Mobile market in turmoil over 3G delays

While the UK's mobile operators may be feeling pleased with themselves because of increased Christmas sales figures, their long-term future does not appear so rosy.

A report from analyst company Forrester Research predicts that with the mobile handset market approaching saturation, fierce competition among European operators will drive all but five to the wall by 2008.

The driving force behind this wireless massacre will be the gap between investment levels in third-generation (3G) services and the profits generated from them, particularly in the mobile internet space.

The study expects average revenue per user (ARPU) in the overall mobile sector to tumble by 15 per cent to just £200 by 2005 as users sniff out the best deals. The report's author, Forrester telecoms analyst Lars Godell, also predicts that the total value of the market will shrivel by 36 per cent.

While operators insist that revenues from future 3G services will compensate in roughly equal measure for a revenue plunge in the traditional market, Godell is sceptical.

Shortfall in finances

He predicts that income from network access, content subscriptions and location-based marketing contracts will be lower than expected, leaving operators with a shortfall of about £44 per user per year.

And he believes that operators in high-cost licence countries such as the UK, will suffer most because, as competition drives prices down, budgets will be strained to breaking point and profit margins will disappear. This means that for players with shallow pockets, it will be "game over".

Mark Blowers, a senior researcher at analysts Butler Group, agreed that consolidation would hit mobile markets, but he expects astute operators to exploit new opportunities as the market shifts.

"It's pessimistic to say that mobile internet services won't take over from traditional revenue streams. Network operators are in a prime position to leverage additional revenue from various areas, such as wireless portals. Partnerships with content providers will allow them to grow their revenues," he said.

With the handset market saturated, and the likelihood of there being a long gap before full 3G services are made available, service providers will need to differentiate themselves to succeed.

Competition to retain subscribers will send prices tumbling, which means that technological innovation will be key to marking service providers out from the mobile crowd.

But Blowers believes that it is wrong to assume that users will use a single converged device from the very start of the 3G revolution.

"You've got to be careful talking about saturation of the mobile device market. In terms of numbers of people, we are approaching saturation, but there will be multiple wireless devices per person, and that figure will continue to grow," he said.

Paying the price

Blowers added that the first wave of 3G subscribers will pay for the privilege of using such services, but company bean counters will not. "Business users will not pay a premium for 3G services. They'll expect the rates to be close to what they're paying now. In fact, they'll be looking for more value for money and value-added services," he warned.

And last month's statement by the International Telecommunications Union (ITU) that the necessary infrastructure for 3G services will not be in place until at least 2003, is not likely to have brightened operators' moods, particularly because they may find themselves having to fight customer ennui as they become sick of waiting for speedy mobile internet access.

As technological advancements have accelerated, the expectations of domestic and business users have likewise increased. They want a mobile office that can hook into a small shopping centre, which fits in the palm of their hand. And they want it now.

Jack Blaeser, vice president of international sales at integrated messaging firm coms.com, warned that the delay between 2G and 3G handsets and services hitting the market could damage network operators' reputations.

"One problem is the time this technology is taking to get to market. People will slowly become bored with their 2G mobiles and, with saturation approaching in the handset market, the time to strike is now," he said.

For operators' marketing departments, this could become a serious headache as they seek to differentiate their offerings from the opposition, while providing no tangible technical advantages. They will have to tread a fine line between trying to create a market for 3G technology and over-hyping it, thereby creating a situation where disillusionment can set in.

The ITU's schedule for bringing services online will add to this dilemma, and arguments concerning schedules for creating standards could simply be seen as a further excuse for delays.

All this could mean that charging users premium subscription rates for the services when they finally appear could become the equivalent of selling hair gel to William Hague.

Redefining the community

To overcome these hurdles, Blaeser believes that operators should embrace the concept of the collective rather than the individual subscriber.

"Creative players in the market will redefine their value proposition in much the way that AOL did in the US, by creating new portals. They need to drive more applications to a bigger range of mobile devices. AOL redefined itself as a community. That helped it to retain subscribers," he explained.

Whether the technological advantages of 3G services justify the enormous premium levied on them by the UK government is open to question. But any delay in providing a full range of truly next-generation services could see business and domestic users literally slamming down the phone.

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