Major uncertainty in the telecom market

The causes of uncertainty over demand for mobile data and the Internet go to the core of the business itself:
• NTT DoCoMo delayed the launch of its I-Mode in Europe, expected at the end of 2001,because of the dire financial difficulties being faced by its joint venture partner KPN, as well as concerns over user demand
• Ericsson announced 12,000 jobs cut worldwide in Q1 2001, as concerns over demand for new handsets mounted. Overall it had lost £350 million in the first three months of 2001. But Ericsson’s mobile phone business, which lost £1.14 billion in 2000, crashed further into the red to the tune of more than £400 million in the first quarter of 2001
• in Asia, the mobile market that is the most bullish and has the highest growth in the world, doubts are openly being expressed about the demand for 3G. Hong Kong’s Business Daily noted that the slow adoption by local operators of mobile data services portends a lethargic launch of 3G wireless communications in Hong Kong’
• in the US, the view of 3G-market demand is even bleaker than in Europe. Many analysts are now saying that 3G will not happen there until 2007.

The effects of the attack on the World Trade Centre

The impact of the attack on the World Trade Centre and subsequent war is having a complex effect on telecommunications:
• the US mobile market, which has had low penetration rates in comparison with other leading economies, has been opened up to a new raft of consumers, who have realized the security value of owning a mobile phone
• fear of flying makes telecommunications (and especially videoconferencing) more attractive
• expenditure on armaments gives a boost to some industry sectors
• but other industries, such as air transport, travel, tourism etc are being badly hit. This reduces income from, for example, mobile roaming and business communications from these sectors.

Attitude of investors There has been a sea change in investor sentiment towards the broadband mobile sector in the US.
Mobile operators must factor in the financial sector’s deep misgivings and skepticism into their tariff plans, or risk loss of funding or being penalised by onerous repayment terms. When a success story is sufficiently publicised, however, investors’ sentiments can quickly reverse. Such was the case with DoCoMo’s, $8 billion share offering, which was greeted with enthusiasm in Japan and around the world. The message to operators is clear: demonstrate successful services, attract customers and investor funds will not be a problem.

Financial constraints will dominate for the next two years

Every 3G user will have to spend an average of $200 more per year than the average 2G user, just to service the debt and infrastructure costs incurred by world Telco’s. At the same time, commercial and regulatory pressures are forcing Telco’s to reduce their 2G prices – especially inter-network and roaming prices. Mid-2001 to mid-2003 will be a dangerous time and it is likely that many players will not survive. But for those that do, there are many ways in which to increase ARPU.

New revenue models and new sources of revenue

The old telecom business models, which relied on high-margin transport services and limited competition, have largely been replaced by uncertainty. Competition has driven down ARPU and, at the same time, high licence fees and network build-out costs have increased Telco spend. Whilst the search for a ‘killer’ application is a dangerous myth, NTT DoCoMo has established that customers are ready to pay for services that they perceive as valuable. For many customers – particularly high value business customers – ‘time is money’ and they are prepared to pay for services that help them make the best use of their time.
Fortunately, there are new revenue streams that operators can tap, including revenues from:
• third-party applications or products
• advertising sponsorship • information and entertainment
• financial transactions.
The impact of pricing on broadband services

In general, Telco’s have introduced xDSL services at a relatively high price point, and have reduced prices as take-up increased. This policy has been driven by the high cost of provisioning xDSL lines, and by the lack of effective competition in many markets. The question is whether this will also be the case with GPRS and 3G services? The answer is that the situation will vary from country to country, although Figure 1 shows generic factors that will influence the pricing policies adopted.

Figure 1 Factors Influencing GPRS and 3G Pricing Points
Source: Chorleywood Consulting

For high price	For low price
High level of investment will have to be recouped	Need to build a critical mass of users
Handsets and other customer equipment will be expensive	Need to deliver a large group of customers to third-party content providers
Network will only be able to support a limited number of customers in the first phase	High level of competition in most markets