 42 million subscribers. December also saw Sprint PCS and Nextel Communications announce a definitive agreement to merge, creating the third-largest wireless operator in the U.S. in a deal estimated to be worth US$35 billion. With about 35 million subscribers and 5 million additional subs through affiliates, the merged company, Sprint Nextel, trails closely behind Verizon Wireless and the enlarged Cingular Wireless. The emergence of three strong entities in the U.S. has put yet more distance between them and fourth-placed T-Mobile. Gavin Patterson: Yes, T-Mobile must be looking over its shoulder now. The operator is a distant fourth place with 16.3 million subs end-2004 while the combined operations of Alltel and Western Wireless had about 10 million, making the prospective merged operator the nation’s fifth largest wireless carrier. Alltel’s US$6 billion deal for Western Wireless should really be seen as a statement of intent. Industry watchers expect the deal to mark the start of a consolidation frenzy amongst some of the regional players as the market gravitates to a smaller number of larger players.

Q: What other markets are ripe for consolidation?

Paul Lambert: With a multitude of regional and national operators, India is a market that must inevitably undergo consolidation until it becomes, most likely, a four or five player market. In the first instance, consolidation is likely to be driven by the large national operators, not least because foreign investors are prevented from owning more than 74% of a local company.

• MOBILE INDUSTRY OUTLOOK 2005/06 •

42

Consolidation

Mumbai-based BPL, with 2.3 million subs at 3Q 2004, is thought to be a likely target for a foreign operator. The company is understood to be looking to sell a 49% equity stake, and several global operators including Vodafone and Deutsche Telekom are believed to be interested in the stake. Hong Kong is also a market that suffers from the presence of too many operators (see fig.). Operators from China are known to be eager to drive consolidation in Hong Kong, and also to provide seamless roaming between the mainland and the Special Economic Region. Indeed, China Mobile is understood to be looking at CSL, Hong Kong’s secondplaced operator.
Hong Kong subscribers by network
Operator Network Launched 4Q04 Hong Kong CSL Hong Kong CSL SmarTone Hutchison Hutchison Hutchison Peoples Telephone New World Sunday Total
Source: Informa Telecoms & Media

Subs (000) 3Q04 31 1,250 1,150 1,850 26 145 1,067 1,300 670 7,489 2Q04 32 1,220 1,100 1,800 28 90 1,058 1,250 659 7,237 1Q04 32 1,200 1,060 1,765 38 37 1,050 1,210 662 7,053 4Q03 33 1,150 1,043 1,660 40 not launched 1,048 1,180 660 6,813

TDMA800 GSM900/1800 GSM900/1800 GSM900/1800 CDMA800 WCDMA GSM1800 GSM1800 GSM1800

Oct 1992 Jul 1993 Jan 1993 May 1995 Sep 1995 Jan 2004 Jan 1997 Mar 1997 Sep 1997

30 1,289 1,168 1,915 18 210 1,086 1,355 673 7,744

Gavin Patterson: China and Hong Kong are both very interesting at the moment. In China, the National Development and Reform Commission (NDRC) looks set to approve division of China Unicom’s mobile assets between the country’s fixed line operators as part of the government’s 3G licensing regime. China Telecom is expected to be the largest beneficiary gaining Unicom’s GSM business while China Netcom will end up with the CDMA operation. Unicom’s breakup would dramatically alter the Chinese market, as it would present both Netcom and Telecom with legacy cellular networks and an installed subscriber base, while offering a path to migrate their existing PAS subscribers. Meanwhile, in Hong Kong, there are six operators of which only four have a 3G license. Peoples Telephone, which decided to rollout EDGE rather than bid for a 3G license in October 2001, has stepped up plans to launch as a 3G MVNO. Peoples has already talked to Hutchison Telecom, CSL, SmarTone and Sunday about leasing network capacity. However, while they are obligated to lease 30% of their capacity to MVNOs, the leasing terms will be under commercial negotiation and are, therefore, unlikely to be cheap.

• MOBILE INDUSTRY OUTLOOK 2005/06 •

43

Consolidation

Q: And which regions are generating the most M&A interest?

Paul Lambert: The CEE region is ripe with opportunities, with operators in the mature western European markets eager to secure new growth in the untapped emerging mobile markets of central and eastern Europe. Cesky Telecom, the Czech fixed-line operator is currently the subject of interest from five operators in western Europe, comprising (at the time of press), Vodafone Denmark’s TDC, Spain’s Telefonica, TeliaSonera and Swisscom, each of whom picked up bid documents for the 51.1% stake in Cesky Telecom, which controls 100% of the country’s leading cellco, Eurotel Praha. Cesky Telecom estimates that the stake will be sold for CKr40-60 billion (US$1.742.6 billion), while market estimates have valued the stake at €1.6-2.1 billion (US$2.12.8 billion). In Bulgaria, Telekom Austria is understood to be looking to buy 100% of leading Bulgarian operator MobilTel again. In October 2003 Telekom Austria failed to acquire MobilTel for €1.5 billion (US$2.0 billion) and is now thought to be involved in a bidding war for control of Bulgaria’s leading operator with Vodafone, Deutsche Telekom and Canadian investment firm TIW, and is thought to be offering €1.6 billion (US$2.1 billion) for the operator. Paul Lambert: Ailing cellcos in the regions’ mature markets are also being targeted for acquisition. Spanish carrier Auna Group, which owns Amena, the country’s third-largest cellco, is the subject of a bid by a group of private investment firms led by the Carlyle Group, which is putting together Europe’s largest leveraged buyout with an €11 billion (US$14.5 billion) offer. It has been suggested the consortium is backed by a large European carrier looking to expand its presence in the Spanish market, and France Telecom along with Deutsche Telekom have been linked to the bid.
Paul Lambert is Editor of Global Mobile Paul has been covering the wireless industry with Informa Telecoms & Media for four years. He has worked across a variety of news publications, including Global Mobile Daily and 3G Mobile, and was the launch editor for Eastern Europe Wireless Analyst. Paul has also contributed to analyst reports, providing an indepth view of the trends and issues that shape the wireless industry. Gavin Patterson is Editorial Director of Global Mobile, 3G Mobile and Mobile Handset Analyst Gavin has been a senior business journalist since 1989 and specialized on the telecoms industry since joining Baskerville (now part of Informa Telecoms & Media) in 1997 where he helped launch a number of new products including 3G Mobile and Global Mobile Daily. Previously, he was Business Editor of the Hongkong Standard and Eastern Express newspapers in Hong Kong. Gavin is a regular fixture at international conferences in Europe, Asia and North America and also conducts regular briefing sessions with analysts and media organizations on operator strategy and technology issues. Informa Telecoms & Media provides business intelligence and strategic services to the global telecoms and media markets. We specialise in working with organisations to help them achieve strategic advantage.

Q: Is there much activity in western Europe?

• MOBILE INDUSTRY OUTLOOK 2005/06 •

44

Consolidation

Our global wireless coverage includes: • Mobile, fixed-operator and service provider strategies and market trends • Global wireless developments across mature and developing markets. Find out more about our complete product portfolio at: www.informatm.com Global Mobile – newsletter and continuous research service Global Mobile is the leading source of business-critical intelligence on the mobile communications industry for senior telecoms executives worldwide. With 16 pages of exclusive news, statistics and analysis into the strategies, players and technologies that are shaping the international mobile markets. Key coverage includes: • Key subscriber data for every network in every country worldwide, we feature a different region in each issue. • Comprehensive regional profiling providing a detailed summary of the current status of one region summarising the current trends and likely future developments of 2, 2.5 and 3G network and operator activity. Global Mobile continuous research service is available online for multiple users and includes a fully searchable online archive of back issues to enable powerful market tracking. Find out more at www.telecoms.com/gm

• MOBILE INDUSTRY OUTLOOK 2005/06 •

45

Roaming

International roaming regulation
National regulatory authorities (NRAs), the European Union’s Competition Commission, as well as the European Regulators Group are each undertaking examination of inter-operator tariffs (roaming charges) that are the basis for the cost it makes end-users to use mobile services while abroad. Here, PAUL LAMBERT outlines the possibility that some operators may face punitive action while regulators impose stringent cuts on existing rates.

Q: What’s happening with the EC’s inquiry into roaming?

Paul Lambert: The European Commission’s Directorate General for Competition has signalled that operators could be fined up to 10% of annual revenues if they are found in breach of EC competition laws after claiming that roaming rates are “excessively high.” The EC has raised this as a possibility that may arise from its three-year inquiry into companies operating in the UK and Germany. mmO 2 and Vodafone are preparing to file their responses to the EC’s preliminary conclusions, which they received this summer as part of the EU’s sector inquiry into roaming rates. In its preliminary conclusions announced in July, EC Competition Commissioner Mario Monti called attention to “high roaming fees” arising from O2 and Vodafone’s abuse of their dominant positions in the UK market. And in November, an EC competition lawyer told Global Mobile the EC is prepared, in the worst-case scenario, to impose fines on operators found breaking competition law in their roaming tariffs up to 10% of annual revenues. Indeed, the EC has proven itself ready to impose fines on companies judged to have broken competition law, with Microsoft, Tetrapak and Michelin as precedents. The EC has also indicated that it may widen its inquiry into international roaming rates to the rest of Europe. All of mmO 2 ’s assets are in Europe, while about 65% of Vodafone’s assets are in the region. Paul Lambert: Over and above the possible remedies the EC’s Competition Commission may impose on operators found breaking competition law with their international roaming rates, the EC’s telecoms package gives NRAs the power to regulate roaming prices. Beginning Jan. 1 NRAs were empowered to begin investigating international roaming rates in national markets. Indeed, the EC has said it is aiming to establish its methodology for examining roaming rates in the UK and Germany and hopes it will form a template for national regulatory authorities (NRAs) to force roaming rates to drop in other EU countries. Adding to the level of regulatory scrutiny of international roaming rates, in December the European Regulators Group sent out a questionnaire to European cellcos in individual EU countries for comparable information on their wholesale international roaming prices, discounts and traffic-direction abilities. The ERG has said the information will help it “undertake a harmonized market analysis and will indicate the need for regulation of wholesale international roaming in Europe.” The ERG aims to present some preliminary results in May.

Q: What about national regulators?

• MOBILE INDUSTRY OUTLOOK 2005/06 •

46

Roaming

Q: How much does roaming generate for operators in revenues?

Paul Lambert: It’s hard to say, as operators don’t publish figures for roaming revenues (perhaps wisely!). Still, informed estimates from roaming solutions providers suggest that while only 2-3% of traffic comes from roaming, roaming traffic contributes 10-12% of revenues, and can generate 25-50% of an operator’s gross margin. There were estimated to be about 100 million active roamers in 2003, making it a US$50 billion-a-year market and growing. Paul Lambert: Yes, in an indication operators are moving to pre-empt harsh or punitive judgements against their IOTs (inter-operator tariffs), Vodafone CEO Arun Sarin said late last year that the operator will cut the cost of international roaming calls next year (ie 2005). Sarin said that roaming calls “will be cheaper” in 2005 and that the company was planning to launch something “exciting” in the area of roaming tariffs. At the same time, operator alliances, such as, in Europe, FreeMove and Starmap are making inroads into lowering end-user roaming rates. In November, FreeMove, the European mobile alliance formed by Orange, Telefonica Moviles, Telecom Italia Mobile and T-Mobile, announced its first offering, a predictable pricing structure for multinational corporations to manage their roaming costs more efficiently. The alliance will offer customers with operations in the UK, France, Switzerland, the Netherlands, Belgium, Germany, Italy and Spain a range of services with predictable tariffs, simple zoning, network independence and transparency. The FreeMove alliance reaches almost 170 million managed customers in 20 European countries. Paul Lambert: No, the U.S. regulator, the Federal Communications Commission, released a notice of inquiry (NOI) Oct. 26 asking for information, data, comments and analyses on foreign mobile termination rates. The FCC will look into the cost to U.S. consumers of making a call from the U.S. to a mobile phone in a foreign country. The FCC says it has been monitoring the issue of foreign mobile termination rates for the past few years and has been interested in their effect on U.S. customers. It says the NOI was prompted by concern about such rates and their possible effect on U.S. customers from U.S. international carriers. If the FCC finds mobile termination rates in need of regulatory-led remedies, the Office of the U.S. Trade Representative would be the most likely arm of the U.S. government to bring them about. The USTR led the U.S. government’s objection to China’s pursuit of its own Wi-Fi technology, WAPI, and in May succeeded in forcing a reversal of policy from the Chinese government on mandating the use of the WAPI standard. In Europe, it is understood that the U.S. mobile industry perceives mobile termination rates to be unusually high in Switzerland and Germany. Paul Lambert: Revenue from WCDMA roaming is already a major doubt for operators, since the cost to offer next-generation services could run up to 15 times that of 2.5G services. It is clear the mobile operators need to begin to cooperate now on building a new model for roaming pricing if data roaming is to take off in a 3G environment. Indeed, cost is one the main barriers to use data in the roaming environment. Vodafone in the UK charges between £3.50 (US$6.60) and £5 (US$9.43) per megabyte, depending

Q: Given what’s at stake, are operators doing anything to address the roaming issue?

Q: Is it only in the European Union that roaming rates are too high?

Q: What about data roaming?

• MOBILE INDUSTRY OUTLOOK 2005/06 •

47

Roaming

on the customer’s usage plan, for roaming on other Vodafone 3G networks. The offnetwork rate rises to £8.75 (US$16.51) per megabyte. Still, excessive roaming costs could be avoided. Increased use of transit hubs could be one solution to encourage 3G data roaming. In the existing 2.5G environment, a singlepoint connection with 30-plus operators is one of best ways to get fast MMS internetworking. There are, however, moves within the industry to migrate to a more general-purpose VPN for operators to cope with IMS and GPRS all on the one network.
Paul Lambert is Editor of Global Mobile Paul has been covering the wireless industry with Informa Telecoms & Media for four years. He has worked across a variety of news publications, including Global Mobile Daily and 3G Mobile, and was the launch editor for Eastern Europe Wireless Analyst. Paul has also contributed to analyst reports, providing an indepth view of the trends and issues that shape the wireless industry. Informa Telecoms & Media provides business intelligence and strategic services to the global telecoms and media markets. We specialise in working with organisations to help them achieve strategic advantage. Our global wireless coverage includes: • Mobile, fixed-operator and service provider strategies and market trends • Global wireless developments across mature and developing markets. Find out more about our complete product portfolio at: www.informatm.com Global Mobile Roaming – Strategic Research Report Global Mobile Roaming offers key in-depth analysis of the current status of the global roaming market. Based on the results of an exclusive industry survey amongst key industry professional across the world. This key study examines the key issues affecting the global mobile roaming market including the emergence of roaming alliances, pricing strategies, virtual home networks, managed roaming and traffic redirection and a look at roaming across technology Published: April 2005 Find out more: www.telecoms.com/globalroaming

• MOBILE INDUSTRY OUTLOOK 2005/06 •

48

Handsets

Software and devices
The mobile handset market is enjoying a period of sales growth with global handset shipments breaching the 600-million mark for the first time in 2004. Developing markets are becoming more mature, with a greater choice of GSM and CDMA carriers in markets like Latin America. In more developed markets like Japan and Europe it is technological innovation that is helping to drive sales. Here, MICHAEL CARROLL, DAVID MCQUEEN and MALIK SAADI discuss whether the growth can be maintained, if Nokia will remain top-dog in 2005, and the status of 3G chipset and device development.

Q: Is the current growth in unit shipments sustainable?

David McQueen: Many indications suggest that growth will be sustainable for the next four years. Demand from key developing regions, namely Brazil, China, India, Mexico and Russia where the market is not yet saturated, will surely buoy global handset sales. In addition the use of advanced wireless data services will gradually become part of consumers’ lifestyle mainly in developed countries. In these markets, the growth will be driven by more active replacements of handsets for devices with enhanced performance, technical capabilities, and features including high resolution colour screens and cameras, music players, advanced gaming, slot-in storage, Bluetooth/WLAN, email, location based services, and support of broadcasting services. Michael Carroll: After a troubled start to 2004, Nokia looked to have picked up the ball again in the back half of the year. The vendor applied its technological ability to react
Top six global vendors' rank by region, 2004
Nokia Less-developed regions China India Other Asia-Pacific Latin America CEMEA Subtotal Subtotal excluding China More-developed regions Western Europe North America Japan, South Korea Subtotal Global share
Note; *Co-holder of ranking Source: CSFB estimates

Q: Can Nokia continue to build on its 2H 2004 sales momentum?

Motorola

Samsung

Siemens

Sony Ericsson LG Electronics

1 1 1 1 1 1 1

2 4 3 2 3 2 2

3 2* 2 4 4 3 3

<5 <5 <5 3 2 4 4

<5 <5 <5 5 5 5 5

<5 2* 2* <5 <5 <5 <5

1 2 <5 1 1

3 1 <5 2 2

4* 3 3 3 3

2 <5 <5 5* 4

4* <5 <5 5* 5*

<5 4 <5 4 5*

• MOBILE INDUSTRY OUTLOOK 2005/06 •

49

Handsets

quickly to the shortfalls of its device range, and has driven its work on mobile platforms in particular, which leaves it in a strong position. The firm also appears to have softened its stance against operators, having agreed deals with Vodafone and T-Mobile in 2004, while also joining the primarily operator-led Open Mobile Terminal Group and GSM Association.

Q: What are the main challenges facing vendors today in terms of handset technology?

David McQueen: As the handset market becomes more competitive, Nokia is now facing stiff competition across all its markets and product segments. Nokia had not faced the same level of competition prior to 2004 because many of its major rivals faced problems in sourcing components to meet demand. In response, Nokia launched more than 44 new products in 2004 – most of them midrange devices with enhanced features such as colour screens, cameras, and Java. However, it remains to be seen how Nokia will fare against its rivals’ updated product lines that feature 65,000-colour screen and megapixel cameras in the midrange segment. These will compete with Nokia’s midrange products, which have 4,000-colour screens, and VGA and CIF camera resolution. Moving forward, the vendor is likely to deploy the same price cutting campaign in the midrange segment, as it has in its entry level devices. This might be a good strategy for the immediate future but without innovation and product differentiation the Nokia brand might lose its prestige as the best seller in the mobile phone market in the longer term. Malik Saadi: One of the main challenges is to find the right balance between device costs, performance, network interoperability and style. Handset manufacturers must be able to differentiate themselves from the competition by understanding the consumer groups they are targeting and gaining insight into consumer buying behaviour. Customised handsets to suit the audience will become crucial to encourage further handset sales. In the longer term, one of the biggest challenges facing the industry is fragmentation. The mobile phone market is lucrative because it addresses a base of 2.5 billion consumers. The magnitude of this market has attracted many players from different backgrounds including, wireless, electronic consumer, computing, and data content industries. Consequently, there are a wide range of competing solutions in each link of the technology value chain, as well as some very stark regional and operator differences in adopting these solutions. Therefore, the industry has to react immediately by implementing common standards in each link of the value chain to encourage interoperability between competing solutions, and roaming between different networks and services.

Q: Who do you think are the forerunners in producing 3G chipsets, and what do other silicon vendors need to do to close the gap?

Michael Carroll: One of the main challenges at present is to develop stable fixed/cellular chipsets to tackle the converged device market, as well as developing silicon that combines a number of wireless technologies, such as GSM/GPRS; GSM/GPRS/EDGE; GPRS/EDGE /WCDMA; or GPRS/1xEV-DO/DV. Voice over IP is currently generating a lot of interest, with vendors including Nokia and Motorola working on devices that should be available later this year. Such terminals would offer users the chance to have one phone with one number, whether they are at home or on the move. The trouble is that it is not always economically viable for a chipset vendor to include

• MOBILE INDUSTRY OUTLOOK 2005/06 •

50

Handsets

every permutation of every wireless technology. A lot was made of the possibility of a combined cellular/WiFi terminal during 2004. While most chipset providers have the ability to include WiFi technology in their WCDMA solutions, many have said they will not produce a compliant chipset until there is a clear demand from handset vendors.
WCDMA Release 99 and HSDPA baseband market competitive summary
Silicon vendor Qualcomm Texas Instruments Agere Philips Semiconductor Infineon Motorola/Freescale Broadcomm Innovics ZyRay Wireless (acquired by Broadcomm) Cellular3G Modem Art PrairieComm InterDigital Intel Icera Semiconductors Sandbridge Wireless Ericsson Mobile Platforms
Source: Deutsche Bank

WCDMA/UMTS products MSM6200 (2Q02), 6225 (2H04), 6250 (2Q03) TCS4105 Yes Nexperia PCF0501, UMTS companion chip ZyRay supply in a companion chip for integration with E-GOLD family. After its acquisition, status of relationship is unknown Trial with NTT DoCoMo Early-stage funding to Innovics and ZyRay. Acquired ZyRay Wireless. Status of the relationship with Innovics unknown In development Spinner TopHat MA1050 (Rel 99 and Rel 4) PCI5110 Baseband patnership in Infineon Bulverde No No Yes

HSDPA products MSM6275 (4Q04), 6280 (2H05), 7200 (4Q05), 7600 Not announced Not announced Not announced Not announced A835 (Sep-05) Will likely use ZyRay’s solution as a launching platform for entering into HSDPA Not announced Announced plans, but may not have made significant progress because of limited resources Not announced Not announced Not announced Not announced Not announced 2H05 Not announced Yes

Michael Carroll: The consensus in the industry is clear. Ericsson Mobile Platforms and Qualcomm lead the way in producing WCDMA chipsets, with both being rated highly for the reliability and stability of their solutions. The duo’s 15 closest rivals are there or thereabouts, but if you take the status of work on HSDPA as a marker for progress in WCDMA, you again find only Qualcomm and Ericsson with a working solution. The slow progress by rivals suggests the bulk of chipset firms are struggling to produce stable 3G chipset solutions.

Q: Browsers and software are an increasingly important part of any mobile handset. How do you see these markets developing in the next five years and will any single OS come to dominate?

Malik Saadi: Browsers are featured in virtually all new mobile phone models. However, third party browser vendors such as Openwave, Teleca, or Access will face fierce competition from other solutions including advanced OSes such as Symbian, Microsoft, or Palm that generally come with integrated browsers. Dynamic UI solutions like those provided by Triginex (now part of Qualcomm), Insignia, SurfKitchen, or Action Engine are also potential competitors to browser technology.

• MOBILE INDUSTRY OUTLOOK 2005/06 •

51

Handsets

Service providers are seeking solutions that enable them to push their services to the end-user while controlling the device in order to tailor the best and highest-generating revenue services to their customers. Unfortunately, the browser on its own is not the best solution to achieve this target. Michael Carroll: It’s becoming clear that no single OS will come to dominate the market as it stands today. The bulk of OS solutions are restricted to the smartphone market, which represents a small portion of the overall device market. The main three players in smartphone OSes -– Symbian, Microsoft and PalmSource – realise this and are busily amending their products to tackle the next rung down in the handset ladder, which they dub as Feature phones. Symbian and Microsoft are likely to have the early lead here, due to the former’s vendor backing and the sheer size of the latter. PalmSource is more of an unknown quantity. However, its recent decision to offer a Linux-based version of its OS could prove decisive in markets like Asia Pacific, where Linux has generated the most interest.

Q: Why not use a 3G data card plugged into your laptop to access multimedia content and data, rather than a bulky and powerhungry handset?

Michael Carroll: It’s really a question of user preference – some of us will always prefer the convenience of a broadband connection and a large display on our desktop PCs, others are confined to carrying laptops around anyway, so the solution would make sense. Compared with first generation 3G handsets, laptop PCs do have the edge when it comes to battery power, but you’re still looking at a usage time of around four hours before you have to look for the plug. As second and third generation WCDMA devices come to market, battery life has become less of an issue, with usage times comparable – if not better – than laptops offer. Malik Saadi: 3G data cards might be used in the enterprise segment but are unlikely to be used in the mass market. However, the migration from 3G to higher bandwidth networks such as HSDPA, CDMA 1x EV-DV or WiMAX is likely to drive significant growth of PC data cards. These networks will operate at bandwidths higher than 1Mbps, hence seriously challenging the performance of mobile handset hardware. I personally believe that services based on these networks will initially be supported by Notebooks via PC cards because handset hardware technology is unlikely to be ready for supporting these networks before 2009 or even after.

Michael Carroll is Editor of Mobile Handset analyst

Michael began his career as a telecoms journalist almost six years ago and, in 2000, launched 3G Mobile Devices newsletter, the forerunner to Mobile Handset analyst – a fortnightly newsletter covering all aspects of the mobile device industry. He regularly attends major global industry conferences and has acted as chair at a number of IBC events focused on mobile handsets.
David McQueen is a Senior Consultant and Analyst at Informa Telecoms & Media

David has over 12 years’ experience as a market and competitor analyst in the communications industry, now focusing on mobile handset development and vendor strategies. David has co-authored a number of ARC ’s leading industry titles including

• MOBILE INDUSTRY OUTLOOK 2005/06 •

52

Handsets

Future Mobile Handsets. He holds a Masters Degree in Marketing and an honours degree in Econometrics and Mathematical Economics.
Dr Malik Kamal-Saadi is Senior Analyst at Informa Telecoms & Media Malik has over ten years’ experience in the telecommunications industry, having played a key role in a number of European and government projects. He specialises in market and technology development and is lead author of many ARC reports including Future Mobile Computing and Mobile Application Platforms and Operating Systems. He is also co-author of ARC Group’s Future Mobile Handsets 2003. Malik has a PhD from Group d’Etude des Semiconducteurs (GES, Montpellier, France), specialising in semiconductor devices and materials, design and engineering. Informa Telecoms & Media provides business intelligence and strategic services to the global telecoms and media markets. We specialise in working with organisations to help them achieve strategic advantage. Our technology coverage includes: • Infrastructure and networks, hardware and software • Handsets and devices. Find out more about our complete product portfolio at: www.informatm.com Mobile Application Platforms and OS – Second annual event London, April 2005 Mobile Application Platforms and OS 2005 conference builds upon the success of the 2004 event which attracted over 150 senior level delegates from across the value chain. As new technologies in the field evolve by the month, this essential event tracks recent technical innovations and their implication on strategy and the market. This event allows you to: • Keep up to date with the very latest technical developments in the field, and understand the implications of technical innovation in the areas of security, the user interface and applications technology • Plan future business strategy and understand the costs and benefits associated with growth and trends within the evolving OS markets • Understand consumer engagement and future opportunities in the OS space develop their customer base and increase ARPU • Participate in interactive panels and discussions on issues such as standardisation, interoperability and customisation which will set the agenda and shape industry direction • Network with a unique gathering of senior level executives and engineers, and develop business relationships right across the value chain Find out more at www.telecoms.com/mapos05

• MOBILE INDUSTRY OUTLOOK 2005/06 •

53

Convergence

Fixed-mobile convergence
The word ‘convergence’ means many different things to many different people. On the one hand there is the convergence between telecoms and the internet; there is also the convergence of the mobile industry with various types of media and, more importantly nowadays, between fixed and mobile networks. Here, ANTHONY COX, SHANI RAJA and GAVIN PATTERSON look at the increasing trend towards fixed-mobile convergence from both sides of the fence and the different strategies being employed by fixed and mobile operators.

Q: What is the driving force behind fixed-mobile convergence?

Shani Raja: One major driver is the growing popularity of mobile. In western Europe, for example, there has been phenomenal growth in mobile traffic (both voice and SMS) in recent years. The trouble is, this has been largely to the detriment of many fixed-line operators, which have steadily been losing traffic and revenues to their mobile counterparts. Nowadays, we increasingly hear the phrase “fixed-to-mobile substitution”, which refers to the phenomenon of users increasingly substituting their fixed lines for mobiles. A recent Ofcom report - Communications Market 2004 - highlighted this trend. It pointed out that, although fixed-to-mobile substitution was not yet widespread in the UK, consumer spending on mobile and text services overtook outlays on fixed-line rental and calls for the first time ever in the fourth quarter of 2003 (£1.8 billion [US$3.4 billion] compared with £1.7 billion [US$3.2 billion] for fixed). This trend has forced fixed carriers to raise their game, with the result that a growing number are now developing mobile strategies. Gavin Patterson: The next five years will see mobile and fixed operators involved in a land grab for enterprise customers as operators, vendors and system integrators all seek to gain revenues from the lucrative corporate market. Operators with both fixed and mobile offerings - such as France Telecom and Deutsche Telekom - will fare best so it is not surprising that we are increasingly seeing the reintegration of fixed and mobile operations as carriers see the benefits of utilizing a common core network to offer converged services - think of Telecom Italia and TIM and Sprint FON and PCS in the U.S. Large-scale implementations are unlikely before 2006, but operators are already preparing converged services. The stakes were raised at the end of last year by the launch of BT Mobile, the Vodafone-hosted MVNO from UK fixed-line incumbent BT. BT Mobile is aimed at the enterprise market with a range of services, including a mobile VPN and mobile conference calling, and poses a significant threat to mobile operators in the enterprise market. BT aims to have a range of converged services delivered to enterprise customers by year end under its BluePhone project.

Q: What convergence strategies are we seeing?

Shani Raja: A number of different types. But as one telecoms consultancy points out, opinions vary as to what “true” convergence is. Some believe that “true” convergence is

• MOBILE INDUSTRY OUTLOOK 2005/06 •

54

Convergence

where operators are able to offer all-IP networks from the core all the way out to the access network. For others, it’s enough that circuit-switched cellular networks are able to “talk” to other packet-switched wired and wireless networks. The BT-led Fixed Mobile Convergence Alliance (FMCA), for instance, is currently focused on promoting the development of short-range wireless technologies, such as Wi-Fi and Bluetooth, to enable GSM and 3G voice and data calls to be steered onto fixed networks. BT’s BluePhone service is aimed at this, but there are a number of existing broadband players and newcomers too that plan to take advantage of the growing availability of high-speed wireless IP access technologies, and the maturing of voice-over-IP technologies. The danger for mobile operators is that such technologies may allow fixed players to seize a significant part of enterprise expenditure that mobile operators had presumed would be captured by 3G services. Anthony Cox: Voice over IP certainly is causing a stir. Using VoIP for the long-haul carriage of voice traffic is nothing new - what is changing is that the quality has improved enough for it to be used in the access part of the network in the last couple of years. VoIP technology allows any ISP to become a voice operator, threatening incumbents’ local revenues as well as the revenue they get when traffic “lands” on their networks. And since the cost base of IP networks is low compared with circuit switched networks, several incumbents have embraced VoIP themselves. BT leads the field with huge investments planned in its so-called 21st century network. This should cut its network management costs and, amongst other things, make it easier to offer integrated mobile and fixed offerings. In fact the only operators that do not plan to offer residential VoIP services in 2005 are Belgacom and Swisscom.

Q. Is Wi-Fi something which fixed operators are getting interested in?

Anthony Cox: Wi-Fi is often an add-on for a broadband operator – a way one operator can distinguish itself from the next player. How Wi-Fi generates revenues in its own right is difficult to picture. In time though, wireless LANs will be integrated into both fixed and mobile networks. This is already happening with plans such as BT’s BluePhone project. Mobile operators like mmO2 can add wireless LANs to the edge of their networks to provide fixed/mobile converged services, stealing voice revenues from fixed carriers that way. But the fixed operators are just as well placed to adopt a similar strategy: through a service provider or MVNO partnership, a fixed operator can tie-in its fixed customers by offering them mobility both locally, through the wireless LAN, and outside the reach of the WLAN through the GSM network. Calls will hop onto a mobile network when out of the “Home Zone”. With clever pricing an operator such as France Telecom with both fixed and mobile units may actually be able to increase overall revenues - users will pay for the convenience of one handset and in-home mobility. Shani Raja: They certainly are. One battlefield is broadband services, where mobile operators are hoping to deploy technologies such as HSDPA (a high-speed WCDMA upgrade) to compete in this market with fixed-line carriers. The trouble is, none of this is happening in a vacuum. Alternative technologies such as WiMAX and proprietary

Q: Are mobile operators fighting back?

• MOBILE INDUSTRY OUTLOOK 2005/06 •

55

Convergence

wireless-broadband solutions from companies such as Flarion Technologies and IP Wireless are enabling new players to come in and challenge traditional operators on both sides of the fixed/mobile divide.

Q: What are the long term trends across the fixed-line industry?

Anthony Cox: On the bright side, traditional revenue streams, such as those generated by residential calls, combined with stringent cost-cutting exercises have sorted out most players’ immediate debt problems. Even if VoIP is a threat to incumbent operators at least they will receive some revenues from supplying the wholesale broadband needed to offer it. Both incumbents and alternative carriers now want to get closer to the end user, particularly if that user is a large enterprise. Rather than just providing the ‘pipes’ they will increasingly offer tailored services for (and within) the enterprise.
Anthony Cox is Editorial Director of Telecom Markets Anthony has been commenting on the fixed telecoms market for six years, initially as one of the founding journalists at Telecom Finance, where he was deputy editor. Following a year freelancing for major media groups, including Pearson and Institutional Investor, he joined Baskerville as editor of the fixed-line title Telecom Markets. Anthony has most recently conceived and designed a fixed-line database tracking worldwide DSL, cable and broadband and fixed-line connectivity. Shani Raja is Editorial Director of Mobile Communications Shani has been writing about the mobile industry since 1998, when he first joined the then FT-owned Mobile Communications newsletter as a senior reporter and contributed to its fixed-line sister title, Telecom Markets. He has been a journalist for eight years, including writing for CFO Europe, an Economistowned publication aimed at finance directors and treasurers of European multinational corporations. Gavin Patterson is Editorial Director of Global Mobile, 3G Mobile and Mobile Handset Analyst Gavin has been a senior business journalist since 1989 and specialized on the telecoms industry since joining Baskerville in 1997 where he helped launch a number of new products including 3G Mobile and Global Mobile Daily. Previously, he was Business Editor of the Hongkong Standard and Eastern Express newspapers in Hong Kong. Gavin is a regular fixture at international conferences in Europe, Asia and North America and also conducts regular briefing sessions with analysts and media organizations on operator strategy and technology issues. Informa Telecoms & Media provides business intelligence and strategic services to the global telecoms and media markets. We specialise in working with organisations to help them achieve strategic advantage. Our global wireless coverage includes: • Mobile, fixed-operator and service provider strategies and market trends • Global wireless developments across mature and developing markets. Find out more about our complete product portfolio at: www.informatm.com

• MOBILE INDUSTRY OUTLOOK 2005/06 •

56

Convergence

Telecom Markets– newsletter and continuous research service Telecom Markets is the leading source of news and analysis on fixed-line and broadband network strategy and regulation. Published since 1986, the newsletter delivers a detailed analysis of industry activity and its impact on your business. Key coverage includes: • Unrivalled news & analysis • Exclusive global connectivity statistics • Interconnection & regulatory issues • Examination of next generation technologies • Focus on emerging market opportunities • Analysis of mergers, acquisitions and alliances Telecom Markets continuous research service is available online for multiple users and includes a fully searchable online archive of back issues to enable powerful market tracking. Find out more at www.telecoms.com/tm

• MOBILE INDUSTRY OUTLOOK 2005/06 •

57

Developing Markets

Middle East and Africa
Mobile subscribers in Africa overtook those of the Middle East for the first time in 2Q 2004, according to data from Informa Telecoms & Media. African mobile subscribers reached 64.3 million at the end of June 2004, as compared with 61.4 million in the Middle East at the same date. Africa’s rapid subscriber growth, the fastest in the world in percentage terms, was largely attributable to continued robust growth in Nigeria, South Africa, and northern African markets such as Tunisia and Algeria. Here, JOHN EVERINGTON and TAWANDA CHIHOTA look at some of the region’s major growth markets and identify the different trends in the development of the African market versus that in the Middle East.

Q: How strong was subscriber growth across the Middle East and Africa in 2004?

John Everington: We estimate that subscribers in the Middle East and Africa grew by 36% in 2004 to 146.7 million, making it the fastest growing region in the world behind eastern Europe. The region added a record 38.5 million subscribers in 2004, in comparison with 27.1 million and 20.8 million in 2003 and 2002 respectively. As the largest and most competitive market of the Middle East, Turkey enjoyed another bumper year of growth, growing by 7.2 million to 35.4 million subscribers at the end of 2004. Subscriber growth in the country has been boosted by the merger of Aria and Aycell in February 2004 to create Avea, which has been better placed to compete against market leaders Turkcell and Telsim. Tawanda Chihota: Africa had about 75.7 million subscribers end-2004, representing annual growth of more than 45% – widening the gap with the Middle East further. A number of markets in Africa experienced growth rates in excess of 100%, although it is accepted that for many of these growth is being experienced from a very low installed base. However, the onset of competition in a number of markets has prompted strong subscriber growth. For instance, Iraq’s market became competitive at the end of last year when the regional operators were allowed to begin competing on a national basis. Iraqna, which is backed by Orascom Telecom, launched services in the northern territory of the country. At the same time AtheerTel, backed by MTC, announced plans to develop coverage in the central region of the country. Both operators had met their regional coverage requirements within their first 12 months of operation and so are now allowed to expand. Although future subscriber growth will be largely impacted upon by the long-term political stability, starting with the outcome of the country’s first democratic elections, Iraqi subscribers are forecast to increase to over 2 million by the end of 2005.

Q: Which are the major growth markets?

John Everington: Saudi Arabia’s telecoms market has continued to develop rapidly, with competition set to arrive for the first in early 2004 in the shape of the UAE’s Etisalat. Although subscriber additions slowed to 1.8 million in 2004, down from 2.3 million in 2003, the imminent arrival of competition is likely to make 2005 a record growth year in the kingdom.

• MOBILE INDUSTRY OUTLOOK 2005/06 •

58

Developing Markets

2004 was the year that Nigeria officially became Africa’s largest growth market, with subscriber additions in the country overtaking South Africa’s for the first time (see fig.). The country, the largest on the continent, saw its mobile subscriber base increase by just under 5.5 million, in the wake of MEA markets exceeding 1 million net subscriber fierce competition between the additions in 2004 country’s four GSM operators to Country Subs end-04 Net adds in Growth sign up new subscribers, they (mil.) 2004 (mil.) (%) constantly lowered entry costs for Turkey 35.443 7.190 25.45 new subscribers in order to win Nigeria 8.830 5.479 163.51 market share. South Africa 18.935 3.305 21.14 Despite being the continent’s most developed market, South Saudi Arabia 9.162 1.812 24.65 Africa’s mobile subscriber base Tunisia 3.713 1.762 90.26 continued to grow in 2004, Morocco 9.094 1.734 23.56 although subscriber growth is likely Algeria 3.156 1.706 117.72 to flatten off in 2005 and beyond. Egypt 6.995 1.366 24.26 In addition the highly developed markets of Egypt and Morocco Syria 2.174 1.034 90.74 Source: Informa Telecoms & Media continue to post robust subscriber growth, although the latter is also likely to see its subscriber net adds for 2005 and beyond begin to decrease. Its near neighbours Libya, Algeria and Tunisia, however, are likely to provide robust growth for some years to come.

Q: What are the main differences in the trends and development of the African mobile market versus that in the Middle East?

Tawanda Chihota: The African mobile market is widely geared towards the further expansion of voice services while the Middle East is experimenting with non-voice services in a significant way. Growth in basic voice services remains robust in the Middle East, but technological advances such as WCMDA are higher up the agenda. In Africa, operators widely remain busy rolling out, powering and securing their networks across wider geographic regions and prepaid remains very much the de facto payment methodology. John Everington: Despite some similarities, the Middle East and Africa should on the whole be considered as separate regions. Africa’s low penetration (standing at 8.53% the end of 2004) is largely due to its low economic development in comparison with the rest of the world, including the Middle East. This is particularly true for Sub-Saharan Africa, which has a lower GDP per capita than any other region in the world, and therefore a lower mobile penetration (7.4%), the exception of course being South Africa. Despite dramatic subscriber growth in recent years, Africa in general remains at a very early stage in the development of its mobile sector. With the exception of the North African markets and South Africa, the priority for most African operators remains the expansion of their network coverage and to increase subscribers on their networks. This dynamic has made Africa the largest growing market in the world in percentage terms in 2004. Although subscriber growth remains the priority for the Middle Eastern operators in emerging markets such as Iran, Iraq and Yemen, operators in other countries where

• MOBILE INDUSTRY OUTLOOK 2005/06 •

59

Developing Markets

penetration has grown higher focus on driving more value out of their existing customer bases rather than chase after a dwindling pool of non-subscribers. This has led to the gradual spread of GPRS and MMS throughout the region, and more recently the deployment of EDGE and WCDMA.

Q: EDGE and WCDMA have now been introduced by a number of players in the Middle East and Africa. What types of services are being offered over these technologies and what has market response to them been like?

John Everington: WCDMA is currently more theory than reality in the Middle East and Africa, despite six operators in the region having launched by the end of 2004. Operators launching have thus far tended to be limited in scope, offering coverage in selected builtup areas only. In addition, the lack of attractive WCDMA handsets has, until recently, severely hampered take-up of the services. Israel is likely to witness the first flourishing of 3G in the region, with one 1x EV-DO and two WCDMA launches by the end of 2004. So far Partner has been the most successful at pushing these services, which include video calling and media downloads. EDGE is likely to spread faster in the region than WCDMA, due to the relative ease of upgrade for most operators. The technology has so far been seen as an enhancement for existing GPRS services, although newer services offered by operators, such as video streaming, are likely to see the technology being more widely adopted. As WCDMA continues to spread, EDGE will increasingly be used to provide coverage in more remote areas not covered by initial WCDMA deployments.
Tawanda Chihota is Editor of Eastern Europe Wireless Analyst and Middle East & Africa Wireless Analyst Tawanda has tracked the global cellular sector for over five years and in the last 18 months has concentrated on operator strategy in the emerging markets of the Middle East and Africa and central and eastern Europe and. He has authored and co-authored a number of management reports assessing the investment opportunities in the ICT sectors of a selection of emerging markets. Prior to his current role, Tawanda was a researcher with an independent macro-economic think-tank based in Johannesburg, South Africa. John Everington is a Senior Research Analyst within Informa Telecom’s Data and Forecasting Team John focuses on North Africa and the Middle East and is a key contributor to EMC World Cellular Operator Benchmarking. In addition to his work with EMC, John is a regular contributor to Middle East and Africa Wireless Analyst. John joined EMC in September 2002, and previously worked at the Business Information Centre at PricewaterhouseCoopers in London. John holds a BA in Arabic and History, from the School of Oriental and African Studies at the University of London. Informa Telecoms & Media provides business intelligence and strategic services to the global telecoms and media markets. We specialise in working with organisations to help them achieve strategic advantage. Our global wireless coverage includes: • Mobile, fixed-operator and service provider strategies and market trends • Global wireless developments across mature and developing markets.

• MOBILE INDUSTRY OUTLOOK 2005/06 •

60

Developing Markets

Find out more about our complete product portfolio at: www.informatm.com Middle East and Africa Wireless Analyst– newsletter and continuous research service Middle East and Africa Wireless Analyst covers key events in the Middle East and African mobile markets. Analysing strategic, regulatory and technological developments through exclusive news and accurate, informed commentary. Regular coverage includes: • Company case studies, profiling the region’s success stories • Sector and country profiles, detailing potential growth areas and investment opportunities • Reliable regional subscriber data including total subscribers and penetration rates, mobile subscribers by operator and prepaid subscribers by country. Find out more at: www.telecoms.com/meawa The GSM World Series Informa Telecoms & Media and the GSM Association have established a highly successful series of GSM events world-wide, each recognised as a crucial local meeting place for the GSM industry. Our flagship annual event is the 3GSM World Congress, which attracts 28,000 plus visitors, 650 exhibitors and participation from 173 countries. The GSM World Series enables you to meet all your existing clients, potential customers and partners in one place. This saves greatly on the time and expense of having to fly around each continent to present your products and services to key decision makers. Find out more at: www.gsmconferences.com/

• MOBILE INDUSTRY OUTLOOK 2005/06 •

61

Developing Markets

Asia Pacific
The Asia Pacific region, if not the entire global mobile industry, is dominated by the world’s two largest markets – China and India. China, according to Ministry of Information Industry, saw 65 million net adds during the course of 2004 taking the total installed base to 334 million. For 2005, the MII expects the mobile penetration rate to reach 30% with 392 million subs. Meanwhile, India had 48 million wireless subs end-2004, up almost 70% year on year and equivalent to a penetration rate of just 4.6%. The Telecom Regulatory Authority of India expects monthly net adds to rise 50% over the next 12-15 months from current levels of 2-3 million per month. Here, LIZ HALL and NICOLE MCCORMICK discuss the growth potential and opportunities in Asia’s developing markets.

Has subscriber growth slowed in China and India over the past year?

Nicole McCormick: The MII’s robust targets for 2005 (see fig.) are in line with average net adds over the last three years. This is despite the fact that net adds in 4Q 2004 slowed down thanks in part to Document 204, which calls on cellcos to rein in excessive discounting. In the past though, the MII has ensured that its targets are rarely missed. It is worth noting that the MII’s MII telecoms forecasts monthly subscriber figures are 2004 actual 2004f 2005f significantly overstated when compared with subscriber numbers Mobile subs (mil.) 334 321 392 disclosed by China Mobile and YOY change (%) 24 19 17 China Unicom. In fact, the Global Mobile Subscriber Database Net adds (mil.) 65 52 58 estimates that China had closer to Fixed lines (mil.) 316 303 361 303.24 million mobile subs at the end of September 2004, compared YOY change (%) 20 15 14 with the MII’s estimate of 320 Net adds (mil.) 53 40 45 million, giving a discrepancy of Mobile penetration (%) 26 27 30 almost 17 million users. India, meanwhile, is certainly Fixed-line penetration (%) 24 25 28 one of the region’s major growth Telecom revenues (US$ bil.) 63 63 n/a markets. TRAI believes that lower “policy-induced costs,” such as YOY change (%) 13 13 n/a revenue sharing and access deficit Telecom revenues/GDP (%) 3.9 3.9 n/a charges, infrastructure sharing, Sources: CLSA, MII lower handset costs and the exponential rise in network coverage to smaller towns and cities, will remain the key drivers to growth. ABN-AMRO has upgraded its subscriber forecasts 10-12% to 83 million by March 2006 and 113 million by 207. It now expects 100 million subs by October 2006 instead of March 2007 as it originally forecast.

• MOBILE INDUSTRY OUTLOOK 2005/06 •

62

Developing Markets

What are the other major growth markets?

Nicole McCormick: The answer would have been easy a couple of years ago; the Philippines, Thailand and Malaysia. However, with penetration in these markets gathering speed – Malaysia’s penetration was 56.6% as of end-September, followed by Thailand on 40.8% and the Philippines on 35.6% – growing mobile subs is more complicated now, especially since many metropolitan areas have or will soon reach saturation point. That probably leaves Indonesia and possibly Pakistan as the region’s next most obvious growth market. Nicole McCormick: According to EMC, Pakistan had 6.1 million subs as of endSeptember, making for a penetration of only 4%. Pakistan’s four-player mobile industry has already witnessed sharp price and package undercutting with the auction of two GSM licenses in April, and now a second wave of discounting has boosted the industry since the award of WLL-CDMA licenses in lateAugust. Hamid Farooq, CEO of GSM licensee Warid Telecom, said the company plans to start services in 20 cities in 1H 2005, while Telenor plans to debut its GSM service by April. Both companies picked up their licenses for a whopping US$291 million in April. Meanwhile, state-run heavyweight Pakistan Telecommunication (PTCL) launched CDMA-WLL services in November and has now extended its CDMA-WLL coverage to 85 cities and towns. Liz Hall: Headline grabbing investments in mobile operators in the region were pretty scarce during 2004 and 2005 will probably be no different. Most European and US operators have pulled out of their investments in the region and many Asia-Pacific operators are now owned in some part by a larger parent company from within the region. However, there are a few investments up for the taking during the year. In Pakistan, the government is selling a 26% stake in PTCL, which owns 100% of the GSM network operator PTML. Interested parties have included SingTel, Emirates Telecommunications, Kuwait’s Mobile Telecoms and MTN International from South Africa. There will continue to be further moves towards consolidation within the India market. Hutchison is awaiting approval from the regulator to acquire Aircel. BPL and Spice Telecom are further possible acquisition targets. Telekom Malaysia acquired a 27.3% in Indonesia’s Excelcomindo at the end of 2004 and intends to acquire additional shares to achieve a majority shareholding in 2005. The next 12 months could also be the year when the ‘rumor’ that China Mobile may invest in a foreign mobile operator turns into an actual investment. However, China Mobile’s foreign aspirations could all be put to one side if 3G licenses are finally awarded in China during 2005. Nicole McCormick: Licensing opportunities are few and far between on the 2G front in developing markets. On the traditional 3G front, a few countries, including the Philippines, Thailand, India and, of course, China are yet to detail their licensing policies. While two new local players have put their hands up for 3G licenses in the Philippines, due to be issued this year, the 3G window in developing Asia-Pacific countries will, by and large, be limited for newcomers and foreign operators.

How is the Pakistan shaping up?

Q. Do you expect any significant M&A activities during 2005?

What licensing opportunities remain in developing markets?

• MOBILE INDUSTRY OUTLOOK 2005/06 •

63

Developing Markets

Perhaps the greatest area of opportunity for a niche player for a lot less cash is in the TDD spectrum arena as well as the limited-mobility WLL and WLAN/WiBro/WiMAX markets.

Q. Are we seeing a significant uptake of advanced mobile data services outside the traditional data-centric markets of Korea and Japan?

Liz Hall: In terms of the usage of advanced data services over GPRS, over the last year there was definitely progress in expanding the number of users in some developing markets within Asia-Pacific. However, there is still a lot more work to be done. During 2004 operators in the Philippines and Thailand had some success growing their base of GPRS users. Over 22% of Smart Communications (Philippines) and TA Orange’s (Thailand) subscriber bases were actively using services over GPRS towards the end of 2004, compared with less than 15% at the beginning of 2004. In the larger markets of China and India usage of advanced data services is still relatively low: at the end of September 2004 only 5% of China Mobile and Hutchison’s Indian subscriber bases were using GPRS services actively. Even as the number of data users continues to grow, the average amount of data usage per subscriber continues to shrink – a scenario that is all too familiar when considering the decline in ARPU in developing markets. Going forward, while operators will continue to focus on growing the active user base of advanced data services, they will have to keep working on encouraging existing GPRS subscribers to use more of their data services – something that will only come through more compelling and user friendly services at affordable prices. Nicole McCormick: In countries where SMS is cheap compared with local-call tariffs, mobile data revenues contribute a high percentage of total operator revenues. The classic example is the Philippines where PLDT’s and Globe Telecom’s mobile data revenues as a percentage of total revenues are the highest in the region. As of 3Q 2004, PLDT claimed that its cellular data services accounted for 48% of its GSM cellular revenues. In the Philippines, to send an SMS costs just P1 (US$0.02) compared with voice call tariff of typically around P6.50 (US$0.12) per minute. MMS is not seen as “improved SMS” in the Philippines, however, and so MMS revenues are unlikely to see the same spectacular growth as SMS. Globe’s subscribers might be sending more than 1.5 million MMSes per month, and the company’s GPRS-based services’ revenues are forecast to at least double this year from P220 million (US$4 million) in 2003 as MMS handsets become more affordable, yet the MMS contribution to data revenues will remain small. In countries where SMS has never really taken grip, including Taiwan and Hong Kong, operators have had to leapfrog SMS straight to MMS. In Taiwan, where the usage of classical (but complex) Chinese characters has inhibited SMS take-up, operators’ data revenues remain small. In short, the Taiwan market is very much a handset driven one, not data led.

Q: So if 3G is out of developing operators’ sights for the minute, what are cellcos’ main concerns for 2G?

Nicole McCormick: Cheap handsets! During the last 3GSM World Congress Asia conference in Singapore, Singapore Telecom Mobile CEO Lim Chuan Poh called on vendors to increase volumes of low-cost handsets in the Asia Pacific region, saying devices for consumers as cheap as US$30 will be a major driver toward the next billion subscribers

• MOBILE INDUSTRY OUTLOOK 2005/06 •

64

Developing Markets

worldwide. Lim said the very-low-end market was “unserved,” describing that segment as the “real untapped potential in Asia.” In fact, Lim said there’s been a “general reluctance” by vendors to produce low-cost handsets, which in turn has prevented Asian operators from tapping the potential of the very-low-end market. He described low-cost handsets as ranging from non-color terminals with voice and SMS capability only to color-screen handsets offering MMS and but no cameras.
Nicole McCormick is Editor of Asia Pacific Wireless Analyst and Managing Editor of ASIAcom Nicole commenced her career in the UK office of Baskerville in early-1996 where she was a reporter on TVI Daily. Since then, Nicole has edited Pan-Asian Telecom, ASIAcom and Asia Pacific Wireless Analyst and now covers the telecommunications, broadband and television markets across the Asia-Pacific region for Informa Telecoms & Media. She has a Bachelor of Arts degree, majoring in journalism and economics, from the University of Queensland. Liz Hall is a Principal Analyst with Informa Telecoms & Media’s Data division Liz is responsible for co-managing the research analyst team. Her special focus is on the Asia-Pacific region, in particular developments within South East Asia. She is also involved in tracking the strategies of the world’s largest cellular investors. Liz has presented at industry events, including Informa’s annual 3GSM Asia-Pacific conference, and regularly comments on the state of the industry in publications. Liz joined Informa in 2001 and holds a MBA from the University of Southampton and an undergraduate BA in Modern History and Politics. Informa Telecoms & Media provides business intelligence and strategic services to the global telecoms and media markets. We specialise in working with organisations to help them achieve strategic advantage. Our global wireless coverage includes: • Mobile, fixed-operator and service provider strategies and market trends • Global wireless developments across mature and developing markets. Find out more about our complete product portfolio at: www.informatm.com World Cellular Information Service The World Cellular Information Service is Informa Telecoms & Media’s core data product, delivering complete cellular information resource incorporating unrivalled industry data starting from the beginnings of cellular. It combines primary data, consultancy level analysis and regular support from senior analysts. Our strong industry relationships and multi-lingual team of researchers based around the globe ensure the accuracy of our data – making us the industry standard source of market sizing data. Find out more at www.telecoms.com/wcis

• MOBILE INDUSTRY OUTLOOK 2005/06 •

65

Developing Markets

The GSM World Series Informa Telecoms & Media and the GSM Association have established a highly successful series of GSM events world-wide, each recognised as a crucial local meeting place for the GSM industry. Our flagship annual event is the 3GSM World Congress, which attracts 28,000 plus visitors, 650 exhibitors and participation from 173 countries. The GSM World Series enables you to meet all your existing clients, potential customers and partners in one place. This saves greatly on the time and expense of having to fly around each continent to present your products and services to key decision makers. Find out more at: www.gsmconferences.com/

• MOBILE INDUSTRY OUTLOOK 2005/06 •

66

Developing Markets

Latin America and the Caribbean
Latin America and the Caribbean were estimated to have a total of 167.61 million subs at the end of 2004, equivalent to almost 32% growth over the year. Brazil and Mexico still dominate the region in terms of their installed bases and growth, while GSM last year overtook CDMA as the most popular technology. Here, LESLIE HILLMAN and ANA HERMOSA look at the various regional trends and opportunities.

Q. Which countries are expected to show the strongest subscriber growth in 2005?

Leslie Hillman: In Latin America last year many people underestimated how the epic marketing wars between Telefonica Moviles, America Movil and Telecom Italia would reenergize subscriber growth in several countries. There has been some discussion that the companies’ promotions and subsidies would abate somewhat once investors started complaining about the resulting decline in profits, but don’t believe it. In Brazil, for example, promotions at Christmas were as bountiful as ever. Lower-priced handsets also contributed to growth last year. Since operators appear to be continuing the spending spree and the downward pressure on handset prices continues, mobile subs growth in 2005 should continue to be strong. Mexico is also a head-on competition between Telefonica Moviles and America Movil, but the market there is likely to be more limited by the point at which it reaches saturation. Mexico had already surpassed 32% mobile penetration in September and market observers have questioned whether penetration will reach much higher than 4045%. But between those two figures there’s still more room for growth in 2005. Ana Hermoso: As of December 2004, there were about 9.8 million subscriptions in the Caribbean, not including Belize, Suriname and Guyana. According to our forecasts, there will be 13.4 million subscriptions as of December 2009, which means a growth rate in excess of 50%. A significant proportion of growth will be driven by the Dominican Republic, which has the second largest population in the Caribbean after Cuba. Over the last few years there has been a process of The largest Caribbean markets at end-2004 liberalization in the Caribbean 3.0 which has been ongoing 2.5 throughout the whole region, allowing the leading wireless 2.0 operators to expand their 1.5 footprints and leading to an 1.0 increase in competition. As a result, prices have 0.5 dropped and operators have 0.0 oriented their marketing efforts, increasing the amount of VAS offered to their Source: Informa Telecoms & Media subscriptions.
Millions
W e di st es o ca os Fr Tr in da d Do m Re ini pu can bl ic Ri c rb ad ag o To b en ch to Pu er Ba & Ja In m ai

Q. Who is winning the technology war – GSM or CDMA?

• MOBILE INDUSTRY OUTLOOK 2005/06 •

67

Developing Markets

Q. Are there any M&A opportunities in the region?

Leslie Hillman: The technology wars have shifted into a higher gear as the two camps compete on applications, handsets and mobile data platforms. GSM subs surpassed CDMA in Latin America in 2004, amid the heavy growth Latin American/Caribbean mobile subs by technology in big GSM markets such as AMPS 1.6% Mexico, Brazil and Argentina (see fig.). Telefonica Moviles’ CDMA purchase of BellSouth’s 10 25.0% Latin American operations is TDMA 39.5% likely to turn a few more CDMA operators over to GSM, so it’s probable GSM will have a better year than GSM iDEN CDMA again in 2005. Also, 32.8% 1.1% expect TDMA’s growth rate to Note: data is from 4Q 2004 slow from previous years, since Source: World Cellular Database operators for the most part finally halted selling new TDMA accounts and handsets. AMPS is almost completely out of the picture in Latin America as of the end of last year. Ana Hermoso: Between 2000 and 2004, 90% of the TDMA migrations in the Caribbean have been to GSM. During the last four years, nearly half of these migrations have taken place in 2004, being every single migration in 2004 to GSM. We forecast that as of December 2004 GSM will dominate the Caribbean region with 39% of the total number of subscriptions in this technology, followed by CDMA with a 33% and finally TDMA with a 26%. As a result of this new situation, Caribbean operators will be able to offer cheaper handsets thanks to the effect of economies of scale, opening at the same time the door to the ‘profitable’ international roaming market, which continues to attract tourist to buy subscriptions. Leslie Hillman: Despite last year’s string of acquisitions, this year there are still a few more deals that could be made. For example, Carlos Slim appears not to have lost his interest for buying Telecom Argentina, given his purchase of a minority stake in Nortel Inversora, the holding company for Telecom. Other Telecom Italia properties are also likely up for sale, if buyer and seller can agree on a price; Carlos Slim’s America Movil is said to be the most interested party. Millicom International Cellular has a number of mobile operations in smaller markets across Latin America that it has been trying to sell, although at this point it’s not clear who would buy them, unless Millicom is willing to offer a heavily discounted price. As each year goes by, it becomes less likely that an entirely new player will enter the Latin American or Caribbean market. That said, there is still speculation that some European operators, such as T-Mobile or Vodafone, may be interested enough to try it anyway. Telecom Italia and Millicom in Latin America and Digicel in the Caribbean would be the most likely sellers for these two to pursue, but don’t discount Vodafone going for an affiliation with a pan-regional Latin American operator.

Q: What is the situation with fixedline substitution?

Q. How is Latin America addressing the issue of 3G licensing?

• MOBILE INDUSTRY OUTLOOK 2005/06 •

68

Developing Markets

Ana Hermoso: The number of mobile phones in the Dominican Republic overtook the number of fixed lines in 2001, according to figures released by the state telecoms institute, Indotel. The situation in the Dominican Republic is entirely in line with the trend in other markets, such as Brazil, Argentina and Paraguay for example, where there has been sudden demand for telecoms infrastructure. It is cheaper and quicker to meet this demand by installing wireless networks than fixed lines. Sometimes, residents in less developed areas are forced to choose wireless services because there is no infrastructure to install fixed telephony where they live. Leslie Hillman: Latin America could see its first auction of UMTS spectrum in Venezuela this year, and the region is very likely to see other auctions in 2006, with Brazil having committed to an auction of 1.9-2.1GHz spectrum next year. It is also possible that an operator may decide to launch UMTS on 1900MHz PCS spectrum in Latin America or the Caribbean, following its launch in the United States last year. Of course, as all of these deployments happen, operators won’t let you forget that EDGE and 1xRTT are technically still 3G as well.
Leslie Hillman is Editor of LatinCom and Caribbean Telecoms analyst Leslie has been covering telecoms and media since 1998 and also has more than a dozen years’ experience covering business, finance and politics in Latin America and the Caribbean, including five years at Bloomberg News in Miami; Caracas, Venezuela; and Princeton, New Jersey. She provides Latin American- and Caribbean-related news and analysis for other products at Informa Telecoms & Media and contributes to the development of statistical databases, yearbooks, and strategic reports as well. Leslie is a graduate of Cornell University in New York, she speaks English, Spanish, Portuguese and German. Ana Hermoso is a Research Analyst within Informa Telecom & Media’s Data and Forecasting Team. Ana covers North America and the Caribbean and is also a member of the World Cellular Datametrics team, which tracks the evolution of mobile data services on a worldwide basis. Ana joined Informa in September 2002, having worked as a telecoms analyst consultant for Accenture in Madrid. Ana holds two Masters Degrees (Marketing and Business Administration) from the Pontificia Comillas University, ICADE, in Madrid. Informa Telecoms & Media provides business intelligence and strategic services to the global telecoms and media markets. We specialise in working with organisations to help them achieve strategic advantage. Our global wireless coverage includes: • Mobile, fixed-operator and service provider strategies and market trends • Global wireless developments across mature and developing markets. Find out more about our complete product portfolio at: www.informatm.com

• MOBILE INDUSTRY OUTLOOK 2005/06 •

69

Developing Markets

Caribbean Telecoms Analyst – newsletter and continuous research service Caribbean Telecoms Analyst, produced in association with CANTO (The Caribbean Association of National Telecommunication Organisations), is the first analytical subscription newsletter to focus on the emerging Caribbean fixed-line and mobile telecoms markets. Published every month, the newsletter provides complete coverage of the region using an intelligent mix of the latest news, detailed analysis and accurate broadband and cellular data sets. Regular coverage includes: • Breaking news and trend analysis of the of the activities of Caribbean operators • Key analysis of the regulatory environment of major Caribbean markets • Broadband, fixed-line and cellular subscriber data, plus tariff data by country. Caribbean Telecoms Analyst continuous research service is available online for multiple users and includes a fully searchable online archive of back issues to enable powerful market tracking. Find out more at www.telecoms.com/cta The GSM World Series Informa Telecoms & Media and the GSM Association have established a highly successful series of GSM events world-wide, each recognised as a crucial local meeting place for the GSM industry. Our flagship annual event is the 3GSM World Congress, which attracts 28,000 plus visitors, 650 exhibitors and participation from 173 countries. The GSM World Series enables you to meet all your existing clients, potential customers and partners in one place. This saves greatly on the time and expense of having to fly around each continent to present your products and services to key decision makers. Find out more at: www.gsmconferences.com/

• MOBILE INDUSTRY OUTLOOK 2005/06 •

70

Developing Markets

Eastern Europe
Driven by the explosive expansion of the Russian market, subscriber growth in central and eastern Europe continues apace. The total number of subscribers reached 170 million at the end of 2004, up from 144.2 million at the end of August. For full-year 2003 the total number of subscribers in the region grew 46.5%, the second-highest regional growth in percentage terms after Africa (excluding the Middle East). In comparison, the global industry grew 21.2% in 2003, while western Europe grew less than 10%. Here, TAWANDA CHIHOTA and KESTER MANN look at the main growth markets and opportunities in the year ahead.

Q: Russia is the major market in CEE. Has subscriber growth slowed over the past year, and are current growth rates sustainable?

Kester Mann: While it is true to point out that the growth rate in percentage terms slowed during 2004 (83% compared with 104% the previous year), net subscriber additions in Russia reached a record 31 million, almost 12 million more than in 2003. The Russian mobile market more than doubled in size for four consecutive years from 2000 to 2003 and although this sort of increase will not be sustainable going forward (the market is forecast to grow by 33% in 2005 and just 14% in 2006) the growth in terms of absolute numbers will nonetheless be significant, with the market exceeding 100 million subscribers in 2006. Mobile penetration was close to passing the 50% mark at the end of 2004, indicating plenty of future growth opportunity, despite a slowdown in percentage terms. The main factor driving growth in Russia is the consolidation of network operators and the expansion of the three national operators into the regions. When a national operator enters a new region it is able to launch attractive marketing packages and brings with it experience in targeting distinct market segments, attracting new subscribers. Tawanda Chihota: The recent explosion in subscriber numbers in Russia is one of the key reasons for the continued growth across the whole region. Russia was second-placed in the region – behind Poland – in June 2002 but its growth has been such that it is now the region’s largest market by a substantial margin, with over 40 million more subscribers than Poland. Russia had 68 million subscribers at the end of 2004, according to Informa Telecoms & Media data, representing a growth rate of 82.6%. Statistics from Russian operators showed that an astounding 8 million subscribers were added during the course of the December 2004 alone, more than the number added in China over the same period, despite China having 10 times the population of Russia. According to Iks-Consulting, Mobile TeleSystems had 26.54 million subscribers at the end of December, followed by VimpelCom with 25.7 million, MegaFon with 13.6 million, Uralsvyazinform with 2.11 million, and SMARTS with 1.82 million.

Q: What are the major growth markets besides Russia in the region?

Tawanda Chihota: The Ukrainian market reached a total of more than 13.5 million subscribers at the end of 2004, a growth rate of 107% for the year, which was largely driven by the success of UMC’s Jeans prepaid package.

• MOBILE INDUSTRY OUTLOOK 2005/06 •

71

Developing Markets

Growth in Poland also remains strong boosted by an ongoing price war where operators are targeting new market segments, such as the urban youth or older residents who have previously been resistant to new technologies. Kester Mann: The Ukraine (7 million), Poland (nearly 5 million) and Romania (nearly 3 million) led regional subscriber growth in terms of net additions outside Russia during 2004, with a further five markets CEE markets exceeding 1 million net subscriber each expanding by more than 1 additions in 2004 million subscribers during the year Country Subs (mil.) Net adds (mil.) Growth (%) (see fig.). Russia 67.898 30.711 82.6 The Ukraine was particularly Ukraine 13.548 6.997 106.8 noteworthy, more than doubling in size during 2004, thanks Poland 22.347 4.946 28.4 predominantly to the fierce Romania 10.009 2.971 42.2 competition between UMC and Belarus 2.434 1.307 115.9 Kyivstar. Meanwhile growth in Bulgaria 4.932 1.244 33.7 Poland has been fuelled by an onKazakhstan 2.629 1.169 80.1 going price war initiated by market leader PTC, and in particular its Serbia 4.343 1.057 32.2 successful new prepaid youth tariff Lithuania 3.22 1.009 45.6 called Heyah. Source: Informa Telecoms & Media Belarus showed the region’s largest increase in percentage terms, expanding by more than 115%. However, growth rates in Poland and Bulgaria were noticeably lower, as mobile penetration in these markets increased to 58% and 66% respectively at year-end.

Q: What is the status of 3G licensing and 3G network deployments in the region?

Kester Mann: A total of 21 WCDMA licenses have so far been awarded in nine markets within the central and eastern Europe region, most recently in Hungary, Croatia and Romania. However, many tenders were overshadowed by poor sentiment towards the industry and over-ambitious efforts to sell at inflated prices, with Tele2 (Croatia) the sole greenfield WCDMA licensee within the region. In both the Czech Republic and Poland (twice), the mandatory start date was delayed following requests from the operators, who argued that the market was unready for WCDMA services and wanted more time to monitor the progress of the technology elsewhere. Additional licenses may be awarded in the Czech Republic and Latvia during 2005, while Bulgaria, Lithuania and Russia will likely take further steps towards tendering during the year. Slovene operator Mobitel took the lead in terms of deployment by launching in December 2003, albeit with limited coverage and handset availability. Three other operators (two in Poland and one in Croatia) have since also launched services, but only on a low-key basis, with limited coverage and handset availability. It is unlikely that significant numbers of operators across the region will have launched full commercial services with a range of supporting handsets and widespread coverage until late 2006 at the earliest.

• MOBILE INDUSTRY OUTLOOK 2005/06 •

72

Developing Markets

Q: What is the status as regards consolidation and M&A activity amongst operators in the region, and are any players emerging as leading pan-regional players?

Kester Mann: With the industry recovering, operators are again looking at central and eastern Europe as a means of expansion into growth markets. Deutsche Telekom, the largest regional operator in terms of proportionate subscribers, has stakes in 10 markets in central and eastern Europe including three that are now branded T-Mobile. It has made no secret of its intention to expand further within the region, which includes gaining full ownership of PTC (Poland) and EuroTel Bratislava (Slovakia). Vodafone, Telenor, France Telecom (via Orange) and TeliaSonera each have stakes in at least four regional operators and are monitoring potential acquisition opportunities within central and eastern Europe. Cosmote (Greece) and Telecom Austria, which is negotiating full ownership of MobilTel (Bulgaria) and courting Telecom Montenegro, are also emerging as key investors within the region. The upcoming privatization of Cesky Telecom, which owns the largest Czech mobile operator Eurotel, presents a significant opportunity for investors looking to further strengthen their position within the region.
Tawanda Chihota is Editor of Eastern Europe Wireless Analyst and Middle East & Africa Wireless Analyst Tawanda has tracked the global cellular sector for over five years and in the last eighteen months has concentrated on operator strategy in the emerging markets of central and eastern Europe and the Middle East and Africa. He has authored and co-authored a number of management reports assessing the investment opportunities in the ICT sectors of a selection of emerging markets. Prior to his current role, Tawanda was a researcher with an independent macro-economic think-tank based in Johannesburg, South Africa. Kester Mann is a Senior Research Analyst within Informa Telecom’s Data and Forecasting Team Kester has a special focus on the Central and Eastern Europe markets, where he has undertaken a number of recent research trips. Kester is a regular contributor to Eastern Europe Wireless Analyst and manages the World Cellular Data Metrics product, which tracks mobile data deployment and uptake. Kester has a BSc in Managerial and Administrative Studies and previously worked for Motorola. Informa Telecoms & Media provides business intelligence and strategic services to the global telecoms and media markets. We specialise in working with organisations to help them achieve strategic advantage. Our global wireless coverage includes: • Mobile, fixed-operator and service provider strategies and market trends • Global wireless developments across mature and developing markets. Find out more about our complete product portfolio at: www.informatm.com Eastern Europe Wireless Analyst – newsletter and continuous research service Eastern Europe Wireless Analyst is the first subscription newsletter to cover wireless developments in Eastern Europe and the Caucasus. It provides intelligent, original and complete coverage of tomorrow’s growth markets.

• MOBILE INDUSTRY OUTLOOK 2005/06 •

73

Developing Markets

Regular coverage includes: • Detailed coverage of regulation and licensing at both local and the European level • Network investment strategy and vendor activity • Regional subscriber data by operator including total, prepaid and data subscribers. Eastern Europe Wireless Analyst continuous research service is available online for multiple users and includes a fully searchable online archive of back issues to enable powerful market tracking. Find out more: www.telecoms.com/eewa The GSM World Series Informa Telecoms & Media and the GSM Association have established a highly successful series of GSM events world-wide, each recognised as a crucial local meeting place for the GSM industry. Our flagship annual event is the 3GSM World Congress, which attracts 28,000 plus visitors, 650 exhibitors and participation from 173 countries. The GSM World Series enables you to meet all your existing clients, potential customers and partners in one place. This saves greatly on the time and expense of having to fly around each continent to present your products and services to key decision makers. Find out more at: www.gsmconferences.com/

• MOBILE INDUSTRY OUTLOOK 2005/06 •

74

Mature Markets

Western Europe
Mobile subscriber growth appeared to have peaked in 2000 at about 90 million net adds in western Europe. Growth halved to 46 million in 2001 and then roughly halved again to 24 million in 2002. Given the high penetration rate, it might have been reasonable to expect a pronounced slowdown, but 2003 saw faster growth with around 27 million net adds and growth was even higher in 2004. Here, SHANI RAJA looks at how multiple SIM-card ownership has reinvigorated the market and what this means for ARPU across the region.

Q: Why do you think growth increased in 2003/04 after two years of decline?

Shani Raja: We believe it’s a lot to do with the growth of multiple subscriptions across western Europe. Indeed, the official penetration rate in most countries in the region is actually misleading. When we say the region is 90% penetrated, we actually mean that SIM ownership accounts for 90% of western Europe’s population. We’re talking about 90 subscriptions per 100 inhabitants. But that’s not the same thing as saying that 90% of people in western Europe subscribe to a mobile service. This is because there is a growing - but unknown - number of multiple SIM-owners. In other words, the region is not as highly penetrated as it seems, which is why growth in net additions is becoming so difficult to predict. What makes matters more difficult is that some of the region’s mobile operators are actually promoting multiple subscriptions these days; they have strategies in place for this. In Italy, particularly, multiple SIM ownership is very popular. Here, users increasingly

Subs growth in the western European cellular market, Jan 2002 - Dec 2004
2002 Net Month January February March April May June July August September October November December additions 1,128,003 932,723 906,237 1,394,226 1,440,694 1,369,631 2,272,841 2,090,948 1,704,962 2,780,371 2,749,139 5,162,938 23,932,713
Source: Informa Telecom & Media

2003 Relative Net Month January February March April May June July August September October November December additions 1,536,218 1,461,420 1,475,293 1,756,532 1,653,864 1,588,320 2,762,531 2,370,262 2,287,662 2,615,779 2,393,565 5,369,928 27,271,374 Relative growth (%) 0.51 0.48 0.48 0.57 0.53 0.51 0.88 0.75 0.72 0.82 0.74 1.65 8.99 Month January February March April May June July August September October November December Net additions 2,089,308 1,915,909 1,774,652 1,503,549 1,525,261 1,675,732 2,621,435 2,508,689 2,097,921 2,089,739 2,141,698 5,352,570 27,296,463

2004 Relative growth (%) 0.63 0.58 0.53 0.45 0.45 0.49 0.77 0.73 0.61 0.6 0.61 1.52 8.26

growth (%) 0.4 0.33 0.32 0.49 0.51 0.48 0.79 0.72 0.59 0.95 0.93 1.73 8.57

• MOBILE INDUSTRY OUTLOOK 2005/06 •

75

Mature Markets

hold more than one card to take advantage of varying call rates offered by the country’s operators at different times of the day. And Vodafone Germany also actively pushes multiple SIM ownership in the form of “partner cards” – designed for use by the owner’s other family members, but which are increasingly used exclusively in their own cars. Now, there’s obviously a good side to all of this. Although the phenomenon of multiple subscriptions makes subscriber-growth trends harder to predict, it means that operators have a largely unanticipated growth opportunity. There is no reason why we shouldn’t ultimately see official penetration rates exceeding 150 % across the region, as multiple subscriptions grow further. What we need now, more than ever, is a better measure of the extent, and potential, of multiple SIM ownership. This is something that Mobile Communications plans to track more closely in the coming months.

Q: How many countries have officially passed 100% penetration?

Shani Raja: Among the major markets in western Europe, the UK, Italy, Portugal and Sweden have officially passed the 100% barrier. We believe that these countries have high quantities of multiple subscriptions. The same could be said of Denmark, Finland, Greece and Austria, which also have official penetration rates above 95%. Indeed, of the major markets, only Belgium, France and Germany have penetration rates significantly below 90%, although all are above 70%. Germany is the country with the highest number of subscriptions in western Europe - nearly 70 million - followed by the UK and Italy (around 60 million each) and France (about 45 million). Shani Raja: According to the best estimates, ARPU growth looks to have been around 2% in 2004. I’m talking about the regional average, as there are vast differences among individual operators. Growth in the third quarter of 2004 was around flat for the region as a whole, but the first and second quarters of last year were a little healthier, so the fullyear figure looks like a 2%, or so, rise. Still, analysts had expected a higher rise than this in 2004, because 2003 growth was 1-4% (according to various analysts’ estimates) after several years in which ARPU growth was stable or actually declined. Last year was supposed to be one in which mobile-data usage, in particular, was expected to grow following the launch of 3G services in the region and the maturity of operators’ GPRS networks. Shani Raja: Vodafone Spain is doing particularly well. Its 3Q 2004 ARPU was about €36.70 (US$47.60), a more-than-10% rise compared with the corresponding quarter in 2003. This growth had a lot to do with a 2% growth in its contract base, the operator says. Its contract base grew from 43% a year earlier to 45%. Some of the worst ARPU performers were KPN Mobile in the Netherlands and TeliaSonera Mobile of Sweden. Both are dominant operators in their markets but have been forced to cut prices because of fierce competition from so-called discount MVNOs. Still, we have to be extremely cautious when analysing ARPU results these days. It’s not only multiple subscriptions that can cause a problem. There are also issues around double-counting (where users in the process of churning from one network to another are counted by both at once) and differences in the way operators recognise subscribers as “active”, which makes direct comparisons difficult.

Q: Has ARPU also continued to grow in western Europe?

Q: Which operators are seeing the strongest ARPU growth?

• MOBILE INDUSTRY OUTLOOK 2005/06 •

76

Mature Markets

Q: Finally, what’s happening to subscriber growth in eastern Europe at the moment?

Shani Raja: The situation in eastern Europe is very different. There is a wide disparity in maturity rates among the various countries in the region. But although the market as a whole is immature compared with western Europe, there are notable exceptions with some very high penetration rates. For instance, the Czech Republic, Hungary, Estonia, Lithuania, Montenegro, Slovakia and Slovenia all have comparable penetration rates to the leading countries in western Europe – respectively, 100%, 80%, 85%, 80%, 99%, 75% and 95%. The region’s total subscriber base, though, is a lot smaller, only around 90 million. In terms of net additions, growth is starting to accelerate. Net additions in 2000 stood at around 10.5 million, but then hovered at around 15 million for the next two years. In 2003, net additions rose to nearly 16 million, but the 2004 figure looks to be much better – more than 20 million – although we’ve yet to see the kind of acceleration that the western European market saw in the lead-up to its 2000 peak of 90 million net additions.
Shani Raja is Editorial Director of Mobile Communications Shani has been writing about the mobile industry since 1998, when he first joined the then FT-owned Mobile Communications newsletter as a senior reporter and contributed to its fixed-line sister title, Telecom Markets. He has been a journalist for eight years, including writing for CFO Europe, an Economistowned publication aimed at finance directors and treasurers of European multinational corporations. Informa Telecoms & Media provides business intelligence and strategic services to the global telecoms and media markets. We specialise in working with organisations to help them achieve strategic advantage. Our global wireless coverage includes: • Mobile, fixed-operator and service provider strategies and market trends • Global wireless developments across mature and developing markets. Find out more about our complete product portfolio at: www.informatm.com Mobile Communications – newsletter and continuous research service Every fortnight since 1988 Mobile Communications has provided independent news, data and analysis to the telecoms industry. We explain what industry developments mean for your business and what implications they have for the European mobile industry as a whole, enabling you to understand the big picture on strategic, regulatory and technological developments. Regular coverage includes: • Unique, extensive subscriber data penetration data for western and eastern Europe • Detailed country profiles – analysing complex content partner relationships, 3G network status and strategy • 2, 2.5 and 3G network and operator activity. Mobile Communications continuous research service is available online for multiple users and includes a fully searchable online archive of back issues to enable powerful market tracking. Find out more at www.telecoms.com/mobilecomms

• MOBILE INDUSTRY OUTLOOK 2005/06 •

77

Mature markets

North America
The end of 2004 has seen the Federal Communication Commission approve Cingular Wireless’s US$44.1 billion acquisition of AT&T Wireless. It also saw Sprint PCS and Nextel Communications agree to merge their operations in a deal estimated to be worth US$35 billion, while January saw AllTel announce the US$6 billion acquisition of Western Wireless. Here, TAMMY PARKER reviews the competitive landscape in the U.S. and takes a look at the future of wireless broadband services.

Q. Do you think the consolidation we are seeing in the U.S. market is good for the competitive landscape?

Tammy Parker: Despite consumer advocates who would tell us otherwise, my sense is that consolidation among wireless operators in the United States is not only beneficial but necessary. It’s really unfortunate that the Federal Communications Commission was forced to adopt a cookie-cutter mentality when it was issuing PCS licenses for the 1.9GHz band. In issuing only regional licenses and conducting certain auctions that only benefited small “entrepreneurial” businesses, the commission ensured that numerous weak players would enter the wireless business and struggle mightily. Unfortunately, the FCC will continue pushing the same utopian vision of competition in the spectrum auction started in January 2005. With so many operators - many major markets are served by at least six wireless companies - the past few years were marked by a ridiculous amount of redundant building of parallel networks. Now that some of those operators are consolidating, they can put their focus on building out networks to areas that have insufficient coverage and deploying next-generation networks that will provide a host of competitive data services. By lifting the spectrum cap and allowing some consolidation, the FCC is acknowledging that bigger is indeed better when it comes to being a wireless network operator. On that note, however, the one drawback is that the small and regional operators will struggle all the more to compete against the remaining national behemoths unless they follow the lead of Alltel and Western Wireless. Tammy Parker: The merger will provide Alltel with coverage in nine new states and will boost its coverage in many existing markets but I expect it will continue focusing on rural states and Tier 2 and 3 markets. Alltel’s acquisition of Western Wireless will create a rural powerhouse that can serve the top four national operators as a roaming partner thanks to its multiple network platforms. While Alltel has made its mark in wireless as a CDMA operator, Western Wireless operates CDMA networks for its own customers as well as TDMA and GSM networks for roaming customers. The merged company will expand on Western’s GSM networks but only in order to increase roaming revenues. Nevertheless, Scott Ford, Alltel’s president and CEO, told reporters that the company could be involved in future consolidation activity, as either a buyer or a seller, so it may be harbouring greater ambitions. Many Wall Street analysts raised their ratings on Alltel after the merger announcement, in part because the acquisition makes the company appear an even more attractive takeover target than before.

Q: Is Alltel planning to become the fifth national operator?

• MOBILE INDUSTRY OUTLOOK 2005/06 •

78

Mature markets

Q. How important is wireless broadband to the North American market?

Tammy Parker: Wireless broadband could be especially huge in North America, where businesses and consumers alike are increasingly used to being “plugged in” via the Internet. Future generations will demand the full Internet experience when they’re away from home or the office, and that opens the door for wireless broadband. Verizon Wireless sees 1xEV-DO as key to drawing corporate customers, early adopters and, I’m willing to bet, younger consumers who demand constant Internet connectivity and applications such as real-time, multiplayer games, multicasting and more. To compete against 1xEV-DO, rivals will have to deploy the same or find something as good or better - such as HSDPA, Flarion’s FLASH-OFDM platform or maybe some sort of WiMAX offering. The bottom line, as always, will be money. In this case, that means cost of network deployment, cost per bit delivered and end-user costs. Many people are getting used to free Wi-Fi hotspot service in coffeehouses that want to draw in foot traffic. The demand for free Wi-Fi has also prompted the practice of war-chalking, where people mark buildings that offer, usually unintentionally, unsecured Wi-Fi access. So, the question is whether wireless broadband services can be offered in such a way to draw a mass audience that’s willing to pay over the long-term. The jury’s still out, but I’d be willing to bet a lot of people will gladly shell out a reasonable charge for wireless broadband that they can access anywhere that their mobile phone works. I know I would. Tammy Parker: All major wireless-networking vendors have now joined the WiMAX Forum, pledging some sort of allegiance to the technology, but few are being forthcoming about their plans or even the technology’s chances for long-term success. At the start of this year Lucent Technologies became the first major vendor to announce specific plans pertaining to WiMAX. The manufacturer will integrate Alvarion’s BreezeMAX product line, considered pre-WiMAX today, into its Accelerate NextGeneration Communications Solutions portfolio. The idea is to offer a converged networking solution to service providers that includes the seamless interoperability of WiMAX, 3G mobile, Wi-Fi and wireline networks. The company is taking a low-risk approach by becoming a reseller of Alvarion’s products rather than developing its own solution. Though the WiMAX standard isn’t even complete yet, there has been plenty of buzz surrounding the metro-area fixed wireless technology, known as either 802.16-2004 or 802.16 Revision D, and its mobile version, 802.16e. Intel’s commitment to embed WiMAX in every Centrino chip it sells is seen as an endorsement of the technology’s success. Tammy Parker: Some people think that the major vendors’ participation in WiMAXstandardization efforts might represent an effort to keep WiMAX from encroaching too far on their turf as there are many issues on which they are likely to clash with WiMAX advocates. Ericsson, the world’s largest mobile vendor, signed on with the WiMAX Forum in December but is focusing its involvement on the wireline side. The company expects an initial product offering to target the fixed wireless 802.16-2004 standard as a complement to DSL and other fixed broadband technologies.

Q: When do you expect to see the first WiMAX offerings?

Q: Are you surprised that vendors haven’t been more vocal about their plans for WiMAX?

• MOBILE INDUSTRY OUTLOOK 2005/06 •

79

Mature markets

Other vendors emphasize that WiMAX is only suitable for fixed applications, contradicting the major hype from WiMAX advocates positioning the technology to take on the mobile community – even before a mobile standard for WiMAX has been developed. The lack of agreed-upon spectrum allocations globally is a major limitation to WiMAX’s ability to compete with 3G. Unlicensed spectrum is problematic in terms of interference and quality of service for WiMAX, which is why the WiMAX Forum began a heavy push in 2004 to focus on harmonizing spectrum bands around the world for WiMAX systems and to lobby the Federal Communications Commission for more frequencies, including spectrum in the coveted 700MHz band. Such moves are generally in contrast to the interest of mobile operators, which are the major source of revenue for the likes of Ericsson, Nokia and Lucent. In October last year Fujitsu even accused Qualcomm of attempting to delay ratification of a mobile WiMAX technical standard. Among Fujitsu’s charges was that Qualcomm dispatched a host of engineers into the WiMAX Forum to delay the approval of a standard.
Tammy Parker is Editor of North America Wireless Analyst In addition to editing North America Wireless Analyst, Tammy has also authored four successful research studies on the wireless communications industry for divisions of Informa Telecoms & Media. She previously held senior editorial positions at several. high-tech publications in the U.S, including Wireless Week, RCR and Pen Computing. Informa Telecoms & Media provides business intelligence and strategic services to the global telecoms and media markets. We specialise in working with organisations to help them achieve strategic advantage. Our global wireless coverage includes: • Mobile, fixed-operator and service provider strategies and market trends • Global wireless developments across mature and developing markets. Find out more about our complete product portfolio at: www.informatm.com North America Wireless Analyst – newsletter and continuous research service Every fortnight, North America Wireless Analyst filters the significant developments across the U.S. and Canada, analyses their significance and presents a concise, coherent view of the likely future developments. Regular coverage includes: • Network investment strategy and rollout – covering the current trends in network rollout and network technology choices • Key subscriber data from operators across the regions • In-depth company, country and sector profiles North America Wireless Analyst continuous research service is available online for multiple users and includes a fully searchable online archive of back issues to enable powerful market tracking. Find out more at www.telecoms.com/nawa

• MOBILE INDUSTRY OUTLOOK 2005/06 •

80

Mature Markets

Asia Pacific
The Asia Pacific mobile market is split between the undeveloped, the developing and the mature. With almost 640 million subscribers at the end of 3Q 2004 the region certainly leads the world in terms of its installed subscriber base. However, only 17.2 million were hooked up to either WCDMA or 1xEV-DO and, of these, 97.1% came from Japan and South Korea – highlighting the division between mature and developing markets in the region. Here, NICOLE MCCORMICK examines the main issues affecting the region’s mature markets.

Q: Is the Japanese market about to get more competitive?

Nicole McCormick: Softbank and Japanese ADSL wholesaler eAccess certainly hope so! But it will be tough going for any new players with a mass market strategy to take on the might of the incumbents, especially with mobile penetration standing at 66.8% as of December. For its part, eAccess has announced plans to embark upon a trial of WCDMA and HSDPA technologies at 1.7GHz with local vendor Fujitsu and a commercial 3G launch is targeted for 2006. In early November, eAccess management expressed a preference for 1.7GHz spectrum. Before this, it requested allocation of the 2GHz band for a TDDbased service, and it is still field-testing Navini Networks’ TD-CDMA-based solution at 2GHz. eAccess is convinced that it will receive spectrum when the government allocates frequencies in the 1.7GHz band later this year, and it envisions spending ¥100-300 billion (US$956 million-2.87 billion) on a 3G network – which is expected to be financed by debt and possibly equity – through 2010. The company aims to provide 90% mobile coverage in Japan by 2010 and plans to offer a flat-rate service at about half the price charged by existing operators. The Ministry of Internal Affairs and Communications plans to add the 1.7GHz band, exclusively for use for 3G services, to existing cellular bands in the 800MHz, 1.5GHz and 2GHz spectrum, and to reallocate a part of the 2GHz band by end-2005. Softbank’s plans to trial WCDMA at 1.7GHz and says it should be able to construct a nationwide mobile network for ¥300-500 billion. Analysts say Softbank could receive spectrum at 800MHz after DoCoMo and KDDI’s migration within the 800MHz band. However, the MIC is aiming to reallocate 800MHz spectrum only among existing operators, a process that could take until 2012. Meanwhile, Softbank is still testing IPWireless’ TD-SCDMA solution at 2GHz and has also reportedly been in MVNO talks with Vodafone Japan. Softbank recently also denied reports that it has made a ¥200 billion offer for KDDI’s PDC mobile business, Tu-Ka which achieved net adds in excess of 10,000 in December for the first time since June 2001, boosting its subs base to 3.6 million. Nicole McCormick: The answer is unequivocally DoCoMo for several reasons, including its strong handset line-up thanks to its close vendor relations. Japan added 1.38 million WCDMA, 1xRTT and 1xEV-DO subscribers in December,

Q: Who is winning the 3G battle in Japan and why?

• MOBILE INDUSTRY OUTLOOK 2005/06 •

81

Mature Markets

representing a 59% increase year on year. As of December, there were 25.7 million WCDMA and 1x users in Japan (see fig.), which is 30% of all cellular subs.
3G Subscriber Trends in Japan
Dec 3G Net Additions Grand Total NTT DoCoMo au Vodafone 3G Total Subscribers Grand Total NTT DoCoMo au Vodafone 3G Subscribers Ratio Cellular Grand Total 3G Total 3G Ratio (%) NTT DoCoMo Total 3G Total 3G Ratio (%) au Total 3G Total 3G Ratio (%) Vodafone (VGS) 3G Total 3G Ratio (%)
Note: * December 2004 figures are provisional. Sources: Companies

Mar

Jun

Sep

Dec*

867,300 255,100 593,700 18,500

1,472,400 723,800 742,800 5,800

941,100 572,600 341,600 26,900

957,500 587,500 346,500 23,500

1,378,700 930,100 379,100 69,500

13,756,800 1,881,000 11,764,100 111,700

16,692,000 3,045,100 13,509,200 137,700

19,486,900 4,583,100 14,704,300 199,500

22,607,000 6,487,600 15,858,300 261,100

25,694,600 8,499,200 16,829,000 366,400

79,787,200 13,756,800 17.2 45,365,900 1,881,000 4.1 15,977,300 11,764,100 73.6 14,774,000 111,700 0.8

81,519,700 16,692,000 20.5 45,926,700 3,045,100 6.6 16,958,800 13,509,200 79.7 15,002,400 137,700 0.9

82,713,900 19,486,900 23.6 46,407,600 4,583,100 9.9 17,591,100 14,704,300 83.6 15,108,800 199,500 1.3

83,836,600 22,607,000 27.0 46,886,400 6,487,600 13.8 18,188,800 15,858,300 87.2 15,173,700 261,100 1.7

85,483,800 25,694,600 30.1 47,914,200 8,499,200 17.7 18,759,000 16,829,000 89.7 15,211,000 366,400 2.4

During December, DoCoMo added a record 930,100 FOMA subs, up 265% year on year, taking its more than three year old WCDMA subs base to 8.5 million, or 17.7% of its total subs. In contrast, as recently as March 2004, FOMA subs made up just 6.6% of DoCoMo’s total subs. December marks the fully-fledged launch of DoCoMo’s FeliCa-equipped FOMA handsets, which should attract new subs and boost replacement rates. December also saw the launch of rival au’s EV-DO handsets with full song downloading functionality. For its part, KDDI’s au added 379,100 cdma1x users in December, a drop of 36% on December 2003. Around 90%, or 16.8 million, of its total au subs had 1xRTT handsets as of December. The company claimed 1.2 million EV-DO subs at end-September and 14.7 million 1xRTT subs.

• MOBILE INDUSTRY OUTLOOK 2005/06 •

82

Mature Markets

Vodafone’s WCDMA net adds still did not reach the 100,000 mark during December with the company taking on just 69,500 new users to its Global Standard 3G service, despite launching five new and much-touted 3GPP-compliant WCDMA handsets in December. Vodafone claimed 366,400 3G users – 2.4% of its total subs – and is targeting half of all users on 3G by 2008.

Q: What are the different strategies of the three 3G players now operating in Hong Kong?

Nicole McCormick: Hutchison Whampoa-backed 3 Hong Kong launched its WCDMA service Jan. 27, 2004 and reportedly had 210,000 subs at end-December, while SmarTone launched its consumer 3G service Dec. 19 and CSL followed Dec. 21. The fourth 3G licensee, Sunday, is reportedly due to launch its WCDMA packages in 2Q 2005. With almost a year’s lead time over its two 3G rivals, it will come as no surprise to learn that 3 has a significant lead over SmarTone and CSL in terms of handset availability. It is also a lot more aggressive than its smaller rivals on 3G tariffs. In short, Hong Kong really has only one serious 3G player in the market right now – 3. In terms of handsets, 3 has 17 handsets from five handset manufacturers in the market and it offers attractive handset rebates. In comparison, SmarTone offers only the Motorola E1000 and Nokia 6630 handsets, while CSL retails just one terminal, the Nokia 6630. Moreover, a recent Merrill Lynch survey of 11 handsets from 3, found that seven retail for less than HK$2,000 (US$257) with a 12-month contract. Conversely, handsets from SmarTone and CSL cost over HK$4,000 (US$513). Selected Hong Kong 3G tariff plans SmarTone aims to launch eight new models in 1Q 2005, SmarTone including exclusive stock from Sanyo and Sharp, but Merrill Lynch doesn’t foresee any retailing for less than HK$2,000 Monthly tariff (HK$) 128 178 238 368 (US$257) until late-2005. Basic minutes 900 1,100 1,700 3,100 Concerning tariffs, 3 trumps its rivals with the cheapest On-net minutes 800 1,000 1,100 1,700 subscriber monthly charge of HK$123 (US$15.78) which Video minutes 30 50 75 130 includes 1,200 minutes of basic voice minutes and 50 video minutes (see fig.). For the first three months, a subscriber actually can use up to 150 video minutes. 3 Hong Kong SmarTone iN 3G’s cheapest package is HK$128 Monthly tariff (HK$) 123 183 263 383 533 (US$16.41) per month and includes only 900 minutes of Basic minutes 1,200 2,000 3,000 4,500 7,000 voice calls and just 30 minutes of video calls. Meanwhile, On-net minutes 900 1,200 1,500 2,000 3,000 CSL’s cheapest monthly rate is HK$188 (US$24.11) and Video minutes (1st 3 months) 150 225 300 450 750 includes 1,700 minutes of free voice calls only for One2Free subscribers. In addition, it charges HK$1.50 (US$0.19) per Video minutes (after 3 months) 50 75 100 150 250 Sources: Merrill Lynch, companies minute for video calls. In short, 3 has a much bolder 3G strategy than its rivals in Hong Kong thanks in part to its ability to tap its parent’s handset economies of scale. In contrast, its rivals appear to have only dipped their toes into the water with limited higherend handsets, less aggressive pricing and not very big marketing campaigns behind them. Nicole McCormick: The number of mobile subscribers in Taiwan has dropped almost 3 million between January 2004 and September 2004, to 22.3 million, thanks largely to operators purging inactive users.

Q: What’s the state of play in Taiwan, Asia’s second-most penetrated market after Hong Kong?

• MOBILE INDUSTRY OUTLOOK 2005/06 •

83

Mature Markets

Consequently, the country’s mobile penetration rate (measured in terms of SIM cards in the market) has been pushed back to a little over 100%. Taiwan Cellular lost 188,000 net subs in October, with a monthly churn rate of 6.2%, and its prepaid deactivations increased from 94,000 in September to 165,000 in October. To give a clearer indication of the extent of the prepaid and postpaid mobile subs cleanup, net subscriber losses for TCC and its TransAsia affiliate rose from 242,000 in 2Q 2004 to 407,000 in 3Q 2004. The clean-up of inactive subscribers was due to be completed by December. Already, the proportion of prepaid subs at TCC has been reduced from 21.4% in December 2003 to 20.5% as of end-3Q 2004, while the proportion of prepaid subs at Far EasTone was lowered from 43% to 33% in the same period. At Far EasTone-owned KG Telecom, the percentage of prepaid users is 32%, down from 37% at December 2003. March was the biggest month for subscriber culling at KGT, with a reduction of a whopping 970,406 net subs. Because of the subscriber purge, Far EasTone-KGT’s blended ARPU jumped from NT$719 (US$22.68) as of end-2Q 2004 to NT$771 (US$24.32) in 3Q 2004: KGT’s blended ARPU alone strengthened from NT$629 (US$19.84) in January to NT$946 (US$29.84) at end-September. Similarly, TCC’s blended ARPU has increased from NT$663 (US$20.91) in 2Q 2004 to NT$711 (US$22.43) in 3Q 2004, with CHT’s figure rising 2% quarter on quarter to NT$732 (US$23.09). To prepare for the introduction of mobile number portability – which will now most likely happen toward end-2005 – TCC and Far EasTone have ramped up customerretention programs, including offering subsidized handsets to high-ARPU customers when their contracts expire. CHT’s handset subsidies rose 6% quarter on quarter to NT$2,201 (US$69.43). For its part, Asia Pacific Broadband Wireless says it won’t launch a price war in the lead up to MNP being introduced. As of mid-November, the firm claimed almost 500,000 subs and it plans to launch 1xEV-DO services in 1Q 2005. Meanwhile, rival CDMA 3G contender, Vibo Telecom, is yet to secure a vendor, while CHT and Far EasTone reportedly hope to kick off their WCDMA services by end-1H 2005. TCC reportedly has earmarked 3Q 2005 as its launch date. All operators have a mandate to launch commercial 3G operations by year-end. MNP and 3G will inevitably put pressure on the sector, with analysts forecasting slight EBITDA-margin declines for the leading three cellcos this year.
Nicole McCormick is Editor of Asia Pacific Wireless Analyst and Managing Editor of ASIAcom Nicole commenced her career in the UK office of Baskerville in early-1996 where she was a reporter on TVI Daily. Since then, Nicole has edited Pan-Asian Telecom, ASIAcom and Asia Pacific Wireless Analyst and now covers the telecommunications, broadband and television markets across the Asia-Pacific region for Informa Telecoms & Media. She has a Bachelor of Arts degree, majoring in journalism and economics, from the University of Queensland. Informa Telecoms & Media provides business intelligence and strategic services to the global telecoms and media markets. We specialise in working with organisations to help them achieve strategic

• MOBILE INDUSTRY OUTLOOK 2005/06 •

84

Mature Markets

advantage. Our global wireless coverage includes: • Mobile, fixed-operator and service provider strategies and market trends • Global wireless developments across mature and developing markets. Find out more about our complete product portfolio at: www.informatm.com Asia Pacific Wireless Analyst – newsletter and continuous research service Asia Pacific Wireless Analyst is your essential fortnightly guide to the shifting power dynamic of Asian next generation mobile development. From new pricing and tariffing requirements to mergers and consolidation, every issue includes the comprehensive analysis and data necessary to compete. Regular coverage includes: • Breaking news, including the latest 3G license competitions, bidders, partnerships, regulations, mergers and acquisition • Powerful profiles of operators and service providers • Exclusive data sets including subscriber numbers, mobile data, WAP and i-mode users and SMS traffic. Asia Pacific Wireless Analyst continuous research service is available online for multiple users and includes a fully searchable online archive of back issues to enable powerful market tracking. Find out more at www.telecoms.com/apwa

• MOBILE INDUSTRY OUTLOOK 2005/06 •

85