Fear Grips European Operators

In what could turn out to be a sign of the times, a public row has flared up in recent weeks between Mobilcom, Germany's third largest mobile operator, and France Telecom, one of its shareholders.

France Telecom has told Mobilcom to slash its spending on third-generation (3G) infrastructure, and Mobilcom has, in effect, said: ”Heraus!” It claims that France Telecom has no right to dictate its spending and is threatening to prove this by publishing the text of contracts with the French operator. (No invasion is planned at this time.)

The row demonstrates just how nervous European operators have become over whether they will ever be able to make a profit on 3G networks, having already spent billions on the licenses. The prospect of a big shakeout is looming, according to some analysts.

"There is a lot of fear in the industry," says Steve Brazier, CEO of research firm Canalys. The hope is that new wireless data services will drive up average revenue per user (ARPU), a measure that is a key signifier for all carriers. ARPU from wireless data services has to rise faster than revenue from voice services falls. This is supposedly how carriers will recoup their 3G stakes.

But did European operators spend too much to make that a practical ambition? Germany and the U.K. were the two countries in Europe where carriers spent most on 3G licenses. Operators paid out nearly $36 billion in the U.K. -- not too shabby -- but Germany topped that with more than $45 billion. Certainly the investment that France Telecom made on 3G in Germany is one of the underlying reasons for the row with Mobilcom now.

Factor in the huge costs of installing the networks and marketing them to a public that didn't know it wanted '3G' in the first place, and paying it all back becomes a hefty proposition for carriers. Back in 2000, the Ovum Group estimated that it would take operators three years to recoup their 3G investments. That may prove to be a conservative estimate.

It is just not clear that mobile data services can help operators whip their ARPU into shape. "We're skeptical that consumers can drive massive growth," said Brazier. They want to see their bills go down, not up, he added.

Even hugely successful wireless data services like Japan's I-mode service, offered by NTT DoCoMo, have not driven ARPU up, merely kept it at a consistent level, according to Brazier. Clearly this is not good enough for European operators who have to make money to make their payments.

This is why you will find executives at conferences and press events talking about "killer apps" for 3G. They need to find the goose that will lay the golden ARPU.

Brazier, however, reckons that operators have already found their cash cow in short messaging service (SMS) two-way text communication. This is bad news for the operators, as they can hardly expect to start charging significantly more for SMS, either to consumers or enterprise customers. Email is still the most commonly used application on the Internet, according to Brazier, and "SMS is to the mobile Internet what email is to the real Internet."

Over the next couple of years, the problem of how to make up this shortfall is likely to lead to greater consolidation in the industry and some casualties along the way. Larger operators like Vodafone, Deutsche Telekom, and France Telecom are best placed to profit from the situation and acquire smaller carriers along with their 3G infrastructures.

"Generally, those operators who have large numbers of subscribers and high ARPUs will be the ones that succeed, but nothing is guaranteed," Brazier cautions. Some smaller carriers may be able to offer services faster and react better to market demand.

— Dan Jones, Senior Editor, Unstrung

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