3G Can Rescue the Swedish Wireless Market

Europe : Sweden is one of the most advanced wireless markets in the world, with 107% population penetration in December 2004. This reflects multiple wireless device ownership, which is a feature of advanced markets. Therefore, the country provides insight into trends other markets will experience in the next 5 years. However, the outlook is not rosy. During 2005, Yankee Group estimates that 3G devices will account for 24% of total handset sales in Sweden.

Swedish mobile ARPU is declining at an alarming rate, with no end in sight. Providers must halt and reverse this trend, driven by the entry of a new 3G player. If they don’t, the future of at least one of Sweden’s four mobile network operators (MNOs) is at risk. 3G offers a glimpse of hope.

Firm Regulation Accelerates 3G Network Deployment
Swedish 3G services are relatively advanced. New entrant 3 launched in 2003; its competitors, TeliaSonera, Vodafone and Tele2 introduced 3G during 2004. Competition has since intensified significantly. 3G will become a critical battleground. By 2009, more than 60% of Swedish mobile phone users will be using 3G handsets.

Sweden’s communications regulator deserves credit for taking a strong position on 3G licensing and network deployment. In contrast to the experience in most other European markets, the regulator didn’t allocate 3G spectrum to the incumbent MNO, TeliaSonera, when it first issued licenses in December 2000. Vodafone, 3, Tele2 and Orange all received licenses. The licensing process was a so-called beauty contest, whereby the regulator allocated spectrum to companies that demonstrated the greatest overall commitment to 3G. TeliaSonera has since found a way back into the 3G market through its network-sharing agreement with Tele2. Nevertheless, the Swedish regulator sent a strong message to the Swedish incumbent—and to the rest of Europe. It made it clear that reputation wouldn’t guarantee companies a piece of the 3G action. Instead, Swedish MNOs had to demonstrate a strong commitment to the technology.

The Swedish regulator also deserves credit for allowing 3G network sharing, while simultaneously adhering to its original 3G coverage requirements. The operators were required to offer services to more than 7 million people by the end of 2004, increasing to 8 million by the end of 2005 and 8.5 million at the end of 2006.

The onerous requirements have created one notable casualty: In January 2003, Orange announced it was withdrawing from the market. It cited unreasonable pressure from the communications regulator to achieve 3G coverage requirements. Although the deployment targets are demanding, the MNOs are allowed to share networks. In addition to the TeliaSonera/Tele2 arrangement, its two rivals—Vodafone and 3—are also sharing a network.

The results of the regulators’ tough stance on 3G have been impressive. In February 2004, the Swedish National Post and Telecom Agency claimed 85% of the population had access to 3G services. It claimed Sweden was the leading European country for 3G network coverage.

Regulators can play an important role in ensuring that the largest possible number of people have access to 3G services. Left to commercial forces, the network deployment won’t be as rapid. Regulators in other markets should not bow to pressure from 3G licensees to ease network coverage requirements.

Impact of 3G on Competition Is Limited
Despite these admirable network achievements, 3G technology has yet to have a major impact on the Swedish wireless market. Since 3G was introduced, the downward trend in mobile ARPU has continued. Although 3G phones accounted for approximately one in 10 of new phones sold during the fourth quarter of 2004 and the first quarter of 2005, 3G data services have not halted the downward ARPU trend.

Although 3G technology has not led to a significant increase in data service usage, the entry of the new 3G operator led to increased network usage and lower prices. From January to March 2005, TeliaSonera estimated mobile service prices in Sweden declined by 10% to 15% compared with 2004. During the same time frame, it claimed mobile minutes of use (MOU) increased by approximately 9%. In the 12 months prior to March 31, 2005, Vodafone Sweden experienced a 4% decline in service revenue and cited fierce price competition as the main cause. This trend, fueled by the introduction of an aggressive 3G new entrant, is similar to that seen in other European markets. In markets such as the UK and Italy, a new entrant pursued an aggressive customer acquisition strategy: It reduced prices, which forces competitors to respond with lower rates. This increases overall MOU, but ARPU continues to fall because the reduction in prices outweighs the increase in MOU. Simultaneously, demand for high ARPU 3G data services remains weak, and these services produce little incremental ARPU.

In Sweden and elsewhere in Europe, MNOs must break this cycle, and the only way is to drive demand for premium mobile content services, while resisting further damaging price cuts. The Swedish MNOs are attempting to do this.

Initiatives to Boost 3G Adoption and Usage
New Services: Operators Betting on Mobile Music and TV Popularity
3G has enabled some new services. In addition to the most high-profile 3G applications, such as video telephony and video downloads, the Swedish MNOs have focused on mobile music and mobile TV.

For Vodafone, the summer of 2005 will be an important test period for its mobile music offering. Between June 1 and August 31, Vodafone’s 3G customers can pay a one-off fee of SEK 99 (€10.98) to receive unlimited access to its downloadable music collection. Vodafone has extended to the music range to 500,000 full-length tracks. 3 has also launched a mobile music jukebox service through its partnership with the web-based radio operator Nordic Web Radio (NWR). 3’s customers can choose from 500 music tracks.

The second most high-profile 3G services are live mobile TV broadcasts. In May 2005, TeliaSonera launched a live TV broadcast service in partnership with TV4 News and the TV entertainment channels Star! and The Voice TV. The service is free until the end of August.

The success of these and other high-end services is critical to the overall success of 3G in Sweden. 3G handset penetration remains low and the range of content is still weak, but the next 2 to 3 months in Sweden will be an important indicator of long-term demand for rich 3G services.

Early 3G phones had performance problems that providers are resolving. The 3G devices launched in Sweden in 2005 are more compelling for end users. For example, in January 2005, Vodafone launched the Sharp 902 phone, which was the first 3G phone with a 2 megapixel digital camera available in Europe. Some of Vodafone’s new 3G handsets can be fitted with a 1 GB memory card. This enables users to store hundreds of music tracks on the device, which will encourage customers to download more tracks and leverage the 3G network capability. Subsidization of 3G phone prices continues to be an important characteristic of the Swedish market. At launch, Vodafone offered the Sharp 902 for SEK 895 (€99.27) if the customer signed a 24-month contract. Without the contract, the phone costs SEK 6,795 (€753.71). As providers launch more exciting 3G phones during 2005, demand will improve and 3G will replace 2G/2.5G as the preferred choice for most customers. During 2005, Yankee Group estimates that 3G devices will account for 24% of total handset sales in Sweden.

Lower Prices and Innovative Tariffs
Pricing remains the MNOs’ best option for encouraging 3G adoption. The Swedish operators have been particularly progressive on pricing. Exhibit 2 describes a sample of their many innovative 3G pricing schemes. These include straightforward price cuts, most notably by Vodafone and TeliaSonera, in response to 3’s aggressive prices. For example, Vodafone’s summer music sale allows customers to download unlimited music tracks between June and August for a one-off fee.

Improved User Interfaces
To make it easier for customers to discover new 3G services, Vodafone and TeliaSonera improved their mobile portal user interfaces. TeliaSonera is introducing a unified mobile internet portal, under the brand name SurfPort. Following in the footsteps of Vodafone live!, OrangeWorld and other multinational portals, SurfPort is an attempt by TeliaSonera to leverage its scale across the Scandinavian region.

Recommendations for Swedish Mobile Operators
· Stop complaining about 3G license conditions and save your energy for growing the 3G market. MNOs should leverage their impressive 3G network coverage to promote the reliability of the service and encourage customer migration from 2G/2.5G.

· Compete on 3G content and innovation—not exclusively on price. Today’s fierce price-based competition is unsustainable. If maintained, at least one of the existing MNOs will not survive. 3G provides an opportunity to increase customer loyalty, but this is possible only if customers begin to distinguish between the MNOs based on their 3G service portfolio, rather than their voice tariffs.

· Don’t forget voice. Swedish MNOs should use their excellent 3G coverage and the capacity improvements that 3G enables to accelerate the clear trend toward fixed-to-mobile traffic displacement. For example, they should each offer at least one 3G tariff that is designed as an alternative to landline telephony services.