Shosteck Group reports on how UMTS enables operators to increase data profitability by expanding traffic

January 19, 2004

4 Min Read

WHEATON, Md. -- UMTS increases data profitability. Key to profitability is understanding which applications and services provide the greatest margins. The most profitable services - those that occupy the sweet spot -- maximize AMPU (Average Margin Per User), not ARPU (Average Revenue per User).

This analysis is published in a new white paper by The Shosteck Group. UMTS - THE DATA STORY: PROFIT OPPORTUNITIES FOR OPERATORS is a follow-on to the firm's earlier white paper, UMTS: WHEN AND WHY IT WILL HAPPEN: TIMETABLES AND FORECASTS. In that earlier paper, the firm showed how UMTS will provide increased network capacity and as a consequence, lower operator costs, particularly in terms of voice.

UMTS - THE DATA STORY: PROFIT OPPORTUNITIES FOR OPERATORS quantifies the extent to which UMTS will lower operator costs, how far operators might reduce tariffs, and the extent to which such reductions will increase data traffic, revenues, and profits. It concludes that by expanding traffic exponentially, UMTS will reduce the full costs per byte by 3.5 to 5.2x below those of GSM-GPRS.

It then examines how UMTS operators can accelerate data traffic and generate additional revenue - and profit - from data services.

Central to this is the "sweet spot" analysis which characterizes which applications and services will prove most profitable.

"UMTS increases the sweet spot in two ways," stated Dr. Herschel Shosteck, President and Chairman of The Shosteck Group. "First, UMTS lowers the cost of delivery, enabling operators to charge less. Second, UMTS enables improved services - higher image resolution, faster delivery, larger and more functional applications, and better Quality of Service -- critical to the success of data offerings. If services under-perform (poor quality), users will not adopt them. Improved services at lower charges mean that more people will use them and do so more often," he continued.

In the center of the sweet spot are services which (1) have high value to end-users, (2) perform well, (3) are inexpensive to provide, and (4) can be delivered in large quantities. These will be the most profitable.

"Video-telephony is highly hyped. It is the flagship service of Hutchison 3G. It is also offered by NTT DoCoMo. But it's unlikely to prove profitable for operators over the near term," stated Jane Zweig, Chief Executive Officer of The Shosteck Group. "Three factors devalue it - technology immaturity, limited network coverage, and potentially high pricing. Given the above, video-telephony, at present, fails the sweet spot test."

However, Ms. Zweig noted that with time and continued network build-out, maturity issues will be resolved. UMTS will be fully mature by late 2006. By then, video-telephony may be built into a majority of phones, much like camera phones in Korea today.

Rather than video-telephony, The Shosteck Group points to multimedia services - in particular video-streaming - as a far more attractive proposition that cost less to deliver and provides the potential for greater margins.

"Over the near term, operators who focus on simpler and less expensive UMTS services are most likely to profit," commented Dr. Shosteck. "Nonetheless, with time, handsets will become more sophisticated. Networks will mature. These will enable operators to deliver more complex services than are feasible, at present, and to profit from them," he continued.

"The value of services will increase. This will enable operators to support specific market segments with highly focused offerings," Ms. Zweig pointed out.

These market segments will encompass:

  • Consumer multimedia services. These include NTT DoCoMo's i-mode and Vodafone's "Vodafone Live!" Such services are still being delivered on 2G or 2.5G networks. However, UMTS will enhance their quality and functionality, as well as reduce their cost of delivery.

  • High-value markets. These include enterprises and vertical markets, which have specific mobile requirements. In many cases, the applications these customers require aren't economically justifiable over 2.5G networks.

  • New devices. These will support applications outside the sweet spot of current networks. Examples are camera phones, which take very high-resolution pictures, and PDAs, which support interactive services originating from the Internet.

  • Small-to-Medium Businesses (SMBs). These will use off-the-shelf software to connect office applications to mobile devices.

  • Mobile laptop users. With UMTS providing a wide-area alternative to Wi-Fi and GSM -- with greater cost-effectiveness -- this market expands.

"These segments aren't new. But with increased network capacity, lower costs, and all-IP networks (with Release 5 and beyond), UMTS operators will be better positioned to serve them," Ms. Zweig stated. "Lower rates will attract customers beyond the classic 'road warrior.' This will increase revenue and profit for all UMTS operators."

Shosteck Group

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