Japan 3G Beats the Hype – Lessons for European Cellcos
The International Herald Tribune ran a couple of gloomy 3G-related articles last week (see “3G cost billions: Will it ever live up to its hype?” and “Operators in Asia learn from mistakes“). It’s the height of the summer vacation slow-news cycle, and maybe the IHT was just fishing for some headline attention, but we couldn’t let these egregiously faulty items pass without comment.
3G cost billions: Will it ever live up to its hype? European mobile phone companies spent $129 billion six years ago to buy licenses for third-generation (3G) networks, which were supposed to give people the freedom to virtually live from their cell phones, reading email, browsing the Internet, placing video calls, enjoying music and movies, buying products and services, making reservations, monitoring health — all from the beach, the bus, the dentist’s waiting room or wherever they were.But today, most people use their cell phones just as they did in 2000 — to make calls — and the modest gains 3G has made do not begin to justify the massive costs of the technology, which has strapped some mobile operators financially, bankrupted entrepreneurs, spurred multibillion-euro lawsuits against governments and phone companies, and sapped research spending.Over the long term, 3G runs the risk of becoming the Edsel of the mobile phone industry — an expensive, unwanted albatross rejected by consumers and bypassed by other, less costly technologies, some experts say.
These articles are worse than merely wrong: they help fuel the flawed thinking and misguided strategies to which 3G license holders are addicted (helping cause the continued malaise). So widespread user apathy and risible revenues must prove that 3G’s a loser, right? Wrong. And to see why, you need look no further than Japan. Why have 3G carriers elsewhere in the world not realised: you don’t have to be DoCoMo to succeed like DoCoMo does.
These articles are worse than merely wrong: they help fuel the flawed thinking and misguided strategies to which 3G license holders are addicted (helping cause the continued malaise). So widespread user apathy and risible revenues must prove that 3G’s a loser, right? Wrong. And to see why, you need look no further than Japan. Why have 3G carriers elsewhere in the world not realised: you don’t have to be DoCoMo to succeed like DoCoMo does. WWJ paid subscribers: Log in for our 10-point rebuttal to the first IHT article (‘3G Hype’). Note: it’s a little long, so best to print out and read poolside!
Editor’s note: The text below is a 10-point rebuttal of the most significant issues raised in the first of two recent IHT articles: “3G cost billions: Will it ever live up to its hype?”
“There are currently a lot of competing delivery methods for high-speed data services such as video,” said Pete Hulbert, a research engineer at Roke Manor Research, a division of Siemens in Romsey, England, that researches mobile technology for the British telecommunications regulator. “There is a lot of competition for delivering these services from digital mobile broadcasting and even WiMax. There isn’t one compelling argument to say it’s definitely going to be 3G.”
Carriers in Europe have already spent $130 bn on 3G licenses as well as further large sums on building network infrastructure and subsidising handsets; this alone is a solid reason to pursue 3G vigorously. But economic theory teaches never to throw good money after bad and if 3G is a white elephant, than — yes — carriers should scale back on 3G and start examining would-be alternatives such as WiFi and WiMax. The problem is: these networks are not true alternatives to 3G. The guy the IHT quotes here is a radio network research engineer (not a 3G business strategist by any stretch). Yes, some mobile data, such as video and even email and Web, can be delivered via WiFi and WiMax. But these do not additionally provide the fundamental service that all 3G networks provide: reliable, dependable, always-on voice calling.Japan proves that the mobile Internet works in part because the device in your pocket is a phone and you don’t leave home without it. The provision of value-added 3G data services (i-mode et al) that are useful, fun and/or entertaining on top of voice is the winning combination that people are willing to pay for.
Sure, you can make IP calls via WiFi or WiMax, but these networks are still new and there are fundamental structural reasons why they’ll never replace cellular. We know of no one who would discard their licensed-spectrum cell phone in favour of a WiFi IP phone — and use it in the hopes that they’ll conveniently be standing next to a hotspot next time they happen to need to make a call. Despite what any radio engineer tells you, forget about trying to build a successful mobile Internet platform on top of anything other than 3G.
Even Vodafone, the biggest network operator in Europe, which since 2000 has spent $34 billion buying 3G licenses and building 3G networks, made just 3.8 percent of sales in the quarter ended March 31 from 3G’s supposed “killer application” – high-speed wireless data.
Vodafone et al have merely built the necessary radio infrastructure; before they complain that 3G data revenues are still tiny, we would like to ask a couple of questions: Why haven’t they also built a workable mobile Internet platform — offering a growing mix of content and services provided by a growing mix of 3rd-party content, application and service providers? Why haven’t they fielded a full line-up of good/high-quality data-capable phones at a price the average pocketbook can handle? Why haven’t they force-seeded usage by making their data platforms standard on every phone, accessible via one-touch buttons? In fact, most recent Nokia, Samsung and Motorola terminals are more than capable of handling 3G data (mail, web, multimedia) — but where are the open carrier platforms to tie it all together?Euro carriers have made unwise choices: their data platforms are closed, revenue shares with 3rd-party content providers are laughable, and the content and marketing that does exist is narrowly skewed towards news, football and images — of interest to only a narrow slice of the overall phone-using population base.
DoCoMo started i-mode in 1999 with a 91/9 revenue share; content providers got (and mostly still get) 91 percent of the content fee. This creates a huge incentive for providers to create new and fresh content and for new providers to join. This in turn attracts a growing number of subscribers who wish to access the content because it is fresh, useful, fun, valuable and/or entertaining.
Why have European carriers not taken this simple, fundamental business decision? Revenue shares so far run anywhere from 40-60 percent at most. And this decision has nothing to do with culture, nothing to do with ‘that’s how those odd Japanese do it,’ and nothing to do with technology. Until they learn this obvious lesson from Japan, European carriers have no one to blame but themselves.
Across the continent, 3G take-up has been underwhelming. Of nearly 720 million cell phone connections in Eastern and Western Europe at the end of June, 38.6 million, or 5.4 percent, were 3G, according to Wireless Intelligence, a joint venture of the GSM Association and the market researcher Ovum in London. “Telecom companies misjudged the value of 3G licenses and paid way too much. Governments holding the auctions were only too happy to oblige, basically blackmailing the industry,” said Joachim Dreyer, the former chief executive of Debitel, a phone service reseller that unsuccessfully bid for a German 3G license in 2000. “There was a failure from the top on down.”
The Japanese regulators realized that charging telcos large sums to utilize public spectrum would only result in compounding the debt they would incur to additionally develop and deploy then-untried and immature 3G bases stations and network infrastructure. The ministry therefore set firm guidelines for the carriers to meet (deployment dates, area coverage, minimum services, etc.) and then freed them to use their capital to build out their networks instead. It’s disappointing that the same path was not followed in the EU or elsewhere, but there appears little the cellcos can do about it.
The most recent signs are not encouraging. The 3G technology has been so unpopular that operators in Finland – home of Nokia, a leader in 3G network equipment – persuaded lawmakers last year to let them subsidize the sales of 3G cell phones, a practice not allowed for ordinary GSM mobile phones. “Operators basically had to give away the handsets because nobody was buying them,” said John Strand, an industry consultant in Copenhagen.
Carriers in Japan recognized from the very beginning that they would have to drive new 3G devices into consumers’ hands. The strong subsidy on the front-end offered by all carriers here has paid off in long-term dividends. 3G handsets have attained excellent quality, prices have plummeted and consumers want to own them. The simple logic is that if people have a good handset, simply ready to work with 3G data services (mail, Web, multimedia) from the moment they walk out the shop, they’ll use it. In Japan, buy any 3G handset and you can send your first email within 30 seconds of receiving the phone. Further, if mobile users have a wide range of useful, fun and/or entertaining content and services easily available — with an easy payment system — they’ll buy! And they’ll also tell their friends. The best way to get people to use more voice minutes (which is still where all carriers make most revenue) is to get people using their phones more often.
Industry executives concede that the benefits of 3G had been overstated and that few correctly had anticipated how much the time would be needed to make the technology work. But most point out that sales of 3G data, at 3 percent to 7 percent of operator revenue, are growing fast, a sign the technology is taking off. “It was overhyped at the beginning, and we foundered for a few years, but we are now seeing light at the end of the tunnel,” said Vivek Badinrath, chief technology officer for Orange, the France Télécom wireless unit. “We spent a lot of money, but now the enablers are falling into place.”
Data revenue in Japan is over 20 percent of ARPU now, 4 years into the 3G era. You have to plant seeds if you want to harvest. France Telecom is perhaps one of the best ‘outside Japan’ operators when it came to observing the system in place here (they have R&D staff in Japan) and attempting to apply those lessons in their home market. Bouygues Telecom in France has also done well with their 2G launch of i-mode.
Time will tell. They also said the future was bright in 2000. Emboldened by a decade of fast growth, many industry executives then saw no end to the cell phones’ ascent. With stock market values swollen at the peak of the Internet bubble, Vodafone and its competitors splurged on 3G licenses, spurred on in part by the buzz of the meteoric rise of i-mode mobile phone services in Japan.
Yes, and in the 5 years since they spent all of that money to get the spectrum, what have any Euro carriers done to emulate the Japanese carriers’ excellent mobile Internet platforms?
Over the 18 months through September 2001, 20 auctions and so-called beauty contest selections in Europe, Asia, Australia and New Zealand raised $129 billion in licenses fees, according to 3G.co.uk, an industry organization that is based in Cardiff, Wales. Telecommunications executives told shareholders that the costs were worth it. In May 2000, Vodafone’s chief executive, Sir Chris Gent, predicted that 3G cell phones would let consumers do mobile banking, make electronic payments and even find the nearest café. “The terminal is really going to become an indispensable part of people’s lives, for more than just voice communications,” Gent said during an interview reprinted in Vodafone’s 2000 annual report. Six years later, through March 31, just 4.5 percent of Vodafone customers owned 3G-enabled handsets.
And the 3G terminals in Europe are still weak, compared to Japan. Where are the integrated FM radio players? Removable memory sticks? GPS? Analogue TV (which didn’t even start with 3G)? 3D motion sensors (for games)? And what about DoCoMo’s latest strategic move: into e-commerce by integrating an IC cash chip onto the phones. The chip technology was developed by Sony and Phillips. Why hasn’t Vodafone done a deal with Phillips to get an IC chip e-commerce system in place in Europe? There’s plenty of transportation tickets/passes used in Europe’s subways, trams and trains that could be a fertile ground for the service — just as there are in Japan.
Operators say the challenge now is developing 3G services that consumers are willing to buy. The current offerings – streaming video, video telephony, music downloads and mobile Internet – are expensive and impractical, said Jens Tiemann, an engineer who tests 3G handsets at the Fraunhofer Institute in Berlin. “I see no reason for consumers to embrace this yet,” he said.
Yet another lesson long proven in Japan that EU carriers have not learned: Provide the network, specify a uniform and easy-to-use handset fleet, open up the data platform and take care of the customer billing — then get out of the way! Empower the content and application providers to do what they do best. Let them drive the billable packet data usage.
Carriers other than Vodafone are pruning their 3G ambitions. Orange pulled out of Sweden, a country that gave away 3G licenses for free, after deciding it was not worth it to fulfil a requirement to build networks serving 78 percent of Swedes by 2005. “There wasn’t enough serious analysis of the price wars that emerged or that voice would still be the dominant application,” said Erik Bohlin, an associate professor of industrial management at Chalmers University in Gothenburg. “3G has still not found a reason to be.”
For European carriers, voice (and increasingly SMS) is a zero sum game, or at least, growth will only be proportional to the user base (no geometric growth as in Japan at the start of the mobile Internet). ARPU is weak and, in some cases, declining. That alone should be reason enough for carriers to push 3G mobile data. If large portions of the European user base are voice-and-SMS-only customers, accessing the network via prepaid cards and providing extremely low marginal revenues (think Italy), why not build 3G as a value added, useful package of services that people will actually want to use? This was precisely the situation in Japan at the start of i-mode (in the 2G era) when DoCoMo already had 10 percent of mobile ARPU coming from a proprietary messaging system similar to SMS. By launching i-mode — using Internet-standard email, with messages priced at about 1 JPY — they killed this cash cow — but have since never looked back.
By the end of this year, the number of people using 3G networks will nearly double to 111.1 million from 62.8 million at the end of March, according to the GSM Association. It says 105 operators in 40 countries are running or building 3G networks. “If I had the chance to do it over again, I would still get a 3G license,” said René Obermann, chief executive of T-Mobile International, based in Bonn, with 3G networks in six countries. Even the E-Plus chief executive, Thorsten Dirks, whose company has yet to turn an annual profit from 3G, is optimistic. From 1992 to 1997, Dirks said, GSM phones reached 10 percent of Germany’s population. From 1997 to 2002, penetration leapt to 80 percent. 3G’s development, he said, will be similar. “That is how this business works,” Dirks said.
Don’t you just love a happy ending! NTT DoCoMo had it’s Q1 for 2006 earnings release on 29 July, which contained several gems, however none more relevant than this: in the 90-day period ending 30 June, the company reported 90 percent of all new contracts were for 3G models. Edsel or Lexus? The answer seems quite clear from where we stand in Tokyo.
— The Editors