BuddeBlog

The announcement from Vodafone in September 2004 that it would launch consumer 3G services to the mass market in time for the Christmas holiday period this year marks a major step forward in the industry – and only three years late. And what is emerging is less a revolution than a steady evolution in the mobile telecommunications market, more akin to the transition from analogue to digital than a paradigm shift in communications: voice is, and will remain, the “killer application” for mobile telephony. This does not, however, mean that the arrival of 3G services is irrelevant.

Vodafone’s announcement, that it would be starting to sell 3G handsets in November from manufacturers including Samsung, Sharp, Sony Ericsson, Motorola, NEC and Nokia, marks a major advance on its launch of datacard services in European markets in early 2004. The range includes what the company claims is Europe’s first 2 megapixel camera phone, the Sharp 902, as well as the Sharp 802, the Motorola E1000, V980 and C980, NEC’s 802N, the Sony Ericsson V800, Nokia 6630, and the Z110V and Z107V models from Samsung. The handsets will be available, and will be able to roam between, all Vodafone controlled operations with the exception of Australia and New Zealand. Vodafone will then challenge Hutchison directly in its home market of the UK.

The 3G frenzy that shook the industry in Europe has had permanent effects. Operators like BT and Deutsche Telekom have struggled with the debt load from the licence auctions in their countries, leading to the divestiture of the mobile arm from the British incumbent. Across Europe, the ground has been littered with failed service providers and returned licences from operators who despaired of making a commercial return from rolling out 3G networks. 100 billion was spent on these licenses in the 2000-2002 period; it seems uncertain how much of this money has simply been wasted. Telecommunications has never seen such a bubble of speculation, collapse, and ‘creative destruction’ of investment.

Some parts of the industry are still smarting from the disappointments of the past few years. Dave McGlade, CEO of BT’s demerged mobile unit, O2 UK, stated the position in response to Vodafone’s announcement. "As an industry we have a track record of hyping technology before it is ready. Instead we should be launching it only when it has the right customer experience… 3G will be a central pillar for the mobile industry moving forwards – but we won’t see mass market adoption of this technology until late 2005." As this is pretty much the exact position taken by Vodafone’s Arun Sarin in 2003, it seems to be a question of timing and judgment, rather than doubts about the value of the 3G mobile proposition in and of itself.

A number of operators, including both O2 UK and Orange UK, have launched data only 3G services in 2003, and have not yet declared their intention to commence conventional handset and voice services on their UMTS networks. Many European operators, faced with the frustrations and disappointments of trying to launch 3G services in the last two years found themselves eyeing up a booming demand for mobile data services that was leaking off into new, unregulated Wireless LAN services – WiFi. Deutsche Telekom, Swisscom and many other major operators have invested heavily in WiFi services to maintain their hold on mobile data before 3G was up and running. This strategy has continued with the launch of 3G datacard services providing mobile data access for laptop computers, accepting that the consumer demand for advanced non-voice mobile services has failed to match expectations, and that current handset technology is simply not well suited to encourage heavy use of mobile data.

Hutchison Whampoa’s Three has been a lonely standard bearer for 3G in the European market for over a year. The company set itself a target of a million subscribers in the UK by Christmas 2003, a target it finally claimed to have reached in August 2004. Worldwide, the 3G mobile phone network operator had 3.2 million subscribers at that time, a net gain of 2.5 million customers in six months. Growth has massively accelerated as its other operations, in Italy, Denmark, Sweden and Austria, come online, and as the company turns to aggressive pricing and launches prepaid plans in a burst for growth. Early problems, with poor availability of sub-standard handsets, poor network coverage and resilience, and poor distribution networks compounded by expensive tariff schemes, have largely been overcome. The company has also had success in attracting high-spending and inquisitive customers from other operators and is experiencing demand for its new services, such as video clips and multimedia –but the company continues to burn cash, reporting negative EBITDA of HK$4,153m for the first half of 2004. The industry has decided that 3G is here, and is here to stay – but there is a long way to go before the boom times come.

The business realities of Mobile Content and Mobile Data
Roundtable with Paul Budde and industry experts – Wednesday 20 October 2004
Cost: $325 per person (excluding GST) – this includes morning/afternoon coffee and lunch
Venue: The Observatory Hotel, 89-113 Kent Street, Sydney
Booking: Call or e-mail Christine Lewis to make your booking.
Online registration: Telephone: 02 4998 8144, E-mail: pbc@budde.com.au

The Australian online advertising market grew 41% in 2003, to reach $236 million, according to the 2003 online advertising expenditure report of the Audit Bureau of Verification Services. Spending grew 51% to $137 million in the six months to December 30.

Personal banking and the finance industry generally was the top spender in general advertising but the recruitment industry maintained its position at number one for classifieds.

Full year 2003 revenues for general advertising grew 30% to $80.7 million. Classifieds revenues grew 44% to $86.3 million while search and directories advertising increased 53% to $69 million.

General advertising grew 64% in the second half of 2003. Classifieds grew 24% and search and directories grew 31%.

See also:
Australia – ISP Market – Revenues
Australia – Internet – Web Sites, Web hosting
Australia – Internet Market – Residential Market

The roll out of 3G services in Asia has been somewhat paradoxical. Whilst there is still much debate over the viability and the optimum business models for 3G, in most countries in the region operators are simply ‘getting on with business’. At the same time, given the early problems with 3G, especially in Europe, operators do not want to appear reckless in the way they are proceeding. As a consequence, those operators in Asia that have been rolling out networks are doing so with the minimum of fuss and without indulging in too much fanfare.

As the Asian market pushes cautiously beyond 2G it is now starting to happen on a broad front. With Japan and South Korea leading the push, both having launched 3G services in 2001/2002, a raft of other Asia economies have also been on the move. In Malaysia, Taiwan and Hong Kong, operators have launched 3G. At the same time, Indonesia, Thailand and Vietnam have seen the launch of next generation services, services that might be more correctly described as 2.5G. And in those countries that have not yet seen a 3G launch, regulators have been issuing or preparing to issue licences and frequencies bands for various types of mobile services beyond 2G.

The one significant player that has been holding back on 3G is China. With the stakes so high – it is estimated that the cost of 3G network rollouts in China will exceed US$80 billion – the authorities are waiting to see what happens in the rest of the market. A decision by the government on the issuing of 3G licences and technology selection in China is not expected until mid-2005.

In Hong Kong, only one of the four 3G licensees, Hutchison Whampoa, has launched a 3G service. Sunday, one of the other operators, has said it would not be launching its network until 2005 because it wanted see a more mature market. Arguing that, so far, growth in 3G subscribers in Hong Kong had been ‘force-fed’ with heavy subsidies, Sunday is expecting the supply of 3G handsets, availability of content and quality of network to be much improved by next year and consumers will be more willing to subscribe to the service then.

Despite some reluctance in the marketplace, all eyes have been focused on the mobile operators in Japan and South Korea as they seriously test the 3G market. In effect, these operators have been developing their business models ‘on the run’. And they have been quick to conclude that for 3G, at least for the time being, it is very much a Customer Segment Specific market. The immediate challenge for the operators is therefore to understand the attraction of different services to different groups of customer.

KTF, South Korea’s No. 1 mobile operator, has been building a strong market-segmented strategy. It offers a service for 13-18 year olds that includes unlimited text messaging, another service for 18-25 year old students that packages free movie tickets and Internet access at selected universities, and a further service aimed specifically at women. Other operators in South Korea and Japan do similar things.

It is worth noting that some analysts, especially in Europe, have been warning 3G operators against placing too much emphasis on Internet services. They argue that such services will ultimately damage 3G’s profitability, as the services will not generate enough revenue per megabyte. Instead, operators are being urged to make the most of 3G as a high-value proposition, utilising such inherent advantages in the technology as wide area availability and always-on connectivity.

In the meantime, to exploit the sort of customer-segmented market that seems to be emerging, companies are preparing to set themselves up as Mobile Virtual Network Operators (MVNOs). This is looking increasingly attractive as a business model for 3G. By going into partnership with an existing operator, an MVNO does not have the burden of building its own network, but can sell access to its partner’s network. In this way it can put its major effort into branding and marketing its product, thereby reaching out to the customers. The bonus for the operator is that the more nimble-footed MVNOs can more effectively bring in the customers by targeting the right market segments. The 3G operators know only too well that they must generate enough voice and data traffic to fill up their high cost 3G networks and they will need all the help they can get to achieve this.

An interesting variation on this partnership concept is to be found in South Korea where KT Corp is using KTF’s network for what it has labelled its DU service. The service is based on a cdma2000 1xEV-DO (3G) portable handset operating on the KTF network, but it is also Bluetooth-enabled and automatically switches calls from the mobile network to KT’s own fixed network when the customer comes within range of their fixed line access point. In Korea, mobile calls cost up to 10 times more than local fixed-line calls. The DU service is therefore likely to offer savings to customers. Mobile operators are already seeing this as unfair competition as KT controls around 96% of the country’s fixed line services. KT has a 47% shareholding in KTF.

The business realities of Mobile Content and Mobile Data
Roundtable with Paul Budde and industry experts – Wednesday 20 October 2004
Cost: $325 per person (excluding GST) – this includes morning/afternoon coffee and lunch
Venue: The Observatory Hotel, 89-113 Kent Street, Sydney
Booking: Call or e-mail Christine Lewis to make your booking.
Online registration: Telephone: 02 4998 8144, E-mail: pbc@budde.com.au

The Sony deal to acquire MGM heralds a new era for convergence.

During the mid-1990s several content/technology deals were launched, but none of them were overly successful – as a matter of fact, most of them failed.

The difference between then and now is that the combination of broadband infrastructure with digital technologies is at last opening up new distribution media for content.

Get set to enter the brave new world of ‘New Media’.

Sony was also involved in those early ventures, but, due to its characteristically long-term Asian business culture, it has been one of the survivors. The fact that the company is now building on that earlier move clearly demonstrates the importance of content for technology companies. For years Sony has wanted to be at the forefront of every business related to the digital home entertainment area. Its focus has been on a grand scale but, to date, it hasn’t had the money to proceed.

Although access is the current king, allowing people always-on Internet/e-mail access, the emphasis is now moving over to the various applications that these new technologies have to offer.

These applications will combine video, voice and data – also known as triple-play business models. While the majority of broadband usage will come from the consumers’ own triple-play communications (home pics, video, education, healthcare, etc), entertainment will also form an important part of the new media. In that respect, having access to content is a key issue.

The industry is still a few steps away from having televisions that are integrated to the Internet. Various companies are jockeying for position – such as Microsoft, HP, Comcast, News Ltd, Time Warner, most national telcos and many broadcasters.

Sony is an early mover in this field. Most of the others are still talking about it, or are concentrating on technology-based issues. The real opportunity, however, lies in setting up the right business model to allow these companies to move into this market. Any leading company involved in IT, telecoms, broadcasting and consumer electronics that doesn’t make this adjustment will be taking a huge risk.

Sony and three other investors (Texas Pacific Group, Providence Equity Partners and DLJ Merchant Banking Partners) bid $2.9 billion, to acquire Metro-Goldwyn-Mayer Inc (MGM). The deal will double Sony’s film library and advance its strategy of combining entertainment and technology businesses to spur growth. MGM’s library includes the world’s largest collection of post-1948 feature films – about 4,000 features. It also owns more than 10,400 TV episodes.

Sony and MGM, combined, boast 8,000 film titles. They are already partners with Viacom’s Paramount Pictures in Movielink LLC, which allows users to download movies onto personal computers for $5 a title.

The company has also announced that it plans a Japanese movie downloading business by the end of this year. As well as this they own Columbia TriStar Home Entertainment, which has more than 2,500 film titles. Films account for about one-tenth of Sony’s sales.

The MGM deal paves the way for a venture with Comcast Corp, the world’s largest cable television operator, which also offers customers VoD services. Comcast will distribute the combined studios’ films and may also become an investor.

Sony’s goal is to unite consumer-electronics and media businesses through products such as the PSP hand-held game machine and the Airboard portable television, which is designed for watching movies on the Internet.

The market for movies downloaded over the Web may rise from an expected $10 million in 2005 to $500 million in 2010.

See also:-
Convergence
Global – Convergence of Media & Telecommunications

There are obviously different views on how successful or unsuccessful competition is in the telco industry.

In general terms the global sentiment is very much that competition is failing, the incumbents are back in the saddle and most of them are able, to a large extent, to ignore government policies and regulations and to continue to dominate the markets in which they operate.

Within that environment competition certainly is far from ideal.

However, we have also reported on specular growth in other parts of the markets where, based on new technologies and away from the core telco business, smaller players most certainly are making progress. Sometimes this is based on geographic niches; other times it is derived from new products or niche markets.

Telecoms has become a more important business tool in both the public and the private sector. Healthcare and education are among the biggest telecoms growth markets. Money from these huge budgets gets redirected and a significant proportion of that ends up in the telco market.

So, somebody must be making money.

Wireless broadband, IT-based developments around VoIP, broadband, datacentres, ASP models for mobile and fixed applications, CRM based developments and so on – all these are markets where double-digit growth occurs.

The reality is that these developments are taking place at the edge of the telco market and therefore don’t have a large effect on the core business. So, in the end, the picture remains the same – there is not a lot of ‘real’ competition.

At the same time, many small players have combined, creating competition, and they are growing faster than the incumbents. Therefore, while the overall market continues to grow by 5%-7%, the incumbents might perhaps only score a 1%-2% growth. So the competitors are slowly but surely gaining market share, especially if you take into account that this sort of lopsided growth has been taking place for close to a decade.

So, yes, there is still hope for the competition. Progress might be slow, but we are talking about an ever-increasing market where small market-share percentages often mean a hundred million dollar business.

See also:
Global – Analysis – Industry – The Telecoms Industry in 2004
Global – Forecasts – Industry – Developments for 2004
Global – Forecasts – Market Developments in 2004