3G might be a bad investment after all - Part 2
August 30, 2002 - source: Datamonitor
Give it away now...
Actually, no! It's becoming clear that no consumer is prepared
to pay more than around E499 for any sort of advanced device, and
most will pay no more than E250. Considering that most devices in
the offing (such as Sendo's smartphone) are around E1,200 at unsubsidized
retail value, subsidies of between E500 and E800 look necessary.
Do the math - if a European operator with 12 million subscribers
wants even half of them to have a 3G handset, the cost of subsidy
will exceed E3 billion. Of course in reality, around 65% of those
customers will be pre-pay and as such, not an initial 3G data-service
target, but the point is implicit.
Now add the cost of service development, deployment and marketing
and it starts mounting up. Operators' original 3G business plans
had been looking to fund some of this from the increase in existing
customer revenues. However, uptake of any mobile data services so
far has been shockingly low.
Even though GPRS handsets are being sold at a moderate rate, the
percentage of those actually signing up to a GPRS tariff is abysmal.
SMS continues to be a success story, so much so that demand for
innovative services outstrips operator abilities in tracking, provisioning
and billing. MMS however, has already suffered the same fate as
other mobile acronyms - over-hype.
While few doubt the value of this application, predicted uptake
and revenues have been massively inflated, not least as it is likely
to cannibalize existing SMS revenues. The handsets just aren't available
right now, with only two camera-phones on the market and about another
3 or 4 models in the next few months.
In the run-up to Christmas, Datamonitor believes that consumers
are far more likely to demand handsets with radios and MP3 players.
Business models with this extent of exposure to fragile consumer
confidence (not only in the US, but also in Europe if interest rates
start rising towards the end of the year) will come under even heavier
pressure if consumer expenditure drops off.
Dis-content providers
Unless operators can offload more of their costs to content providers,
the chicken and egg scenario of data-service subscribers and services
will continue unabated.
However, while content providers lamented the lousy margins proposed
by operators up until six months ago (especially in Europe, where
these might have been as low as 20%), the introduction of i-mode
services has gone some way towards fostering a change. The operator
industry is tending towards a margin of 15% on consumer services.
But any kind of venture funding for small content houses has all
but dried up, with only a few investments remaining in messaging
technology. Several dedicated start-ups are on their last legs;
real-world media groups are tightening belts and cutting back anything
that's online or unprofitable - especially things that are both
- and the industry is looking more than expectantly to Hutchison
3G to blaze a trail out of the mire.
No handsets - well, none that work
All this would be enough of a problem, even if anyone had made
a successful 3G handset. But so far, no one has really managed to
integrate the circuitry required for 2G (inc 2.5G) and 3G to exist
on the same silicon wafer. In effect, all prototype 3G handsets
at present comprise 'two handsets in one' under the bonnet.
Nobody has even properly managed to make these double-chip 2G/3G
combinations work successfully. Hutchison 3G hopes to be the first
major European 3G player to bring a service to market, hoping to
launch in late 2002. It recently admitted, however, that its dual-mode
handsets cannot currently hand-over calls between 2G and 3G networks,
meaning that the user has to ring back.
This is serious: if you pay E499 for a phone, you'll be justifiably
annoyed about having to re-dial your call every time you move from
one network area to another. According to Hutchison, the problem
won't be fixed until mid-2003 - and the same will be true for other
operators.
This hybrid phone also incurs a correspondingly larger BOM (bill
of materials) for manufacturers, and they are in no position to
absorb this through additional efficiencies in production - they're
sailing as close to the wind already, when it comes to making margin
on handsets. So more charges for operators...
And the walls come tumbling down
Operators' capital expenditure on building and subsidizing 3G services
simply can't keep going as it is. Low uptake will cause a cash-vacuum
and that won't service the billions of dollars of debt in license
and infrastructure costs.
So what's the net result? Some operators will follow Telefonica/Sonera
and pull out; some may go bust or be acquired. Parent companies
of smaller operators might have painful decisions to make, with
respect to allowing a slide into receivership, the sale of a going
concern (which no one will want to buy unless some debt is written
off) or injecting yet more cash. One thing is clear - BT's decision
to divest itself of O2 is proving to be wiser by the week.
his is not to tar all operators with the same brush. Some show
more prudence than others and have rather healthier balance sheets
and some have not been subject to such massive license costs, such
as in Norway. MVNOs may yet have their day.
With no revenue streams, 3G operators may have no option but to
lease capacity to brands like Manchester United, AOL Time Warner
or Disney. And if governments doesn't revise contractual obligations,
we may well see a gray market for 3G licenses before 2002 is out.
read part 1
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