Looking Ahead to 2003
By Carlo Longino, Mon Dec 23 09:00:00 GMT 2002

2002 was bad, but 2003 may not be all doom-and-gloom.

The mobile industry has been taking it on the chin like a punch-drunk boxer for a couple of years now. Revenue shortfalls, heavy losses, and lay-offs are the status quo as carriers cut back on network spending and consumers tighten the purse strings. Once-venerable companies like Lucent and Ericsson are fighting for survival, hoping to stave off trouble just until spending picks back up - if it picks back up.

But several signs point that something of a recovery may be in the cards for 2003, the least of which shares in many industry stalwarts bouncing well off their lows - even recent laggard Ericsson has doubled from its 52-week low. Granted these prices don't even come close to their late-90s highs, but reflect a great deal of investor optimism that the coming year may be kinder, if only just a little.

2002 wasn't pretty. The market for network infrastructure shrank 20%, the handset market stayed as flat as a pancake, and executives had their managers searching for change under sofa cushions the world over and anything else they could think of to trim some fat. But 2003 may offer some solace: the total global mobile user base is projected to increase from 1.1 billion people to 1.5 billion; consumers are projected to buy between 440 million and 475 million handsets and devices, at least a 10% increase over 2002; and some forecasts even see the infrastructure market remaining flat - hey, at least it's not another big drop.

This isn't to say that everyone will again find success in the coming year, as the market is still a minefield to negotiate. But things just may not be as bad as they seem.

Services Are Key

The biggest driving force in 2003 will be the uptake of MMS and other advanced services. Intriguing, compelling, cool services will prompt users to buy the new advanced devices needed to access them, and will compel carriers to buy the infrastructure to support them. This scenario is already beginning to play out as MMS gains momentum, and services like Vodafone Live! bear it out.

The service is quickly winning users across Europe, and in the Netherlands, is outselling KPN's competing i-mode service 5 to 1. I-mode is offered on handsets that cost a third of the roughly 300-euro models Vodafone offers with the service, so the draw of the content can outweigh simple economics. And MMS is the backbone of Vodafone Live!, and is something KPN can't offer with i-mode. And that's something that's drawing users, especially young ones.

Apart from wanting to have the latest and greatest phone to be the envy of all their playground buddies (or boardroom buddies, as "mobile envy" tends to transcend age a bit!), they also want to be able to access these services, especially MMS, as it's an extension of their favorite communications MO, the venerable SMS. Carriers need to be quick to jump on this trend lest they lose out to their competitors and buy the equipment and software to support these services (good news for the gear makers!), and these advanced, often pricey handsets need to be available in the shops, ready to be snapped up (good news for the device makers!).

Vodafone and mmO2 in the UK are even going so far as to offer consumer financing to help ease the pain of shelling out for these handsets - let's just hope they handle it better than the infamous vendor financing that's hurt some 3G infrastructure makers.

Another key service, and one ripe for rapid growth, is mobile gaming. Trans-atlantic consultancy Strategy Analytics says downloadable games will be the fastest-growing consumer application of 2003, and will generate USD 2 billion by the end of the year. That may be just a bit optimistic, but it's on the right track. Another firm, Analysys, is also hot on games, saying they'll be worth EUR 3 billion by 2005. Carriers are already offering virtual arcades, like Verizon in the US with its BREW-enabled phones and Vodafone and O2 on Java devices in Europe. But of course, to play anything better than Snake (and I don't mean Snake II), you've got to have a new phone. And for the carriers to sell these services, they've got to have the network equipment in place.

A lot of eyes will be on Hutchison's 3G venture in the UK, cleverly named "3," which plans to launch sometime early in the year. If it can get lots of people making calls, sending pictures and watching Premier League football highlights on its GBP 400 devices, it will quickly push the market forward and spur other carriers to action. Of course, if it's plagued by network and device problems soon after its launch, all the other carriers will meet up in a bar somewhere to sit around and say "I told you so."

Hardware Looking Up

Network spending may receive another slight boost this year from European governments, although not in the form of that well-known French dish, government bailout a la France Telecom, but through various countries' deadlines for 3G coverage that were established as conditions for the spectrum licenses. In Germany, for instance, 25% of the population must be covered with 3G service by the end of the year, or operators risk losing their license. O2 estimates building that network will cost it somewhere between EUR 500 million and 700 million - add to that the costs of the country's other operators, and it's a fairly hefty chunk of change. Unless they all decide to share one network, of course.

There is always the possibility that regulators will relax these deadlines, although Swedish regulators (who have stipulated all the country's 9 million residents must be covered by year's end) have already rejected such pleas from carriers. In Germany, technical issues have been given as the only reason for such a delay; carriers' financial states haven't come up in the discussion. Which seems a little funny given that the German government still owns 43% of the beleaguered Deutsche Telekom, struggling under some EUR 60 billion in debt.

It's also important to consider that many of the carriers' announced network spending "cuts" aren't necessarily so. Again, looking at O2 in Germany, although it reduced network spending by 65% in the first 6 months of the year, nearly half those cuts were deferrals - meaning they're being kept warm on the back burner, ready to be served to preserve quality of service or add new services. So for mmO2 worldwide, capex for its fiscal year ending in March 2004 will actually rise by 40% to about EUR 2 billion. Many analysts expect Vodafone will hold its spending steady in 2003 - but at roughly EUR 8 billion (and some half of that on 3G), it's nothing to scoff at.

Things are looking rosy - well, rosier, anyway - in the handset market too. In addition to the above-mentioned services driving new handset sales, a natural replacement cycle is coming around in Europe and other parts of the world that experienced heavy uptake in the late 90s. Many users who still carry their first phone from 3 to 5 years ago will trade in those models soon, for any variety of reasons - WAP or GPRS access, fashion, size, or simply age. But even if they replace their phones with cheaper entry-level models, manufacturers are making huge margins thanks to increased manufacturing efficiency and drops in component pricing, even in spite of their low price point.

And in places where CDMA is dominant, things are looking up as well. In the US, CDMA carriers have completed nationwide upgrades to CDMA1x, which although compatible with the older CDMAOne standard, requires a new handset to access high-speed data services. Growth in India and China has also helped companies strong in CDMA, like Qualcomm and Lucent. China Unicom, which launched CDMA services alongside its GSM network earlier this year, gained between 5 and 6 million consumers. Out of 85 million or so CDMA handsets sold worldwide, that's quite a boost. And the heightened competition in the CDMA market in 2003 tells a similar story. Ericsson has said it will make a big push into the space in 2003, hoping to triple its market share in CDMA network equipment to 15%, and Nokia, who has always eschewed Qualcomm's chips in favor of its own designs, is considering licensing its CDMA chipset designs to other handset manufacturers in an effort to challenge Qualcomm's near-monopoly.

There's a Light...

So there's plenty of room for optimism in the industry, though we should be careful to get too excited. There are still plenty of large obstacles to overcome, 3G development and testing costs being the biggest. But as carriers enjoy success with advanced data services, the fruits of those revenues will trickle down to manufacturers.

The storm isn't over, so don't put the umbrella away just yet. But the sun is trying to peek through the clouds.

Carlo Longino is a freelance writer based in Austin, Texas. His previous experience includes work for The Wall Street Journal, Dow Jones Newswires, and Hoover's Online.