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

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

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

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

But did European operators spend too much to make that a practicalambition? Germany and the U.K. were the two countries in Europe wherecarriers spent most on 3G licenses. Operators paid out nearly $36billion in the U.K. -- not too shabby -- but Germany topped that withmore than $45 billion. Certainly the investment that France Telecommade on 3G in Germany is one of the underlying reasons for the row withMobilcom now.

Factor in the huge costs of installing the networks and marketing themto a public that didn't know it wanted '3G' in the first place, andpaying it all back becomes a hefty proposition for carriers. Back in2000, the Ovum Groupestimated that it would take operators three years to recoup their 3Ginvestments. That may prove to be a conservative estimate.

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

Even hugely successful wireless data services like Japan's I-modeservice, offered by NTTDoCoMo, have not driven ARPU up, merely kept it at a consistentlevel, according to Brazier. Clearly this is not good enough forEuropean operators who have to make money to make their payments.

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

Brazier, however, reckons that operators have already found their cashcow in short messaging service (SMS) two-way text communication. This isbad news for the operators, as they can hardly expect to start chargingsignificantly 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 whatemail is to the real Internet."

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

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

— Dan Jones, Senior Editor, Unstrung
http://www.unstrung.com