Mobile telephony has been touted as one of the revolutionary inventions, changing the way people interact in both professional and social situations. It's not hard to imagine that the 'anytime, anywhere' availability of voice communication and data access will be a disruptive technology.
Will this disruption hit the global community with equal force? To answer this, we need to look at how mobile telephony has developed around the world, and the forces that are driving it: economic, regulatory, and technological.
As an example, Western Europe has seen penetration rates soar as a result of a favourable economic climate, a competition-conscious regulatory environment and a unified technical standard in GSM. Recently, however, Western Europe has begun to lag behind the technological innovations in data services seen in countries like Japan and Korea. At the same time there are fears that European regulators may have set the industry up for a fall due to their approach to 3G spectrum allocation, leaving many companies debt-laden and with cumbersome obligations to roll-out expensive infrastructure over very short periods.
The US market has been pushed into a different position: Despite being the wealthiest country in the world, handset penetration is lower than in many other regions. Divergent technological standards, loose regulation and lacklustre marketing have played an important part in retarding growth.
By analysing the differences between markets, we can draw out some lessons from one region, in order to make prescriptions for another. Along the way we will identify potential problems and challenges that mobile operators are likely to face in the near future.
Economic wealth and competition: Not always enough
Fierce and innovative competition amongst operators, and the relative wealth of the citizens, mean that Western European markets commonly enjoy mobile penetration rates of sixty percent or more. Operators have shifted their focus away from capturing new users to retaining and increasing the profitability of the ones they already have.
Despite having an even higher-income population, the US market has failed to witness the same development in mobile telephony. With a penetration rate of only around forty percent, operators still have an opportunity to push customer acquisition further.
Innovative mass marketing techniques used by operators in other regions have yet to be fully exploited in the US. These techniques include attractive off-the-shelf packages, price-busting launch promotions, mass-market distribution channels (for example, in the UK you can buy mobile phones in supermarkets and petrol stations) and innovative calling plans and handset offers.
Innovation in marketing and pricing are likely to be crucial for the development of markets where a wider range of income profiles mean that not everyone appears to be a potential customer for a mobile phone.
In Africa, Latin America, India and China, penetration is growing rapidly within the 'addressable market'. For example, South Africa has a penetration rate of twenty seven percent, and rising. The problem is that the 'addressable market' is considered to be only approximately sixty percent of the total population, while the other forty percent is considered an uneconomic prospect. In many countries, such as Brazil, this figure is much higher. Given that the infrastructure is being built anyway, and often over very large geographic areas, the game in these countries is to find innovative ways to expand the number of potential subscribers.
Prepaid plans are an important tool for doing so, a strategy successfully employed in various European markets already. By next year, over seventy percent of net additions in China are predicted to be prepaid subscribers. India has already reached that figure. Prepaid plans offer operators the added advantage of eliminating the necessity for credit checking, which in some countries is complex and risky. Operators in Brazil can expect to write off anywhere up to ten percent of contract subscriber revenues as bad debt.
Reducing the cost of handsets, which represents the largest entry barrier for new subscribers, may also increase penetration. Local brand Chinese handsets are now sold for around $100 a unit, about fifteen percent of the price charged only three years ago. The development of ultra-cheap 'disposable' phone technology may speed up this price erosion even further. Operators could also accept payment for handsets in instalments, even on prepaid accounts. In Portugal, customers can choose to pay off their handsets over time with up to half of the credit on their recharge cards.
Fortunately for mobile operators, a number of developing markets do not have an adequate alternative to mobile telephony. Countries such as Brazil and China have seen very significant fixed-mobile substitution trends. In China, the number of new mobile subscribers exceeded the number of new fixed line subscribers for the first time last year. With capital expenditure per mobile net addition less than half that for a new fixed line subscriber this is a trend that is likely to continue.
Regulators: Heroes or bogeymen?
Regulation has been a key driver of the mobile industry's development and can arguably make or break a market. Many would agree that the US experience has been less than satisfactory. The lack of direction in setting technological standards, the failure to set stricter coverage requirements, and the 'called party pays' system are all factors that have contributed to a fragmented and under-developed market where forty percent of subscribers are still on analogue systems. In Brazil, the system of regional licenses has led to complexity for operators without providing clear benefits for consumers.
In general, the European experience has been better perceived. The GSM standard and initiatives such as number portability in the UK are recognised as drivers of growth. However, many believe that the 3G licence awards may have negatively affected this track record. Licence assignments came with such strict conditions and financial penalties that there is doubt as to whether operators will be able to fulfil their new obligations
While the regulators cannot be accused of forcing operators to bid enormous amounts in licence auctions, some have been at least partly responsible of 'upping the ante'. High minimum bid requirements in the French and Italian auctions are a case in point. Even in the 'beauty contest' awards, inviting applicants to effectively 'bid' on coverage commitments (e.g. Sweden) and the requirement to allow the entry of MVNOs (e.g. Ireland) add to the contentious nature of the licensing process.
Poland has recently completed its 3G auction process despite strong opposition from operators who believe that the country is not yet ready to move to this stage of development. GSM networks are still only partially completed and the base of customers who will be interested in 3G type services any time soon is minimal. This belief was confirmed by the auction's failure to attract a single green-field bidder.
The lessons to be learned by under-developed markets are clear ? there is a fine line to walk between regulation and market forces. Some countries may not be paying attention to this warning.
Technology: How do we move on from here?
The focal point of most operators' strategies in mature markets is how to move subscribers on to premium data services. So far the poor functionality and limited content of WAP services has frustrated rather than excited consumers. GPRS, the next stage of development, will give operators the opportunity to offer compelling content that meets user needs.
To create a successful mobile data strategy, operators and third parties should look closely at the experience of Japan. Undoubtedly, the key to the success of NTT DoCoMo's i-mode service has been the breadth of available content. The company has deliberately encouraged third party developers to produce a wide range of applications. Their task has been made simpler by i-mode's choice to support cHTML-based applications allowing easy translation from HTML Internet content. This in turn meant that by the end of 2000, i-mode had over 30,000 content sites, increasing the chances that each consumer will find his/her 'killer' application.
In October 2000, SK Telecom of Korea became one of the first companies to launch a commercial 2.5G (1xRTT) service. Despite the fact that the number of Korean mobile Internet subscribers has grown from zero to approximately thirty five percent of all mobile subscribers in a little over a year and a half, take-up rates for 1xRTT have been disappointing so far. A key reason for this appears to be the handsets, which offer little additional functionality compared to 2G versions, and have often been in short supply. This is a problem that could easily beset European operators if they are not careful. NTT DoCoMo largely avoided the issue by working closely with handset manufacturers to develop high levels of functionality and to ensure that handsets were available on time.
However, while NTT DoCoMo was helped by market dominance and could therefore demand many sacrifices of handset manufacturers, European operators are unlikely to have that luxury. (Even NTT DoCoMo is currently experiencing delays in its 3G handset deliveries).
European handset vendors such as Nokia and Ericsson are under immense pressure to deliver a satisfactory product in time for mass-market GPRS launches. There are a number of Japanese manufacturers who have built large amounts of experience in advanced handset design, and for whom this is a good opportunity to push into European markets where they have traditionally been very weak.
North American operators face all these issues, but their problems are further compounded by the lack of a clear technology migration path to data services. CDMA operators will be able to move fairly easily to W-CDMA 3G systems. Operators who currently run on TDMA face the costly and difficult process of moving sideways to a GSM system before they move forward to 3G.
TDMA operators have already largely missed out on opportunities offered by WAP, since their networks need expensive upgrades to support the service. Many Latin American and some South East Asian operators face such issues.
Priorities for the regions
The varying stages of market development around the world leave various instructive lessons for the future, several of which can be seized on by regions that follow a little behind the leaders.
Operators in the developing markets can take advantage of a number of marketing strategies in order to substantially increase their subscriber base. In the US and Latin America there are no short term solutions for the structural handicap created by the varied technology paths, but marketing and pricing can go a long way to mitigating the effects.
Europe and South East Asia will take the lead in creating a test-bed of mobile data users. In this, operators must focus not only on getting the technology right, but also on convincing the customer that it is worth their while paying for it.
It will be some time yet before a mobile phone subscriber can roam the world and find compatibility and comparable levels of service in different regions. It is likely to be even longer before one company can provide this. However, there is no shortage of operators willing to try, and so this is only the beginning of the mobile story.
It's Mobile World Week on TheFeature. From mobile developments in Brazil, Africa and Asia to global standardization issues, you'll find it this week on TheFeature.
Christopher Perry is a Senior Associate at Diamondcluster International in London. He has worked on a variety of issues within the wireless communications market; including the development of 3G services and infrastructure; and the implications for operators of limited spectrum capacity. Christopher holds an MBA from INSEAD in Fontainebleau, France and a BSc in Economics from the University of Bristol in the UK.