Data Services Radically Changing The Mobile Industry

The wireless market can be segmented into voice and data services, with voice revenues and services dwarfing that of data by orders of magnitude. There are more than a billion people on the planet using mobile communications. In the US alone, there are some 150 million Americans paying ~ $50/month for service. This is a small miracle in itself. The mobile market has the most complex supply chain of any industry making purchase decisions difficult. Which phone can be used with which network? Can I send a message to a Sprint end point if I am using Verizon? What is the tariff this month on this service? Not only is the purchasing complex, but for some operators, there are hidden penalties for canceling service. But even with these hurdles, the average number of cell phone minutes used per month in the U.S. jumped 74% to 422 (about seven hours) last year. This is up from 242 in 1999, according to J.D. Power.

High Debt Withers 3G

But don´t be fooled by an increase in the number of minutes consumed, the traditional voice based mobile market is far from a high growth industry any more. Not only has growth in subscribers slowed, but many large European mobile operators are so heavily in debt, it seems like nothing short of a government bail out will save them. And the chances of that bail out are pretty high. European mobile operators spent more than $115 billion in 2000 on licenses for 3rd generation wireless networks which promise high speed wireless data services. Servicing that debt along with the gloom over the telecommunications industry has made tapping capital markets to build their 3rd generation or 3G W-CDMA based networks nearly impossible. The result, many European 3G deployments have been either delayed or shelved for the time being.

The debt issue is most acute in Germany. Germany has four major mobile operators, T-Mobile www.tmobile.com (Deutsche Telekom), Vodafone www.vodafone.com , E-Plus www.eplus.com (NTT) and O2 www.o2.com . T-Mobile and Vodafone service approximately 80% of Germany´s 52 million mobile subscribers. Thanks to buying up spectrum to build out a 3G W-CDMA mobile network, T-Mobile finds itself with a EUR64.2 billion debt burden. TMobile is the largest telecom carrier in Europe servicing some 73 million subscribers worldwide. It has put in place a program to cut its debt to EUR50B by YE02 with reduction in staff and other expense cuts. In short, T-Mobile will find it hard to build out a 3G network any time soon.

Large debt is not isolated to just T-Mobile, many others are burdened with this problem too. But debt is only half the problem, subscribers and thus revenues are not growing as anticipated and in some cases such as Sprint www.sprintpcs.com they are contracting due to subscriber churn. It´s these arguments that Kevin Kennedy COO of Openwave says?¬¢‚Äö?ᬮ¬¨?? the mobile industry is so fragile neither the operators or equipment suppliers can implement 3G systems in the short term. The time to generate cash from 3G services is long, perhaps until the end of the decade. It´s not a question if 3G will happen, but when. This delay in 3G deployment opens a huge window of opportunity for mobile networks based upon the US CDMA 2000 and new 802.11 high speed wireless internet access standards?¬¢‚Äö?ᬮ¬¨?? Kevin goes further to say that before any major infrastructure spend occurs, the mobile industry will continue down the road of consolidation with equipment suppliers consolidating first, followed by mobile operators.

2003: A Year of Consolidation

The mobile industry structure is much like the airline industry today. There are a small number of huge airports and a small number of small airports, but there aren´t many medium sized airports or mobile operators. This tends to move an industry to a vertical structure. The mobile market is dominated by vertically oriented equipment suppliers and operators providing total solutions. This means there are a few large equipment suppliers such as Lucent www.lucent.com , Nortel www.nortel.com , Ericsson www.ericsson.com , Nokia www.nokia.com , et al providing solutions to a small number of huge mobile operators. But here´s the twist, the operators will have to consolidate to gain efficiency while the equipment suppliers may bifurcate into a few large vendors selling primarily the old mobile equipment and a host of new entries selling primarily internet wireless infrastructure equipment.

As the mobile operators consolidate, those left standing will be better positioned to use scarce spectrum, service debt and offer new services, primarily data or internet based. There are some 30 mobile operators servicing Europe, the US and Asia, with Asia being the only worldwide bright spot. Considering slowing growth in the US and Europe, the question is, does the world need 30 operators? Who will make it? Your guess is as good as mine. Vodafone has the deepest reach in all the large markets including Germany, UK, Italy, France, Japan, China and US. T-Mobile, if it can restructure its debt, has significant share in Germany, the UK and the US. Orange www.orange.com dominates in France and has 27% of the UK market. NTT www.ntt.com and China Mobile www.chinamobile.com have 60% and 64% of the Japanese and Chinese markets, respectively. In the US, Vodafone owns 45% of Verizon www.verizon.com , making Verizon a winner. And you can´t count Cingular www.cingular.com and AT&T www.attwireless.com out either.

We´ll know that the operator consolidation phase is over when the industry reaches an inflection point marked by stable pricing of voice and data services that are easy to purchase i.e., a simplification of the supply and value chain. The mobile operators will be slow to consolidate due to the need for regulatory approval which will leave the equipment suppliers twisting in the wind. With equipment suppliers confronting shrinking revenues and fewer operators, look for these plays to start consolidating in 2003.

The Battle for The Consumer

While macro economics is influencing mobile industry structure, technology trends are also shaping its future. The most important trend is the growth of data services which has it own set of challenges. For example, the end point (a phone, PDA, laptop, etc) supply chain is very complex. The value chain and user experience need to be tightly aligned for a successful service. To deliver value to the user, a digital end point needs to incorporate a color display, a browser and applications such as games, internet access and plain old voice. These technologies are offered by a wide range of companies, making the integration into a end point difficult and intricate.

The shift in the end point feature load is pitting operators against end point manufactures such as Nokia, Ericsson, Sanyo, et al. The end point players want to entice consumers with features while operators want to deliver features as a service. This is a major shift from the past where end point manufacturers worked with operators to deliver features. But now there is a battle over who will own the customer fracturing the once friendly partnership between manufacturers and operators. In short there is a branding war occurring in the mobile market over who will have control of the industry, the end point folks or the operators. It´s too early to tell who will win this match too with so much technology in flux. But what it does do is create more confusion over which type of mobile infrastructure to build to support internet based services since it´s unclear if those features should be part of the end point or the network.

Second Thoughts on GSM

Not only are the end point manufacturers and operators in conflict, so too are the equipment suppliers and operators. There is shift in thinking that questions if the European´s GSM based mobile wireless network is the right technology model to support data or internet access. The European´s are ahead of the US in subscriber adoption rates and most importantly the ability to roam across Europe with a single phone and receive voice service. This is all thanks to the past tight partnership between equipment suppliers such as Nokia and Ericsson and the mobile operators. But mobile operators are struggling. They struggle to service their high debt. They struggle to support a boom in SMS data traffic that is occurring on a network that was not designed for SMS, but is a control channel for SS7 traffic. They struggle to keep quality up while supporting more and more data subscribers on an under designed data network. They don´t have the capital to build a new network. While they struggle, equipment suppliers keep pushing the operators to build out 3G, a multi-billion dollar spend proposition. This problem/solution mismatch is straining these long standing partnerships between equipment suppliers and operators. For many of the equipment suppliers, survival is linked to 3G rollouts. But the operators are saying, they need to add incremental value on top of their infrastructure that generates revenues today. They are not interested in a massive multi-billion EUR 3G spend which requires a huge swap-out of equipment. Not only that, 3G forces operators to swap voice channels for data services putting their voice revenues at risk. Operators do not want the option of either taking spectrum from voice to add data or doing expensive things such as implementing more cells. As if it couldn´t get any worse for GSM mobile operators, for first time, these operators are increasingly vulnerable to CDMA based operators. The beauty of GSM is also its difficulty. Since GSM is common between operators, subscribers can roam between networks. But this commonality limits differentiation. There is little competition or
technical advantage between GSM operators since they all offer the same basic services built on the same infrastructure. The only way to gain market share is on price or to acquire your competitor, which Vodafone has done very successfully.

But the Europeans will continue to dominate the mobile equipment market since the GSM standard controls 80% of the world market. The GSM operators aren’t expected to make the switch to CDMA 2000 any time soon. But CDMA 2000 has made inroads in South Korea, Japan and Latin America. The wild card is China, which still hasn’t chosen. CDMA with public wi-fi 802.11 has the potential to leapfrog the traditionally strong European market over time.

Looking Toward Asia

CDMA operators have the flexibility to offer data services without the huge capital spend required in GSM networks. For data service innovation look toward the CDMA operators. The US is primarily a CDMA country. Also US operators have better balance sheets then their European competitors. This provides some major U.S. wirelessphone operators flexibility to invest in new services. Verizon launched a high-speed Internet service for mobile phones earlier this year. Sprint´s PCS is planning similar services during YE2002/Q12003. CDMA 2000, one US approach to 3G wireless data services, is used by Verizon and Sprint. CDMA 2000 and its various forms allow operators to offer data services with smaller capital outlays rather then the fork lift upgrade GSM operators are confronted with.

The Asian CDMA operators are being more aggressive and smart about data services too. First they are segmenting the market into age groups and gender. Second they are launching a range of experimental data services such as sharing photos on digital mobile phones which is now being exported to the US by Sprint. Their innovation spans telecommunications and TV programming linking the two in profit sharing interactive TV shows.

It´s All About Internet Access

Mobile operators worldwide require open data network standards to build out next generation wireless systems. Larry Lang, Vice President and General Manager of Cisco’s Mobile Wireless Group offers this analogy. In many respects the conflict over 3G mobile network standards is much like the debate over ISDN in the early 90s. Narrowband and broadband ISDN was driven by Bell heads rooted in the telecommunications industry. These folks underestimated the internet and growth of data traffic. ISDN offered too little bandwidth for data and it did so over the wrong infrastructure. GSM´s 3G, like ISDN, is too little to late and cost too much. The internet folks like packet mode interfaces for data services and for good reasons. We have a few in CDMA 2000 and 802.11.

Data traffic is driving a massive change in mobile communications much like it did to the circuit switched voice network in the late 90s. While public 802.11 based wireless services will not replace or eliminate 2.5G or 3G mobile infrastructure it will surly slow their adoption rates even further as mobile operators seek ways to offer new data services with lower capital spend. Add to the mix a complex value chain of new digital end points and the ensuing branding battle between end point manufactures and operators and the real winner could be wi-fi operators equipped with a simple high speed service for wi-fi enabled end points.

Posted 2 December 2002 at 6:54 pm under Lippis Report. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.