MONTE CARLO, Monaco-Seemingly lost in the breakneck expansion of the cellular industry is a largely forgotten fact-it was cellular operators wanting a common digital voice standard that drove the rapid adoption of GSM, not the technology developers.
This market pull appears to be missing from the widespread hype surrounding the need for operators to move rapidly to second- or third-generation network technology. The pressure for operators to evolve is being led by the regulators, with an eye to the proceeds from spectrum auctions, and infrastructure developers looking for network-expansion contracts.
However, the majority of existing operators are quietly expressing their `caution’ as to the business model that would support these investments.
Michael Stocks, chairman of the GSM Association, made the point that this new, high-bandwidth technology has a lot of potential, “but, it’s unclear what operators might do with it.” He believes that operators in most countries will want to take part in the UMTS bidding because of their past investment and the pressure to stay abreast. “These operators must now make a decision to invest a lot of money without being very clear what the real benefits are going to be.”
SMS usage provides guideline
To reassure operators that they will recoup their investments by obtaining revenues from new services, Nokia’s head of marketing for wireless data server systems, Pekka Pohjakallio, quoted the recent upsurge in SMS (short message services) traffic as a valid example. He maintains that, in Norway, over a period of 18 months, the usage of SMS has grown by 100 percent, while in Italy the growth has been higher-a 700-percent increase during the last six months.
“There is now very clear proof that SMS is a business on its own. We have calculated that if all European cellular operators were to use SMS, even at a lower rate than experienced in Finland (an average of 25 per month), the operator revenue would be US$10 billion annually for sending 140-byte messages.”
However, Pohjakallio admitted that SMS technology is ridiculous, “even though it hurts me to say it. The user interface is clumsy, it’s slow and extremely expensive for the user when measured on a dollar-per-byte basis.” Regardless of these drawbacks, Pohjakallio said the recent success of SMS has convinced him that the consumer, without any technology push from developers such as Nokia, will adopt and use data services.
This shift away from a total reliance on voice services requires operators to consider what role they will play in the mobile communications world of tomorrow. Many of the equipment developers are urging their operator customers to start planning what new data services they might want to provide in the future. One of Ericsson’s business development managers, Hakan Ihrfors, said that, with 2G or 3G technology, equipment developers need to present the options that are available to the operator. “The operators need to decide what role they wish to play. It’s a question of `who will I be and who will be my competitors?”‘
Service strategy
The importance of this question to the future strategy of operators is underlined by the `accepted’ view that the cellular network revenue will only comprise between 20 percent to 30 percent of the overall business model. The existing value chain in the cellular world will become increasingly complex as external service and content providers help to differentiate the operators’ overall service offerings, but only in return for a heavy reward.
The difficult decision for the operator is what services and content should be made available across its network and when. Unfortunately, there is no clear answer to this. The equipment suppliers admit they will need to help each individual operator make this move, making software platforms available that can host an array of service applications and content, together with deciding what to charge for these services and, more importantly, how and whom to bill.
Ken Blakeslee, Nortel Networks’ vice president of business development, candidly admitted that the company is trying to identify the learning ground where Nortel and operators can start from. “There will be a lot of experiments to start with. We have to get the cost down and the response fast. These services must be able to respond to subscribers’ impulsive requests. Instant gratification is part of the value.” Blakeslee said that some of these attempts will most likely prove cumbersome and too expensive for the user.
Blakeslee gave an illustration of this uncertain world by noting that, in the past, he predicted cellphone subscribers would only send text e-mails with no attachments. “I got it wrong. A lot of people are sending a JPEG file of a photo to their relatives as an attachment. This doesn’t need another application such as a PowerPoint attachment would-all you need is a browser. Little short messages turn into pictures; you can see the progression.” He points to Nokia and Ericsson, both which are pushing the idea of video images transmitted and received by the smartphone.
Billing concern
Regardless of the offering, operators will not launch a new service until it has the billing mechanism firmly in place. This brave new world of external service/content providers will call for a fundamental overhaul of these systems. Operators will need to track which service is being used by each user and then pass on a percentage to each service provider. This could be made more complex if the TV or Internet model is adopted, which seems highly likely, where users can receive a free service in return for listening to or viewing some advertising message.
Ericsson’s Ihrfors claims that sponsored advertising provides operators with the chance to gain revenues from other sources. “This is confusing operators at the moment. You have to open their mind that revenues can be gained from sources other than the end user. This is one of the changes to the model of the future.”
The concept of providing free, sponsored video clips to smartphone users is already under discussion. Would Budweiser or Guinness be willing to pay the operator a cent to have its brand displayed for one second on the subscriber smartphone and thereby provide a free, sponsored, video clip to the subscriber? The answer would appear to be yes-if 3G infrastructure can deliver the right cost base.
Nortel claims that, with UMTS compression, the transmission time for a five-second video clip would be under one second-is that 1 cent’s worth of traffic? Blakeslee said that this content formula is already established in the TV and Internet world. “These things have some inevitability associated with them, not something that hasn’t already been invented-it’s a progression of something that has already started.”
Change for change’s sake?
According to the GSM Association, cellphone operators outside of Europe are expressing their strong reluctance to being pushed into adopting UMTS. Many accept the need and benefit of moving to 2G, but want the industry to investigate how this GSM-based technology could be developed further without jumping to UMTS.
