3G Business Models: a Commercial Perspective

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3G: a commercial view

Neale Anderson Senior Analyst

Email: [email protected] Direct line: +44 (0)20 7551 9268 Date: 23rd October 2003 www.ovum.com

Agenda

• 3G: then and now • 3: brave new world • Existing operators’ dilemma • The business model for data services • Where next for 3G in Europe?

• 3G ‘means’ high speed mobile multimedia to the public Users will be able to surf the Internet and see pictures of the people ARPU make-up for W.Europe they are talking to, and 100 MM messaging eventually they will be 90 able to watch movies Portal • Originally positioned as a 80 and listen to music on Data access 70 generator of substantial their handsets Text 60 - BBC Voice incremental revenues 50 40 $ per month 30 • This is why government 20 10 wanted its share of the pie 0 2002 2003 2004 2005 2006 2007 2008 Source: Nokia adapted by Ovum 3G would have been better kept a supply-side secret 3

...to workhorse

• Vendors now positioning 3G as a driver of network cost- 3G is like a fuel-additive efficiencies -Nokia

We asked for • Capacity increases are now 3G’s most immediate raison more spectrum, they gave us 3G d’être - Anon. MNO

MNOs shouldn’t be • 3G now publicly disassociated from new ‘whiz-bang’ allowed to spend a single $ on 3G until we’ve got applications and device features the maximum out of SMS - Anon. mobile retailer

• Outside Japan/Korea users have little reason to be At first they tout anything other than sceptical about mobile data 50-112kbit/s [for GPRS], then I’ve heard it’s just 15-20 kbit/s This is the way it should have been all along - Anon. Corp. User 4

3: ‘first entrant in a new market’

• Relatively heedless of market sentiment • Aggressive marketing of mobile data/video • Launched despite network/handset shortcomings

• Consumer indifference • Discounted voice and handsets used as an incentive • A race to buy market share

As a greenfield player, 3 had no alternative 6

• Handsets improving 3.500 3.000 • Pricing is persuasive 3 UK subscribers • Leveraging efficiency of W-CDMA 2.500 3 Italy 2.000 subscribers

1.500 3 Austria • No signs of data use subscribers 1.000 3 Sweden • Price cuts erode margins subscribers 0.500 • ‘First-mover disadvantage’ - 2004 2005 2006 2007 2008

The window of opportunity for 3 is now 7

Many operators feel stranded with 3G strategies

CapacityCapacity ? MassMass marketmarket reliefrelief multimediamultimedia

• Better business case … but • Low credibility • Coverage requirements • Limited access to capital • No cheap, simple 3G phones • No compelling reason to buy

Need more degrees of freedom to go forward 8

Revenue trends in Western Europe

350 30%

300 25%

250 20%

200 Voice ARPU ($) $ 15% Data ARPU ($) 150 Data ARPU as % of revenues

10% 100

5% 50

0 0% 2002 2003 2004 2005 2006 2007

Data growth driven by messaging 10

Estimated wireless text messaging traffic in Western Europe

300

250 Wireless e-mail via packet data 200 Wireless e-mail via SMS Wireless instant messaging via 150 packet data Wireless instant messaging via SMS

100 Long text messages (MMS text

Billions of messages messages) 50 Basic text messages (SMS or equivalent)

2003 2004 2005 2006 2007 2008

Next-generation services will boost usage 11

The revenue picture

Estimated wireless text messaging revenue in Western Europe (assuming volume-based charging for IM and e-mail over 2.5G/3G)

16,000 Wireless e-mail via packet data

Wireless e-mail via SMS

12,000 Wireless instant messaging via packet data Wireless instant messaging via SMS

US$ millions 8,000 Long text messages (MMS text messages)

Basic text messages (SMS or 4,000 equivalent)

2003 2004 2005 2006 2007 2008

Volume-pricing for IM is very dangerous 12

Premium value Mass market Volumes

Music Sports download Niche Video telephony Multimedia Games Messaging

News

Texting

High cost

Where next for 3G in Europe?

• We are exciting capital growth • Telecoms is a utility business stocks • Do not expect more than single • There is a lot of new revenue digit growth potential • Predictable revenue, profit ... and • It’s just a question of getting it especially dividend • Services are the key • CapEx : Sales = ~12-15% • 3G will be needed to carry them • Scale becoming really important

The industry has now got to prove itself! 15

Expect further disruption

• The technology mix continues to proliferate

• Regulatory pressure increases • Mobile termination rates

• Lots of churn/swapping; stable market shares are illusory • User spend grows slowly through substitution - from fixed/other media

• Mobile operator strategy focuses on next ‘little things’, constant re-invention and opportunism

• Operators have more say • W-CDMA works, but slowly • Other technologies compete • Regulators are petitioned to relax both rollout and technology-specific requirements • Mobile becomes a two/three tier world • Operators serve niches • Some go for data, some don’t

Incumbents are unlikely to rush into W-CDMA

TypeThank conclusion you. statement here