GPRS/ 3G UMTS in Europe is Back on the Road

UMTS will be a tool with which mobile operators optimise their networks, rebuild their balance sheets and retain the loyalty of customers. These are the main conclusions of an major industry report published jointly by Arthur D. Little and Exane, “Back in the Road: But Who’s Got the Map?"

The report argues that mobile multimedia will spark competition in certain European countries, while the UK will remain the most competitive country for mobile operators in Europe. Competition between operators for customers using data services will cause changes in market share, which may lead to mobile operators with a subscriber base less than 10% of the population struggling for survival.

In a key forecast, the report predicts that ARPU in Europe will creep up to just €32 by 2005 from the present level of €30, with weak growth continuing until 2010. It also predicts an increase in the amount operators have to pay to retain their customers.

Although mobile operators see new mobile multimedia services including access to multimedia content as a source for ARPU growth, Arthur D.Little and Exane believe that this may be hoping for too much too soon. They point to persisting unresolved technical problems and argue that the attractiveness of the new services remains to be proved.

According to Philip Shepherd, Director at Arthur D. Little: “The European market launch of colour screen handsets and mobile messaging services (MMS) using GPRS will disappoint mobile operators seeking to increase their average revenue per user (ARPU) through the sale of multi-media services. MMS - the multimedia equivalent of SMS - will not take off until the start of 2004. In the meantime, European operators can increase the penetration of SMS in countries such as France where it is lower than average. They can also take the opportunity to increase the use each subscriber makes of SMS per month”.

European ARPU to creep up to €35 from €30

European ARPU will hover around €30 through to 2010, not boosted by mobile multimedia as many had hoped.

"In the short term, we see mobile multimedia less as a growth factor for ARPU and more as a possible catalyst to spark an upturn in competition in certain countries", says Antoine Pradayrol, head of Exane's telecoms research.

The gross margins mobile operators win from their ARPU from MMS will not rise in line with general ARPU increases because premium SMS services, external GPRS traffic and access to content will increase as part of the total makeup of ARPU. These three services involve payments by the mobile operator to third parties: other mobile operators, service providers and content owners.

But any ARPU increases may be under threat from a growing use of Wireless LAN (WiFi) offered by, among others, fixed-line operators in hot spots which could siphon off part of the wireless data market. Mobile operators will launch their own WiFi hot spots to complement GPRS/UMTS services and pre-empt this competition.

The gradual employment of UMTS to supplement GPRS will allow European mobile operators to lower their capital expenditures (capex) right through to 2010 after a 3% rebound in 2003 from an 11% fall in 2002.

Operators are key to the commercial success of mobile multimedia

The success of mobile multimedia will depend on the creation of a favourable ecosystem for all participants. This is largely in the hands of the operators who will have to ensure that services are interoperable, not only between mobiles but also with fixed-line internet. The operators will also have to do three things: set attractive revenue-sharing terms for service and content suppliers; subsidise handset sales to encourage customer take-up; and help handset distributors educate users, in return for a payment.

UMTS will optimise GSM networks and help cut investment needs

The combination of efficient compression technology and GPRS should be capable of handling 90% of the new mobile multimedia services. A big attraction of UMTS, apart from the possibility of downloading large files, will be video. However, demand for video services is still uncertain and it remains to be seen what price customers will be prepared to pay for them.

Nevertheless, Philip Shepherd at Arthur D. Little, says: "UMTS is a logical move for the big operators. It offers a less expensive way of alleviating congestion in 2G networks because the capacity of a node B (UMTS antenna) is around 8 times greater than that of a GSM BTS for a unit cost of 1-1.5 times that of a GSM BTS".

UMTS is expected to roll out very gradually, starting with highly populated urban areas. These areas already suffer the heaviest network congestion and probably concentrate most potential demand for mobile broadband services. This will keep network investment costs down and help the operators smooth their costs over several years.

Medium term opportunities, but short-term risks in some countries

In the medium term, stiff competition between the handset manufacturers will tip the balance of power in favour of the mobile operators, who will gain more influence over the handset/user interface. As a result, customer loyalty is more likely to go to the operators than the handset manufacturers.

The strategic shift from winning to retaining customers will be a prime opportunity for value creation for mobile operators. Mobile multimedia offers a new source of differentiation other than price.

Nevertheless, in the short term, some operators may take advantage of the arrival of colour handsets and MMS to gain a head start on competitors and win market share.

Arthur D. Little and Exane believe that the contrasts between the different national markets will become even sharper in accordance with the presence or not in each of new UMTS entrants and medium-sized GSM operators.

The presence of new UMTS entrants, such as Hutchison 3G, will stoke competition because they will be unable to make niche strategies work and will have to attack the mass market. Medium-sized GSM operators, with a subscriber base between 10% and 17% of the population, will seek to make full use of the economies of scale while the opportunity lasts. Moreover, several mid-sized operators have the cash flow to finance these short-term objectives.

The UK and Italy will see the fiercest competition. Competition in France and Spain will remain lukewarm.

"The Japanese example shows that the arrival of new a generation of mobile multimedia services, with clearly differentiated offerings from the three operators, has resulted in renewed market share volatility as far as net adds are concerned, without any significant improvement in margins", says Arthur D. Little’s Philip Shepherd.

High potential for P2P services (SMS + MMS), that will not be cannibalised by e-mail before 2005

P2P services are largely dominated by SMS. In time, P2P service ARPU is expected to be around €5.

Mobile e-mail, targeting the same market as SMS and MMS, but at lower prices, will gradually cannibalise SMS and MMS. However, this will not occur until after 2005 because e-mail enabled handsets will take time to penetrate the market and will remain too expensive for young users for some time to come. Also, it will be some time before mobile e-mails are as easy to send as SMS.