3G: pessismists are wrong
The billions invested in third generation mobile services by Europe's operators will pay healthy dividends and sooner than most expect, argues Bjorn Krylander, CEO of UbiNetics
The received wisdom amongst leading analysts and journalists today is that Britain's mobile operators will struggle to make a return on the billions invested in third generation (3G) services. Analysys, a respected telecoms analyst house, released the latest in a series of bearish reports earlier on this month.
Pessimists point to the fact that video and other advanced data services are much less profitable than simple text messaging for 3, Britain's first 3G mobile company. They also highlight how, despite 3's early focus on the video and data capabilities of its phones, over 95% of its traffic comes from traditional voice calls.
But hang on a minute. Can it really be true that an entire industry has got it all wrong and bet tens of billions of euros on the wrong technological horse? At a superficial level, the situation does indeed appear grim for 3G, but a closer examination of the facts reveals a far more positive picture.
First and foremost, we should not forget that Vodafone --- the world's biggest mobile operator by far --- has not written down its 3G investments by a single penny. There are many sound reasons for this and it is worth examining some of them in detail.
First, in its latest report, Analysys points out that one of the big challenges facing 3 is that the "most exciting" of the new 3G services on offer, such as video telephony, generates the least revenue per megabyte of capacity. This is because video requires hugely more bandwidth than a voice or text message. It is certainly true that on a "cost of delivery" basis, video is more expensive to send than voice, but this is actually pretty irrelevant.
What will happen is that customers will get to choose from a large
variety of content streams, some of which will make lots of money for operators, with the surplus cross-subsidising more bandwidth hungry applications.
A perfect case in point is text messaging --- the cost to the operator of sending an SMS is a tiny fraction of what is charged to the end consumer. The market supports this because the "per event" charge is bearable to most users and thus they are willing to pay for it.
All the indicators from the Far East, where 3G is more entrenched, are that there is a healthy appetite for mobile data services way beyond basic text messaging. And the initial success of Vodafone's GPRS-based Live! service across Europe proves there is no reason to believe the same won't be true here as well. It is also a fact that the Far Eastern operators are making very healthy margins from their 3G services that are more than paying for the initial investments required to build them in the first place.
Secondly, it is also a fact that even without video and other high bandwidth data services, 3G will stand on its own two legs financially because on a per megabit basis, it costs significantly less to deliver capacity than it does on existing GSM networks.
Finally, the early signs are that early adopters of 3G services - both businessmen using Vodafone's 3G datacard and 3 customers --- are finding them equally as addictive as broadband and mobile phones.
Once 3G handset technology advances to the stage where all this rich functionality can fit into a 2G-sized phone, data-generated revenues are sure to explode.
And the technology is advancing at such a rate that these handsets will be widely available by the second half of 2006. When this happens, operators are betting that consumers will be quick to embrace the extra data services that 3G enables. Given the much higher than average ARPU generated by the average 3 customer, the odds are almost certainly stacked in the operators' favour that the 3G power horse will finally gain some real momentum within the next two years.
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