3G MOBILE WIRELESS DATA

UK & Japan

Which Way Next?

Marketing Project Report

Submitted byThe London Project Team

September 2001

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Marketing Project, September 2001,MBA in Entrepreneurship Evening Programme

A Comparative Analysis of the Market for Mobile Data, particularly in relation to the introduction of 3G Technology in the UK and Japan.

London Team

Toyin Aluko, Steve Baker, Hubert DempseyJustin Sadler, Granville Smithies, Nitzan Yaniv

ABSTRACT

The UK and Japan wireless mobile communication networks are undergoing fundamental change. Technology improvements driven by projected capacity shortfalls are changing services from what is known as 2G through 2.5G to 3G in the UK, and from 2.5G equivalent to 3G in Japan. It is a time of flux, technological innovation, and the provision of new information services, which are to be accessed by new hardware devices.

The markets will require joint ventures and partnerships between network operators, network equipment manufacturers, device manufacturers, portals, content aggregators, content providers, and financiers to work effectively, and realignment of parties will take place.

Japanese network technology is ahead of the UK by about 2 years, and a number of UK network operators have equity stakes in Japanese network operators who hold 3G licences. Lessons learned in Japan on 2.5 G and 3G, will be applied in the UK. The provision of 3G mobile data services in Japan will probably be a success if, and only if, network download speeds are significantly enhanced from those currently existing on i-mode (2.5G) of 9kbs, and which are planned at the commencement of 3G introduction, to a minimum level of 64kbs, which itself will still be below the international standard for 3G of 2Mbs.

Success in the provision of mobile data services under 3G technology in the UK may never be achieved if the intervening and competing 2.5G technology improvements with GPRS (download speeds of up to 500kbs) become popular and are enhanced to the standard of 3G. This may not apply in the Isle of Man where BT/mmO2 are conducting a controlled pilot experiment by introducing 3G straight from 2G.

Massive capital investment is, and will continue to be, required by all network operators (£47 billion in the UK and £17 billion in Japan in aggregate) in licence fees, infrastructure costs, and in computer hardware and software if mobile data use is to be readily available and grow. This needs to be spent over 2-3 years and is hard to justify except as strategic business acts. These are not marketing decisions, but real-option entry prices in a deadly game of corporate survival.

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CONTENTS

ABSTRACT......................................................................................................2

PART I THE ESSENCE....................................................................................5

A Introduction............................................................................................5

B Summary...............................................................................................7

PART II TECHNICAL & PRODUCT BACKGROUND.....................................10

A. Technological Evolution.......................................................................10

B. User Expectations................................................................................14

C. 3G Mobile Applications and Services..................................................17

D. 3G Devices..........................................................................................32

PART III ANALYSIS OF UK MARKET...........................................................37

SECTION 1 UK MARKET DEMAND..............................................................37

A. Today...................................................................................................37

B. Demand Curves...................................................................................39

C. Substitute Goods.................................................................................42

D. Complementary Goods........................................................................44

E. Market Size..........................................................................................45

F. Latent Demand....................................................................................52

SECTION 2 UK MARKET STRUCTURE AND SHARE..................................55

A. Historical Development of the Market..................................................55

B. Current Position...................................................................................57

C. Current Environment............................................................................60

D. UK Market Segmentation.....................................................................80

E. The Way Ahead...................................................................................85

SECTION 3 – UK MARKETING MIX..............................................................87

A. PRODUCT.......................................................................................87

B. POSITIONING..................................................................................93

C. PROMOTION......................................................................................96

D. PLACEMENT/ DISTRIBUTION......................................................105

E. PRICING..............................................................................................108

SECTION 4 UK MARKET BUSINESS MODEL............................................115

PART IV ANALYSIS OF THE JAPANESE MARKET...................................118

SECTION 1 JAPANESE MARKET DEMAND..............................................118

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A. Today.................................................................................................118

B. Demand Curves.................................................................................120

C. Substitute Goods...............................................................................121

D. Complementary Goods......................................................................123

E. Market Size........................................................................................123

F. Latent Demand..................................................................................127

SECTION 2 JAPANESE MARKET STRUCTURE AND SHARE..................129

A. Historical Development of the Market................................................129

B. Current Position.................................................................................131

C. Current Environment..........................................................................132

D. Market Segmentation.........................................................................147

E. The Way Ahead.............................................................................150

SECTION 3 – JAPANESE MARKETING MIX..............................................153

A. PRODUCT.....................................................................................153

B. POSITIONING...................................................................................164

C. PROMOTION.....................................................................................164

D. PLACEMENT/DISTRIBUTION.......................................................166

E. PRICING............................................................................................167

SECTION 4 JAPANESE MARKET BUSINESS MODEL..............................170

PART V: COMPARISON OF THE UK & JAPANESE MARKETS................174

SECTION 1 COMPARISON: DEMAND.......................................................174

A. Today & Tomorrow............................................................................174

B. Demand.............................................................................................174

C. Substitute Goods...............................................................................175

D. Complementary Goods......................................................................176

E. Market Size....................................................................................176

F. Latent Demand..................................................................................177

SECTION 2 COMPARISON: MARKET STRUCTURE & SHARE................179

A. Historical Development of the Market................................................179

B. Current Position.................................................................................179

C. Environment......................................................................................181

D. Segmentation....................................................................................187

E. The Way Ahead.................................................................................187

PART V SECTION 3 MARKETING MIX COMPARISON – UK and JAPAN.189

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A. PRODUCT.....................................................................................189

B. POSITIONING................................................................................192

C. PROMOTION.....................................................................................193

D. PLACEMENT/ DISTRIBUTION......................................................193

E. PRICING........................................................................................194

SECTION 4 Market Business Models..........................................................196

PART VI CONCLUSIONS............................................................................198

A. Conclusions.......................................................................................198

B. Lessons Learned...............................................................................200

PART VII GLOSSARY OF TERMS..............................................................202

PART VIII BIBLIOGRAPHY and REFERENCES.........................................203

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PART I THE ESSENCE

A Comparative Analysis of the Market for Mobile Data, particularly in relation to the introduction of 3G Technology in the UK and Japan.

A Introduction

Background

The mobile data market is on the verge of explosive growth1. Most mobile traffic and services are currently voice centric, with mobile data accounting for just over 1% of revenue2. Most of this data revenue is currently generated by Short Messaging Services (SMS)3 and mobile internet access over WAP.

However, things are about to change. Mobile operators have invested and will continue to invest huge sums in 3G licenses and networks, and are under intense pressure to recoup their investments. Within the next two years, total voice revenue will begin to decline – something that has only been avoided until now because rapid growth in mobile penetration has more than compensated for declining average revenue per user (ARPU) from voice services. With market penetration reaching saturation point, the focus is now shifting from simply enlarging the subscriber base, to creating additional value for existing subscribers, particularly through advanced mobile data services and content. Over the next five years, a plethora of innovative data services and applications will appear, and analysts predict that by 2010, 66% of European Mobile Network Operators (MNOs) revenues will come from data related services4.

The shift towards non-voice services - facilitated to a large extent by third generation mobile networks, mainly UMTS5 – is essential for the industry to grow, but it also threatens to disrupt the balance of power in the mobile communications value chain.

Scope

We feel that the mobile data market is worthy of investigation, notwithstanding the scarcity of ‘real’ data for three reasons:

1 The general trends described in this section apply to global as well as local markets. While actual statistics may vary, the general trends are the same. 2 Durlacher UMTS report p. 203 Mainly text messaging and ringtone and icon downloads.4UMTS Forum - 3rd Generation Market Report No. 13 5 Today’s mobile data user has a poor experience. Devices are poorly designed and have a difficult user interface. Users still need to dial up for a connection, speeds are low and calls are easily dropped. 3G technology (UMTS) will drastically improve the value proposition. The always on, high data rate capabilities will provide the technical capability for the deployment of compelling non-voice services

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Firstly, this is a real, live, issue faced by analysts and telecoms executives around the world at this very moment.

Secondly, the next generation of mobile phone services could become an economic and socio-cultural force on the scale of television, the personal computer or the Internet.

Thirdly, the marketing challenges of tackling a new or emerging market driven by technological innovation are a real test of our ability to research a market and apply marketing concepts to a real situation.

The purpose of this paper is to provide a comprehensive comparative analysis of the market for mobile data services in the UK and Japan, focusing on the key issues facing MNOs in both countries as they prepare to roll out 3G services.

The market for mobile data includes both data traffic – i.e. revenues generated by MNOs from airtime provision – and data services and content – i.e. revenues generated from the provision of the data itself and services based around it. Data is everything other than voice.

As will become evident, the markets in the UK and Japan are very different. The whole mobile data communications market in Japan is more advanced than that of the UK. The popularity of the i-mode platform has secured Japan’s place as the largest mobile data market in the world today. Analysts estimate that Japan is about two years ahead of Europe. The Japanese market will, therefore, provide a useful comparison to that of UK and inform the forecasts for the future of the UK market.

By analysing and comparing the markets using appropriate techniques, we hope to answer the following questions:

What will be the determinants of success in a 3G mobile data market place?

How might a mobile communication market structure change with the introduction of 3G?

As marketers, could we justify the investment in 3G licences and infrastructure in each market?

These questions will be addressed in PART VI Conclusions.

Methodology

This report is based on secondary research.

The market for advanced mobile data application is in the early days of its creation, and the first 3G services are not due to go live in the UK until October 2001 in Japan and September 2002 for the UK. As such, most of the discussion is about the future, but referencing the past and present where information is available and relevant.

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Analysing such a young marketplace, has presented a number of challenges, the main one being the lack of information about past and present activities. The lack of established business models, confirmed services and applications, confirmed roll-out schedules, as well as secrecy over pricing, brand, promotion strategy, and distribution has meant that we have had to base our discussion on forecasts and estimates rather than actual historical data, although we have used historical data for mobile communications in total where we feel that this is helpful.

We have had to rely on commentary and forecasts made by analysts, experts and other industry observers. We have tried, as much as we could, to restrict ourselves to ‘independent’ opinion from analysts/ observers who don’t have a vested interest in painting a rosy picture. However, the extent to which that is possible is open to question. Where no or little information has been available, then we have used our own personal knowledge and experiences, where this has been relevant, as a substitute for published information . In some instances we have guessed at what will happen based on our analysis and feel for the situations, as one would do in real life.

Not all the short hand and jargon terms are defined when first used. Please see PART VII Glossary if in doubt as to their meaning.

Duplication

In an ideal world, sections of a report should be mutually exclusive and without duplication of content. However, we have found that in order for sections of the two country analyses to be more easily read, and to avoid continual cross referencing to other sections of the report, we have, where we thought it helpful, included as background certain elements that occur elsewhere. This might give the impression of duplication, but as we have written these additional elements afresh each time then strict duplication has been avoided and freshness has been maintained. Repetition in this manner is no bad thing, as it serves to re-enforce the most salient points of all, and assists with their subliminal commitment to memory.

B Summary

Project Management

We planned the project using operational management techniques, and felt under control, and that good progress was being made, at all times. It therefore came as shock to us to find with 2 weeks to go, that we would not according to the then current work content estimates be able to complete the report by the original closing date, and that a request for a 2 week extension was inevitable. We appreciate being granted this extension.

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We did, however, continue to work on the report with reduced resources, and managed to complete a working unbound final draft in electronic form by the evening of 20th September 2001. We then spent the next 3 working days rereading, checking, editing, and producing the final report.

The Information

Available information was very detailed in terms of the future services that might be provided for both the UK and Japan, and for current mobile communication usage. However, information regarding future forecast usage of all forms of mobile communication, and particularly data, was found to be poor. This most probably reflects the commercially sensitive nature of such forecast as prepared by the network operators themselves, who are the only persons who could reasonably be expected to produce meaningful ones. Third party business analyst forecasts are simply finger in the air, but we have included them where we thought that it would be helpful to the reader.

The Analysis

The following is a distilled essence of the key points discussed in the report. We have purposefully not used extracts from sections of the report, preferring to write them out afresh from our combined understandings:-

1. The published information available on certain parts of the Japanese analysis exceeded that available for the UK in parts, and vice versa;

2. The experience of the network operators in Japan in the provision of mobile data services as part of their historic 2.5G roll-out will be useful to the prospective 3G network operators in the UK;

3. Some UK 3G network operators (particularly Vodafone) have taken stakes in Japanese 3G network operators in order to gain first hand experience in the earlier 3G roll-out;

4. NTT DoCoMo are attempting to stall the 3G implementation in the UK by introducing their 2.5G i-mode product into the UK as a substitute product available now, before 3G roll-out takes place next year;

5. Mobile data devices developed for the Japanese 3G roll-out will determine what services are offered in the UK 3G roll-out;

6. There will be a shortage world-wide of 3G mobile data devices as there are only four current manufacturers, and one of those, Nokia, has recently sold its UK factories, preferring instead to concentrate on design and marketing, and network base station manufacture;

7. Forecast mobile data demand on 3G in both Japan and the UK are unreliable, but real demand needs to be massive over the long term in order for the network operators to recoup their investments and make a cumulative

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profit before tax. The UK operators are exposed to higher commercial risks than the Japanese ones;

8. The need for value chain analysis and value chain contribution will be important to making 3G roll-out a success in both countries;

9. If GPRS service enhancements in the UK (2.5G) and its implementation is very successful, then 3G, in the UK, which comes later, might be a commercial failure, as the relative attractiveness of 3G might then be limited;

10. The cost of UK 3G licences has been high (compared to nil in Japan) and this will impose capital raising demands on UK network operators, which may not be met, thus delaying 3G roll-out. Network sharing is a strong possibility.

11. The two market business models show very high vulnerability to user transfer subsidies, ARPU, and penetration rates.

Conclusions

The conclusions section itself is quite small and should be read in its entirety, but in essence:-

1. The biggest determinant of success will be the availability of money to produce the infrastructures, and in this regard Japan has the advantage;

2. The supply chain will change in the UK to encompass portal development through partnerships with data suppliers – as already is the case in Japan;

3. We feel that we would not be able to justify the 3G licence and infrastructure costs of a 3G network operator in the UK even with network sharing, but would be more inclined to justify it for Japan. Such action must be regarded as the price of a real option on corporate survival, which shareholders are obliged to pay.

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PART II TECHNICAL & PRODUCT BACKGROUND

A. Technological Evolution

Fixed Access Technology

1. ADSL

Asymmetric Digital Subscriber Line (ADSL) is a technology that transforms a twisted pair of copper wires between the local telephone exchange and a telephone socket into a high-speed digital line. It is termed ‘asymmetric’ because data moves in one direction faster than in the other direction e.g. data is transmitted faster from the exchange to the customer rather than from the customer to the exchange. The ADSL signal is carried by two modems – one on the customer premises and another at the local exchange. ADSL provides high speed digital access (between up to 500Kbps and 2Mbps downstream and 256Kpbs upstream).

2. Leased Lines

Leased Line refers to a special kind of high-speed phone line that is rented from a telecommunications company. The Leased Line is a fixed connection between two locations and is open 24 hours a day where data can be transmitted from one location to another without incurring call charges. By using the existing network cabling of a Local Area Network (LAN) all users in an office can connect to the Leased Line to send and receive data. Leased Lines are available in speeds from 64Kbps to 45Mbps.

Mobile Access Technology

There are other mobile access technologies that compliment or replace UMTS for particular business or consumer applications.

1. Infrared (irDA)

Most current mobile devices include irDA ports for data exchange. The data is transmitted via an infrared light and requires the ports to be in line. The two devices need to be in close proximity to each other without any interference between the irDA ports.

2. Bluetooth

Bluetooth utilizes a low power radio technology that allows electronic devices to exchange data and voice at a current maximum range of 10m. Some companies are now researching ways of increasing the range to 100m. The advantage of Bluetooth is that it is widely accepted as a standard for short-

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range, peer-to-peer, and home networking. Many electronic manufacturers presently adopt it in their products.

3. UWB

UWB (Ultra-Wide-Band) is a low-power technology that utilizes coded pulse modulation for data exchange. The advantage of UWB is that it does not need an assigned frequency or a power amplifier and it has broadcast capabilities. There may be problems of interference with other technologies on different frequency bands. UWB could be a competitor of Bluetooth in short-range, peer-to peer, and home networking because of its high bandwidth availability. 4. TETRA

Terrestrial Trunked Radio (TETRA) is offered nationwide by Dolphin Telecom for fleet management in the UK. Tetra could be utilized in specialized cases such as courier companies, police, fire brigade and taxi companies. Dolphin Telecom charges a flat monthly fee for the use of this service. It may not become mainstream technology with the rise in interest of GPRS and UMST services and the decrease of GSM pricing.

5. MESH NETWORKS

Mesh technology is another emerging technology. Mesh requires base stations to be established to transmit signals to various local receivers units. The technology includes receiver units into its networks and allows them to transmit signals also. Consumers create a low power network by receiving and transmitting signals in large population areas. The technology has the potential to create a low-cost wireless local loop (WLL) providing high bandwidth and eliminating the need of installing fibre networks in the home.

6. WLAN

WLAN (Wireless Local Area Network) allow communication over an air interface at a certain frequency band. It can be installed in locations where the base station has a network interface utilizing a broadband wire connection such as XDSL or leased lines.

There is presently no WLAN standard where there are several competing WLAN technologies such as IEEE 802.11B, 802.11A, Home RF and HiperLAN. Current WLAN can provide data connectivity of up to 11Mbps (IEEE 802.11B) but within three years they will provide speeds up to 54Mbps (IEEE 802.11A and HiperLAN). Beyond three years, transfer rates could reach 100Mbps. In comparison to 3G services and WAP, WLAN does not require any application development.

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WLAN base stations are currently being installed in densely populated areas. The market segmentation for development of WLAN technology will be private, public, and commercial shared areas:- Private shared areas where access points are provided in homes and offices for consumer and business use.- Public shared areas where access points are provided in public parks, bus stations and other public gathering points for consumer use.- Commercial shared areas where access points are provided in airports, cafes and hotels and customers are charged for using the service.

Payment can be made in two ways either by billing customers or by purchasing surf cards similar to mobile telephone cards.

Because of the high bandwidth that will become available, WLAN could become the business and consumers choice in the future providing serious competition for UMTS (and 3G).

The disadvantage of WLAN technology is that it causes interference with low-power Bluetooth technology because the systems operate at the same frequency band. The main problems are in private and commercial share environments where Bluetooth already exists. But the Wireless LAN Association and Bluetooth Forum are working at resolving these issues.

3G Standards

One of the biggest problems with today’s digital mobile systems, is the existence of competing, incompatible standards in different parts of the world. Hence the idea behind 3G is to unify these disparate standards that today's second generation (2G) wireless networks use. Instead of different network types being adopted in The Americas, Europe and Japan, the plan is for a single network standard to be agreed and implemented. This will deliver on the promise of seamless, anytime, anywhere communications. Now, through the work of the ITU (International Telecommunications Union) and its member organizations, that vision has been set to become a reality through the adoption of the IMT-2000 standard.

To date, the ITU has decided on a single flexible standard with a choice of multiple access methods (CDMA, TDMA and a hybrid TDMA/CDMA). CDMA is perceived to be the predominant air interface.

Two 3G standards, wideband CDMA (W-CDMA, supported by current GSM-centric countries, like the UK) and cdma2000 (supported by current CDMA-centric countries), have emerged as the most prominent contenders. Although both technologies are CDMA-based, major differences exist between them. W-CDMA systems work on a RF bandwidth of 5MHz, much wider than the cdmaOne carrier size of 1.25MHz.

Whichever the standard that is chosen by an operator, IMT-2000 aims to ensure that in the evolution / migration towards 3G, operators can continue to leverage on existing infrastructure. In addition, all 3G systems will support the following data bit rates:

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up to 144kbps in macro-cellular environments (e.g. in moving vehicle), up to 384kbps in micro-cellular environments (e.g. walking pedestrian), and up to 2Mbps in indoor/pico-cellular environments (e.g. in office

buildings).

IMT-2000 has also been designed from the outset to link both terrestrial and satellite components, so that subscribers roaming between terrestrial and satellite networks can expect smooth communication.

From 1G to 3G:

Delia MacMillan, Gartner Dataquest, quoted “technology succeeds when it makes an application faster, easier or cheaper”6.

First generation (1G) mobile communications systems started in the early to mid 1980’s, offering simple wireless voice services based on analogue technology. These 1G systems which provided low quality voice services, were very limited in capacity and did not extend across geographic areas.

Digital second generation (2G) systems were developed in Europe (mainly GSM, based on TDMA technology) and the US (mainly IS95, based on CDMA technology) to provide better voice quality, higher capacity, global roaming capability as well as lower power consumption. 2G systems also offer support for simple non-voice services like SMS. However, different 2G technologies do not inter-operate. There are also difficulties with roaming between GSM and IS95 countries. In addition, the low bit rate of 2G systems (9.6kbps for GSM) cannot meet subscriber demands for new and faster non-voice services on the move.  In the evolution from 2G to 3G systems, different migration paths have been identified for GSM and CDMA-centric systems. The objective is to enhance spectral efficiency and network capacity. Mobile operators around the world are starting to migrate their networks towards 2.5G (e.g. General Packet Radio Service - GPRS) or even 3G systems.

Unlike 2G systems, 2.5G and 3G systems will feature packet-switched technology. Packet-switching means that dedicated circuits do not need to be established between communicating devices, and network resources are used only when actual data is transmitted. This means "always-on" connectivity for subscribers. Billing for 2.5G and 3G services could, in the future, be packet-based, time-based or a mixture of the two.

GSM-centric operators, like the UK for example, have the option to implement General Packet Radio Service (GPRS) and/or Enhanced Data Rates for Global Evolution (EDGE) prior to 3G rollout. GPRS provides a relatively easy upgrade of existing 2G networks to support higher bit rates. Commonly considered a 2.5G technology, GPRS offers a theoretical maximum 171.2kbps bit rate, when all 8 time slots are utilised at once. However, it is more likely that subscribers would only be allocated 2-4 time slots,

6 * Great Expectations – services and technology.

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significantly lowering the actual bit rate. In addition, initial GPRS deployments would only provide point-to-point support, meaning that subscribers can only communicate with one party at any one time.

Beyond GPRS, operators have the option of implementing EDGE or migrating directly to W-CDMA. EDGE enhances GPRS and offers bit rates of up to 384kbps through the use of a more efficient modulation technique. Another advantage of EDGE over GPRS is support for point-to-multipoint communication. Operators without 3G licenses may be able to offer GPRS or EDGE instead. However, some operators may prefer a direct 3G implementation over additional infrastructure costs in association with EDGE. Also, a significant challenge facing GSM migration is handset compatibility. New handsets will be required for every migration step, GPRS, EDGE, as well as W-CDMA.

B. User Expectations

Users are becoming far more sophisticated in their requirements for the delivery of personalised services in order to suit their lifestyles and locality. Above all, these must be usable on whatever device they elect to choose.

There are two clear trends that can be recognised in today’s telecommunications market:Users have an increasing need to gain access to information in an efficient manner as possible.Users have an increasing need to be mobile.

To date, these two requirements have been met by two very different solutions, namely the Internet and mobile networks, respectively. The convergence of both solutions is the ultimate goal of 3G systems, and will enable both user requirements to be met through the same platform and through new generations of access devices.

User Perceptions:

From a user perspective, there are three key attributes that describe a

successful service.7 These are:

- Value means that the service satisfies a need or requirement. Value can have different interpretations, depending on the different user perspectives. For example, it can relate to saving money, time or how much “fun” a service is to use.

- Ease-of-use for both terminals and services demands a user-friendly, intuitive Man Machine Interface (MMI). Ease-of-use also refers to effective navigation tools that encourage service usage and the full exploitation of enhanced features by avoiding steep learning curves.

7 The UMTS Third Generation Market – Structuring the Service Revenues Opportunities – Report No.9

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- Cost benefits are closely related to perceived value. Cost-effectiveness is based upon what the user concludes when evaluating benefits against costs.

Users will consider the following aspects when evaluating the benefits of 3G relative to the current fixed line and 2G/2G+ (2.5G) services:

- Access to a wide variety of multimedia content (e.g. information, entertainment).

- Control of personalised services (“profiling”).

- The same “look and feel” irrespective of the user’s location, e.g. Virtual Home Environment (VHE).

It has been found through market demand that the following characteristics, depending on the specific market, will attract users to 3G services:

- One number/one address.- One bill.- Pre-pay option.- One-stop shopping.- Single point of customer care.- Single access point to content and services, enabled through the

concept of wireless portals.- Seamless access to services, irrespective of the serving network.- Transparency/visibility of service charges.

User needs:

The anticipated user needs relative to the six service categories are set out in Table II.1 below. These service categories have been identified to represent the majority of the demand for 3G services over the next five years.

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Table II.1: User profiles and needs by service Source: The UMTS Third Generation Market – Structuring the Service Revenues Opportunities –

Report No.9

Migration towards 3G from a User Perspective:

As already stated, we the users, are about to experience fundamental changes in the use of personal communications, data networks, broadcasting and entertainment services. Many of which constitute a revolutionary shift from current business models and the underlying value chain.

Early adopters will gain their first experience of the advantages of advanced data services and new tariff models using GPRS (2.5G)/EDGE devices that may incorporate short-range radio and/or WAP capabilities. This is already the situation in the UK with the advent of WAP and the initial rollout out of GPRS and multi-band handsets.

From a user perspective, multi-mode and multi-band devices will be the first step in the transition from 2G to 3G. Over time, network operators and service providers will promote some of their new service offerings only on their 3G networks, differentiating themselves from other operators and defining a natural migration path to 3G. Consistent tariffs in 2G/3G networks, and 3G coverage areas will be key factors to consider in the rollout of 3G services. From a user perspective, this migration phase means that initial service quality may not be globally consistent.

Figure II.1: More Advanced Services as the Market Evolves

Figure II.1 illustrates how services will evolve with the market and what users may expect in the near-term and long-term future. Near-term services are enablers for long-term services. The creation of long-term services will require

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a thorough understanding of the matured market, which will have been gained through experiences from near-term services.

An example is, “Mobile Business” encompasses the sum of all services (e.g. mobile commerce and Intranet access) that facilitate the combination of business and mobility. A number of issues will need to be resolved for the implementation of long-term services, including the creation of rich content and application software as well as legal aspects.

C. 3G Mobile Applications and Services

The terminology serves to confuse rather than clarify. A clear distinction between the two are given below8:

Applications enable the delivery of services over mobile networks and they are usually sourced from third-party suppliers but may also be created by mobile services providers. Some applications could be sold by services providers into the corporate market creating a separate revenue stream, or the application cost could be bundled within the service charges. Services are entities that mobile networks deliver from the user’s perspective. However, the main market demand is for services, not applications.

Definitions

Applications are service enablers—deployed by services providers, manufacturers or users.

Applications are invisible to the user. They do not appear on a user’s bill. A banking service, for example, would require a secure transaction application to be implemented by the services provider. A unified messaging service would require voice recognition and text-to-speech applications deployed on the network or in the terminal device. Individual applications will often be enablers for a wide range of services.

S ervices are the portfolio of choices offered by services providers to a user.

Services are entities that services providers may choose to charge for separately. They will be a prime differentiator between services providers in the 3G environment. Users are likely to select their preferred 3G services providers based on the options available in that product portfolio. Different users will choose different service options. They may elect to subscribe to a personalised mobile portal offering banking facilities. They may later decide to add unified messaging. Such service options will affect the user’s bill.

3G Applications:

In this section, applications are described in terms of their enabling functionality.

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Multimedia Applications:

These applications are enablers for broadband services with either real-time (e.g. video telephony) and/or non real-time (e.g. Internet access, file transfer) requirements. 3G systems take care of the resulting basic bandwidth demand in combination with global mobility and interactivity. This unique combination of capabilities enables new applications.

Video Telephony and Videoconferencing – These two are typical communication services which can be supported by 3G networks. To date, they have not become as successful as anticipated because of the lack of bandwidth , high cost, lack of equipment and services and the need for dedicated equipment rooms. Availability of high bandwidth is now emerging in both fixed and mobile telecommunications networks. Video telephony and videoconferencing are now possible on a broad scale and have acceptable quality. 3G systems support both the required bandwidth and provide mobility, which enables videoconferencing to take place independent of a fixed location.

Audio-Visual Non- Broadcasting Data Transport over 3G – The high bandwidth of 3G enables real-time and fast downloading of multimedia content from various service platforms and the Internet. Such services will compete with offline stored media such as CDs and Music Cassettes.

Mobile Commerce:

This can involve the purchasing of goods, services or content, or making financial transactions from a handset. The key to the m-commerce revolution is the Internet. This is because the Internet provides ubiquitous connectivity for virtually all non-voice communications. The flat-rate tariff structures and low entry cost characteristics of the Internet environment encourage global use.

Analysts forecast an exploding demand for the different m-commerce applications, for example, banking and ordering tickets for travel or entertainment. It is expected to become one of the most important applications for nearly all social classes. It is said that m-commerce will become a leading driver for the successful rollout of 3G. However, there are some concerns relating to m-commerce, such as security, trust and methods of payment. Until these are fully ironed-out, the conservative UK consumer market, will be a bit slow on the uptake.

Unified Multimedia Messaging:

The increasing volume of communications is resulting in information overload. Messaging appears to offer a solution but it needs to be intelligent and intuitive. Speech recognition, neural networks and even mood monitors are all

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going to come into play in the future of messaging technology. Unified Multimedia Messaging uses MIME and transmits word processing, faxes, voice, video, e-commerce, software applications and multimedia data files. MIME allows the transmission of compound documents (e.g. images and drawings) and will handle future requirements such as simultaneous voice and fax transmissions. It can therefore be considered as a converged application, which is ideally suited to the mobile network and can deliver significant end-user value. Having a single mailbox and one number for voice, fax and e-mail (all messages, types and formats) improves time efficiency for the end user.

The desire to increase productivity is driving unified messaging. Users can save time by only having to check one box with mobile and fixed access for all their messages. Unified messaging saves everyone else’s time by removing the need to chase people around leaving messages in random locations. It allows individuals to receive and act quickly upon urgent or important information they could not receive directly for some reason, allowing them to choose not to be interrupted. Adding “indexing” of messages (i.e. providing a summary including type, originator and priority) allows users to access mailbox information selectively, avoiding charges for accessing unimportant messages. Users can also respond to messages in the most appropriate manner, through voice, fax or e-mail. The interest in this market is already prevalent – mobile workers, work-at-home households and road warriors.

Voice over IP (VoIP):

This is a generic term used to describe the various techniques that are used to carry voice traffic over IP. 3G network operators have an interest in reducing costs in their networks (especially after the great costs incurred for the bidding of the UK licenses). It is unlikely that a network operator will want to operate both circuit-switched and packet-switched networks to cater for different data types for very long. The most likely scenario is that the network operator will want to migrate quickly to a single multi-service packet-switched network. VoIP will become an important enabler of convergence for services in fixed and mobile networks (2G+/3G).

Interactive Broadcasting:

Broadcasting and telecommunications are inherently different: broadcasting is mainly “one-to-many” whereas telecommunications is mainly “one-to-one”9. No single model is the best for every service; both models have advantages and disadvantages, and so both will continue to be needed for different types of services. However, these two formerly separate markets are converging as broadcasting embraces digital techniques and mobile gains access to broadband capacity, allowing for the interactive provision of multimedia services to a broad audience of mobile users. The need to provide Internet access has effectively driven this process.

9 Enabling UMTS Third Generation Services and Applications– Report No.11 –pg29

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This would open a wide variety of business opportunities in many areas including:

- Education: High School, University, Continuous Education/Life-long Learning

- Trade and Commerce: Enterprises, Finance, Stock Exchange transactions and sales, Employment Agencies

- Interactive games

- Location-based information services

- Healthcare services.

Broadcasters are contemplating the use of mobile communications systems such as 3G to enhance their multimedia content (e.g. feedback from audiences, including real-time polling – UK theatres?). Mobile operators are seeking to provide user access to such content and in so doing provide a whole new range of rich services (e.g. complementing broadcast services with other 3G entertainment and information services).

Positioning:

There are two basic mechanisms for determining a user’s location: satellite-based (e.g. GPS) or terrestrial infrastructure-based (e.g. 3G systems). Both can enable a large number of services, albeit with different properties in terms of positioning parameters such as availability, accuracy and reliability. GPS reception in particular may sometimes be partially interrupted for many reasons. For example, going through tunnels or between high-rise buildings.

Network-based solutions may deliver less precise accuracy compared with GPS, however the ability of network-based solutions to support existing handsets is an advantage in the rollout of location-based services.

Terrestrial and satellite-based location systems have their own place, and complement each other in certain cases: satellite-based location does not work well in deep canyons and indoors where cellular coverage may be denser. Terrestrial-based location may be less precise with sparse deployment of base stations in rural environments, where satellite visibility is at its best.

Positioning can be described in terms of different attributes, such as accuracy, reliability and time-to-fix. Each positioning method has different values associated with these attributes (e.g. different levels of accuracy). Applications using location information are likely to have differing requirements concerning these attribute values. Some methods will be better suited for certain classes of service than others.

- Satellite-based: Global Positioning System (GPS) – Any satellite-based location system requires a GPS receiver to be implemented at the mobile terminal, increasing the cost and complexity of the device.

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- Terrestrial Infrastructure-based – Location determination through terrestrial infrastructure comes with two main options, each with its advantages and disadvantages. The first is where the position is determined by the terminal itself, called the “terminal-centric” approach. The second is where the position of the mobile phone is established by the infrastructure, the “infrastructure-centric” approach.

Sub-options such as the “network-centric” approach might require additional information from the handset, the “terminal-assisted” case, while in the “terminal-centric” approach there might be some interest in getting some corrections from the network, the “network-assisted” case.

Cellular networks such as existing 2G and future 3G systems have a built-in capability to identify the cell where a specific mobile terminal is located with an appropriate level of accuracy. This capability is an inherent part of mobility management. Clearly, the positional accuracy increases with decreasing cell size. 3G systems will offer a coarse location capability, which will be sufficient to support many classes of location-based services such as zone-based billing.

3G Services:

Categories:There have been six service categories identified and they are believed to represent the majority of the demand for 3G services over the next five years. These service categories are defined from a user perspective and are intended to reflect the perception of the market.

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Figure II.2: 3G Service framework

Inevitably the boundaries between these service categories are somewhat “artificial”, and there is considerable overlap between the categories. Whether an individual service offering falls into one category or another could be the source of debate.

These definitions provide a framework for the analysis of market demand and discussion of industry trends. They also encapsulate the essential differences between the mobile and fixed environments—differences that create enormous opportunities. They incorporate the major learning that has already emerged from the introduction of data services in the 2G environment. However, we must remember that this framework cannot include radically new service categories that have yet to be invented or implemented. Such developments will inevitably occur and will only further expand the market opportunity for 3G services.

A summary of the six service-categories indicating the market segments analysed is presented below in Table II.2.

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Table II.2: Services that represent the majority of the near-term 3G demand

Overview:We must remember that the market for business services is significantly different from the market for consumer services. Factors that are driving these differences are numerous and include:

- Value drivers and propositions – Generally, consumers base value more on a qualitative decision process, whereas enterprises base value more on a quantitative decision process. Enterprises will justify their spending on mobile applications by trying to quantify a Return on Investment (ROI), whereas consumers are much more likely to qualify their decisions to use mobile applications to generate fun and convenience.

- Complexity – Consumers will use simple applications, whereas business applications will vary in their degree of complexity ranging from simple to complex applications.

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- Focus – Generic (or horizontal) applications will dominate the consumer market. Applications in the business market will be a mixture between generic and vertical applications. Generic applications are “out-of-the-box” and targeted at a broad base of users, for example, e-mail and instant messaging, whereas specialised applications are developed for particular markets against very specific requirements such as mobile fleet management systems.

- Role of Mobile Access – Multi-channel access will be important in all segments of the market, but the relative importance of mobile access will be higher in the consumer market than in the business market. For example, it is highly unlikely that a large share of business transactions will be carried out on a mobile device alone. In the consumer market, it can be expected that the share of exclusively mobile transactions will be much higher.

- Device Usage – In the business segment of the market, users are more likely to use high-end and/or specialised devices such as PDAs or laptops equipped with a mobile modem. Most users in the consumer segment will continue to use voice-centric devices for another five years at least, whereby the vast majority will be microbrowser-enabled mobile phones sometimes with niche mobile data devices such as mobile gaming consoles and MP3 music players.

- Geographic Usage – Business applications will need to cater for increased business user mobility. Additionally, enterprise applications need to follow the geographical scope of the business activities they support.

Overall, the space for 3G applications will not differ substantially from that already established for 2.5G applications. In 3G, as in 2.5G, business services and applications will remain distinct from consumer applications. Basic application categories are not likely to change. The progression from 2G towards 2.5G and 3G will manifest itself in gradually richer information content, greater interactivity, and in some new or greatly enhanced application features such as location dependence, personalisation, and immediacy. These will enhance the usability of many applications and services.

The 3G application and service space is mapped in Figure II.3 below.

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Figure II.3: Mobile Services Overview

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Consumer Services:

- Mobile Information – Digital distribution of content and information is growing rapidly. A great variety of information with a varying attached value can be delivered via a mobile device to the end-user. Examples of such services include sports news, weather information, share prices, and traffic updates. This content can be accompanied by various forms of sponsored advertisements. Currently mobile information is enabled mostly through SMS because of the current poor connection times and because of the restricted user interface offered by today’s WAP terminals running on the GSM network. Most types of mobile-eligible information can be easily transferred in alphanumeric format, a format that is fairly easily handled by today’s 2G mobile phones. Examples of ‘push’ information services include horoscopes, weather information, stock quotes and news feeds. In contrast to push services, information pull is more difficult to achieve with SMS due to the constrained user interface. The “clickability” of links on WAP devices constitutes a significant usability improvement, enhancing interactivity between the user and the content management system. However, WAP servers have not been very stable to date, and they are often difficult and slow to access. This has resulted in increased dissatisfaction with the technology among end-users. However, advances in technology will give users more control over the process of information retrieval, prompting a shift from pure SMS-based intrusive ‘push’ services and applications towards more dynamic, continuously updated services and applications.

- Mobile Communication – While SMS will continue to be the largest single source of revenues by far until 2004*, advertising is expected to start generating some revenues too, since availability of GPRS and location-based services will enable the growth of the market.

- Mobile messaging: Mobile messaging applications, including all person-to-person communication excluding voice telephony are generally regarded as the “killer applications” in the upcoming 3G environment. This is supported by the huge success of SMS in the GSM world and by the success of internet messaging services such as e-mail and instant messaging. Currently, mobile messaging in Europe is dominated by SMS, the most popular data communication service available for mobile devices. Through the implementation of GPRS and finally with 3G, a wider range of messaging applications will become available.

- Multimedia Messaging: Mobile messaging currently exists in fairly basic forms and is still waiting for multimedia capabilities. The first step towards multimedia messaging is the picture messaging capability as supported in the newer Nokia and Philips phones. The phone can store messages that include small GIF-images that can be ordered using SMS, WAP or the internet. Once the images are stored on the phone they can be sent with inserted text to other

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phones that support this messaging format. The problem with the current terminals is that the images cannot be produced on the terminal and therefore the options for the user are limited at a given point of time.

- E-mail Applications: The second major focus area for messaging applications is access to internet e-mail. The majority of email applications available today are based on SMS and WAP. With the deployment of GPRS (even though it is in its infancy), instant messaging will be possible. Users will also be able to send moderate sized attachments with their e-mail through mobile devices. With the introduction of GPRS, it is expected that mobile e-mail applications will fully emerge, with SMS serving more the lower segments of the market.

Mobile Entertainment – Entertainment services, i.e. mobile games, gambling, icons, ringing tones, audio and video, will be key to unlocking the revenue opportunity in the B2C market. To date, revenues from mobile entertainment services are very limited indeed. The transition towards an always on environment and higher speeds, in combination with the emergence of gaming-centric devices, will result in features that will particularly appeal to young people in the market.

Mobile Transactions – Mobile transactions will become a lucrative market. However, revenues will be derived from sources other than the end-user. Very limited opportunities exist for generating direct revenues. In the short to-medium term some users will be prepared to pay for some services and applications that focus on enabling transactions, but in the long term it can be expected that these direct revenue opportunities will sizzle out. The bulk of transaction-related revenues will therefore continue to be indirect.

- M-Tailing: M-Tailing refers to mobile transactions facilitated by or concluded with a mobile device. Mobile devices provide consumers with an additional channel for electronic ordering of products. The killer applications in the mobile retail domain will be those that resonate most with the key advantages of the mobile channel: location-specificity, personalisation, and immediacy. Based on these factors, the most likely killer applications in the m-(re)tailing domain will include m-auctions, m-promotions, and other retail applications that are based on time-critical information and benefit from immediate response from the user.

- Mobile Finance: Traditional and online banks view mobile data as an additional distribution channel for their traditional and online banking services. Many financial institutions are concerned that mobile operators will move into their territory by providing financial services to their end-users. Many financial institutions have therefore invested a considerable amount of money to prepare for the eventual growth of the mobile financial services market.

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- Mobile Payment: A mobile payment system is defined as a method of payment that requires or enables the use of a mobile device to conduct financial transactions. There are two main mobile payment solutions available for customers, 3rd party virtual clearing solutions and smartcard solutions. Third party virtual clearing is a flexible mobile payment solution that does not require any major changes such as middleware or device implementation when it is installed in the existing business infrastructure of the implementing company. This is because third parties are used to verify and carry out the transaction. Smartcard mobile payment solutions differ from 3rd party virtual clearing in that they require changes in the business infrastructure of the implementing company. For security purposes, smartcard solutions integrate a dual slot reader for external smartcards in mobile phones.

Mobile payments enable immediate payment anytime and at any location. They provide direct access to personal accounts and profiles. Mobile payments are convenient in that they provide cashless capabilities and add functions similar to credit cards. Mobile brokerage and banking have already experienced reasonable success and will become an increasingly user-friendly option for consumers once current networks are fully upgraded to GPRS.

The long-term success of mobile payments depends on a variety of factors. Security concerns from consumers will need to be allayed by implementing adequate measures and building confidence and trust in mobile payment providers. International billing capabilities and acceptance issues will need to be resolved by network operators and credit institutions. User-friendly navigation and attractive pricing schemes will be crucial to ensurewidespread consumer adoption.

Business Services:

Applications have always existed to assist businesses to achieve competitive advantages in terms of saving costs or realizing revenue opportunities. Mobile technologies have the potential to enhance an organisation’s processes and interfaces by making them available anywhere at any time. In a very fragmented business application market, there are three major segments positioned to gain significantly from mobile technology10. These are:

Mobile Customer Relationship Management (M-CRM) – Customer relationship management (CRM) solutions are designed to enhance an organisation’s customer-facing functions such as sales, service and marketing. They have satisfaction and profitability. Mobile CRM enables current systems to extend existing services and transactions through mobile devices.

10 Durlacher pg 107

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- Marketing function: The marketing function of CRM involves aggregating all interactions conducted by the end-customer from different channels into an integrated data repository used

to generate promotional and marketing campaigns based on end-customers’ preferences.

- Sale function: The sales function of CRM systems focuses on sales force automation (SFA) to co-ordinate sales efforts and provide easy to use tools for representatives in the field. A wide range of solutions has been developed for mobile access to enterprise systems as mobility plays an increasing role in streamlining business processes and increasing customer loyalty.

- Service function: Service features available on mobile devices include accessing information regarding product problems, job details, and technical specifications. Significant value can be added to traditional service applications by mobilising these features. Customers, for instance, could access delivery information for products on their mobile devices – a great help with the current delivery “situation” in the UK.

Mobile Supply Chain Management (M-SCM) – The emergence of the Internet and the development of e-marketplaces and e-business hubs has had a dramatic influence on the supply-side function of enterprises across all industries, in which the mobile channel will be of assistance. Markets have enabled companies to purchase, fulfil and ship orders more efficiently. Identified the following M-SCM connectivity and visibility-related applications that are most likely to benefit from mobile technology. These are:

- Mobile data collection applications: Primary data collection is an important enterprise function that spans across the entire organisation. The quality and accuracy of primary information affects planning and forecast applications and inventory applications, and enables transactions to be conducted in a faster, more controlled way. There are several areas where mobile technologies could contribute to better results:

- Barcode Scanning- RFID (Radio Frequency ID)- Location-Stamping- M2M (machine to machine)

- Mobile alert generation applications: Information collected from primary data sources has to be communicated to decision-makers and fed into respective enterprise systems. Alert generation applications can deliver timely and actionable alerts to corporate mobile employees.

The key properties of such systems should include:

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- connectivity to enterprise systems - ability to create flexible business

rules that trigger messaging events - ability to deliver information

intelligently through a variety of channels

- interactivity features that allow the user to react to specific alerts in a predefined way

- Mobile-enabled integrated SCM applications: To reap the maximum benefits of SCM technology, enterprises have to enable their suppliers to access the same SCM technology. A

single point of connection to the network can be established through the internet, a VPN, a WAN or mobile devices using WAP and SMS alerts.

- Mobile Workforce Applications - Mobile workforce applications facilitate communication of business processes to mobile employees through services such as planning, connectivity and collaboration. The majority of mobile office applications will not require intensive bandwidth speeds. However, GPRS will provide adequate bandwidth for these applications. The potential constraints will lie in poor device functionality and lack of integration with the back office systems.

Key Improvements:

- Location-specific information – One of the distinguishing features of mobile devices is their ability to provide location-specific information to users. More exact positioning data will enable businesses to push locally tailored information to users, thereby increasing the potential value to the user. New positioning technologies are being developed to further enhance the provision of location-specific data in 2.5G and 3G networks. Such data will open the door for enhancing existing services (e.g. location-specific advertising and price-comparison) as well as entirely new ones (e.g. personal navigation).

- Personalisation – The online industry has demonstrated the importance of creating personalised end-user interfaces that are tailored according to the individual’s personal needs and preferences. The success of many online portals has been partly based on their ability to personalise the user’s service experience. 3G will allow new ways of personalizing the mobile service according to individual user needs. In particular, it can be expected to see the emergence of intelligent personalisation solutions that will be able to record and learn from the user’s behaviour patterns.

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- Immediacy – Immediate access to information is also a key distinguishing factor of mobile applications and services because users generally always carry their terminals with them. The immediacy of information access will be enhanced in 2.5G and 3G networks by the ‘always-on’ functionality. 2G systems already incorporated a ‘push’ feature in the form of SMS messages. This feature will become even more relevant in the 2.5G and 3G systems as the technology allows continuous streaming of new information without becoming too intrusive. The ‘push’ and ‘always-on’ features support the provision of time-critical information for conducting high value transactions, such as participating in (mobile) auctions and executing mobile stock-trading deals. Providing localised and relevant information in a timely manner will be increasingly critical to attracting and retaining mobile data users in future.

- Service Availability – Availability of services, servers and sites with WAP has not been up to a level that expected by both, operators and end-customers. Disappointment over long connection times as well as the lack of service quality have led to a negative image of the mobile internet.

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D. 3G Devices

It is difficult to determine precisely how 3G devices will evolve. For certain, their evolutionary path will be the key to when certain 3G services will be available for introduction. However, there are many obstacles that appear to be lined up for 3G-device development. Device manufacturers want narrow product lines to maintain cost levels as they are squeezed by suppliers and customers. 3G services providers want special consideration with demands for customised or subsidised devices in order to differentiate from competitors. The meeting point will probably be in the choices of keypads, screens, video cameras, colour and device accessories that individual 3G services providers and/or subscribers are willing to pay for. For as long as phones and computing devices have been made, there has been a natural conflict between users and services providers (who want many more choices and features), and manufacturers (who typically seek a narrow product line that allows reasonable profit margins based on lower design and production costs).

Something that will come with the availability of 3G devices is risk sharing between manufacturers and services providers. Revenue sharing will be based on the success of the total service, including the device. This is happening partially because 3G devices will be critical for product introduction. Also, they will be extremely difficult to design and build, and complex dual-mode handsets are likely to be the first device deployed. In talking with market leaders, it is clear that functions that device makers will automatically have to include in 3G devices are: voice communications; smaller and clearer colour screens; lighter weights; longer battery life; more computing power; and a variety of input choices such as keypads, pens, touch pads, and speech recognition.

All the above will be found in a mobile device capable of being held in your hands (Table II.3).

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Table II.3: 3G Device categories and characteristics.

3G Device Types:

The UMTS Forum has chosen five 3G device types that will fill the study period of 2000 to 2010 with functionality that will enable the six 3G services. These 3G devices will overlap at times, succeed each other in some instances, and decline and evolve in most cases. Each will have its own product lifecycle in accordance with a standard product-lifecycle demand curve such as that illustrated in Figure II.4.

Figure II.4: Typical product lifecycle demand curve for a 3G device.

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There will be a consolidation in devices as manufacturers seek to meet customer needs while controlling costs. Smartphones and Personal Digital Assistants (PDAs) will become talkative PDAs by 2002. 3G Laptops and 3G Web Tablets, while keeping their separate identities, will both be handheld Internet devices, hitting the high and low end of 3G users. Like all of the 3G devices noted in Figure II.3, the 3G Web Tablet will have a product lifecycle of its own through 2010. As innovative technology and customer demand cause the accumulation of all new device capabilities, the 3G Multimedia Device or 3G Personal Companion will become the sought after all-in-one mobile Internet tool for the middle of the decade. Others have predicted that by 2010, there will be a single wireless gadget that will meet all needs.

Smartphones/WAP Phones – These early devices provide content and Web browsing. They use standard and new operating systems and protocols (like Pocket PC and WAP), and will soon synchronise with other devices (like desktops and mobile phones). As WAP becomes popular and takes advantage of the high data rates and always on capability that GPRS will provide, these devices will naturally evolve into some of the first 3G devices at the even higher 3G data rates. The Smartphone will evolve to a Talkative PDA by 2002.

Personal Digital Assistant (Talkative PDA) – Although there is still room for coverage and quality improvements, today you can purchase a PDA that also has mobile voice communications (e.g., radio modems for GSM, OmniSky). Besides their calendars, address books and other organising features, PDAs are thin and lightweight, have colour screens, and are quickly gaining computer strength due to low power chip designs, screen miniaturisation and evolving operating systems (such as Palm Operating System (OS) and EPOC). As they grow in computing capability while maintaining their hand-held form factor, they will continue to distinguish themselves from 3G laptops as less expensive, less powerful solutions. Examples are numerous with Palm, Casio, HP and others leading the pack.

3G Laptop (Handheld Internet) – Laptops today have modems and Personal Computer Memory Card International Association (PCMCIA) cards that enable wireless communications. They continue to get smaller, lighter and with more powerful computing. Operating systems include Windows, Windows CE and Linux. With the bandwidth 3G will offer, these powerful, portable computers will thrive with the custom graphics, two-way video, and large file transfers of tomorrow.

3G Web Tablet (Handheld Internet) – Emerging in 2000 with Qubit and others supplying “Wireless Web Tablets,” these devices offer portable Internet access by plugging into power and access at home, and gaining limited mobility via a short wireless connection. As low cost, lightweight, thin Internet appliances the size of magazines, these devices offer e-mail, robust Internet access and Web browsing. Eventually (estimated 2004), they will gain both full mobile access and synchronisation with other devices via more powerful 3G spectrum.

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3G Multimedia Device (Personal Companion) – Today’s slow connections based on low bandwidth cause “jerky” video images. Even compression techniques cannot overcome the need for speed and capacity. 3G will answer this problem in the mobile world. There are many visions of the ultimate 3G device with some saying it will evolve from phones, others from computers. Since there will be different 3G services addressing specific user needs, all of the above devices will develop from both worlds. However, there will be a need for an all-powerful device that does quality VoIP, full Internet access, and two-way video—in a hand-held form factor.

Figure 11.5 shows how four device types today will evolve into a multi-purpose 3G Multimedia Device in 2005. Each of the four devices will continue to be available resulting in five device types by 2005.

Figure II.5: 3G device evolution 2000-2005.

Table II.4 shows device availability and how each of the five devices maps to current service definitions. In other words, this table does not consider 2005 capabilities of these devices.

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Table II.4: Service availability by device types based on current device definitions

Figure II.6: Mobile Multimedia Devices

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PART III ANALYSIS OF UK MARKET

SECTION 1 UK MARKET DEMAND

A. Today

The use of the mobile phone around the world is very widespread. Many of us would no longer know how to cope without our cell phones being permanently available. Always being connected to the world near and far offers us flexibility in our lifestyles, makes us more productive in our jobs, and makes us feel more secure. So far, voice has been the primary wireless application. But, with the Internet continuing to influence an increasing proportion of our daily lives, and with more of our work being away from the office, the demand for wireless data was inevitable. Already, in those countries that have cellular-data services readily available, the number of cellular subscribers taking advantage of data usage has reached significant proportions. We want wireless Internet, we want our organisational data from anywhere, and we want it now.

The question has now become whether current cellular-data services are sufficient, or whether the networks need to deliver greater capabilities. The fact is that with proper application configuration, use of middleware, and new wireless-optimised protocols, today’s cellular-data can offer tremendous productivity enhancements. For those potential users who are still on the sidelines, the providers of subsequent generations of cellular data services are hoping to overcome all remaining resistance. These new services will roll-out both as enhancements to existing second-generation cellular networks, and as an entirely new third generation of cellular technology-3G.

There is little amount of published data to give us the actual size of the market by volume and value, due to the fact that demand for 3G devices and services in the UK is mostly hypothetical.

The primary cellular-based data services are Cellular Digital Packet Data (CDPD), circuit-switched data services for GSM networks, and circuit-switched data service for CDMA networks. Some consumers connect their PC Card modems to their cell phones, but this approach is not very popular because it is tricky to configure. All of these services offer speeds in the 9.6 Kbps to 14.4 Kbps range. Why are speeds so low? The basic reason is that in today’s cellular systems, data is allocated to the same radio bandwidth as a voice call. Since voice encoders (vocoders) in current cellular networks digitise voice in the range of 8 to 13 Kbps, that’s also the amount available for data. Also, today’s digital and PCS technology designs were started over five years ago. Back then, 9.6 Kbps was considered more than adequate. Today, it can seem slow with graphical or multimedia content, though it is more than adequate for text-based applications and carefully configured applications.

There are two basic ways that the cellular industry is currently delivering data services. One approach is with smart phones, which are cellular phones that include a micro browser. With these, you can view specially formatted Internet information. The other approach is through wireless modems, supplied either

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in PC Card format or by using a cell phone with a cable connection, to a computer.

Figure III.1.1 Smart phone versus phone connected to laptop

Both approaches can give access to Internet sites and corporate systems, including e-mail, databases, or host-based systems. But both approaches also require that the user take throughput and latency of the network into account. In contrast, next generation networks promise throughput, reduced latency, global coverage, and ease-of-use that will greatly expand the mobile computing options.

The World Tomorrow

From a user perspective, the offerings from all networks will be largely comparable. Introduction dates of services may vary by up to a year, and exact data rates may differ by 20 or 30%. Just as voice users today may be hard-pressed to distinguish between the quality of an IS-136 call using AT&T’s wireless network, a GSM call using Omni point’s network, or a CDMA call using Sprint PCS network, data users in future will not notice great differences in quality between the new cellular-data services.

In thinking about the rollout of next generation services, we consider what features can be added to existing networks, and what features will require vastly new network infrastructure. Since we refer to the current generation of cellular as second generation, then new feature advancements to the current network are sometimes called 2.5G. Generally, 2.5G technologies have been developed for third generation (3G) networks, but they are applied incrementally, and not completely, to existing networks. This approach allows carriers to offer some new high-speed data and increased voice capacity at much lower cost and sooner than deploying all new 3G networks. Plus, they can do so using their existing electromagnetic spectrums.

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Figure III.1.2 Some 3G prototype phones

B. Demand Curves

The level of demand for a product or service is the quantity of the good that consumers in the market are willing and able to purchase. The quantity of a good the consumer is able to purchase will depend on their income purchasing power, and this is known as the income effect. The quantity of a good the same consumer is willing to purchase will depend on its attractiveness in comparison to alternative goods or substitute goods, which is called the substitute effect.

The highlighted items will be referred to in this analysis.

Price of 3G Devices

The price of product/services of 3G devices will have an impact on the level of demand. There are three main consumer groups for this product and they all have different purchasing power. The three groups are: Business, Adult, Youth, each of which will be price sensitive in different ways. See Figure III.1.1 for forecasts.

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Figure III.1.1 Projected Demand for handsets based on suitable Price formulae for services for each group

All figures are based on assumption that there will be little demand for 3G devices initially. It also assumes that businesses will be the main consumer initially but at the end youth will be the highest user of mobile data.

Time Period

An important point to note, is that of the time period when innovations are made and the consumer responds to it. There will be some consumers who will be early-adopters, that is they will want to own equipment based on the latest available technology, while there are those who will be laggards, who will wait till the products are stable and prices are low as saturation in the market takes place.

Expectations of future Price Changes

With all new technology, there will always be a customer expectation that prices will fall over time. Most consumers will wait until their expected price reduction occurs before buying, unless the features/price analysis at any given point in time alters their evaluation and decision point. This means that demand for 3G devices will follow a traditional phased approach based on product and market life-cycles, and will not reach high levels for many years.

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Income

As a person’s income rises they are increasingly able to purchase products they were previously unwilling to buy. Income will have a great effect on initial demand for 3G devices. From historical data on the use of mobile phone as a data transmitter (text messages), youth are the higher user. It could therefore be expected that they will also be the main user of 3G devices but, initially, they might be out of the price range of most youth, unless special tariffs are developed for them.

Aggregate Product Life Cycle Curve

The Product Life Curve (PLC) shown below can be viewed as an aggregate of the sales of all the cellular phone models on the market at a point in time. It is made up of the life-span curves of the different models introduced over time.

The average market life of the top models used to be over a year. But now with a premium model marketed every six months, it tends to be moved to the discount sector much earlier, having been replaced by a more sophisticated slimmer model.

Figure III.1.2 PLC and Model Life Span

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Other Factors which determine Demand Taste

The more attractive a good is considered to be in the market, the greater the demand will be for that good. Companies often attempt to make a good more desirable to potential customers through advertising; our tastes can also be affected by fashion, and our own previous experience of the good or a similar one. One of the factors, which will affect consumer taste, is the question of the size of the 3G devices. Will the newer devices be bigger or smaller than current models?

A wide variety of styles and sizes of handsets are being developed to meet the individual needs of users. 3G will offer new Internet and multi-media services that will require convenient viewing screens. Handsets could vary from wristwatch style 'simple' telephone's to palm-pilot style for multi-media web-browsing usage.

Consumers are used to small mobile phones, so the prospect of carrying larger devices might not be appealing for most.

C. Substitute Goods

Goods, which are perceived by the consumer to be alternatives to a product, are termed Substitute Goods. An example would be fixed line Internet service, which is a substitute good of a mobile device Internet service. The number and price of substitute goods will affect the demand for a product. If a substitute good's price was to fall well below that of a company’s product, consumers may well switch to the substitute thus reducing demand for the company’s product. The greater the difficulty of a consumer in switching between goods for technical or investment reasons, then the smaller the effect of substitute goods on demand for a product. Companies often attempt, therefore, to introduce or generate 'switching costs' which a consumer will incur if they attempt to switch to a substitute good.

The advantage which the current substitute markets have over 3G is that they already exist and have gone through their own teething problems of initial introduction in the market, and so they can now concentrate on the fine tuning stage of marketing or product feature improvement.

Substitute Products in the marketplace for the use of data:

Fixed Access Technology Alternatives

ADSL, Leased Lines, (See PART II Technology & Product background, A. Technology Evolution for more details), which operate at high speeds linking PCs and palmtops to the internet will continue to provide substitute services for data to those provided by mobile wireless operators.

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Mobile Access Technology Alternatives

There are other mobile access technologies that compliment or replace UMTS for particular business or consumer applications. These are Infrared (irDA), Bluetooth, UWB, TETRA, MESH NETWORKS, WLAN. (See PART II, Technology & Product Background – A. Technology Evolution for more details).

Alternative Services

1. GPRS

General Packet Radio Service (GPRS) is a packet-based data transfer technology that is currently being deployed throughout the UK. It provides increased capacity and higher data transfer rates than GSM (Global System for Mobile Telecommunications) services currently in operation. GPRS and Enhanced Data Rates for GSM Evolution (EDGE) are modifications of GSM (2G). It is claimed that GPRS boosts GSM services to half that of a practical 3G network thus the technology is termed as 2.5G but there is no fixed standard for a 2.5G service. As a result of the slow rollout of 3G services in the UK the demand for GPRS is expected to grow and operators expect customers to migrate to GPRS where they intend to assign more transceiver space at GSM base stations for GPRS services. GPRS specifications claim it can practically offer most of the benefits of 3G services. GPRS uses an IP protocol and can support virtually all applications but it cannot support real-time video that 3G propose to offer.

2. WAP

WAP (Wireless Application Protocol) was developed by the WAP Forum, which originally was four companies, to allow small limited devices such as mobile phones to access the Internet. The WAP Forum presently consists of approximately 500 company members and they have set up a special protocol as a result of current resource and bandwidth constraints. Between the WAP device and the Internet is a WAP proxy, which provides a gateway to the Internet. The purpose of the WAP proxy is to achieve data compression in order that data can be viewed on WAP devices. WAP devices have a simple micro-browser incorporated into the phone, which make a request in WML (wireless mark-up language). The WAP proxy will receive the request in WML or HTML (internet language) format. In the latter case the gateway will translate the request into WML format and the information is returned to the user. WAP currently operates at 9.6Kbps.

The present WAP subscriber level is very low with approximately 1% of mobile owners in Europe registered and 33% of them using WAP services.

The disadvantage of WAP is that the service is very slow, which customers find frustrating, and expensive under GSM. When viewing WAP content, customers are limited to a few lines of words with no images. With the advent

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of GPRS, WAP subscribers will achieve an increase in speed in accessing WAP content but they may have the added cost of purchasing a GPRS device. A new version WAP known as WAP 2.0 is presently being developed which promises to provide more Internet content and information downloading at faster speeds.

D. Complementary Goods

Goods, which are consumed together, are termed Complementary Goods. An example would be 3G devices and the service provider; if the price of either good increases, then the demand for both the good and its complementary good will fall. For example if the price of the content provider service were to rise dramatically, less people would chose to buy 3G devices.

The main driver of the wireless data market is customer demand for valuable content. The largest and richest world-wide source of content is the Internet, which includes details about local restaurants as well as flight timetables and business resources. This explosion of accessible content has rapidly raised the value of filtering information, and several mobile operators are now trying to become service brokers, editing and reformatting information for delivery to a mobile handset client. ARC Group research suggests that although intelligent access and filtering of content and applications is likely to be a critical element in the delivery value chain for the foreseeable future, important technology and market trends need to be taken into consideration when formulating future strategy. For example, the latest intelligent agents used in the fixed Internet environment can already search, reformat, filter and perform some of the functions wireless operators are considering to offer. Next generation functions will operate in the mobile network-handset environment and will perform unimaginable tasks on the mobile user’s behalf. ARC Group believes that while there will still be a need for intermediaries they will not necessarily play the role wireless operators foresee today.

Most of these Internet based data services are not expected to generate large revenue streams for operators, but their access will be essential to attract and retain new customers. Consequently operators might have to offer the smartest agent technologies coupled with speech to text recognition technology if they want to avoid losing their customers to the competition.

As competition amongst wireless operators intensifies, each company involved will work to exploit its advantages (e.g. relationship with fixed operator, bank or ISP; international alliances; content provision; etc.).

A large range of revenue generating services will be offered by wireless operators independently, or semi-independently of the Internet. Future applications expected to meet with success include a range of voice-data all-in-one integrated applications, real-time Multilanguage translation for mobile users, Virtual Home Environment (VHE) based applications, special on-line business services, and fully customised services or solutions for companies or group of companies.

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Another important finding is that as data traffic takes off, access will become critical. Opportunities exist for wireless operators in the area of provision of high quality networks, network security and/or large bandwidth networks for service providers, private companies and as a substitute for wire line. Content provision is likely to be less important than in the high-bandwidth, fixed environment.

The take-up of 3G services will be relatively slow in the initial two to three years due to the deployment of evolutionary, enhanced GSM technologies, known as 2.5G technologies, on existing 2G networks by many existing operators. GPRS and EDGE are examples of these interim technologies, which are expected to satisfy a growing demand for higher speed data applications.

Nevertheless, 3G will grow significantly. Through dual mode, 2G/3G handsets, it is forecast that 40.8% of the total global cellular market by 201 0 will be 3G subscribers. Based on Baskerville's current cellular projections, this figure represents over 505 million subscribers world-wide, the majority of which will be in Europe, Asia and North America.

Figure III.1.3 Growth in Mobile Subscribers

E. Market Size

Developing a Market for Services

There is much debate surrounding the real demand that may exist for multimedia mobile services. In a report, issued last October, UK consultancy, Analysys, estimated the global mobile multimedia market to be worth as much as ECU 105 billion by 2005. With spectrum for voice looking increasingly congested and demand for mobile telephony growing in tandem with Internet usage, many argue that UMTS will be market driven, rather than government

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or vendor driven. Mike Grant of Analysis said, “Many issues point to the need users will have for connectivity to computing platforms. This includes the number of business processes moving to IT, the number of devices, and the increases in data traffic over fixed networks,” he explained. “It is therefore a logical extension, considering the number of laptops, for users to expect those services to be connected in mobile terms.”

Others, however, are sceptical about this market potential. Earlier this year, another UK-based consultancy firm, Ovum, warned that the mobile industry would witness zero growth in data services above 144 kbps before 2005, and that even demand for 64-144 kbps services would amount to no more than 10 per cent of the global mobile market.

Regardless of the demand that may (or may not) exist, today’s network operators still face the challenge of balancing opportunities in a still-growing market for current services, while exploiting a future market for advanced applications. First and second generation systems currently have over 250 million subscribers worldwide. According to Grant, there are two main areas where users could gain extra value with 3G -- data services including the extension of corporate intranets, and lower cost voice services available in more environments, such as in buildings.

For UK operator Vodafone Limited, UMTS will be portrayed as an add-on to existing GSM services. “UMTS is an evolution for GSM; a tool to deliver more services. It may be completely unapparent to the customer that they are using UMTS,” said Tim Harrabin, strategy director for the company.

Vodafone announced plans for the next stage of its 3G trials. Working with a number of manufacturers, Vodafone will use its current GSM network as the backbone on which to trial CDMA radio technology and packet switched services across an area of three base stations. While technically biased, the trials are expected to shift to service-based testing by bringing in corporate customers from the local area as soon as possible. “We aim to learn exactly how the new 3G technology works; to train our own staff; and to learn about potential services through customer feedback,” Harrabin said. Noting that recent surveys have shown 70 per cent of large UK companies have intranets, Harrabin added that the operator intends to demonstrate the potential that mobile access offers to intranets for corporations. For small businesses and consumers, Harrabin said, “We want them to start perceiving mobile not as a phone to talk into, but as means of offering a broader range of facilities.... This takes an element of boldness.” Drawing on the similarities between nascent 3G services and the early establishment of cellular services, Harrabin warned that foresight is as important now as it was then.

What different services will be available on 3rd Generation systems?

Video on demand, high-speed multimedia and mobile Internet access is just a few of the possibilities for users in the future. 3rd Generation Systems will expand the possibilities of information and communication. The main benefit is that they will offer high-end service capabilities, which includes substantially

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enhanced capacity, quality and data rates than is currently available. They will also include the concurrent usage of multiple services. 3rd Generation systems will also bridge the gap between the wireless world and the computing/ Internet world, making inter-operation apparently seamless.

When mobile services first came on the market, there was a lot of talk – and most of it was the largely voice-only traffic that once dominated the world's telecoms networks. The staggering growth of the World Wide Web since 1994 has changed all that. Today, telecommunications data traffic on fixed land lines has already outstripped voice in markets like the US and the UK and is expected to do so throughout the rest of the developed world in the very near future. As an increasing amount of information becomes available on-line, more and more people are using the Web and proprietary on-line services as the first port of call for everything from the latest stock prices and weather forecasts to finding the answers to the most arcane questions. But on-line information is just the beginning. As the number of Web connections continues to double every year, the climate is right for the long-awaited explosion in electronic commerce. Reach that critical mass of on-line shoppers, via mobile telecommunications, and the sky's the limit for telcos, who'll see network traffic – and revenues – soar.

While it's true that for the foreseeable future, at least, wireless speeds will always play second fiddle to the speeds achievable with a souped-up wire line connection, the 2Mbps promised by third generation systems should be ample for mobile Web access and complex multimedia services, right up to full motion personal video-conferencing. While wireless systems are not likely to replace wire line at any time soon, it seems likely that many people, especially in the industrialised world, will soon be using their home wire line service almost exclusively for fixed connection to the Web through a PC or a high-end digital TV. For the rest of their telecoms needs, from simple voice to high-speed file transfer, Web surfing and integrated messaging, they'll use a lightweight, large-screen, mobile communicator based on third generation technology.

There will be a period when 2nd Generation and 3rd Generation systems co-exist. In essence 3rd Generation systems are based on today's 2nd Generation infrastructure and services, but offer a new radio interface, amongst other features. So, a current mobile will continue to operate. It will be up to a consumer to chose if they need to use the 3rd Generation services, and need to upgrade their mobile to be able to use these services.

Effect of Government Legislation on Demand

Licensing

The British Government announced on 13th February 2000, that they were going ahead with an auction for the necessary radio spectrum for the licensing framework of the 3G Mobile Services. Given the spectrum constraint, they decided to issue four “local” 3G licences and one other to an “external” MNO. Their policy objectives were;

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(a) promote the development of the telecommunications industry;(b) protect consumers' interests; and(c) to maximise the benefits to the economy as a whole.

A major risk with auctions is that the prices paid by licensees may become excessive; this was the case in the UK. The auctions began on the 6 th March 2000 and lasted through 150 rounds of bidding until 27th April 2001. The 13 bidders each had to pledge an initial $82 million just to enter. The auction eventually spiralled out of control, raising an approximate $35 billion which was way beyond the expected $5 billion.

A breakdown of the awards and associated statistics that are relevant to the UK, is as follows:

Date of Licence Awards: April 2000

Number of 3G Licences: Five Number of 2G Licences: Four

Amount paid: £22.477 billion (US$35.361 billion)

Terms: Licences are valid for 20 years from the beginning of 2001. The government reserved the largest amount of bandwidth for a new entrant. In addition the regulator has promised to step-in and grant the newcomer automatic roaming rights on the networks of the established operators if this cannot be achieved through negotiation. There is concern that the four current 2G licence holders will have too much of an advantage over the one licence winner that has no infrastructure. While new entrants establish their own networks they will be able to offer third-generation services similar to other operators, although it is not clear whose infrastructure they will use and whether roaming rights will cover 2G and 2.5G services. The right to roaming agreements only last until the new licensee has achieved coverage of 20% of the UK population. Roaming agreements will expire in 2009. All operators are obliged to reach 80% population coverage by end 2007. Population: 59.511 million

Licence fee per head of population: £377.60 (US$594.19)

GDP per head: US$21,800 (CIA estimate end 1999 based on purchasing power parity)

Mobile penetration: 49% (end June 2000)

Home internet penetration: 42% (Nielsen / Netratings: end September 2000).

Licence winners:

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The results were:-

Licence Awarded to Amount paid

Licence A TIW UMTS (UK) Limited £4,384,700,000 Licence B Vodafone Limited £5,964,000,000Licence C BT (3G) Limited £4,030,100,000Licence D One2One Personal £4,003,600,000

Communications LimitedLicence E Orange 3G Limited £4,095,000,000

Total: £22,477,400,000

Hutchison 3G - The licence was originally won by a consortium of Hutchison Whampoa (90%) and Canadian Telesystem International Wireless (10%). However, the Canadian operator is now out of the frame and the new ownership line-up is as follows: Hutchison Whampoa Limited (65%), NTT DoCoMo (20%) and KPN Mobile (15%). Amount paid: £4.384 billion (US$6.9 billion). Hutchison 3G is the only one of the five 3G licence winners not to possess a 2G licence. Vodafone UK - 100% owned by Vodafone AirTouch. Amount paid: Vodafone won Licence B with a final bid of £5.964 billion (US$9.4 billion). 3G infrastructure partner: Shortly after winning its licence, Vodafone announced it would use its long standing supplier Ericsson for the majority of its 3G network needs. The pair had been working together to trial 3G services. In November Vodafone signed up optical equipment supplier Sycamore in a contract worth up to US$40 million. Sycamore will supply optical switches for Vodafone's UK backbone supporting mobile data services.

BT 3G - BT Cellnet is wholly owned by BT. Amount paid: £4.03 billion (US$6.35 billion). 3G infrastructure partners - To the surprise of many BT Cellnet picked Nortel Networks as its principal supplier of 3G network equipment. The deal marked Nortel's first 3G success. BT Cellnet has said it plans to see 3G mobiles on sale at the end of 2001.

One2One - Owned by Deutsche Telekom (100%). Amount paid: £4.0003 billion (US$6.3 billion). The smallest of the UK's four operators its market share has been creeping up in recent years - in 1999 it boosted its share of the market to 17.4% from 15%.

Orange - Owned by France Telecom (100%). Amount paid: £4.095 billion (US$6.44 billion). The French operator agreed to buy Orange from Vodafone, which was forced to sell it off as it absorbed Mannesmann, for US$40.6 billion in May 2000. France Telecom will also pick up the tab for the 3G licence fee.

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It could be said that because of these astronomical prices paid for the licenses, this has caused a great deal of concern and as well as resentment amongst the telecommunications industry and the government. It is said that the government has potentially set mobile Internet development back by demanding investment in fees rather than networks11. Surely this was a contradiction of their policy objective, which was to “promote the development of the telecommunications industry”!

The MNOs will want to raise revenue as soon as possible, to start recovering the high cost of these operating licenses, thus a faster rollout could be expected because of these vast sums paid for the licenses. However, in the UK, 3G is synonymous with high cost and delay.

3G networks will require between four and 16 more base stations than current 2G services creating an argument for network sharing which will enable earlier rollout of 3G services and help reduce operational costs. The latter is particularly important considering the large debts the licence operators have incurred as a result of the fees they have paid out to obtain 3G licences. Network sharing may also help provide lower end-user prices and environmentally it will help reduce the number of masts across the countryside. Network sharing could break the laws of the European Commission rules concerning monopolies. There currently are concerns where network sharing may lead to less competition in the industry and the absence of competition in regions where coverage is poor e.g. remote parts of the UK.

MARKET FORECASTS

Four possible development plans for third generation 3G mobile network technology have been forecast in a report carried out by Ovum, an industry analyst. According to the report, the success of third generation mobiles will be determined by the consumer's understanding and the availability of low-cost standardised network and handset equipment. The report predicts that 3G will be performing in most markets by 2006. However since full technical capabilities will not be available at launch in 2001, Ovum suggests network operators will need to develop a long term plan of extending existing services in order to drive consumer demand for data-intensive 3G services. The four development scenarios for 3G development, predicted by Ovum are;-

- Slow Growth: Slow consumer's exploitation of mobile data services, combined with complex and expensive network and terminal equipment, results in limited rollout of 3G technology

11 White paper – 3G – The Third Generation of Mobile Services. Pg 14.

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- 3G Upgrade: Because of a limited consumer demand for data services, 3G networks are used to meet operational improvements and for delivering multimedia services to companies

- Substitution: High growth in the demand for mobile data services is hindered by the expense and complexity of 3G hardware, resulting in a rapid use of 2G+ services such as GPRS, limiting migration to 3G to the business community

- Rapid Growth: Strong consumer demand for data services is met by 3G technology, since the cost to both the operator and the subscriber is reduced by economies of scale.

Ovum says that demand for data mobile services in the United Kingdom is growing quickly, meaning that the UK could progress to the Rapid Growth stage by early 2005.

Connections(in 000s)

Voice revenues(£ millions)

Data revenues(£ million)

Total revenues

Voice ARPU*(£/month)

Data ARPU*(£/month)

Total ARPU*(£/month)

1999

23,947

6,657

276

6,937

2000

41,097

9,202

692

9,894

23.6

1.78

25.4

2001

49,205

11,341

1,348

12,689

20.9

2.5

23.4

2002

52,249

11,526

2,145

13,671

18.9

3.5

22.4

2003

53,305

10,900

3,365

14,265

17.2

5.3

22.5

2004

53,662

10,050

5,231

15,281

15.6

8.2

23.8

2005

54,549

8,818

8,544

17,362

13.6

13.2

26.8

Table III.1.3 Current & Forecast Data and Voice revenues for the UKSource: Durlacher ‘UMTS Report’, April 2001. ARPU is the average revenue per user

The forecast graph, Figure III.1.4, shows that by 2005 the revenues generated from mobile data application will equal those from voice application in the UK.

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Figure III.1.4 Current and forecast data revenues, 1999 –2005 Source: Durlacher UMTS Report April 2001

F. Latent Demand

In its simplest form Universal Mobile Telecommunications System (UMTS) is mobile multimedia. It is widely understood that the need for data is fast outstripping the demand for voice. Combined with the enormous success of digital cellular itself and its voice services – called the second generation services – the latent demand for non-voice and value–added services delivered to wireless handsets is viewed as overwhelming.

Development of such third generation (3G) value–added services is still at a relatively early stage and the services have yet to be fully defined.

By taking a look at the next twenty years we can have a glimpse of what the future holds.

The Next Twenty Years Scenario per Orange

Orange, a GSM service provider who has also obtained a current UK 3G licence, has a view12 of the future 20 years from now on as follows: -

Every person, including children over the age of 5, say, will be connected to the world-wide communications network. Each person will appear to have their own centrally located but apparently local personal assistant with whom they will communicate by voice activated commands, which are recognised from each person’s voice print. The personal assistant will appear to be by the side of you. The voiceprint of the personal assistant may be changed at will and selected from a list of standard voiceprints. The sex, age, and accent can

12 The Next Twenty Years Seminar, London October 2000, Queen Elizabeth Hall.

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be chosen to suit the mood of the connected person, or their age. e.g. a mother could put in and store her own voiceprint to communicate with her children. Parents will be able to set access controls for their children to inhibit what they do.

Each person will have a tiny earpiece and microphone. These will be fitted either into the ear, or an ear-ring or spectacles, or necklace or brooch, and possibly in the future may be implanted under the skin.

Additionally, if a person wears spectacles, then the lens may be used as a screen to display data at infinity (for focus), but at a reasonable size chosen by ones-self for word recognition, as is currently used by aircraft fighter pilots with their current head-up instrument displays.

Each subscriber’s diary, schedule, and to-do list, and reminders, will be kept centrally. Central facilities will include alarm calls, wake-up calls, and event scheduling with other people and firm’s diaries and schedules.

There will be a multitude of display devices located ‘everywhere’, including wall-displays, on-line TV screens, 3D holograms, in-car and in-transport entertainment, and personal compact screens/readers.

Most household and personal appliances and equipment that are electrically powered, and all transportation systems and equipment, will be permanently connected to the broadband telecommunications network, and will give regular status reports and will be capable of being activated remotely to do things such as switch on and off. Connectors for real-time medical data readings will be common, and people will be immediately advised of their medical conditions, what to do about them to treat them, when they should be operated on, and where they should go to be operated on. Real time stress management advice will be pumped ‘through’ at peak stress times.

We will be able to dictate messages, receive messages verbally, display messages and data at the place of our choosing, and have meetings and services (if really necessary), scheduled remotely. Paying for goods and services at time of delivery will be automatic and electronically from our designated bank accounts.

Music, films, videos, games, other entertainment, and news will be available on demand on a pay per receive basis, with no local storage capability, and with instant replay and fast forwarding to the next ‘tape mark’. Sound may be selected via any playing mechanism, and in any language.

Servicing of mechanical equipment will be done when needed, and scheduled to suit us, either by a visit from the service person, or by us delivering the equipment at a time scheduled to fit in with our individual transportation itinerary and the availability of the service resources.

Thus, data storage, manipulation, knowledge, management, and use, will become easier and second nature. There will not be any local filing systems,

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as everything will be call-downable. People will be able to choose where and how they get educated, the form of their education, the form of their work, where they live, and their lifestyle.

Society may not be ready for these developments and the associated implications, including security, privity, privacy, and personal command and control issues, including constant location knowledge of every individual, as set out in the book 1984 by George Orwell. No one can yet forecast with accuracy the psychological outcomes for individuals or the controls that will need to be placed on the service providers and on governments. Some people might opt out and become ‘outlaws’, living beyond the edge of ‘organised society’ where they can get back to nature, produce their own food, and do their own thing.

The Next 10 Years

Will the UK be at the forefront of this communication revolution set out in this future view of the world, and will it come about in less than 20 years and within the time horizon of our own 3G studies? We don’t know. But, 3G telecommunications networks and systems, if fully implemented in 10 years time, or so, in the UK will certainly be a stepping-stone towards implementing this future view. If this view does come about, then the demand for mobile bandwidth will be enormous, and unimaginable in today’s terms.

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SECTION 2 UK MARKET STRUCTURE AND SHARE

A. Historical Development of the Market

Historical Marketing Strategies

Initially, when first introduced, during the market introduction phase for mobile phones, price skimming strategies were adopted. Phones had to be purchased and installed in motorcars, and service contracts were for a 2 year minimum period. Geographic service was limited to in-and-around major cities and motorway corridors, and they were promoted on a segmented basis for business use only. Although prices were kept high, they were kept relatively competitive as between the two major network operators, Cellnet and Vodafone, and equipment suppliers, Motorola and Ericsson. Installation prices were typically £2000 plus VAT.

As the networks were enlarged, and as handsets became smaller, cheaper, truly mobile and more available, then market development strategies were adopted through price reductions and the aggregation of several handsets on to one bulk rolling service contract, which also helped with customer retention.

Eventually, market growth strategies were adopted with consequent device price reductions to customers. The networks subsidised the supply cost of the phones to individual customers via the distribution network, in order to signup more price sensitive customers on term service agreements.

Penetration strategy on the original analogue network culminated in phones being supplied to customers for nil cost and with a £50 kick-back to the customer, as distribution channels ploughed their own network agreement sign-up subsidies into phones so that they could share in future call charge income kickbacks from the operators from the enlarged customer base.

Digital networks, when introduced, offered better quality and consistency of calls, though not coverage of service, and represented a product development within the same market, but using different transmission technology, and so could be regarded as new market development. Existing analogue handset users could not use them on the new digital transmission network. Price skimming was readopted with the new digital handsets being charged for, initially, at full manufacturing cost plus distribution margin. Business users, who were again targeted as a segment, changed over to the new service as soon as their old analogue contracts ran out, as the quality on the new digital service was much better than the old analogue network, which was poor with many lost or inaudible calls taking place.

Once the digital networks were 95% established nationally, and with the advent of two additional powerful competing operators, Orange and One2one (the renamed Mercury mobile service), to make four in all, the networks went for market growth. This entailed not only extending the market, but transferring high usage customers from the analogue service market, while trying to retain low usage customers on it. The same historic level of

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subsidised handsets never came about, as the network operators realised that annual churn by distributors, to obtain more sales margin per customer, was destroying the economics of the network, which needed long term customer revenue to recover the build cost and the handset subsidies. But, low volume users who were out of contract term were still transferred by distributors and churned by them, at a running loss for the networks.

Prepaid and pay-as-you-go card phones were therefore specified by the networks as a way round this dilemma, and they had them developed at their own request and underwrote them by placing initial large orders with the manufacturers. They were promoted by the networks to overcome the low-user churn problem. This product development enabled the digital network market to attempt mass penetration without incurring losses through subsidies. Pay-as-you-go customers had to pay the full price for the phones, whose manufacturing cost had by now been reduced by high volume production being concentrated in the hands of three main manufacturers, Nokia, Ericsson, and Motorola.

The first hand-held computers/PDAs were linked-up to the internet over the mobile digital networks so that mobile business users might send and receive their business e-mails while travelling. This was the first real use of mobile data on a mobile public network and came about through agents external to the networks – i.e. by PDA manufacturers forcing the pace and making connections via the fixed line land lines to the internet, and then making it work via special small battery-driven modems and special cable connectors to mobile phones.

Developments in products (service features) to differentiate the networks and handsets from each other then became important. Both networks and handset manufacturers vied for dominance and formed R&D alliances.

As mobile data usage was developing, and in order to reduce the time and costs of mobile data transmission and to increase its speed, and in response to user surveys as to message lengths, SMS was specified, developed, and implemented. This low cost limited length (160 characters) message service (without internet protocol overheads) together with pre-paid, pay-as-you-go, mobile phones, suddenly caught the imagination of school children between the ages of 13 and 18, and market extension, development, and growth took place. This mobile data application is now the fastest growing segment of the mobile communications marketplace, and is forecast to grow by a factor of 10 from 2001 to 2003. It has already outstripped mobile internet data usage in terms of daily message packets sent, although not in data content.

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B. Current Position

Current Mobile Operators:

There are four ‘real’ mobile operators who own transmitting networks currently operating in the UK market, and a number of ‘virtual’ operators who use the ‘real’ operator’s networks. The ‘real’ operators are BT Cellnet, Vodafone, Orange and One2One. The virtual operators include Virgin Mobile, Telecom Plus and Sainsbury’s One. There were a total of 40 Million UK mobile subscribers by January 2001, an Increase of 67% from a year earlier. Estimates indicate that by the end of 2001 there will be a total of 49 million UK mobile subscribers, an increase of 22% since the end of 2001. If this occurs then this will amount to a penetration rate of 49/60 x 100% = 81.67% of the total population, or approximately 100% of the population over the age of 10 years old.

All network operators have launched GPRS services in Spring and Summer 2001, alongside existing WAP and GSM services, and there are just a few handsets and tariff packages available as of August 2001. GPRS services are charged for on a monthly subscription basis, and then users pay a nominal amount for data actually downloaded, not data browsed.

1. BT Cellnet

Until 1998 BT and Securicor part owned Cellnet. BT bought out Securicor and rebranded it as BT Cellnet. BT Cellnet operate the second largest network in terms of subscriber numbers, a share of 27% of the total market at the end of 2000. BT Cellnet also own 40% of The Link chain of mobile phone retail outlets. The company has been instrumental in pushing mobile internet services forward in 2000 with the launch of Genie Internet Service. WAP services were launched in January 2000. BT Cellnet was the first to launch a pre-pay WAP service in the UK in April 2000. BT partnered Cisco Systems and Motorola to become the first network provider to offer a GPRS service in the UK for business users via it’s PocketNet service in 2000.

2. Vodafone Group Plc

Vodafone is the leading network operator in terms of its number of subscribers with a total market share of 29% at the end of 2000. Vodafone has been involved in two large mergers; one with Airtouch in June 1999 and another with the German Telecoms group Mannesmann in December 1999. Vodafone is one of the largest retailers and has it’s own chain of 370 Vodafone stores in the UK. Vodafone was the first to introduce it’s pre-pay ‘Pay as you go’ service in 1996. It still retains the largest share of the pre-pay market with 35% of the total UK pre-pay market.

Vodafone launched its’s portal service Vizzavi in 2000, a joint venture with media content provider Vivendi.

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3. One2One

One2One has been a wholly owned subsidiary of German Telecoms operator Deutsche Telekom since October 1999. Mercury One2One launched the first digital network on 1993. The Mercury name was dropped in 1996. One2One was the first operator to sign to a UMTS trial facility with Erricson in 2000. WAP services were launched in June 2000. It also owns the Pocket Phone Shop, also acquired in June 2000. One2One has the smallest market share with 21% of the total market in terms of the number of subscribers at the end of 2000.

4. Orange plc

Orange was set up in 1994 as a joint venture between Hutchinson Whampoa and British Aerospace. It was bought by German telecoms group Mannesman in October 1999 and then sold to France Telecom in December 2000, as a result of the Vodafone takeover of Mannesman. By the end of 2000 Orange had 9.8 million subscribers and a market share of 25% making it the 3 rd

largest operator in the UK, but is the fastest growing operator having added 5 million subscribers during 2000. Orange has 137 retail outlets in the UK.

Orange launched it’s first WAP phone in November 1999. It was also the first to introduce ‘everlasting’ pre-pay vouchers on its Just Talk tariff. In January 2001 Orange launched the first videophone in the UK incorporating a mobile phone, digital camera, and PDA with software including Microsoft Pocket Outlook, Word and Excel.

5. Virtual Operators

There has been growth in the number of virtual operators in the last 2 years. Virgin Mobile is the largest if these operators and has over 600,000 subscribers. Virgin purchases airtime from One2One and uses the One2One network, but has it’s own independent tariff structure for users. Virgin does not subsidise handsets but does charge a subscription fee for users. It sells on brand, simple offerings, and low price.

The Carphone Warehouse also uses the One2One network for it’s Value Telecom brand. Carphone Warehouse operates a large retail chain in the UK and promotes it’s service through this chain of outlets. The Carphone Warehouse WAP service Mviva was launched as a joint venture Internet portal service with AOL in 2000.

Sainsbury supermarkets entered the mobile phone market in January 2001 with its Sainsbury’s One service. The service is available to Sainsbury’s Reward Card holders and uses the BT Cellnet network. Sainsbury’s One offers customers the cheapest call rate of the four main networks, and competes on price and convenience of purchase.

1998 1999 2000 % change1998 -2000

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VodafoneBT CellnetOrangeOne2One

otal

000

4,8754,0432,1631,920

13,001

%

38311715

100

000

7,9396,9474,8954,157

29,938

%

33292017

100

000

11,66310,2449,8358,324

40,066

%

29262521

100

+139.2+153.4+354.7+333.5

+208.2

Table III.2.1 Total Network Connections, 1998 –2000Source: Mintel/Network Operators ‘Mobile Phones & Network Providers’ Mintel Intelligence, April 2001

BT Cellnet Vodafone Orange One2One

199819992000

000

3,5033,9303,554

%

353328

000

3,7003,6744,102

%

363132

000

1,6762,4453,077

%

172124

000

1,2701,8071,915

%

131515

Table III.2.2 Mobile phone connections, by Contract type, 1998 –2000:Source: ‘Mobile Phones & Network Providers’ Mintel Intelligence, April 2001

BT Cellnet Vodafone Orange One2One*

199819992000

000

5403,0176,690

%

192524

000

1,1754,2657,561

%

413528

000

4872,4506,758

%

172025

000

6502,3506,409

%

231923

Table III.2.3 Mobile phone connections, by Network Operator, 1998 –2000:Source: ‘Mobile Phones & Network Providers’ Mintel Intelligence, April 2001* includes Virgin Mobile in 2000

C. Current Environment

In looking at the environment we have examined it first from the standpoint of a PEST analysis, extended to include environmental issues, and then from

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the point of view of Porter’s five competitive forces, followed by Market Drivers and Inhibitors, and finally Segmentation.

PEST ANALYSIS: OVERALL NEUTRAL

Political Situation: Overall Neutral

Item # Description +ve/-ve1 Government attitude towards e-commerce and the

delivery of on-line services in UK+ve

2 Commitment to making licences available at suitable frequencies (the old black and white TV frequencies)

+ve

3 Health and Safety issues surrounding use of mobile phones

-ve

4 Government wish to make UK centre of European e-commerce to boost service economy to counter reduction in manufacturing economy

+ve

5 Competition policy (UK & EU) will thwart consolidation and mergers in UK and across Europe of licensed service providers.

-ve

6 EU controls on pooled investment in networks will delay introduction of full national coverage

-ve

Economic Situation: Overall Negative

Item Description +ve/-ve1 Investment needed to build/ configure masts and

transmitters/receivers might take another £16B and may not be available through borrowings, .

-ve

2 Market sentiment is adverse for rights issues and shareholders might not provide the money by way of equity. Licences were paid for initially on borrowings, and are being slowly transferred to equity through rights issues.

-ve

3 General risk of economic downturn, based on following the USA whose forward economic situation looks parlous

-ve

4 Savings ratio is low at the moment, and consumer spend level is high, but this could reverse

+ve

Sociological Issues: Overall Positive

Item Description +ve/-ve1 More people are working from home as their base and +ve

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want mobile office solutions to assist them. The need for access to data streams in their base office will increase with increasing mobility

2 People have less time to do all the things that they want to do, and are still working long hours, and want information and services fast to make them effective and to give them more useable and controllable time

+ve

3 Peer group pressure is high amongst young people aged between 13 and 21, and SMS, which is cheaper and less intrusive than voice traffic, can be extended specifically to address this market in the short term

+ve

4 People without mobile phones, and eventually without mobile data devices, will be thought of as weird or out of touch, and so stigma will apply to laggards

+ve

5 The interference of user specific advertising/offers which are location sensitive and relevant will be felt by many to be intrusive

-ve

Technological Issues: Overall Positive

Item Description +ve/-ve1 Smaller & lighter devices will make them more attractive

to carry and so increase take up. +ve

2 Combined devices such as phone and PDA in one device will make them more appealing to people, as fewer devices will need to be carried to function fully while on the move

+ve

3 Delivery mechanisms for data will extend +ve4 Radiation will be lowered through re-siting of ariels on

hand-held devices away from the brain, perhaps downwards

+ve

5 Internet access and private network access from mobile devices will proliferate

+ve

Environmental Issues: Overall Negative

Item Description +ve/-ve

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1 The number of masts required to give 3G coverage will make them unattractive, and environmentalist will fight against an increased density of them

-ve

2 The amount of electromagnetic waves generated from always-on devices and large data traffic volumes will continue to raise health issues, particularly if carried in breast pockets

-ve

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PORTER’S 5 COMPETITIVE FORCES: OVERALL NEGATIVE

1 1

Figure III.2.2 Diagram of porter’s 5 Generic Competitive Forces

Customers (-ve overall for network operators)

Customers individually have little bargaining power. However, they do have the power to walk away from a service with which they are disaffected. They will, most probably, exercise their individual power not to take up the new services as they are offered if they are unattractive or costly, or to follow like sheep, should they be attractive. There might be great resistance to move from GSM/2.5G unless there are greater features and/or more attractive devices with 3G.

New Entrants (+ve overall for network operators)

It will be difficult for new entrants to enter the market by being a network operator service provider, as these are strictly licensed. It might be possible to enter the market by take over or merger, but this would be subject to competition policy of the UK and the EU. So, this is a positive point for existing licensees, as barriers to entry will be almost impossible to overcome. However, it is noted that in the 3G licence conditions, the government has stipulated that licence holders must cover a certain percentage of the country

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1

CUSTOMERS

3

COMPETITIVE

RIVALRY

5 SUPPLIERS

2 NEW

ENTRANTS

4

SUBSTITUTES

within 8 years, and at that time roaming between networks must be in hand. Additionally, secondary, network operators will be licensed to offer a service for which they may buy-in their physical network capability from other network operators.

In other areas, such as software provision, information provision, virtual network provision, and security services, there are no physical barriers to entry. The real barriers to entry will be the ability to forge good working joint venture links with other service providers, including network operators, to provide a wider, homogenous and seamless service. These links are already being established, but they will no doubt form and reform, based on the ability of the participants to throw money at developing a potential solution which is mutually beneficial. The lack of availability of money to invest in the speculative ventures of development and roll-out will be a barrier to entry.

The exit costs (non-recoverable networks, devices, software, and licence costs) will be huge, and so will deter new entrants who are merely trying out their ideas, or carrying out pilot studies.

Competitive Rivalry (-ve overall for network operators)

This has been very intense between network providers and equipment manufacturers on earlier networks, both analogue and digital. It is expected to be more so on 3G. The costs of obtaining operating licences and the costs of establishing the networks (masts and equipment) will be huge, and competition to carry most traffic, especially data traffic, which will be the most income generative, will be very intense in the long run, as it will be the only way to recoup the start up costs. It has been mooted that the UK cannot support 5 full licences, and later several more virtual networks, at the price that has been paid for the operating licences unless there is massive penetration of the whole population aged between 13 and 83, and assuming that these persons pay more per month on average for the service received than at present (Mintel Report…). Some of the existing licence holders will go out of business and consolidation of the rest will take place, leaving those remaining to slug it out for dominance.

Substitutes (-ve overall for network operators)

The main substitute threat will come from existing mobile telephone networks, both analogue and digital, which attempt to provide enhanced user facilities and features as they upgrade to 2.5G, including enhanced data services. If these upgrades are attractive, say by combining SMS and Instant Messaging as planned to be provided by Internet ISPs, (and which traffic is forecast to grow by a factor of 10 in the next 2 years to 2003), while 3G is still being planned for and being implemented, then the transfer of telecommunication subscribers to 3G from 2.5G could be delayed (until the 3G must-have killer-application – unknown at the moment - is developed and made available).

As the major 3G licence holders in the UK also hold digital mobile phone licences, then these 2.5G enhanced services will provide welcome revenue to

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those companies, to assist with the development cost of 3G services, and they will have to perform a balancing act in the timing of launch of the new 3G service and its mass introduction. Historic networks are not yet fully written off in the books of these companies, and so there will be an exit cost from the earlier networks including 2.5G. At the same time, existing networks will enable 3G to be introduced sooner, especially if they can utilise some of the existing mast structure for 3G transmitters. They may well have to buy transfer business from 2.5G to 3G to achieve critical mass for the 3G networks.

There are a few separate private data networks which have been and are being developed specifically for commerce and B2B use. If money is invested in these at a fraction of the total amount that is going to go into 3G implementation, then they could, in the short term, become an alternative potent force to 3G for data transmission.

Fixed line internet, via cable operators and ADSL, to dwellings, could become the means of connecting one fixed location (such as a home) to another fixed location (such as an office). For data transfer, these links will be fast, and a virtual private network via the internet could be built in this way to link real offices and virtual offices together, obviating the need for the use of a 3G network – which is wireless and essentially mobile (although it can be, and will be, used on a fixed location basis). With optical links, voice over internet protocol being maximised, and local bluetooth inter-device data transmission, then low to medium usage access could be catered for between various and variable fixed locations to give some of the features of 2.5G and 3G, which would lead to a slower take up of the 3G service.

Substitutes will flourish in the short to medium term if 3G is late, or unreliable, or expensive, or if it does not add any features or services to what exists and will exist.

Suppliers (-ve overall for network operators)

There are different forms of suppliers, some of which will pose a threat. The forms are network base station equipment manufacturers, handset/device manufacturers, information/content providers, information aggregators or gateway/portal providers, and software providers. Joint ventures between these parties will ensue in order to deliver a comprehensive 3G service. Some of these JVs will undoubtedly result in mergers and take-overs as the parties get to know each others strengths and weaknesses better.

There are limited suppliers of sufficient stature to form the JVs that will be needed. Those suppliers that have the most cash flow will be in demand and form a real threat to those network operators who don’t. Suppliers with money to contribute to sharing some of the burden of 3G development and roll-out will be able to dictate terms to network operators who run out of cash.

Summary: Overall Negative

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Network operators have probably over-extended themselves in acquiring the 3G licences in the UK and will have to form strategic alliances with suppliers and content providers in order to fully develop and roll-out the 3G services, and they will be vulnerable to insolvency and take-over. One possible new entrant, not discussed above, is the government. It is not beyond the realms of fantasy to imagine that the government may eventually wake up to the full potential of 3G and the future potential applications for citizen and information control. It could then decide to nationalise all 3G networks to rationalise and consolidate them, and to obtain the behavioural intelligence and societal power that they will come to represent.

UK MARKET DRIVERS

SUPPLY SIDE:

Commercial & Investment Drivers:

1. Sustained economic growth has boosted mobile phone usage.

The buoyant economy over the last 5 years has contributed to the mobile phone’s transformation from a discretionary purchase to a main stream, mass market product. Voice market is reaching saturation (76% at the end of 2001, up from 61% at end of 2000) and, with high consumer confidence and costs of ownership falling, more and more people can afford a mobile phone and PDAs (personal digital assistants). Personal disposable income (PDI) has been rising over the last 5 years and is set to continue over the next five years.

PDI Consumer Expenditure

£bn1995 Prices

Index £bn at1995 Prices

SavingsRatio

1995199619971998199920002001 (est.)2005 (fore.)

507.0520.3540.4541.0560.4575.4595.6663.8

100103107107111113117131

454.9472.5491.4511.0533.6552.5569.1626.4

10.39.49.35.85.14.55.67.0

Table III.2.4 PDI, Consumer Expenditure, and Savings ratio, 1995 –2005:Source: National Statistics/Mintel ‘Mobile Phones and Network Providers, Market Intelligence’, April 2000

2. Investment in 3G Licences:

Fast growth in the number of mobile users to a penetration level of 75% of the UK population has lead to capacity bottlenecks, decreasing quality of service

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in dense traffic areas, and overall poor network performance. In the next 5 years traffic increase will lead to overloading and insufficient capacity

To overcome this, new investment has had to be made in a technology and infrastructure which can cope with a growing number of subscribers. The main technology changes will be to packet-based technologies for data transmission which are more easy to transmit and more efficient in terms of network capacity usage. Third Generation (3G) and UTMS are the technologies which are going to enable network operators to overcome the network overload they are currently faced with. This is one of the main reasons why network operators have to invest heavily in 3G licences. In the UK, the government auctioned the 3G licences, and 5 network operators paid a total of £22 billion between them to own the licences for the next 20 years,

Not only will the third generation technologies enable network operators to over come current capacity issues, but it will also enable a whole host of new revenue generating services to be introduced, many of which will be mobile data services. The mobile data market is largely untapped and developments and investments in wireless technologies are enabling higher speeds of data transfer at lower costs.

3. Increased Productivity:

Mobile data will enable businesses to increase workforce productivity and make efficiency gains through the introduction of anytime, anyplace commerce. This will be one of the new services made available with the deployment of 3G mobile data networks. There is the potential for improved processes within organisations. At the moment many of these are conceptual gains and many businesses are trying to work out how to realise the value commercially.

Regulatory Drivers:

The UK government has specific targets to enable increasing percentages of the UK population to have always-open internet access by specific dates. It is therefore encouraging investment and the early deployment of 3G networks throughout the UK, as 3G will enable people to have high speed internet access at low cost.

Technology Drivers:

Over the next 5 years there will be an accelerated introduction of many different applied communication technologies. These technologies will co-exist on different mobile networks, and eventually will converge and work on UTMS – a Universal Mobile Telephone System. These technologies will eventually work across all devices, much like dual and tri-band handsets available currently do.

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New mobile data technologies will enable higher data transfer speeds and there will be a phased introduction of them as they are developed. Technology lifecycles are getting increasingly shorter as newer technologies are developed faster. As the speed of data transfer increases, the range of value added services that network operators can offer will increase. The new technologies are:

1. WAP (2G)

In 2000, WAP was implement in the UK and it runs across the existing GSM mobile networks. WAP is a dial-up technology, and allows users to download text-only information from the internet, much as they would from a PC using a modem, but at relatively slow speeds of 9.6 kbps.

2. GPRS/EDGE (2.5G)

The first packet based technology to be introduced in 2001 will be GPRS. GPRS is an ‘always-on’ technology, and the speed of data transfer is significantly faster than WAP at 40kbps. The GSM networks have had to be slightly upgraded to enable GPRS to function, as the GSM network only allows data transfer speeds of up to 14.4 kbps. Being packet-based, GPRS is much more capacity-efficient than previous technologies and will, therefore, temporarily alleviate the network capacity issues faced by network operators. Edge will be a further extension to GPRS and allow network data speeds of up to 384 kbps.

3. Bluetooth

Bluetooth is a wireless connectivity technology that will be very useful, as it allows the exchange of and synchronization of data between mobile devices and PC applications. It eliminates the need for cable wire connections. It is due to be introduced into the UK late in 2001, and is widely expected to become a world-wide standard, with many equipment manufacturing companies adopting it and developing applications around it. It is seen as a potentially large enabler for the mobile data market.

4. UTMS (3G)

UMTS is to be the world-wide standard which will enable all mobile network standards to converge fully . Data speeds are forecast to be up to 2mb when mobile, but higher when stationary. This will be the enabler for many of the enhanced value-added services that require higher data transfer speeds, such as video and audio streaming. The technology is a variant of CDMA (code division multiple access), which was invented during the 2nd World War and which has since been refined and developed over the last 10 years by Qualcomm, a US telecoms group.

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Figure III.2.4 Progress of data rates with time and generation

Figure 111.2.5 Data Speeds in The Real World

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Product and Services Drivers:

There are 6 core services that are going to be enabled by the introduction of 3G networks over the next 5 years. The development and implementation of these services will occur through partnerships between network operators, virtual network operators, network equipment developers and vendors, enabling technology and handset/device manufacturers, application providers, content providers and application developers.

These services are:

1. Mobile Internet Access:

As 2.5G and 3G technologies are going to be ‘always-on’ data services, rather than just the voice-centric mobile environment to date, anytime and anyplace internet access will add mobility to the user’s internet experience.

2. Mobile Professional Applications:

Unchaining people form their desktops; within 3 years most laptop computers will come with a mobile internet or intranet device to allow remote knowledge management, the creation of mobile offices, and give rise to mobile application hosting and mobile e-commerce (m-commerce).

3. SMS, EMS and MMS:

Short message service (SMS), enhanced messaging services (EMS) and multimedia messaging services (MMS) are going to be very popular services with users. This will also act as a notification means and promotion channel for existing and new services. Predefined or user defined animations, images, and melodies will make SMS more attractive, and become further enhanced with the introduction of new 2.5G and 3G technologies. Multimedia messaging will be integrated with e-mail services.

4. Customised Infotainment:

A whole range of tailored internet based content services will be available to the user and delivered via mobile portals. The key to these services will be the delivery of the right content to the right user to encourage loyalty to the portal, and to exploit any mobile commerce opportunities. Internet portals such as Yahoo and AOL are going to be working in partnership with the network operators, as they have the ability to deliver content, although content may well be provided physically by others.

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5. Location Based Services:

3G technology will enable the network operator to pinpoint the location of a mobile terminal at any time. This application has huge potential, as it can be applied to fixed display machines as well as to mobile devices carried by people. This will enhance other applications, such as customised infotainment, mobile professional applications, and product/service promotions.

6. Voice & Rich Voice:

Voice will continue to be an important service offering with 2.5G and 3G technologies. High speed data rates will enable the provision of videophone and other multimedia capabilities to existing voice services.

Figure III.2.7 UMTS Service Map - Shows some of the envisioned services

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Co-operative commercial relationships are currently being forged to reach new customers with new products and services and, as the implementation of 3G takes off, there will be many such alliances and partnerships. One example is that of Vodafone’s Vizavi – a partnership between Vodafone and Vivendi. BT Cellnet has a service called Genie, which is a partnership between BT Cellnet and AOL. The 6 core services are forecast to be the largest drivers of demand, and there will be significant new product placings and marketing opportunities within the different technologies, mobile data content, and the handset and devices markets. A whole stream of end-to-end service provision partnerships will emerge as the technologies are rolled out.

There are currently a number of virtual operators in the market place who do not own networks, but who have a strong network brand, such as Virgin Mobile, where Virgin is a virtual operator on the One2One network. These virtual operators currently have a 2% market share of the UK mobile market. These operators have a market base or loyal audience. They are well placed, not having to invest in infrastructure, to develop enhanced services on3G and their market shares could well increase.

DEMAND SIDE:

Consumer & Cultural Drivers:

Use mobility is booming, and consumers enjoy anytime, anyplace communication. They enjoy the immediacy, the mobility, and the ubiquity of mobile services. The level of penetration of the voice market is a good indicator that enhanced services are going to be extremely popular.

1. SMS Text Messaging:

Short Message Services (SMS) has been an unexpected huge success since its launch 3 years ago, despite it being relatively difficult to use. In the UK over 1 billion text messages had been sent from between January and August 2001 and volumes are growing, despite margins being high as costs per unit to the customer are low compared with that of a voice call. It only became very popular when there was a critical mass market of users, which triggered a huge demand for person-to-person messaging which gives timing control of message sending and reading. It was not actively promoted by network operators, and its growth took them very much by surprise.

The critical success factors have been identified as follows:

- The benefits of SMS outweigh the difficulties of use and inconvenience of it - - Users needed educating as to the capability of their handsets as terminals- Critical mass increased the usefulness and the reach of the medium

Interfacing SMS with the Internet will provide the scale that is required to permit 2.5G and 3G Internet Protocol (IP) enabled mobile devices to be successful. Both the Internet and the mobile networks will benefit hugely from

73

the effects of the increasing number of installed IP-enabled mobile devices that will be in circulation. E-mail to SMS exists already. SMS to e-mail will extend its reach further.

SMS is not always immediate (it is subject to the delivery of the data packet), but works on 100% of handsets, and is standardised between all mobile networks. The features and benefits that end users appreciate in SMS will only become better and more enhanced as new mobile/ technologies emerge. The introduction of these new technologies should be less problematic and achieved in a much shorter time frame than GSM or other predecessors were. They can also draw on the broad end-user acceptance of the internet. The interface with the Internet will provide the operational scale that is required by 2.5G and 3G to be successful. Additionally, the ‘suppliers’ to the Internet, (as a source of data and transactions) will benefit from the increasing number of IP-enabled mobile devices

2. Growing replacement market

The mobile phone is not only seen as an integral part of everyday life, but is also seen as a fashion accessory. As devices become more intelligent and complex this will be an even more important factor in choosing or replacing a mobile device. As the voice market is reaching maturity, he mobile network operators are now relying on revenues from the replacement market to fill the intervening period on 2.5 G, which will require new handsets, until 3G services become available and established.

3. Only need one device:

Currently consumers have many different devices such as a palm pilot PDA, a mobile phone, a home fixed line phone, a business phone and a PC for Internet access. As new devices are introduced there will be no need for fixed lines at home, or for the many other voice and data access devices consumers currently own and use. The new mobile devices introduced with 2.5G and 3G will permit all voice and data communications, either serially or in parallel, and will become a central part of a user’s life, akin to a magic wand, that allows them to do what they want when they want. By 2005 it is predicted that more people will use mobile devices than fixed devices for voice and data communication.

Economic Drivers:

1. Prepay market:

The major driver of the mobile market continues to be the prepay sector. The prepay concept was first introduced by Vodafone in 1996 who targeted those for whom contract tariffs were unsuitable and to stop low volume and low value customers from churning. The prepay tariff draws on a much wider range of customers from all socio-economic backgrounds. Growth continues

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in this sector of the mobile phone market unabated but tariffs have been falling continuously as each of the 4 mobile operators tried to increase their customer bases. The main problem with prepay tariffs is that they are less profitable than contract packages. One2One and Vodafone are both set to increase their cheapest prepay charges by as much as 40% in 2001 to try to increase profitability of the service. The highest penetration of the mobile prepayment market in 2001 is among the 15 –24 age group at 80%. The growth in prepay packages has occurred largely in this age group as young people can own a mobile phone without having to pay large monthly bills, without parent consent, with parents easily staying in touch with their children and believing that they are safe. Time limits on prepaid vouchers have now been removed. Prepay packages are going to play an important part in the marketing of existing and new mobile data services. BT Cellnet first introduced a prepay WAP Internet phone in April 2000 for £100.00.

2. Falling cost of ownership of mobile/devices

Running costs for mobile users are now lower than ever before. This has been driven by the fast growing prepay market, but simpler tariffs and methods of charging for metered calls have also contributed to this reduction. The high level of penetration in the UK market, at 79% of the total population for all mobile phones, is the highest in Europe, and is driving user costs down.

There is a wider range of tariffs and calling charge plans available that are tailored to the individual customers needs, and customers can even specify which times are to be their ‘off peak’ time. Consumer awareness is high and they are prepared to shop around to find the best deal. Prices are set to rise in the future.

UK MARKET INHIBITORS:

SUPPLY SIDE:

Commercial & Investment Inhibitors:

1. Investor sentiment

In the early part of 2001 the US economy took a downturn and this has had a knock-on effect in the UK. The telecoms and IT sectors of the UK market have been particularly adversely affected by this, and investor sentiment has turned against them. Many believe that the £22 billion paid to the UK government for the 3G licences was excessive, being more per capita of population than for any other jurisdiction in the world. There are widening concerns given this cost, combined with the infrastructure investment required to become operational, that the levels of income generated will never be large enough to recover it, and that the network operators will never make a profit. Stock market valuations of network operators have fallen and consequently the operators have suffered from credit rating downgrades. This has increased

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the cost of borrowing and made it increasingly difficult to borrow more money to financing the rollout of new technology and 3G networks. Rights issues are expected to follow, but may go unsubscribed.

Whilst the existing network capacity bottleneck issues are the biggest driver for the investment in the new network, the value adding data services are forecast to bring in large revenue streams sufficient to pay back the investment costs, but these forecasts are regarded as suspect. Many of the proposed business models for these new additional revenue streams are unproven, and involve complex relationships and partnerships. These also concern investors. Investors are in the dark as to how the technology and licence investment money will be recouped. It is accepted that there will be a huge market for value added services which is largely untapped, but tapping it has associated dangers.

‘The [commercial] risks associated with not bidding for licences were greater than those [associated] with bidding [for them]. An operator would lose competitive advantage and be faced with ongoing capacity issues if hadn’t bid, as it would need to keep on using existing networks, at lower technology levels, such as Edge. On top of this there would be a whole host of handset and other issues.’13

2. Handset subsidies:

There are now 600 million voice-centric terminals world-wide and 30 million Internet enabled mobile handsets, including WAP, world-wide. User product lifecycles of devices are dropping, and are now an average of 15 – 18 months. The widespread adoption of data enabled devices will lead to the replacement of all handsets in circulation.

Handsets have been heavily discounted to users to date and consumers will expect this to continue. It will be a very costly replacement exercise for network operators and handset manufacturers if such subsidies continue. However, the feeling is that the customer should pay the full price for their handset. The market will wonder if it can afford to break this pattern, as competition is going to intensify over the next 5 years as operators battle for increased market share with the take up of new technologies and services. Customer acquisition and retention will remain a high cost to the network operators. Four out of the five UK 3G licences are held by current GSM licence holders, and we think that we shall see digital to 3G transfer incentives for their own customers.

13 Durlacher ‘UMTS Report – An Investment Perspective’, April 2001

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Regulatory Inhibitors:

1. Health and Safety:

3G will be less safe than previous network protocols. Rather than simply holding a device to the user’s ear, the multi-media aspects of 3G services and devices will require visual contact too. This will pose an added danger for users. ‘Eyes free’ kits as well as ‘hands free’ kits may be required. The government currently advises people to use their mobile phones for minimal amounts of time each day and at any one time, and only when necessary. There have been research studies undertaken to investigate negative or harmful effects attributable to using mobile devices. As yet, there have been no concrete findings but it still remains a risk factor in the future, as new and more powerful transmitting devices are developed and introduced.

2. OFTEL:

In June 2001 OFTEL intervened with the 4 existing network operators and highlighted pricing issues, and said that it would be undertaking an investigation into the roaming fees and other call charges made by operators, . Operators currently planning to act in concert to increase tariffs are now aware that OFTEL would be likely to review and disallow it. Investment analysts fear that if OFTEL impose regulation then call charge revenue of network operators could fall by up to 13%.14

3. Network Sharing:

Network sharing between operators has been flagged as a possible roll-out strategy to achieve 20 - 40% network building and maintenance cost savings, and this is being actively pursued by most UK operators. Whilst any network sharing relationship is going to be complex, the potential cost savings are significant. However, Mario Monti, the European Community Competition Commissioner, has said that they may block network co-operation between operators on the basis that it is bad for consumers and is anti-competitive. This likely to be challenged by operators who will be supported by government. BT and T-Mobile have already signed network sharing deals for new and existing locations. If such a block were to be enforced, then all network sharing would have to stop. This would delay the introduction of 3G15.

4. Masts:

There are currently over 30,000 masts with base stations across the UK. The roll out of 3G networks is going to require the replacement of many of these masts and additional new masts. There are already concerns about the level of harmful emissions from these masts, and environmental awareness about both safety and visual impact of masts is high. The masts will have to be deployed to get the contractually required network coverage that operators need to fulfil the roll out of new 3G services.

14 SG ‘Mobile Regulation: Oftel Strikes Again’, SG European Cellular, July 200115 7/8/01 3G.newsroom.com

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Technolgy Inhibitors:

Every aspect of the mobile industry to date has been dogged by delays, faults and poor performance issues. Delays in interim technologies and handsets has been a substantial setback for network operators in the past. This is denying them the opportunity to develop data and value added services on existing networks before the launch of 3G. This was the same story when GSM, and the dual band GSM networks went live.

WAP handsets and technology were late and when they finally went live expectations had been over-hyped. WAP subsequently failed to deliver against such over-inflated end user customer’s expectations, which damaged the credibility of the mobile industry. WAP’s benefits do not outweigh the inconvenience created through long connection times, lack of immediacy, and high priced services. GPRS, EDGE and UMTS will eliminate some of these problems, but the data speeds forecast are not necessarily going to be achieved in reality. Handset delays are currently being experienced in the Isle of Mann where an extensive 3G test is waiting to be undertaken. Handset delays have also delayed GPRS, as the manufacturers cannot produce output volumes fast enough to fulfil demand, or develop the enhanced features fast enough.

Figure III.2.6 Download times in different technologies

Product & Service Inhibitors:

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The lifecycles of the technologies themselves will become increasingly shorter. GSM is expected to be available for another 10 years, having been available for 8 years already. GPRS is expected to be introduced this year and uptake and usage will peak by 2007, to be overtaken by UTMS/3G. 3Gwill itself eventually be overtaken by 4th generation (4G) technologies. The lifecycle of products will decrease as new technology introduction times decrease. Survival in the mobile market will depend on how quickly a business can embrace new technology. There will be cut throat competition and network operators will have to be innovative with product offerings to compete effectively. The shorter product cycles and intense competition will provide a big challenge to PDA device designers, who will be under pressure to deliver on-time quality, error-free reliable products.

Many of the network operators are going to be in partnerships with software designers, content aggregators, network infrastructure suppliers and handset/PDA manufacturers. These interrelationships will be complex and there will inevitably be problems arising from them. On-time delivery from certain sections of the supply chain could delay implementation.

Many network operators talk about ‘killer applications’ – the applications which become mass market products very quickly, such as SMS has become over the past 3 years. To date these have not been identified and the estimated take-up and penetration level of the anticipated different 3G products and services is speculative, with unproven demand.

DEMAND SIDE:

Consumer & Cultural Inhibitors

1. Trends in UK population

UK population has been growing at 1.5- 2% a year over the last 5 years. It is predicted to grow at the same rate over the next 10 years. The population of children under 15 has fallen by 3% reflecting the trend that women are leaving it until later to start having children, and the population as a whole is ageing. This trend has negative implications for the mobile industry as the most rapid advances in mobile customers has occurred amongst teenagers over the last 3 years. Older people are less confident with new technology and become less interested in them as they get older.

2. Trends in UK Internet usage

The Internet was hailed as being the driver of a great technology revolution in 1998 and 1999, and there was a hi-tech boom with many e-businesses being established and hailed as the ‘new economy’ leaders. By 2000 it was clear that use of the Internet was not going to take off in such a dramatic way as the hype had portrayed, and many of the ‘dot com’ e-businesses disappeared. Their business models failed to generate sustainable cash flow or profits. This occurred because the forecast number of users, and hence the number of

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customer exchanges and transactions, didn’t materialised in the way predicted. 95% of Internet use is for email. Internet usage is increasing world-wide and including the UK, but Internet penetration in the UK is lower than for any other of the G7 countries.

Internet data transfer speeds have remained relatively low in this country. This is because the dominant fixed line operator in the UK, British Telecom, has failed to open its network to competition, despite deregulation pressure from OFTEL. This has delayed the introduction of high-speed access to the Internet to the mass market. Increasing the data transfer speeds through mobile wireless use as, an alternative to ADSL and other fixed line technologies will assist to bring this about.

However, there is no guarantee that 3G will be a driver of mass Internet usage, despite it’s high-speed data access capability unless it is at a low cost.

3. Network service quality

WAP was initially seen as a failure in the UK. The quality of the networks had a large part to play in this. The dial-up speed is slow and calls often disconnect because of poor network quality part way through. The current hype over 3G could well cloud the issue because of the consumer’s previous over-hyped experiences with WAP, unless the network quality is significantly better. Disbelief may affect take up rates for the new services.

4. Complexity and Range of Products

There are already three different technologies on offer in most retail mobile phone stores across the UK; GSM, WAP and GPRS. As these increase, alongside the range of different mobile devices becoming available, consumers are going to get confused and could suffer from too much choice. It will be important that consumers fully understand the capabilities of the technology and the functionality of devices, matched with the services they desire, if the mobile data market is going to reach its full potential.

Economic Inhibitors:

1. The UK Economy: Consumer confidence

The US slowdown in 2000 has already rippled across the Atlantic to Europe and economic growth in the UK has slowed during 2001 affecting the performance of many businesses, and doesn’t look set to recover for at least 9 - 12 months. Despite this, consumer confidence and spending are at record highs. The buoyant housing market in the UK is keeping consumer confidence high. Interest rates are at historical lows making borrowing cheap, and property prices are still rising. Layoffs at SMEs have been minimal so far. If consumer confidence falls and spending slows, it is very likely that the UK economy will slide into recession, and this could inhibit the roll-out of new mobile services.

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2. Pricing and Billing

3G operators have not yet established how services are going to be billed to customers. It is widely believed that 3G could enable ‘one bill for everything’ where the consumer might receive one bill from a network operator that has charges for every utility used over the previous month. Billing is going to present challenges for the network operator as more and more services become enable through 3G and build and delivery partnerships become more complex. The popularity of pre-pay tariffs will continue for 3G services, but handling this will be seen as a variation on payment collection means.

D. UK Market Segmentation

The mobile phone market can be segmented by consumer type, by contract type, and by importance of features. These segments will be specifically targeted. Indications as to the size of the future market potentials are set out below.

By Consumer Type:

A survey was carried out by Mintel Market Intelligence (‘Mobile Phones and Network Providers’ Mintel Market Intelligence, April 2001) asking a sample of adults the question ‘Do you own a mobile phone’ to establish consumer segment mobile penetration. The results are shown in Table III.2.5:-

Base: adults aged 15+

Feb 20001402%

Jan 20011585%

% point change2000 - 1

All

Men Woman

15 –2425 –3435 – 4445 –5455 –6465+

ABC1C2DE

47

5143

606459463615

5450484624

66

6864

848182665628

7171676443

+19

+17+21

+24+17+23+20+20+13

+17+21+19+18+19

81

LondonSouthAnglia/MidlandsYorkshire/NENorth WestScotland

Lifestyle:Pre-familyFamilyEmpty nestersPost family

Special Groups:Benefit dependantsBudget familiesBetter-off familiesEmpty nestersWorking managersWorking women

525448464540

61614823

166269587359

676868695765

83816939

338389788681

+15+14+20+23+12+25

+22+20+21+16

+17+21+20+20+13+22

Table III.2.5 Mobile phone penetration in the UK, by demographic sub-group consumer typ e Source: Market survey undertaken by Mintel Market Intelligence, January 2001.

In January 2001, over two thirds of adults owned a mobile phone. Ownership has increased more rapidly among women than among men. Ownership has increased 24% since February 2000 amongst the 15 – 24 year olds and penetration is highest among this sector at 84% at January 2001, this is largely due to the growth in the pre-pay sector. Also many younger consumers have been given a mobile phone as a gift. By contrast only 28% of over 65s own a mobile phone.

By special groups, ownership is highest among the affluent better-off families (89%) and working managers (86%). Penetration has increased most rapidly among families on a tight budget and working men. This is because of affordability and accessibility, and the need to avoid wasted journeys and to co-ordinate activities.

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By Contract Type: Pre pay and Contract for each consumer type

1999 2000 2001(est.)

% change1999 -2000

Prepay PhonesContract Phone

Total

000

88872,963

11,850

%

7525

100

000

14,8501,650

16,500

%

9010

100

000

16,957893

17,850

%

955

100

+91-70

+51

Table III.2.6: UK retail sales of mobile phones, by volume and type of package, 1999 –2000. Source: Mintel Market Intelligence, January 2001.

The sale of pre-pay phones nearly doubled between 1999 and 2001, while contract sales fell by 70% over the same period. Contract phones generate more revenue for operators than pre-pay phones. Vodafone announced that they will be increasing it’s pre-pay ‘pay as you go’ mobile by 40% in March 2001, in a bid to improve revenues from pre-pay customers. One2One has announced that it will be doing the same.

The shift in sales can be attributed to the change in use of mobile phones. Many people use mobile phones for social and leisure use rather than for business. Mobile phones have become a ‘must have’ fashion accessory for teenagers, who are also the biggest senders of SMS text messages, which offers a cheap way to stay in touch with friends.

By Package

Base: adults aged 15+Pre-pay Contract

All

Men Woman

15 –2425 –3435 – 4445 –5455 –6465+

ABC1C2

67

6669

786560617377

536271

32

3530

243640382619

463830

83

DE

LondonSouthAnglia/MidlandsYorkshire/North EastNorth WestScotland

Lifestyle:Pre-familyFamilyEmpty nestersPost family

Special Groups:Benefit dependantsFamilies on a tight budgetBetter-off familiesBetter-off empty nestersWorking managersWorking women

8487

577066797270

65686375

858051554364

1812

413134202829

36333623

112149455636

Table III.2.7: Mobile phone penetration in the UK, by type of packageSource: Market survey undertaken by Mintel Market Intelligence, January 2001.

It is clear from Table III.2.7 that 15-24 year olds prefer the pre-pay package, while 25 – 54 year olds account for the higher proportion of contract users. 25 – 54 year olds use their phones for work, while the younger group use is primarily social.

By Products & Services Utilised by Feature

A survey was carried out by Mintel Market Intelligence (‘Mobile Phones and Network Providers’ Mintel Market Intelligence, January 2001) asking a sample of adults the question ‘Important Features when purchasing a mobile phone‘. The results are shown in Table III.2.8 below:-

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Feature % Importance

Small size/light weightSpecial offerSMS text messagingBrand Pre-pay packageBattery LifeReceived as a gift Personal recommendationCan use phone abroadLatest modelCame with free accessoriesDealer adviceDifferent dialling tonesNo aerial/small aerialVibrates when ringsLarge display screenRemovable/chargeable coversColourOther features (clock, calendar, calculator)WAP/Internet capabilityBuilt in chargerFlashes when ringsVoice activationDon’t know

282626151514131211976666544443224

Table III.2.8: Mobile Phones and Network Providers Source: Mintel Market Intelligence, January 2001 Base: 1043 mobile phone owners aged 15+

Size and weight are the most important considerations when purchasing a mobile phone. This is because of the continual introduction of smaller phones over the last decade. The use of text messaging is the joint second most important consideration. This is one of the key consumer drivers for 2.5G and 3G services, and is not surprising, given the explosion in SMS use over the last two years.

The replacement market is growing, again a key market driver, and therefore branding is an important consumer consideration (15%). Notably WAP and Internet capability is not an important consideration (4%), which is of concern to forecasters. This may be because the pace of change in the mobile market place is too rapid and people are adopting a ‘wait and see’ attitude; or because of WAPs well publicised initial flop in the market place. Network operators are now advertising phones as having ‘Internet access’ and not as having ‘WAP’. The network operators are however advertising ‘GPRS’ which would suggest that they recognize that WAP has been tarnished by the initial flop.

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E. The Way Ahead

Future Marketing Strategies

Marketing Strategies for the short term:

Existing digital network operators are planning upgrades, the resultant service to be known collectively as 2.5G, to those networks to enable always-on connections and faster data downloading. Equipment and software manufacturers are pursuing product development strategies by designing and producing hand-held devices which combine mobile phones with internet access and PDA features. We would expect these enhanced product features to be attractive to business users initially, and we expect to see segmented price skimming strategies reintroduced again, with the full cost of the devices being born by users.

Special tariffs and product features will be developed for them to make it attractive for such devices to replace the digital mobile phones, PDAs, and lap top computers of users, and so make mobile communications and mobile data use through one small, composite, device truly possible.

We would expect lifestyle segmentation to drive product development and marketing.

Marketing Strategies for the longer term including 3G Market Development:

Marketing strategies will initially be synonymous with business strategies as 3G development and roll-out is undertaken. This will be a cash consumptive exercise for all involved, and will lead to large cash calls on shareholders. Additionally, no one service provider will be able to provide all the product feature enhancements that will be required relative to 2.5G implementation.

Business strategies will first of all be those of co-operatives, partnerships, alliances, and joint ventures between network operators, base station manufacturers, software developers, handset manufacturers, information aggregators or portals, and information collectors/providers. Without these being put in place no real feature or coverage advances will be possible over 2.5G. Alliances are already being formed for 2.5G and, if successful, these may well run over into 3G development. Rapid product and network development and risk mitigation will be the over-riding objectives.

Marketing segmentation for directing effort will be important, and all efforts will initially be deployed at making the business user segment truly independent of any fixed office, so that service business, which is the mainstay of the UK economy, may become virtual and prevalent. Introductory price skimming strategies will be used as the offsetting cost savings of eliminating fixed office environments will be enormous. Coverage will initially be limited to those

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areas frequented by mobile business users, e.g. cities and major towns, motorways, main rail routes, aircraft, and people transit termini, resting and meeting points.

First-to-market with fully-functional-business-features will be very important as personal references and technical write-ups will affect take-up. Once the business user has been accommodated by fully functional data access, manipulation, storage, and transmission features, then market growth will be the objective. This will be delivered by adopting special tariff rates for this segment, and by 2.5G transfer incentives.

A complicating matter will be the billing and collection of customer revenues for data use, and the sharing of it between the service partners involved in its provision. A one bill scenario has been mooted by KPMG.

Other segments will then be tackled. These will be matrixed on lifestyle division on the one hand, and personalisation, content aggregation, and transaction type on the other. Each will require specialist software and tariffs, and will be introduced on a phased basis. Each resultant segment offering will probably require a different mix of partnerships, alliances, and JVs for product build and distribution.

Eventually, and not perhaps until five years after its business segment introduction, 3G will be treated as a necessary utility, albeit a complex one. It will eventually replace 2.5G by accommodating 100% user transfer over the ensuing years and, like the original analogue network before it, 2.5G will then be shut down.

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SECTION 3 – UK MARKETING MIX

In this section we look at the traditional 5 Ps, of Product, Position, Promotion, Placement (Distribution), and Pricing. Although the product of a network operator is more of a service than a good, as it is delivered via goods, we do not think that the other two ‘Ps’ of People and Premises, which usually apply to give substance to a pure service, are relevant here.

A. PRODUCT

Product Ranges of the major UK players:

There are currently four “real” as opposed to “virtual” mobile phone network providers (in terms of ownership of transmitter networks), with a growing number of virtual mobile networks having been launched from 1999 onwards. The four are: Vodafone, BT Cellnet, Orange and One2One. The virtual network providers purchase airtime from the main networks. These virtual players include Virgin Mobile and Value Telecom (both using One2One network), Sainsbury (BT Cellnet) and Genie (an offshoot of BT Cellnet).

The relationship with the handset manufacturers is quiet complex but in general the four main players are supplied by most of the major handset manufacturers. Due to the fact that Vodaphone and BT Cellnet operate on the same frequency (GSM 900 – used throughout most of the world), the handsets can be used interchangeably between the two with nothing more than a new SIM card. The same is true for handsets that are used on either the Orange or One2One networks, which operate on the same frequency (PCN/GSM 1800 – less internationally adopted) but a different one to that used by Vodafone and BT Cellnet.

UK Network providers:

- Vodafone – It is the leading network in the UK in terms of subscriber numbers and average revenue per user (ARPU). It is also one of the largest mobile phone retailers, with a chain of 370 high –street outlets. Vodafone was the first network to introduce pay-as-you-go in 1996, initially on its analogue service and later on its digital GSM service in 1997.

In the last couple of years, Vodafone has concentrated mostly on wooing the rapidly growing leisure/personal sector. It has heavily promoted its Pay-as-you-Talk, Allcalls and SmartStep pre-pay packages in the media, in order to attract a wider range of new customers. Current contract tariffs in 2001 include Vodafone 20, aimed at low users, Leisure 200 and 500, offering respective amounts of off-peak minutes, and a number of tariffs for heavier users – Vodafone 60, 150, 350, 700 and 1000.

- BT Cellnet – It is the second largest network in terms of number of users, after Vodafone. BT Cellnet was instrumental in pushing the

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mobile internet forward in 2000, with its heavy promotion of its Genie Internet Service. Genie has subsequently been floated off as a separate virtual network but which still uses BT Cellnet. The first commercially available WAP service was launched in January 2000*. However, there has been considerable user confusion and disappointment in the WAP technology. It has been criticised as offering only limited content and slow access times to the internet.

BT Cellnet linked up with Motorola and Cisco Systems to become the first network to offer GPRS in the UK for the business sector via its PocketNet Service 2000. GPRS is a data-communications upgrade that has been developed in order to speed up the data transfer rates on the existing GSM networks, using the existing radio base stations. GPRS system uses packet-based data-transfer technology, which means that the devices are permanently “on” but consumers will only be charged for the amount of data used and not the time spent searching for it.

BT Cellnet purchased the UK retail operations of DX Communications in September 1999.The chain consists of 140 outlets, including 50 concessions in Powerhouse stores.

In January 2000, BT Cellnet introduced Infotouch and Mmail (Mobile-mail) data services for its existing digital mobile phone subscribers – the first comprehensively-featured mobile Internet service to be made available using existing SMS text messaging technology. BT Cellnet was also the first to introduce a pre-pay WAP internet phone in April 2000, costing £100, with prices now starting from around £40.

The Genie Internet operates as a virtual network, with pre-pay models sold over the Internet or the phone. BT Cellnet’s pre-pay packages offer basic or WAP-enabled phones on their Pay & Go package, which has no expiry date on call vouchers. Contract tariffs include My Time Net 200 and 600, aimed at off-peak users; Net 100, 200 and 400 for heavier users; and Business First for business users.

- Orange plc - Orange was set up in April 1994 as a joint venture between British Aerospace and Hutchison Whampoa. Following the £22 billion buyout of Orange in October 1999 by Mannesmann and the subsequent takeover of Mannesman by Vodafone early in 2000, however, Orange was sold off. This was necessary to avoid the contravention of existing competition legislation. In December 2000, France Telecom acquired Orange. By the end of 2000 there were 9.8 million Orange subscribers, making it the third-largest UK mobile phone network provider.

Orange opened its first retail store in Manchester in 1995 and had 137 outlets in 2000. It has been the fastest-growing network, with 5 million new customers added in 2000.

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Orange launched its first WAP phone – the Nokia 7110e – in November 1999. It was also the first network to introduce ‘everlasting’ call vouchers on its Just Talk pre-pay tariff late in 1999, with all networks now offering this facility to pre-pay customers. The network also launched the first mobile videophone in January 2001 (costing around £1,400), incorporating a mobile phone, PDA, digital camera and software including Microsoft Outlook, Explorer, Reader, Pocket Word and Excel. Orange offers a range of contract tariffs with varying amounts of free minutes call time each month, ranging from the Talk 60 to those aimed at heavier business users such as Talk 150, 500, 1,800, 5,000 and 10,000. The Everyday 50 offers 50 minutes of free calls each day for £15 a month.

- One2One - One2One has been a wholly-owned subsidiary of the German telecoms group Deutsche Telekom since October 1999. Since January 2000 it has also been part of T mobile International, Europe’s largest mobile phone provider with 18 million users across the Continent. Mercury One2One was launched in the UK in September 1993 as the UK’s firs completely digital network, with the Mercury name dropped in 1996 when the network was relaunched as One2One. The network was the first to sign up to Ericsson’s UMTS trial facility in 2000.

The Virgin Mobile service was launched in November 1999 after One2One had agreed a deal for this ‘virtual’ mobile phone operator to enter the market. Virgin Mobile pays for the use of the One2One network but offers its own tariffs to customers. The service had attracted around 0.5 million subscribers by late 2000. Virgin Mobile is aimed at new users who feel an affinity for the Virgin brand values, and offers an option for heavier mobile users as call charges reduce through the day as more airtime is used. Users pay no monthly rental or service charges and handsets are not subsidised, but subscribers can choose to us an existing handset with the SIM card provided with the initial connection pack.

One2One rebranded its pre-pay packages in 2001, phasing out Up 2 You and more 2 Say with Pay as you Go, which is essentially very similar and offered in Standard and Anytime call-charging options. On the Standard tariff the first two minutes of calls a day cost 30p a minute and then 5p a minute at any time after that. On Anytime Daily there is a 50p daily charge giving five minutes of free inclusive calls an then 10p per minute peak or 2p per minute off-peak rates thereafter. In June 2000, One2One launched its first WAP service and then in July 2000, One2One became the first mobile phone network to offer a full roaming facility to per-pay customers.

- Virtual mobile phone networks - While the mobile phone market is still dominated by the four main networks – BT Cellnet, Vodafone, Orange and One2One – there has been growth in the number of virtual network operators in the last two years. The largest of these is Virgin Mobile (part owned by One2One), which operates by purchasing airtime on

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One2One’s network through a joint venture between the companies, but uses its own pricing structure for its mobile phone packages. Virgin is different from existing networks in that it does not provide subsidies on handsets, has abolished monthly subscription fees and offers competitive call charges. While initial purchase and set-up costs are therefore higher, considerable savings are possible for frequent users in the longer term.

The only specialist mobile phone retailer chain said to be totally independent – The Carphone Warehouse – also became a virtual network with the launch of its Value Telecom service, which uses One2One’s network. The Carphone Warehouse did not enter a joint venture with One2One in the same way as Virgin did, but merely purchased airtime on a wholesale basis with customers billed by Cellcom, an independent provider. The service is exclusive to The Carphone Warehouse, with a flat monthly rate for the phone which includes some free calls. Any calls above this level are billed to the customer’s credit card. The Carphone Warehouse has also launched a WAP-based Internet portal, under the Mviva brand, as a joint venture with a number of partners including AOL. Mviva includes access to cut-down versions of some popular Internet sites, such as lastminute.com.

Sainsbury’s entered the mobile phone sector in January 2001 with its virtual network Sainsbury’s One. The service is available to all Reward Card holders who has a pay monthly agreement and who are out of the contract period with their network provider. Using BT Cellnet’s network, Sainsbury’s One offers consumers the cheapest call rate of the four main networks, according to their usage levels.

Handset Manufacturers:

As in previous years, the market continues to be dominated by the “big three” – Nokia, Ericsson and Motorola. However, there are numerous other manufacturers becoming more of a threat to these main players. The other players are Sagem, Trium, Alcatel, Samsung, Siemens and Panasonic, to name but a few.

Nokia Mobile Phones UK Ltd - Based in Finland, Nokia Corporation remains the world’s largest mobile phone manufacturer. The company has a presence in 130 countries, employing around 55,000 people, with R&D facilities in 14 countries and manufacturing capability in around 11. There are two main company divisions – Nokia Mobile Phones and Nokia Networks. Nokia became the first mobile phone manufacturer to launch its own UK retail outlet in 1998, with the opening of a store in London’s Regent Street. At the time, Nokia had already opened stores in other European cities including Dublin, Vienna, Paris, Rome and Madrid.

The year 2001 sees Nokia working with games manufacturer Eidos in a bid to develop games for use on its WAP-enabled phones. The 7110

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WAP phone was launched in 2000, having been made famous through its use in the film The Matrix. Following this, Nokia launched the UK’s first fully synchronised pre-pay phone and handheld computer bundle on the One2One network in December 2000. The Nokia/Handspring package includes a Nokia 5146 handset and a Handspring Visor Deluxe with an integrated mobile Internet browser, email and SMS applications. There is also an expansion slot allowing the Visor to be used as a digital camera or an MP3 player, based around the Palm OS platform.

- Ericsson UK - The Scandinavian strength in mobile phone technology is further illustrated by the fact that the Swedish LM Ericsson Group is also one of the top three mobile phone manufacturers in the world. The group’s UK subsidiary, Ericsson UK, employs over 4,000 people in the UK. With growing volatility in the telecoms sector in 2000 and 2001, however, Ericsson plans to focus more on its transmitters, routers and networks in the next few years.

Following a disappointing set of financial results at the start of 2001 and slower-than-anticipated growth in key markets, Ericsson announced that it is to cease manufacturing mobile phone handsets. Ericsson struck up a strategic alliance with Flextronics in January 2001 to provide economies of scale, greater efficiency and better flexibility in manufacturing. From April 2001 the Singapore-based Flextronics is to take over all Ericsson handset manufacturing facilities in Brazil, Sweden, Malaysia and the UK, making handsets which will then be sold under the Ericsson brand. Ericsson sold 43.3 million mobile handsets worldwide in 2000, an increase of 38% on the previous year. In April 2001, Ericsson was reported to be on the verge of announcing a joint venture with Sony to combine both companies’ handset production.

Ericsson is developing technology that can identify the precise location of a mobile phone. The service – known as iPulse – will, for example, enable people to find out the precise location of all the other mobile phone users in their address book, although customers will have the option of blocking their own phones if so desired. The development of iPulse will be shared with other companies in a bid to launch a range of services employment the new technology – virtual tourist guides being one such idea put forward. In 2000, Ericsson launched the R380s, which incorporates a built-in PDA/palmtop computer and retails for around £250.

- Motorola UK Ltd - Motorola Inc, the other member of the top three global mobile handset manufacturers, is based in the US. The company accounted for a share of around 16% of the world market for mobile handsets by volume in 2000. In 1998, Motorola developed what was then the world’s smallest mobile phone – the clamshell StarTAC – followed by the V-range of ultra-compact handsets in subsequent years.

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Like Ericsson, Motorola now contracts out much of its less profitable handset manufacturing and has also struggled with declining profitability in 2000 and early 2001. The company’s total sales grew by 11% to reach $10.1 billion in 2000, but increases in manufacturing costs and operating expenses restricted profitability. Indeed, as this report went to press, Motorola announced the closure of its handset production plant in Bathgate, Scotland, with the loss of 3,100 jobs.

Sega signed an agreement with Motorola at the end of 2000 to develop games for its next-generation mobile phones. These will operate on Motorola’s new handsets that are set to be introduced first in the US and Canada in the first half of 2001, and then in Europe by the end of 2001. The phones will feature mobile computing functionality to allow applications to be installed as necessary.

Palm Inc and Motorola agreed to co-develop and co-brand a new line of smart mobile phones in September 2000, moving towards greater convergence of mobile phones and personal digital assistants (PDA’s). The aim is to develop a phone by early 2002 that combines Palm’s operating system with Motorola’s wireless technology, with features as a large colour-display screen with Internet facility as well as the usual Palm PDA facilities.

Motorola announced plans to launch a range of six GPRS-equipped handsets in 2001 for the consumer market, following the launch of the P7389I in 2000. The latter model is designed for use with BT Cellnet’s GPRS-enabled PocketNet service for business users, which was launched in June 2000. Although there was no specified launch date at the time this report went to press, the first model due to be launched is the Timeport 260 – a GPRS-enabled tri-band version of the Timeport 250 that should be launched in late Spring 2001.

Other models due for launch in 2001 include the top-of-the-grade Accompli 008, with full PDA facilities, a large LCD touchscreen, clamshell design and TrueSync software to allow for easy synchronisation with a PC. The Accompli will also be equipped with games, notepad function, calendar and built-in infrared modem for data transmission. The V50 clamshell model will be upgraded to the V66 GPRS-enabled handset in the second quarter of 2001, while forthcoming non-GPRS handsets include the Talkabout 191 entry-level WAP model.

Other manufacturers:

Siemens, based in Germany, is one of the fastest-growing mobile phones brands in the world. It is now the fourth largest in the world, rising from eighth in 1998. In the year to September 2000, Siemens sold 24 million mobile phone handsets world-wide, around twice as many as in the previous year. There has been a corresponding increase in the share of the UK market

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recorded in the last four years, as the company has invested more in new products. Siemens joined forces with Japanese mobile phone maker NEC in November 1999 to design and build a platform for the next generation UMTS mobile phones. It is planned that more than £640 million will be invested in the project over the next ten years. The joint venture – called Mobisphere - is based in Reading and is owned by Siemens (51%) and NEC (49%).

Other key brands within the European mobile phones market include the Netherlands-based Philips Consumer Communications. Products are sold under the Philips brand and are popular on pre-pay tariffs, in particular the Savvy and Azalis models. The French Alcatel brand has also grown strongly in the last two years. In 1999 the brand formed a partnership with Japanese manufacturer Sharp to produce the Alcatel One Touch Com/Sharp MC-G1 phone, which was marketed as a Personal Mobile Communicator (PMC). Newer models in 2000 and 2001 include the Once Touch View/Club/Easy and the Max. Sagem is another French-owned brand with a growing presence in the market, again mainly at the budget end of the pre-pay sector. It supplies mainly the BT Cellnet and Vodafone networks.

The leading Japanese and Korean brands in the mobile phones market include Sony and Panasonic, with NEC having fallen back in the last couple of years in terms of the number of models supplied to the consumer market. Mitsubishi supplies mobile phone under the Trium brand, while Korean brown goods supplier Samsung has also increased its share of sales with the launch of many new models in the last couple of years, mainly in the contract sectors. New entries to the market in 2001 include the Finnish Benefon and the UK-based Sendo and VTech brands.

B. POSITIONING

UK Mobile Network Brands

The UK market is dominated by the four mobile network brands. Each has a different character, which in theory, is reflected in the tone and messages of its advertising and other promotional activity. Virgin Mobile16 and BT Wireless’s Genie17 are the only virtual operators to have made an impact on the market. However, BT Wireless recently announced that Genie brand is being scrapped as part of its re-branding plans following the de-merger from BT.

Vodafone has an international, corporate, establishment positioning evidenced by lots of sponsorship activities – e.g., Man United FC, England Test Cricket Team etc. It seeks to balance the ‘big company’ feel through the

16 1 million registered accounts17 5.3 million registered accounts

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personal tone of some of its advertising. Vodafone’s ‘can-do’ approach makes life easier for its customers. It is:Helpful – human, personal, approachable, clear, authentic down-to-earth and reassuringPowerful – relaxed but authoritative, confident, credible and accountable Resourceful – right here right now, practical, contemporary

Orange has the most distinctive positioning of any of the other networks, being aspirational, cool, but possibly a little earnest. It seeks to differentiate mainly on level of customer service.

One2One Branding has successfully differentiated O2O from its competitors. Research has shown that customers perceive the network as having human and emotional characteristics. The name automatically suggests intimacy of communicating O2O and the brand has always stood out as appealing to those who like to talk. O2O stands out as a brand with an especially strong youth appeal and a high perception of value. Recently, the brand has been portraying a somewhat ‘schizophrenic’ personality with self consciously cool advertising yet aggressive, retail price led tactical promotion.

BT Cellnet The BT Cellnet brand follows BT’s overall brand proposition: it is founded on presenting the company as a guide to the potentially bewildering range of new technologies on offer. The overall BT brand consists of three key attributes: trust, potential and freedom. BT operates in an expert, progressive and trustworthy way. In communications with customers, BT is empathetic, imaginative and pro-active. The personality associated with BT is friendly, helpful and enthusiastic. The essence of the BT brand is rooted in the basic human need to connect with people, places, information, experiences and ideas.

Virgin Mobile’s positioning is based on a value orientated, consumer champion approach consistent with the rest of the Virgin brand.

Figure III.3.1 maps the brand positioning (based on the advertising messages as opposed to reality – i.e., based on what the brands say as opposed to what they do). The brands are mapped against two axes: The horizontal axis has ‘real’ on one end and ‘abstract’ on the other. ‘Real’ suggests a focus on now, definitive, tangible. A ‘right here right now’ approach, featuring actual technology and services available. ‘Abstract’ stands for a more futuristic approach, focusing on the brand and the exciting possibilities of things to come, but in a vague manner. The vertical axis illustrates a focus on ‘performance’ on one hand or ‘value’ on the other.

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Figure III.3.1 Brand mapping for main UK mobile brands

None of the brands have so far established themselves as the definitive choice for mobile data services. BT Cellnet attempted to when it was the first network to launch WAP. It’s ‘Surf the BT Cellnet’ campaign was the biggest to focus on mobile internet. However, this attempt has failed miserably as WAP did not live up to expectations. (More on this later.) Vodafone and Orange have recently taken to a more futuristic ‘brand’ advertising, designed to make their brand synonymous with the future of mobile, whatever it may be, although neither has really focused on specific services other than voice. This is probably because voice will remain the main source of revenue for the next few years.

The brand landscape is set to change over the next few years as networks gear up for 3G launch. Two of the four existing networks will be re-branded as early as next year. BT Cellnet will become mmO2 and One2One will become T-Mobile. It is not yet clear what the positioning / philosophy/ character of the new brands will be. Vodafone and Orange will remain unchanged in the UK. Hutchison 3G will unveil a new brand when it launches. Triggered by consolidation, the award of 3G licenses and, in the case of BT Cellnet, the planned demerger of BT Wireless from BT, mobile networks are striving to roll out their chosen brands across all markets in which they operate. The expense of re-branding pales into insignificance alongside the cost of building 3G infrastructure.

With millions of pounds being spent on re-branding and consolidation, only a few network names are likely to survive in the long term. Some industry

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observers believe that by 2010, there will be just two significant operators in the UK (and Europe) – Orange and Vodafone. They not only have the most robust business models, but they also have the strongest brands.

C. PROMOTION

‘Promotion’ covers the entire promotion mix of the four 3G license holders. This includes all outward communication by the company through any of the following channels: Advertising, DM, Sales Promotion, Packaging, the Internet, and others.

This section considers how the networks have been promoting their brands and services to date, as well as what strategy they might adopt to promote 3G services.

The analysis attempts to examine the following key issues relating to the networks’ promotion activity: strategy, spend, creative execution, target audience and media choices. However, it has not been possible to obtain all the information needed to consider each point in detail. In particular, published figures give total advertising spend and do not separate spend on data related services. Similarly, there is very little data available on expenditure on anything other than main advertising media. No data has been found on direct marketing, sales promotion activity or packaging. While it is safe to assume that advertising is the single biggest promotion mix channel by spend, it has not been possible to rank the elements of the promotions mix by spend or effectiveness, particularly with respect to promotion of data services.

It should also be noted that there is a high level of vertical integration between network providers and retailers in the mobile phone sector. Networks such as BT Cellnet, Orange, and Vodafone all sell mobiles through company-owned stores, as well as through other channels. This means that there is also significant synergy between network and retail advertising, making it difficult at times to separate spending on campaigns with a retail focus from campaigns with a network focus.

Spend

(Sources: company reports, Extreme, Mintel, Mystery Shopper.)

The networks have been spending heavily on promotion over the past few years. The majority of promotion spend has been directed towards above-the-line advertising in an attempt to build market share. This trend is set to continue as networks aim to drive usage of data services in a bid to increase ARPU and to drive take-up of 3G.

Table III.3.1 summarises expenditure for 2000 from all sectors within the mobile phone market.

£000 % of total

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Networks/service providers 148,882 56.9Mobile phone handsets 56,086 21.4Mobile phone retailers 32,201 12.3WAP handsets 22,320 8.5Mobile phone accessories 1,740 0.7Online retailers 526 0.2

Total 261,755 100.0

Table III.3.1 Total Promotional Expenditure by Sector 2000Source: ACNielsen MMS/Mintel

Total expenditure on all aspects of the mobile phone market stood at £261.8 million in 200018, with the networks accounting for well over half of this total (57%). With the mobile phone market reaching maturity, it is even more important for the four main networks to compete strongly with each other in order to gain new subscribers and to increase their share of subscribers.

The level of above-the-line advertising in the mobile phones sector has expanded significantly in the last few years as the market has grown. The majority of spend has been directed towards promoting the network brands and voice related services, mainly PAYG. Recently, more money has been directed towards data services such as SMS and WAP, but these still represent a fairly small proportion of overall spend. However, promotion budgets dedicated to data services are set to grow significantly over the next few years. As the market matures, and with new 3G services being introduced, networks will have to intensify their advertising in order to drive demand for new services. Table III.3.2 shows how the four networks have increased their main monitored advertising expenditure year on year in order to capture as large a share as possible of new subscribers, as well as to retain their existing ones.

Table III.3.2: Main monitored media advertising expenditure, by network operator 1996-2000*% change 1999-2000

18 across all advertisers, from the networks to handset manufacturers and retailers

1996 1997 1998 1999 2000 % change£000 £000 £000 £000 £000 1996-2000

Vodafone 16,697 11,016 19,901 25,775 46,416 +178.0One2One 13,834 24,215 38,835 46,662 33,638 +143.2Orange 18,806 18,660 27,478 26,154 26,016 +38.3BT Cellnet 12,666 16,895 25,980 29,412 15,881 +25.4Virgin - - - 4,088 15,475 +278.5*Others 3,210 940 2,368 9,544 11,456 +256.9

Total 65,213 71,726 114,562 141,635 148,882+128.3

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Source: ACNielsen MMS/Mintel

Main monitored media advertising expenditure by all the mobile phone networks grew by 128% between 1996 and 2000, to reach a total of £149 million. In 2000, Vodafone was the leading network in terms of expenditure, accounting for 31% of the total, followed by One2One with a 23% share. Orange accounted for 18% of expenditure while BT Cellnet cut back compared to previous years, taking 11% of expenditure.

2000 2000Advertising Spend (£m)

Revenue (£m) Advertising/ sales ratio (%)

BT Cellnet 38 3031 1.27One2One 35 Orange UK 21 2173 0.95Virgin Mobile 16 Vodafone UK 47 3458 1.35

Table III.3.3: Advertising to Sales RatioSource: Company Financial Statements, Nielsen MMS

We have been unable to source reliable figures for all networks, however, the biggest three players, namely BT Cellnet, Orange and Vodafone seem to be spending between 1 – 1.5% of their revenue on advertising. Clearly, overall promotion spend would be significantly higher.

Table III.3.4 below shows how the advertising spend has been split over the main media channels. It should be noted that due to differing financial year ends/ accounting policies etc. it is impossible to make direct comparison between spend in any given year.

Recent unverified reports in the marketing trade press help to give an indication of more recent expenditure: BT Wireless is rumoured to have lined up £150 million for a pan-European relaunch under a new name (mmO2)19 following demerger from BT.

Orange Direct, the business-to-business sales side of Orange, is rumoured to be spending £6 million on developing affinity partnerships with other companies, while Orange’s CRM account is reported to be worth £25 million20. Like other mobile operators Orange is investing heavily in direct marketing to stem customer churn and increase spend from existing customers. Orange's total direct marketing spend is estimated at £40 million if the Orange Direct business is included.

Spend (£m) 2000 1998 1997 1996

19 The Times, 13th September 200120 Campaign 20 April

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Company Brand Press TV Radio Cinema Outdoor Total

BT Cellnet 38.42BT Cellnet Mobile Internet

0.08 0.40 2.03 2.51 0.00 0.00 0.00

Genie – Mobile Internet

2.50 0.70 1.44 4.64 0.00 0.00 0.00

Total (data services)

2.58 1.10 3.48 7.15

One to One

One to One 6.80 21.00 5.03 2.35 35.18 49.50 39.95 24.33

Orange Orange Communication Services

8.70 6.40 3.30 2.94 21.34 22.08 27.82 18.45

Virgin Mobile

Virgin Mobile

5.40 7.55 1.24 1.31 15.50 4.35

Vodafone Vodafone Network Services

11.50 12.88 5.75 1.09 3.53 46.80 13.45 3.60 3.81

Table III.3.4: Media Spend Channel Breakdown Source: AC Nielsen MMS 2000. Rounded to nearest 100k.

Campaigns

ORANGEOrange continued to spend on its Just Talk package in 2000 with its 'No eek in our off-peak' campaign, and also announced a £70 million sponsorship deal with Formula One team Arrows in March 2000. In January 2001 a new campaign was unveiled using TV, press and poster advertising to promote Orange's Internet services with the strapline 'Orange puts the world in the palm of your hand'. The TV campaign uses human hands to show the personalisation of the company's multimedia services, emphasising their simplicity, ease of use, and relevance to everyday life.

ONE 2 ONEIntegral to the growth and awareness of the brand has been its high profile and award winning advertising campaigns. Back in October 1996, One2One first asked ‘Who would you most like to have a One2One with?’ From Kate Moss to Ian Wright, famous and not so famous faces were invited to answer the pertinent question.

August 1999 saw the introduction of a new campaign called ‘Welcome 2 your world’. With a new look and feel, it combined the emotional benefits of having a One2One with the rational advantages of high capacity mobile communication. Campaign executions focused on Vinnie Jones, Zoe Ball, and Michael Parkinson.

One2One launched a further range of television adverts in September 2000 with the theme 'Welcome 2 your world'. Later in the year, One2One launched

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a new campaign emphasising the reliability of its network and featuring performance-critical operations that rely on One2One for mobile communications, such as a hospital, airport and fire service. This campaign ran in the press, TV and outdoor media. In August 2000, One2One launched a TV campaign to support its sponsorship of the FA Charity Shield and England international matches. Black-and-white ads featured World Amputee Footballer of the Year and England captain Steve Johnson, with the strapline 'Supporting football for disabled people'. During Christmas 2000, One2One launched an £8 million campaign for pre-pay mobile phones to include press, poster and radio executions, with the aim of showing how easy it is to talk for a long time with a One2One pre-pay mobile. One version of the TV ad shows a man reliving his football-playing exploits on the phone to his girlfriend, with the strapline 'Our vouchers go on and on'. Another ad focused on a girl receiving the unwanted attention of a geek who bombards her with messages, aiming to highlight One2One's free voicemail retrieval service. The most recent campaign, ‘Life is a series of One2Ones’ featuring Gary Oldman, plays on the ‘intimacy’ and ‘bringing people together’ themes by showing how life is made up of a string of significant ‘one2one’ moments

Sponsorship is a crucial element of the promotion of One2One. It is one of 10 associate sponsors of the FA and is the preferred mobile phone supplier of the England team. It also sponsors the charity shield. Since 1997 it has been the sponsor of Everton FC.

Affinity deals and strategic alliances also play an important role in ongoing O2O marketing activity. In 1999 O2O kicked off its biggest promotional programme when it tied in with Coca Cola to offer Coke branded mobile phones, connected to the O2O PAYG service from an on-pack token-collect scheme.

VODAFONEVodafone’s 1999/2000 advertising campaigns focused on Pay As You Talk Allcalls and Pay as You Talk Smartstep. The campaign was designed to raise awareness and educate existing and potential customers about the benefits of paying up front. The tone of voice used in the campaign was straightforward, clear, simple and accessible, using the Hamish character who appeared in previous campaigns. The campaign ran on TV, outdoor poster sites and stylish magazines. Target audiences for the advertising included high call-making 20-34 year olds with active social lives and disposable incomes, 18-21 year old students concerned about costs, and mothers in their role as present buyers.

Recent brand advertising for Vodafone has led with the headline ‘You Are Here’, with the key proposition being ‘You are now truly mobile, let the world come to you’. The campaign focused on how Vodafone can deliver sports,

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news, weather, traffic updates, and cinema listings direct to customer’s mobile phones. In press and outdoor advertising the company employed an arrow device to indicate that Vodafone can bring all this information to customers wherever they are.

A major coup in 2000 was the £30 million four-year sponsorship deal of Premiership football club Manchester United. In September 2000, Vodafone launched MUFC-branded mobile phone handsets offering facilities for fans such as club news, goal updates and player information via the Internet. In December 2000, Vodafone furthered its interest in sports sponsorship with the announcement of a £12 million four-year extension of its tie-up with the England & Wales Cricket Board to sponsor the England Test side. Vodafone also signed a six-month £300,000 sponsorship deal with Classic FM in 2000. Vodafone has recently unveiled a £250 million global advertising assault, which aims to position the brand as being relevant to everyone. It is not known how this figure breaks down over the various countries. The campaign kicked off on 1st September with a 60-second commercial on UK and pan-European TV during the Germany versus England World Cup qualifying match. The global campaign, titled "How are you?”, opens with a girl answering her phone at a music festival. The ad then flips to a series of sections that aim to show how Vodafone users can communicate with others. The strapline is: "The people you need are only a touch away. Vodafone — How are you?" Oddly, the campaign focuses on voice only, without showing other ways to communicate.

BT CELLNETBT Cellnet launched its mobile Internet services with a £20 million above- and below-the-line campaign in February 2000 that used the strapline 'Surf the BT Cellnet'. The campaign used television from April 2000 onwards, and also 14,000 billboards across the country. This was a very visible promotion for the new WAP phone technology, although initial take-up of WAP phones was disappointing.

BT Cellnet became headline sponsor of the nightclub Ministry of Sound's first tour of UK universities from September 2000, using it to promote its Pay & Go pre-pay mobile phone service among this key youth audience. The deal also involved the promotion of the BT Cellnet brand through Ministry of Sound media channels, including its website, the Ministry magazine and a series of compilation CDs known as The Annual.

In the summer of 2001, BT Cellnet was the main sponsor on Channel 4’s hit reality show Big Brother, with 10 second idents promoting SMS appearing before and after each commercial break. The deal is reported to have been worth around £5m.

Promoting 3G

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Uptake of 3G and usage of advanced data services are crucial to the future of networks. It is therefore reasonable to assume that significant proportions of marketing budgets will be directed towards promoting these services. The challenge for marketers is to identify the messages that will motivate sceptical consumers. Promotion will have a number of objectives, the key ones being: to raise awareness and create excitement for 3G, thereby driving uptake and usage. In presenting new mobile services to the consumer, advertisers must steer clear of ‘tech speak’ and focus on the services that excite consumers, not the technologies behind them.

Broadly speaking, mobile phone advertising to date has typically taken one of two forms: The ‘lifestyle’ ad or the over excitable, technology-obsessed ‘future is here’

type ad; or Talking about what the product can actually do.

This second approach seems the more sensible of the two. However, it’s all too easy to get carried away and promise more than the product can actually deliver.

This is where the industry has gone wrong. WAP is regarded as a marketing disaster because it was heavily sold at the beginning, particularly by the BT Cellnet surfer ad which led people to believe that they would be able to surf the net on their phone in the same way as they would on their PC. This has led to a consumer backlash because the reality did not deliver on the promise and consumers felt cheated. The backlash has led to what is known in the industry as WAPathy. People are jaded by claims of fantastic innovations on mobiles and it is very hard to get people to listen.

This is the main problem faced by the networks in the run up to 3G launch. Advertisers need to be careful not to make the same mistakes again. A balance needs to be struck between hype surrounding what will be possible, and what is actually available to the consumer. Early indications are that the first 3G services to launch will be a far cry from the world of mobile connectivity touted in company brochures and press releases. While these will evolve and improve over time, creating high expectations now could lead to a repeat of the WAP disaster.

3G Promotion will start in earnest in 2002 as networks start to roll out their services. Current activity consists mainly of PR and corporate literature on designated areas of the networks’ corporate and consumer web sites.

Of some concern to the networks (and handset manufacturers) is the apparent lack of interest among consumers in new features and technologies such as WAP, GPRS and UMTS. Mintel’s research has shown that only 9% of consumers stated that the latest model was an important consideration and only 4% looked for a WAP/Internet-capable phone. Marketing efforts aimed at encouraging people to purchase the new, more technologically advanced 3G phones need to be increased if the network providers are to recoup the £23 billion spent securing UK licences.

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The target audience, by definition, will be anyone who has a mobile phone and uses the internet at the moment. This is supported by research from Nokia21, which suggests that the key factors influencing interest in 3G services are:

• Internet usage (used the internet for personal use within the last 6 months) – those that are most familiar with the fixed internet were more likely to be interested in paying for 3G services. The figures for internet usage show the greatest difference in interest levels. Their overall interest level is 50% (combining very/fairly/maybe) whilst those that did not use the internet have an overall interest of 29%.

• Mobile phone usage – existing owners are more likely to be interested in paying for 3G services (46%) but there is also significant interest from non-Mobile phone owners (28%).

• Age – as may be expected, the younger generation is the one more interested in paying for 3G services. Extremely high interest levels of the16–22 year olds contrast with the lower excitement from those aged 55+.

Early adopters of 3G services are likely to be mobile phone owners, internet users and aged 16–54 years.

TGI currently estimates that there are 10m such people in the UK. Given the above observations on customer attitudes, and given that 3G devices and services are going to be expensive, networks may need to start off by focusing on business users. Similarly, advertisers may benefit from identifying specific interest communities and marketing specific content related services which will be of interest to those communities. For example, advertising football related 3G content to football fans, business applications/content to business people/ corporates etc.

It is difficult to estimate how much the networks will spend on promotion. However, given that the potential target audience can be roughly estimated as between 5 – 10 million people, potential acquisition related spend would be between £0.5 – £1 billion over the first 3-5 years. In any event, this will have a significant effect on the advertising to sales ratio.

Table III.3.5 below illustrates a possible communication mix for the launch of a 3G brand, with an estimated spend of £50m over 12 months.

Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec

Turning strangers into acquaintances

Turning acquaintances into friends

Neutral branding Actual branding

Communication Tools

Launch on June 1 £m

21 NOKIA 3G Tariffing End User Study – by Nokia Networks 3G Research Centre April 2001

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Advertising Focused TV campaign

Focused TV Campaign

15

Sponsorship Sponsorship of World Cup TV coverage 10

Public events supporting sponsorship 0.5Focused press Heavyweight

Press4

Sponsorship of Goal of the Month

1

Focused Online campaign 2Ambient/Outdoor campaign 2

Recruitment in content specific media

0.5

Recruitment campaign on PDAs

0.3

PR Announce 'free' preview

Invite apps

Allocate Distribute

devices for 10k people

eBay auctionsfor previews

Events Announce concert

Invite apps

Allocate Where the Fun begins concert - June 1 1

Launch 5 a side competition

Competition starts Competition finals

1

Launch Music Events

Music Events start 1

Launch Gaming events

Gaming events start 1

Viral activity Fantasy Football game launches

Fantasy Football game launches

1

Music trivia quiz

0.3

Viral campaigns start for Football, Music and Games

1

Demonstration

Hutch Web portal launches

2

AvantGo service launches

0.2

iTV Channel launches

3

Retail stores openField Marketing starts 2

CRM Offer mailed to all prospects

Follow up mailings to unconverted prospects

1.2

50

Table III.3.5: Possible Communication Mix for 3G Brand Launch

To date, there has been a blanket emphasis, by all networks, on customer acquisition in a drive to gain market share. However, with the market reaching saturation, and with networks experiencing very high churn rates22 (anecdotal estimates put defection rates at 30 – 50%) marketers have to pay more attention to retention and loyalty marketing, and this will be reflected in growing DM/ CRM budgets.

At the same time, the evidence suggests that awareness and desire for high value 3G data services are low. This means that marketers will have to maintain a high level of advertising spend to combat this inertia. Identifying

22 Contract plans are decreasing as a percentage of all accounts, which is leading almost to a loss of customer ownership. Cutomer barriers to exit are low, and this reduces loyalty, especially in the fickle fashion / cost driven youth market. It is very difficult to maintain a customer relationship with a prepaid customer.

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and targeting the right segments in terms of product development and promotion strategy will be key to a successful launch.

Budgets will be directed towards high awareness activities such as ATL advertising, sponsorships and sales promotions as well as product demonstrations. As the services themselves become faster, cheaper and more content rich the operators hope that their advertising expenditure will forge an unbreakable link between their brands and the mobile net.

D. PLACEMENT/ DISTRIBUTION

All four mobile phone networks run their own retail chains in the UK and some have part shares in other retail chains. BT Cellnet sells mobile phones through its BT Shops network, DX Communications, the Mobile Phone Store chain, and also owns 40% of shares in the DSG specialist chain The Link. One2One owns The PocketPhone Shop, while both Vodafone and Orange run their own retail networks. Furthermore, all the major networks also offer their services and packages via other retail chains, such as The Carphone Warehouse, and via independent and non-specialist retailers.

The retail distribution pattern for mobile phones has widened considerably with the growth in popularity of pre-pay mobile phones, which are sold off the shelf as all-inclusive packages. The simplification of the retail process has made it possible for all types of retailer to offer mobile phones, as they do not have to deal with the administrative process of credit checks, advising customers on contracts and setting those contracts up. This has in turn opened the way for non-specialist retailers, from supermarkets to catalogue showrooms, thereby widening the distribution net.

Another increasingly important form of distribution for mobile phones is via a range of direct channels that include traditional mail order, direct sales from network providers, the Internet, and direct-response advertising via television and direct mail. Other businesses such as clothing retailers also offer branded phones - Marks & Spencer, for example, offers a range of Orange mobile phones.

1997 1999 2000

The Carphone Warehouse 123 250 455Vodafone Retail Services 250 260 370The Link (Dixons) 90 127 226The PocketPhone Shop** 46 132 168DX Communications* 130 140 150The Mobile Phone Store 30 90 137Orange 13 82 137The Mobile Phone Centre*** 80 90 98

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BT Shops 105 98 96Phones4u 45 74 81

Total 912 1,343 1,918Table III.3.6: Major specialist mobile phone retailers 23 in the UK, by number of outlets, 1997-2000*owned by BT Cellnet since 2000 ** owned by One2One since June 2000 *** franchised dealer network set up by Vodafone. Source: Mintel

The rapidly maturing nature of the mobile phones market has meant that some of the smaller independent retailers and chains have been squeezed out in the last couple of years as competition in the market has intensified.

Table III.3.6 shows that the largest specialist mobile phone retailer in terms of numbers of outlets is The Carphone Warehouse, with 455 outlets at the end of 2000, and Vodafone Retail Services is the second largest with 370 outlets. Both have expanded their store numbers through the acquisition of other chains and via general expansion programmes. The Carphone Warehouse has over 1,000 stores in 14 countries and uses three store formats, with most being the company's standard high street format. Smaller 'express' format stores are sited in locations such as railway stations, while the larger 'plus' stores occupy more extensive out-of-town locations and offer a wider range of non-mobile phone products such as PDAs and fixed-line telephony equipment. The Carphone Warehouse recorded sales of £436 million in 2000, up by 65% on the previous year, with customer numbers up by 27% to 650,000. Early in 2001, The Carphone Warehouse announced that it was to create a new virtual network (using BT Cellnet) in a joint venture with the Financial Times. The aim is to provide high-quality handsets from Siemens, Sony and Nokia which offer a premium business/financial content via FT.com, aimed mainly at the business user.

The PocketPhone Shop has also grown quickly in the last few years and was taken over by One2One in 2000, having previously been part-owned by BT Cellnet. The chain also operates a number of in-store concessions in Time Computer stores (with around 19 in 2000). The Link is part of the DSG empire and is also 40% owned by BT Cellnet, although stores also sell Orange and One2One phones, but not Vodafone packages. DX Communications was purchased by BT Cellnet in September 1999 for £42 million and has around 100 standalone stores and 50 concessions in Powerhouse stores. Orange operates its own retail chain under the Orange fascia, with approximately 137 stores in March 2001.

Table III.3.7 outlines the retail structure for the years 1998, 1999 and 2000.

The specialist multiple chains such as The Carphone Warehouse accounted for the largest share of the retail market, with 44% of volume sales in 2000. This share has fallen by one percentage point since 1998, due largely to the

23 chains with more than 50 outlets

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popularity of pre-pay phones and the subsequent widening of the distribution base for the products. The share taken by other retailers has risen slightly, by 2 percentage points since 1998, because pre-pay phones are easy to stock and sell in non-specialist outlets.

1998 1999 2000 % change000 % 000 % 000 % 1998-2000

Specialist multiples*

2,214 43 5,214 44 7,260 44 +227

Electrical/general multiples

1,030 20 2,252 19 3,465 21 +236

Mail order/direct sales

772 15 1,659 14 1,650 10 +114

Supermarkets 309 6 830 7 1,155 7 +274Others** 824 16 1,896 16 2,970 18 +260

Total 5,149 100 11,850 100 16,500 100 +220Table III.3.7 Retail volume sales of mobile phone handsets, by outlet type, 1998-2000*incl The Carphone Warehouse, The Link, DX Communications, etc** incl mixed retailers, department stores, InternetData may not equal totals due to roundingSource: Mintel

Despite the growth in pre-pay sales through non-specialist outlets, there remains a degree of loyalty to the specialist retailers, which are able to offer a wider choice of packages and handsets. Some 44% of sales were via this channel in 2000, while electrical multiples accounted for 21% of sales in the same year.

The supermarkets have grown rapidly since the pre-pay sector was introduced in 1996, accounting for 7% of mobile sales (exclusively pre-pay) in 2000. In general terms, over three quarters of mobile phones are sold through shops, with 16% bought over the phone and only 1% via the Internet (not tabulated).

Sales of mobile phones over the Internet are steadily increasing, although they still account for only a very small proportion of total sales. Most of the leading retailers and networks have their own web sites where customers can buy online, while a number of specialist Internet-only retailers have also appeared in the last few years. With steady growth in sales and use of WAP phones, coupled with the forthcoming 2G and 3G phones that will allow progressively improved Internet access and use, sales of phones via the Internet are likely to rise more sharply. Companies will be able to target mobile phone users with adverts sent direct to the handset via SMS in a bid to encourage purchasing of new handsets or contracts. The newer Internet-only retailers include e2save and Kondor, while established specialist retailers

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such as The Carphone Warehouse, PocketPhone Shop and Phones4u also sell in this way. The prospect of 3G phones in the next two or three years, however, is likely to be of benefit to the more specialist retailers. Consumers will need more expert advice, at least initially, when purchasing such phones - 3G will offer more in the way of features and facilities than existing phones, so there will be more confusion and ignorance among consumers regarding what services are available and at what cost.

The market may, therefore, polarise between those who are relatively uninterested in using Internet-based services from their mobile phones and those who are keen and active users. This being the case, the market may split further between very basic pre-pay phones and highly featured multimedia mobile phones capable of video-conferencing, showing TV or video clips and with full Internet access. The supermarkets and other general retailers are unlikely, at least initially, to be able to display or explain such products effectively. There is thus likely to be greater growth in sales via specialist retailers in the next few years.

E. PRICING This section examines current pricing practices for mobile data24 and considers how these may evolve as data usage grows. Pricing is a key issue for operators not only because it determines revenue but also because getting it right is a major driver in the adoption of new technology. The importance of price in the purchasing decision is evidenced by the fact that over a quarter (26%) of consumers are influenced by special offers25. This is more so with pre-pay as barriers to switching are low.

Network Tariffs

The various operators have a vast array of contract based and pre-pay call plans, each carefully designed to suit different segments with different usage patterns. Table III.3.8 summarises main call plans (both voice and data) for the four network operators as of 30th August 2001. It should be noted that these are subject to frequent change as networks react to market conditions and competitor activity. It should also be noted that Orange will match other tariffs, so one could be on the Orange network, with a Virgin tariff.

Unsurprisingly, current pricing schemes have been primarily designed for voice calls, i.e., on an airtime, subscription and connection fee basis, and not for mobile data services. The main distinction is between contract and pre-paid plans. Most contract call plans include a certain amount of ‘free’ minutes. Pre-paid plans have a lower entry barrier in terms of cost and provide

24 SMS, SMS information services, Web access over WAP and GPRS, 25 Mintel

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customers with an almost immediate service provisioning.26 According to Mintel, consumers aged 15-24 and over 55 favour the pre-pay option, while 25-54s account for the higher proportion of contract users due to differences in usage patterns/ income.

There will be greater competition between the networks over the next year as they attempt to encourage users to switch networks, given that there will be fewer first-time buyers entering the market. This increased competition will inevitably lead to a fall in voice call rates. Profits made from voice traffic via mobile phones are likely to decrease, with the networks currently researching areas where consumers may be prepared to pay for extra data services such as traffic information, vicinity-based services, etc. It is important to distinguish between paying for carriage of the data versus paying for content. MNOs will not always own the content, and the value in and therefore revenue from the content may belong to the content provider. It is almost certain that MNOs will get a share of such revenue.

26 Prepaid calling plans were critical in capturing the lower segments of the market and boosting the strong demand for cellular services. Customers in the youth segment and lower income individuals prefer prepaid calling plans.

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Network talk plan monthl

y talk time std call charges (p) text data

callsmobile web Inclusiv

e     charge Included p mth Peak off messages

* (WAP/ GPRS)

data    £ Mins per min per

minpence pence pence per

min 

               ORANGE                  Contract Talk 60 17.5 60 15 5 7        Talk 150 25 150 15 5 6        Talk 500 58.75 500 13 5 6        Talk 1800 176.25 1800 13 5 5        Talk 5000 470 5000 12 5 4        Talk 10,000 940 10000 10 5 10        High speed data10 n/a 15 5 10 20    everyday 50 15.5 50 p day 35 1 10       anytime 75 17.5 75 10 2 5        precept 200 25 200 5 5 5        precept 400 35 400 5 5 5        precept max 75 3000 35 35 5      PAYG £5   20 10 10        £10   20 10 10        £15   20 10 10        £25   20 10 10        £50   15 5 5                     BT CELLNET

                 Contract My Time Net

20012.99 200 evening/

wend36 2 12 10  

  My Time Net 600

15 600 evening/ wend

36 2 12 10    Net 100 18 100 18 5 12   10    Net 200 25 200 18 5 12   10    Net 400 40 400 18 5 12   10    Business First 13.99 n/a 10 8 12   10    Fax & Data 0       std call      GPRS Option              Pay as you

use3.99         2p per Kb none

  Value Bundle 7.99         0.39p p Kb 1MbPAYG     25 10 10   10                 One2One                  Contract One2One 20 9.99 20 25 2 10 10    Talk & Text 15 500 off pk + 50

txts  10 10  

  Anytime 75 17.5 75   10   10    Precept 200 25 200   10   10    Precept 400 35 400   10   10    Precept Max 75 3000 free free 10   10    Fax & Data 0       std call    PAYG     30p for first 2 mins then

5p        

               VODAFONE                  Contract Leisure 500 14.99 500 evening/

wend34 2 12    12  

  Leisure 200 14.99 200 evening/ wend

15 2 12    12    Vodafone 20 12.99 20 15 5 12    12    Vodafone 60 17.5 60 15 5 12    12    Vodafone 150 25 150 10 5 12    12    Vodafone 350 40 350 10 5 12    12    Vodafone 700 70 700 10 5 12    12    Vodafone 1000 95 1000 10 5 12    12    Fax & Data 0       std call      GPRS Option 1 3.99         2p per Kb none  GPRS Option 2 7.49         0.5p p Kb 1MbPAYG All Calls   35 5          Smartstep     25 5 12      

*Data calls = using a modem and the mobile phone to transmit data to laptop/ PDA (as opposed to using landline)

Figure III.3.8: Tariff Plan Summary for Main Mobile Network Operators All tariffs inclusive of VAT.

SMS is normally charged per message, although some plans include a certain number of ‘free’ messages per month. WAP access is charged by the minute,

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with most operators charging 10p – 12p per minute. On some of the networks, WAP calls are allowable against ‘free’ time, on others not so.

Most operators provide a fax and data service, which allows for the mobile phone to be used as a fax line/ internet connection (instead of a landline) provided user has a laptop and a modem with all the necessary software. These calls are usually charged at normal call rates although Orange offer a high speed access service for £10 a month plus 20p per minute.

With new GPRS handsets likely to become the norm over the next 18 months, and with 3G rollout looming, more users will be able to access Internet-based data. GPRS call plans are charged on a monthly fee plus cost per Kb downloaded.

Pricing Policies

Pricing for mobile data services and applications can be classified in two main categories, unmetered (flat rate) and metered pricing. Flat rate pricing usually benefits a small percentage of very active users (20%) that are subsidised by a larger group of less active users (80%).

Unmetered PricingFlat-rate pricing does possess some important advantages. For one thing, it promotes greater use of services. Implementing flat rate billing for the services is much less costly than metered billing. However, setting the right rate for unmetered access is critical, and it is reasonable to assume that operators will review their pricing strategy on a regular basis and take corrective measures depending on demand.

Metered PricingMetered pricing allows MNOs to bill for services based on increments of usage. Billing for voice services based on time is the natural established mode for quantifying the value of the call. However, time-based pricing is unsuitable for data services and contributed to the failure of WAP services. Slow connections and long waiting times have resulted in unpredictable prices for information.

For ‘always on’ GPRS services, many operators have now moved on to volume based pricing – i.e., charges are based on the data that is accessed or transmitted, rather than the time spent on calls. This is leading to even higher prices as the price for a 10 kilobyte packet is set to be between 3p – 5p. Prices can vary dramatically for a fixed amount of data from operator to operator. Nevertheless this pricing model is considered a better representation of value then traditional time-based one. This may, initially, lead to renewed demand for contract-based tariffs because many consumers may find it difficult to assess how much information they are handling. A tariff that offers a predetermined amount of free megabytes per month may at first be an attractive proposition, at least until users become more accustomed to the different methods of charging.

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Although there is no single best billing scheme for all services, it can be argued that the key to unlock the full market potential will be value based, and thus, MNOs should adopt differentiated pricing policies based on the perceived value of a service or application. Table III.3.9 highlights some of the options.

Table III.3.9: Pricing Options for Various Mobile ApplicationsSource: Durlacher Research

A good example is the current pricing for SMS, which is priced at various levels depending on the perceived value of the information. For example, a simple person-to-person SMS may cost 10p while a share price sent via SMS might cost 50p and a ring-tone up to £2.50.

Pricing 3G

With the rollout of 3G, value based pricing can get even more sophisticated – for example: a user’s location could also affect pricing. Calls made from different locations can be priced according to the value derived from them - carriers may offer lower rates to people using the mobile phone from home instead of a land line.

An important differentiator will be the pricing associated with accessing data in different modes of mobile services. In the next couple of years, a user of a multi-mode device will be able to choose between downloading a file in a more expensive public UMTS cell or utilising a cheaper local WLAN connection. Another example will be differentiated pricing between voice and data calls.

A tariffing research study from Nokia Research Centre27 examined 3G tariffing issues in Europe. Flat fee (i.e. unmetered access) and standard package28

emerged as the most preferred tariff structures according to consumers (favoured by 78% and 69% of respondents respectively). File size charging is the least preferred tariff structure (also the one that people are less likely to be familiar with).

27 NOKIA 3G Tariffing End User Study – by Nokia Networks 3G Research Centre April 200128 A standard package provides access to the most popular services for a low monthly fee. User can then choose to use extra services for an additional fee. This is similar to the way iMode is being priced.

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It concluded that the key for operator success will be in offering bundles that appeal to different segments.

Respondents felt that the flat fee option was easy to understand, easy to monitor spend, there was no need to worry about time spent exploring, and you knew what was included. It represents the easy, no risk, option where you do not have to be worrying about the different costs and how they build up. The standard package offered similar benefits, although there were questions about what would be included within the package.

It should be noted that respondents were not shown any price points for different tariffs. It may be that when these are considered the standard package would be more popular than the (more expensive) flat fee.

File size charging was seen as confusing and not something that customers identified with. They complained that they did not know the size of files, found it confusing, would not pay attention to file size anyway, and felt that they would lose track of their spend.

Other tariffing options considered were:

• Subscriptions + minute charge:User pays a fixed monthly fee and then a charge for each minute used on the services • Per use fee:Each time a user visits a site on the Internet or use a service, they pay a fee

• Minute band charging:User pays for each minute that they are using the services. The amount paid per minute reduces the more the service is used.

There is a growing belief that the four existing mobile phone networks, along with a joint venture between Hutchison 3G, NTT DoCoMo and KPN Mobile, paid too much at £23 billion for the 3G licences. As such, there are some observers who believe that the networks will need to recoup some of this via increases in prices for either pre-pay packages, contract phones, call charges, or all three. However, an OFTEL report in 1998 highlighted the issue of call charges, placing the networks under constant scrutiny and making it more difficult for them to raise call charges significantly. It is more likely that they will attempt to raise more revenue by encouraging customers to trade up and to spend more on accessing data via their mobile phones.

It is not yet clear how much operators plan to charge or how they plan to bundle/ bill 3G services. Naturally, the various operators are keeping their cards close to their chests for the time being. However, the way forward to successful data services uptake must be value-based pricing. Although the underlying infrastructure will remain a key parameter in determining the

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number of customers and the services they might use, to optimise revenues at all times for operators, the perceived value of the service must be the determining factor. This is in contrast to pricing of voice services, which are more likely to be determined by the intensity of the competition and the cost of providing the service. It may be that operators will subsidise voice calls as loss leaders to encourage uptake of 3G services.

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SECTION 4 UK MARKET BUSINESS MODEL

The Model

This model has been devised to try to establish the vulnerability of the whole industry and to see if the payback periods mooted of between 5-10 years are reasonable. The model has been built in MS Excel, and it is parameter driven.

We have adopted a non-accounting approach, but have got as close as we can to a cash flow model without using forecast accounting data. However, key variables have been extracted from the published financial reports of both Orange and Vodafone for the UK for 2000, and prorated accordingly for the UK industry, and average multipliers for key ratios have been derived from market data (see Marketing Mix)

Forecast data for the market size has been taken from published reports (see the sections on Marketing and Market Structure).

The objective of the model has been to determine the true annual cash flow EBITDA from operations, excluding the investment required in the 3G licences and in the infrastructures for a 10 year period for 2.5G and 3G, and then to present value (PV) those at an assumed WACC. Similarly, the annual investment required in the 3G licences and 2.5G and 3G infrastructures have been determined, and these have also been PVd at the same WACC.

By subtracting one PV from the other we can see if a PV profit is made or not – in other words does the industry have any surplus value over the 10 year period to justify the investment decisions.

The model is set out overleaf, and year 2000 EBITDA for the model is almost that of the summation for the UK mobile industry, and so the model has been taken to be a good enough fit for our purpose.

It is interesting to see, on the basis of the parameters used, that the whole UK mobile industry gives rise to a negative annual EBITDA in 2003, and the PV of all EBITDAs over the next 10 years is negative, and the PV of the investment required cannot be matched – i.e. the investment cannot pay back.

The conclusion of this for the UK is that the break even will take longer than the 10 years mooted, and will certainly require a 20 year view to be taken. Additionally, a PV break even will only probably be achieved overall if user churn and handset subsidies are dramatically reduced in years 10 to 20, or earlier, and if infrastructure sharing is permitted by the competition authorities.

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Table III.4.1 UK Market Model

UNITED KINGDOM

88% of UK population from here

on25.7 p.m.

revenue2.0% p.a.

thereafterYear 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Population 58,000,000 59,160,000 60,343,200 61,550,064 62,781,065 64,036,687 65,317,420 66,623,769 67,956,244 69,315,369 70,701,676 72,115,710 28% 8% 4% 7% 14% 2% 2% 2% 2% 2% 2%

Handsets in use 32,081,712 41,144,617 44,620,623 46,254,864 49,549,287 56,297,017 57,422,957 58,571,416 59,742,845 60,937,702 62,156,456 63,399,585 Year on Year

Increase 6,000,000 9,062,905 3,476,005 1,634,241 3,294,423 6,747,730 1,125,940 1,148,459 1,171,428 1,194,857 1,218,754 1,243,129

Cash Flows:Total Mobile

Revenues £M9894 12689 13761 14265 15281 17362 17709 18063 18425 18793 19169 19552

Income Sharing %

15% 15% 15% 20% 25% 30% 30% 30% 30% 30% 30% 30%

Income Sharing £

-1484 -1903 -2064 -2853 -3820 -5209 -5313 -5419 -5527 -5638 -5751 -5866

Maintenance of Infrastructure

-1077.3 -1677.3 -3222.3 -4467.3 -5727.3 -5727.3 -5727.3 -5727.3 -5727.3 -5727.3 -5727.3 -5727.3

15%Total Promo

Spend at-495 -634 -688 -713 -764 -868 -885 -903 -921 -940 -958 -978

5.0%

Handset Subsidies Increase

-600 -906 -348 -163 -329 -675 -113 -115 -117 -119 -122 -124

Previous Base % Transfer

25% 25% 25% 25% 25% 25% 25% 25% 20% 25% 10% 5%

200Handset

subsidy turn base

-898 -1604 -2057 -2231 -2313 -2477 -2815 -2871 -2343 -2987 -1219 -622

Employees 40132 51469 55817 57862 61983 70424 71832 73269 74734 76229 77753 79308Av Employee

Salaries25675 26317 26975 27649 28340 29049 29775 30520 31282 32065 32866 33688

Overheads -2576 -3386 -3764 -4000 -4392 -5114 -5347 -5590 -5845 -6111 -6389 -66792.5

EBITDA 2764 2577 1618 -163 -2064 -2709 -2491 -2562 -2056 -2729 -997 -443PV EBITDA at

WACC of£2,764 £2,343 £1,337 -£122 -£1,410 -£1,682 -£1,406 -£1,315 -£959 -£1,157 -£384 -£155

10% -£2,148 TOTAL PV

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D&A Requirement

Fixed Assets at entry

7182

2.G upgrades 4000 20003G Licences 22500

3G infrastructure

8300 8300 8400

Total to amortise

29682 4000 10300 8300 8400

Capital Investment

7182 4000 10300 8300 8400 0 0 0 0 0 0 0

Cum Infrastrucure

Capital

7182 11182 21482 29782 38182 38182 38182 38182 38182 38182 38182 38182

PV of D&A £29,682 £3,636 £8,512 £6,236 £5,737 £0 £0 £0 £0 £0 £0 £010% £53,804 TOTAL PV

Diff PV of EBITDA and

D&A

-£55,952

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PART IV ANALYSIS OF THE JAPANESE MARKET

SECTION 1 JAPANESE MARKET DEMAND

A. Today Japan is due to launch its 3G commercial service well before the rest of the world – later in 2001, as opposed to 2003 in the UK. And it will be in demand. In Japan, the capacity problems we have seen recently on UK networks are increased many times over, because there is a more limited spectrum allocation on the PHS system used there therefore the push for 3G in Japan is especially pronounced. Analysts say thats because Japan has so many non-standard proprietary systems and radio spectrum is being used up, another technological standard is needed. This means expansion of the existing networks is not an option. Instead, 3G is the solution.Though the fastest mobile phones in Japan today can download data at 64Kbps -- a sufficient rate for using e-mail -- trying to send pictures or surfing the Internet at that speed is still a time-consuming drag, officials said.

Record numbers of Japanese are already using their cell phones and PDAs to send e-mail, check the weather forecast and reserve tickets. However, executives from NTT Mobile Communications Network (NTT DoCoMo), Japan Telecom, Kokusai Denshin Denwa (KDD), DDI, and IDO say that today's sluggish data transmission rates are not fast enough for the services customers want according to the officials while speaking at the third annual Japan 3G (third-generation) Mobile Systems conference in Tokyo.NTT DoCoMo, Japan's largest cellular service provider with just under 60 percent of the total market, said that its i-mode cellular data service has been growing much faster than the company expected. I-mode cell phones give users access to some on-line services, such as banking and ticket purchases, enable them to send and receive e-mail, and access a limited number of simplified Web sites. Japan Telecom reports a similar demand for data services.

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Figure IV.1.2: Graphical Illustration of Mobile Communications for Multimedia

The World Tomorrow

To meet the growing demand for data services over mobile devices, Japanese telecommunications carriers are scrambling to bring out next-generation mobile broadcasting technology.

The goal of 3G technology is to create a single device which will incorporate all aspect of communication in the modern world.

While 44 million Japanese use mobile devices now, that number is expected to skyrocket after 3G products appear on the market. Japan Telecom's Hashino thinks that the demand for mobile devices will immediately increase by 20 percent in Japan with the launch of 3G.

Tokyo-Mitsubishi's Iba puts that number even higher, saying that Internet surfing, for example, will become a major role for mobile devices. Declaring that 3G would "…write a new page for mobile communications in the 3G wireless technology [and] promises broadband capabilities on cellular phones”. Users will be able to view video content and listen to audio on their devices, which will support high-speed data and voice, as well as advanced global roaming. NTT DoCoMo has launched a trial 3G service, securing its place as

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frontrunner in the race to provide services such as videoconferencing and fast Net access on mobile phones.

Among the 4,500 phones distributed are 1,400 standard phones, 1,200 phones equipped with a video screen, and 1,900 "data card" phones for dedicated mobile high-speed data transmission. Most of the phones have already been handed out free of charge to testers, although the video phones have been delayed and won't be available till later on. Users will pay transmission fees in the range of US$0.80 and US$1.25 for 3 minutes.

Testers, both individual users and companies, will provide feedback on how well the phones work so DoCoMo can fix problems before releasing the phones to the public in October, and is likely to be keenly watched by foreign carriers who have invested heavily in the still unproven technology.

DoCoMo received more than 147,000 applications for the trial service, the same number of subscribers that it expects to sign up by March 2002.

B. Demand Curves

What will drive demand?

Visible demand will give the Japanese manufacturers more room to manoeuvre.

The push to faster bandwidth is being driven heavily by demand for better cellular services in Japan. Wireless data applications, such as wireless banking, are already seriously catching on in Japan.

Table IV.1.1: Existing and Projected growth in total number of mobile

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Internet Subscribers in Japan from 2000-2005 (Source: NTT DoCoMo)

The following are key-success factors of Japan’s mobile internet services and 3G is expected to improve these services, therefore demand will be ensured.

1. Packet-based networks provide always-on connectivity: this provides customers with the benefit of immediacy;

2. Speeds are low (i-Mode only offers 9.6 kbps), but applications are useful;

3. The prices for services are relatively low. i-Mode customers may pay up to € 3 per month for a service channel (although many service channels are available at no cost to the end-user). The price of traffic itself is low as well. NTT DoCoMo have charging capabilities that allows it to bill per byte, and the price per byte is low;

4. Low-usage of fixed-line internet access

5. The youth segment shows significant interest in mobile internet services.

Killer applications in Japan are actually very similar to the applications and services that are very popular in Europe today including SMS messaging, ringing tones and icon downloads.

``Japanese consumers are more willing to pay for mobile content because the settlement system is smoother and more established than in the United States,'' said Fumitaka Okumura, a senior analyst at Jupiter. And Japan's wireless Internet market has even more room to grow, for companies such as airline operators, music providers and advertising firms, he added. With DoCoMo expected to roll out Java-enabled29 mobile phones shortly, security-conscious users will likely be attracted to the market as well.

Taste

All Japanese operators regard the development of handset technology as a key success factor in the uptake of their mobile data services. Their focus is primarily on multimedia and processing capabilities.

C. Substitute Goods

Substitute Products in the marketplace for the use of data.

Fixed Access Technology Alternatives

The equivalent of ADSL and Leased Lines, (See PART II Technology & Product background, A. Technology Evolution for more details), which operate

29 Java is a versatile programming language that will boost security for mobile phone-based commercial transactions.

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at high speeds linking PCs and palmtops to the internet will continue to provide substitute services for data to those provided by mobile wireless operators. However, this has not been a large market, as dedicated line costs in Japan are expensive, and Internet penetration by households ahas not been large.

Mobile Access Technology Alternatives

There are other mobile access technologies that compliment or replace UMTS for particular business or consumer applications. These are Infrared (irDA), Bluetooth, UWB, and WLAN. (See PART II, Technology & Product Background – A. Technology Evolution for more details).

Alternative Services

I-ModeI-mode is a packet-based communication network that is built into NTT DoCoMo’s PDC framework. The packet technology provides always-on connectivity where content is created in compact HTML (cHTML). Customers are charged for packets received by the mobile. Speeds are low offering connectivity at 9.6Kbps but because i-mode users are permanently on-line it gives the impression that it is faster than WAP. i-mode is marketed as a brand while WAP is marketed as a technology. It will work on GSM networks but operates better on GPRS and 3G networks.

I-mode is not technology specific, but based on open technologies and it provides leisure, transport, electronic trade, games and screensavers for its users. Within a period of two years the i-mode subscriber base has grown from zero to over 23 million and generates over 40 million page views per day.

I-mode under GPRS is considered an alternative to 3G services in Japan, and could be a true substitute product to full 3G mobile data services. But because of saturation of existing GSM networks in Japan, on which I-mode operates at the moment, its expansion is blocked unless further investment is made in these GSM networks. Accordingly it is likely to drive faster rollout of 3G services, as a carrier of the i-mode service, but it will remain a substitute competitor to 3G services for the laggards, who will be content with the existing GSM carrier.

J-Phone and J-Sky

J-Phone, a mobile operator, has recently introduced a video phone, on GSM services with content provided under the brand of J-Sky. The video-phone is made by Sony, and J-Phone have an exclusive distribution agreement with them for Japan. For the youth segment, this is a current ‘must-have’ accessory, but the bandwidth required while in use is contributing to overload of the GSM service. It will be available shortly on 3G. Those who move to 3G will find that the picture quality and refresh rate are much better than on GSM,

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thus leading to user transfers. As a result, the overload on GSM should reduce, and the video-phone service will thus improve on GSM, which for laggards who have already purchased them, will remain a substitute to 3G services.

D. Complementary Goods

In order for 3G to be a success, as I-mode and J-Sky have been, it is very important to provide the consumer with good varied content, such as full access to the internet, telephone banking, entertainment, e-mailing, music and video.

There is another aspect of mobile telephony which could prove far more damaging to the industry if not addressed. Currently there are three standards for 3G. The US favours CDMA2000 and parts of Asia have already adopted w-CDMA. In Europe, the European Commission prefers UMTS. All three standards are incompatible with each other, which means separate handsets and base stations need to be developed for each type of service. This will defeat one of the advantages of 3G which is the international roaming aspect.

So it is important that the right device is eventually put out on the market for the international business user who will most likely be the initial main users.

E. Market Size

Takeshi Hashino, Japan Telecom executive advisor to the board, said that around 40 percent of all traffic on his company's mobile broadcast systems was data-related last year, and the percentage is rising.

"Data services on mobile phones are growing rapidly in Japan. For example, entertainment services, like astrology information, are very popular with young kids in Japan," said Toshiaki Iba, senior analyst at Tokyo Mitsubishi Securities.

Effect of Government Legislation on Demand

In Japan 3G licences were allocated free of charge (but subject to a revenue sharing agreement, the terms of which we have not been able to determine) by government selection to NTT DoCoMo, KDDI/au-Group and J-Phone on 12th July 2000. The distribution of 3G licences became known as a beauty contest, in that only companies deemed to have the technology to implement a 3G network were awarded a licence.

Market Forecast

The number of mobile phone users in Japan jumped about 20 percent to nearly 60 million last year as wireless services become one of the fastest-

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growing areas of the economy, data collected from wireless carriers showed on Thursday 30th August 2001.

The total number of mobile phone subscribers in Japan stood at 58 million as of the end of December 2000, according to preliminary numbers collected from Japan's three main providers -- NTT DoCoMo (news - web sites) Inc (9437.T), DDI Corp (9433.T), which is better known as KDDI, and J-Phone, Japan Telecom Co Ltd's (9434.T) wireless unit.

That is a 19.66 percent increase from 48.46 million a year earlier, and does not include data from the PHS (personal handyphone system), a more limited cellular phone service.

Kate Lye, a telecoms analyst at UBS Warburg, said the strong growth was due to the introduction of new handsets with color screens, as well as a seasonal boost since many Japanese receive semi-annual bonus payments in December.

Of the total 58 million, 26.79 million subscribers had Internet-enabled mobile phones, up 11 percent from November.

Number one wireless carrier, NTT DoCoMo, said it had 34.22 million subscribers at the end of December, of which 17.16 million used 'i-mode', the hugely popular Internet-access system that allows Web-surfing on business card-sized screens.

Second-place, KDDI, whose mobile service operates under the brand ``au,'' made a comeback in December after sluggish growth for most of 2000.

It increased its subscriber base by 197,500 in December, a faster pace than the 10,000-70,000 users seen in recent months, to bring its total to 10.48 million. Including subscribers from a separate regional unit, the total for KDDI comes to 26.39 million.

KDDI's Internet service, called EZweb, also hit a milestone of five million, garnering 5.17 million subscribers.

Number-three, J-Phone, which has been marketing aggressively with a wide range of handsets with colour screens, added 156,700 new subscribers to bring its total mobile phone user base to 9.47 million.

Together with PHS, the total number of mobile phone users in Japan reached 63.8 million in 2000, or nearly a half of the country's population.

The market for mobile handheld devices is forecast to reach a saturation level of 88% by 2006.

The value of Japan's wireless Internet market will surge by about 1,400 percent by 2005, as 'handy is mighty'-oriented consumers gear up to surf the web on their mobile phones, a research firm predicted.

The figure, which includes the transaction value for mobile phone content, shopping and advertising, is seen growing to 594 billion yen ($5.11 billion) in 2005, a jump from last year's 39 billion yen, said Japan's Jupiter Media Metrix

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K.K.

Jupiter predicted the number of Net-enabled phone users to balloon to 66 million by 2005, against 27 million last year.

 

Figure IV.1.4 Increase of Subscriber Number of i-modei-mode subscriptions exceeded 26,398,000 as of August 12, 2001.

Of which 5,340,000 are iappli compatible 503i.

Note: Amounts are truncated.

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Figure IV.1.4 continued: I-mode subscribers, monthly

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F. Latent Demand

From a marketing perspective, i-mode fulfilled three important criteria:-

i) The need for a technology that would allow people to be in contact with others while they were on the move was matched by a want from consumers; and

ii) consumers were prepared to pay for it, and in so doing created a demand; and

iii) mobile telecom operators in Japan were there to supply that demand.

Latent demand is based on a supplier persuading a consumer that they need certain products. As demand for the use of this type of technology is already on hand in Japan, persuasion is not needed.

The success of DoCoMo's i-mode service will create a latent demand for additional mobile services which will require the higher data rates, increased capacity, and improved spectral efficiency of 3G technologies.

Otherwise, as they are way ahead of everyone else in this industry, it is almost impossible to give any real detail of likely latent demand for 3G in Japan.

A latent demand in Japan could be for the most geographically isolated yet populated islands in their archipelago, which are currently connected by undersea cable, to be connected by satellite communications over long distance, but local 3G transmitters over the conurbations on those islands, thus mixing technologies and delivering true mobile data communications to the occupants.

An issue which Japan might look into is in the area of convergence of TV and Internet and mobile communications. Using the example of WebTV, the reason why this did not become a hit in the past, and why convergence has yet to occur, is due to what Sony Chairman, Noboyuki Idei, calls the '30 degree principle' which serves as a barrier to convergence. TV is a passive medium in which the user usually leans back at a 30-degree angle to the vertical, while PCs are an active medium which involve logical thinking and a forward inclination at a 30-degree angle. "TVs and PCs are so fundamentally different that the two shall never converge... at least not in the current environment [of 2.5G]", he says.

But the current environment will not last for long. Idei argued that we are now entering the fourth stage of the Internet era: the transition from narrowband to broadband, and it is broadband that will trigger the first true beginning of convergence. Unlike previous predictions of convergence, Idei does not see the 'new' convergence being PC-centric, but instead mobile communication-centric.

There could be a provision of a system whereby users will be able to talk AND access contents/eMail simultaneously. While completely compatible with current i-mode contents, i-applis a 3G technology, can grow in size from a

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max of 10K to 50K and so facilitate this. Regular handsets currently include a smart card similar to the one found in GSM phones, and the installation of a mini USB port, and the requisite software could permit parallel connections. This would trigger latent demand in the business community.

New equipment to be introduced shortly will have the additional features listed:-

P2101V by Panasonic, outwardly similar to the P503is, but sports a camera that besides taking stills allows it function as a TV phone with other P2101V handsets.

N2001 by NEC, the standard phone, with an improved colour screen and -like the P2101V- no external antenna.

P2401 by Panasonic, a PCMCI card designed for data transmission up to 384Kpbs downstream and 64K upstream (a form of mobile ADSL) for asynchronous transmission.

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SECTION 2 JAPANESE MARKET STRUCTURE AND SHARE

A. Historical Development of the Market

Historical Marketing Strategies

Very little could be found out about the history of the early introduction of mobile phones into Japan. However, it appears that the initial introduction was late relative to the UK and Europe, and not based on motorcar units, as mass public transportation systems are better than those in the west, and used by all strata of persons. The networks were limited geographically, being based on a few city networks, and they were aimed at business users. They worked with cumbersome hand-hand devices operating on analogue frequencies, and without going through market growth or mass penetration phases.

Digital networks, when introduced, offered better quality and consistency of calls, and geographic coverage of service, and represented both product development within the same business market segment, using different transmission technology, and new market development, as the targeted users were much wider and of more segments. Price skimming was adopted with the new digital handsets being charged for, initially, at full manufacturing cost plus distribution margin. Business users, who were again targeted as a segment, changed over to the new service as soon as their old analogue contracts ran out, as the quality on the new digital service was much better than the old analogue network, which was poor with many lost or inaudible calls taking place, and geographical coverage was much better.

The mobile phone became a ‘must have device’ for business people and young people, and was seen as an important status symbol defining one’s-self and position in society.

The networks became saturated and service level access, based on fixed access ‘line’ to ‘line’ mobile circuit-switching and connections, reduced, giving rise to customer complaints. To solve this problem, the leading network provider, NTT DoCoMo, devised its own from of packet-switching and short messaging service for sending text messages (packets of data) between handsets, which did not require a dedicated circuit connection for sending and delivery. (This was a concept which appeared to be borrowed from the internet, but packet-switching as a technology has been known since 1967). At the same time, they introduced technological improvements to the networks by way of changed software protocols. This new service was a success, and allowed for data message volume to build up and relieve the direct handset circuit connection bottleneck, as fewer simultaneous direct connections were required. This was the first real volume use of mobile data on a public network, although hand-held computers/PDAs had been linked-up to the Internet over the mobile digital networks so that mobile business users might send and receive their business e-mails while travelling.

Based on the packet-switching success of their own network, NTT DoCoMo pursued a market-leader, first-mover, strategy by attempting to connect

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mobile phones to the internet without the use of modems but using digital technology, and using software in the phones themselves; a new technology when first introduced and appealing to early adopters. They pioneered the development and introduction of a special purpose internet portal. This portal was called I-mode and the services were specified by the network operator, who set out both the software and the hardware standards to be used and the performance requirements. Equipment manufacturers then produced to these standards. NTT DoCoMo selected and controlled the services and web pages that could be accessed, and how they could be used, to ensure uniformity of service that would work with the new range of digital phones with screen displays.

At the time of the launch, i-mode had 70 different types of service on offer through their portal, which was based on a similar concept to that of AOL. A new broadband network was installed, packet-based billing systems were introduced, the service was always-on, and it was GPRS enabled. I-mode permitted the sending and receiving of e-mails by mobile phone to and from the internet, as well as specialist internet web-site downloading. Subscribers pay a fixed monthly charge, which is quite small, of approximately £2, and are then charged for every packet of 128kbytes of data sent or received. This was new billing concept at the time.

This new service was both a product extension, and a market development. It proved very popular, and the killer applications are message sending phone-to-phone, e-mail sending and receiving, and the downloading of ringing tones, and phone ‘wallpaper’, which might be a surprise, but which is very popular with teenagers. These applications currently use more bandwidth than any of the other 70 services provided.

Other networks responded to customer drift by providing copycat networks and facilities, in an attempt to catch up, all of which are incompatible with each other, except that they can transfer short text messages between them from handset to hand set. Developments in products (service features) to differentiate the networks and handsets from each other became important. Both networks and handset manufacturers vied for dominance and formed R&D alliances, although the networks won by setting their own standards to ensure quality of service and customer lock-in through handset incompatibility and portal control. J-Phone has been the first network operator to introduce a camera-phone. Although made by Sony, with whom it has a cooperative venture, it only works on their own network, giving competitive advantage, and is proving popular with users.

Japanese Mobile Network Operators currently provide the three key elements of success; easy access to its services at a reasonable cost, portal control and promotion to associate it with their own branding for a tied network of users, and the provision of services that users actually want30. Additionally, their billing systems allow for the charges of information to be added to the one mobile bill on a monthly basis.

30 Source: Mobile Portals mobilise for scale, Bughin, Lind, Stenius, and Wiltshire, McKinsey Quarterly 2001 No 2

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B. Current Position

Current Mobile Operators:

There are three mobile data network operators in Japan who have been awarded 3G licences;

1. NTT DoCoMo

NTT DoCoMo is the dominant player in the market and is well protected from new comers. It commands a 59% mobile data market share, largely due to the popularity of i-mode. There were 18.5 million subscribers to i-mode by January 2001, and this figure had passed 25 million by August 2001. Its FOMA 3G trial was due to start in June 2001. The trial was advertised and was to utilise 4000 handsets. 143,000 people subscribed to the trial. NTT DoCoMo continues to face funding issues because of stakes in poor performing subsidiaries in other countries, such at AT&T Wireless in the USA (?) and KPN Mobile (in ….?). This has contributed to NTT DoCoMo being caught up by competitors who might appear better funded. It has lost 5% market share to others over the last 12 months.

NTT DoCoMo’s i-mode brand was launched in 1999 and is the company’s mobile data service. To access the service a user presses an i-mode button on the handset and the device switches from a circuit-switched voice service to an ‘always on’ packet-switched data service. i-mode is very popular with email and infotainment users.

2. J-Phone

J-phone is majority owned by Japan Telecom, the main Japanese national telephone carrier, and Vodafone. Vodafone holds a 46% stake in J-phone. J-phone packages mobile data services under it’s ‘J-sky’ brand. The mobile data service allows users to attach images and melodies to emails. J-phone have the most technologically advanced and sophisticated handsets; some have a built in camera. Another J-phone service, J-Navi, was launched in May 2000. This service lists specific businesses and services in specific locations, and being location based, lists local information specific to a users position. In it’s first 48 hours in service it received more than 2.2 million enquiries, and the service broke even within 6 months. J phone services use circuit-switched technology and have over 5 million subscribers. J-phone has a 17% mobile data market share (April 2001).

3. Au Group

Kddi/Au group entered the Japanese mobile data market in November 2000, being the merged acquisitions of KDD, DDI and IDO telecoms groups. Its mobile data service, Ezweb, allows users to access the internet, and send emails. Users can attach images and melodies to emails. It currently has 5.6

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million subscribers and commands an 18% market share of the mobile data market (April 2001).

Figure IV.2. 1 Total Mobile Data Customers, JapanSource: Durlacher UMTS Report, April 2001

C. Current Environment

In looking at the environment we have examined it first from the standpoint of a PEST analysis, extended to include environmental issues, and then from the point of view of Porter’s Five Competitive Forces, followed by Market Drivers & Inhibitors, and finally Segmentation.

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PEST ANALYSIS: OVERALL POSITIVE

POLITICAL SITUATION: Overall Positive

Item Description +ve/-ve1 Government attitude towards e-commerce and the

delivery of on-line services in Japan+ve

2 Commitment to making licences available at suitable frequencies

+ve

3 Health and Safety issues surrounding use of mobile phones will be ignored

+ve

4 Government wish to make Japan centre of SE Asian e-commerce to boost service economy and to spread influence wider in SE Asia

+ve

5 Competition policy encourages closed market and will thwart penetration by external operators and will thwart takeovers by overseas players

+ve

ECONOMIC SITUATION: Overall Negative

Item Description +ve/-ve1 Investment needed to build/configure masts and

transmitters/receivers will be small for low transmission speed 3G. Masts can be used for later speed upgrade .

+ve

2 Current economic downturn has lasted for several years, nearly the whole of the 1990s. Currently stable but stagnated. Very slow recovery is forecast. But recovery might be delayed if USA goes into recession.

neutral

3 Historically high household debt borrowings against over valued land led to speculative stock market investments and stock market highs, which subsequently fell in value, as did land values. High current household interest burden.

-ve

4 Savings ratio is low at the moment, (as debt burden servicing gives low net household disposable income), but consumer spend level is low

-ve

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SOCIOLOGICAL ISSUES: Overall Positive

Item Description +ve/-ve1 People have less time to do all the things that they want

to do, and are still working long hours, and want information and services fast to make them effective and to give them more useable and controllable time

+ve

2 People have many medium level friendships (perhaps as many as 200) who need to be kept in touch with

+ve

3 Peer group pressure is high across all people aged between 13 and 65, and text messages, which are cheap and less demanding to service than voice traffic is very desirable

+ve

4 People without mobile phones, and without mobile data devices, are thought of as weird or out of touch, and so stigma applies to laggards

+ve

5 The interference of user specific advertising/offers which are location sensitive and relevant will be enjoyed

+ve

TECHNOLOGICAL ISSUES: Overall Positive

Item Description +ve/-ve1 Smaller & lighter devices will make them more attractive

to carry and so increase take up. +ve

2 Combined smarter devices such as phone and PDA in one device will make them more appealing to people, as fewer devices will need to be carried to function fully while on the move

+ve

3 Delivery mechanisms for data will extend, taking advantage of packet-based billing on 2.5G i-mode and competitors

+ve

4 Radiation will be lowered through re-siting of ariels on hand-held devices away from the brain, perhaps downwards

+ve

5 Internet access and private network access from mobile devices will proliferate, built on existing 2.5G experiences with i-mode and competitors

+ve

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ENVIRONMENTAL ISSUES: Overall Positive

Item Description +ve/-ve1 The number of masts required to give Japanese low

bandwidth 3G coverage will not increase much and environmentalist will not fight against an increased density of them. Japan is one of the worst polluters on the planet, in any event.

+ve

2 The amount of electromagnetic waves generated from always-on devices and large data traffic volumes will continue to raise health issues, but will be ignored for the sake of convenience

+ve

PORTER’S 5 COMPETITIVE FORCES: OVERALL POSITIVE

1 1

Figure IV.2.1: Porter’s 5 Generic Competitive Forces

1 CUSTOMERS

3 COMPETITIVE RIVALRY

5 SUPPLIERS

2 NEW ENTRANTS

4 SUBSTITUTES

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1. CUSTOMERS (+ve overall for network operators)

Customers individually have little bargaining power. However, they do have the power to walk away from a service with which they are disaffected. They already have a i-mode, a slow, always-on, data traffic network, and other similar competing services, which, being the equivalent of 2.5G in Europe, are forerunners of 3G. These services, which are well liked and heavily used, will be upgraded to Japanese 3G standard, albeit at the same reduced data bandwidth capability of 9.6kbits/sec. It is expected that most customers will simply transfer to the new services provided by their existing operator when introduced, as compatibility issues are not expected to arise.

2. NEW ENTRANTS (+ve overall for network operators)

It will be difficult for new entrants to enter the market by being a network operator service provider, as these are strictly licensed. There will be only three licensed operators. It will be impossible to enter the market by take over or merger. So, this is a positive point for existing licensees, as barriers to entry will be almost impossible to overcome. The 3G licence conditions, are not onerous.

In areas, such as software provision, information provision, virtual network provision, and security services, there are no physical barriers to entry. The real barriers to entry will be the ability to forge good working joint venture links with other service providers, including the three limited network operators, to provide a wider, homogenous and seamless service. Each network operator has its own separate software standards. These links have already being established for 2.5G, but they will no doubt form and reform, based on the ability of the participants to throw money at developing and enhancing the 3G implementation which is mutually beneficial. It is anticipated that there will be no lack of availability of money to invest in the speculative ventures of development and roll-out, and that it will not be a barrier to entry.

The exit costs (non-recoverable networks, devices, software, and licence costs) will not be huge for the existing licensees at low transmission speeds, but would be high for full 2Mbits/sec speeds, and for new entrants if they could get a licence.

3. COMPETITIVE RIVALRY (+ve overall for network operators)

This has been intense rivalry between network providers and equipment manufacturers on earlier networks. It is not expected to be any worse on 3G. Each will try to transfer its user base from 2.5G. Customer loyalty is very high. NTT DoCoMo have a near monopoly on data usage with I-mode at 25 millions subscribers

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4. SUBSTITUTES (-ve overall for network operators)

The main substitute threat will come from existing mobile telephone and data networks. They already provide enhanced user facilities and features including enhanced data services. Japan is already at the equivalent of 2G.

Existing 2.5G networks will enable 3G to be introduced sooner, utilising existing mast structures for low data transmission speed 3G transmitters. The network operators may well have to buy transfer business from 2G to 3G to achieve critical mass for the 3G networks.

Fixed line internet, via cable operators to dwellings, could become the means of connecting one fixed location (such as a home) to another fixed location (such as an office). For data transfer, these links will be fast, and a virtual private network via the internet could be built in this way to link real offices and virtual offices together, obviating the need for the use of a 3G network – which is wireless and essentially mobile (although it can be, and will be, used on a fixed location basis). With optical links, voice over internet protocol being maximised, and local bluetooth inter-device data transmission, then medium usage access could be catered for between various and variable fixed locations to give some of the features of 3G, which could lead to a slower take up of the 3G service.

Substitutes will flourish in the short to medium term on 2G if 3G is late, or unreliable, or expensive, or if it does not add any features or services to what exists.

5. SUPPLIERS (neutral overall for network operators)

There are different forms of suppliers, some of which will pose a threat. The forms are network base station equipment manufacturers, handset/device manufacturers, information/content providers, information aggregators or gateway/portal providers, and software providers. Joint ventures between these parties are already in hand in order to deliver a 2.5G service, and these will be extended for a comprehensive 3G service. Some of these JVs will undoubtedly result in domestic mergers as the parties get to know each other’s strengths and weaknesses better. Take-overs rarely take place in Japan, as face would be lost by one party.

There are limited suppliers of sufficient stature to form the JVs that are needed. Those suppliers that have the most cash flow are already in demand. Suppliers with money to contribute to sharing some of the burden of 3G development and roll-out have been able to negotiates strong terms with network operators

6. SUMMARY : OVERALL POSITIVE

Network operators have had to form strategic alliances with suppliers and content providers in order to fully develop and roll-out the 2.5G services and this will continue for 3G services. However, they are not vulnerable to

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insolvency and take-over. The old Shogun Houses and banks have great influence in Japanese government. The Japanese government is not against bailing out and nationalising any industry or commercial operation that is significant to the economy and which is in trouble. (Witness saving from liquidation of The long Term Credit Bank of Japan by the Japanese government). The government is probably aware of the full potential of 3G and the future potential applications for citizen and information control. Since the Japanese culture is one of high personal loyalty to one’s company and state, the government is probably simply biding its time, hoping that more money will be required by the network operators who will then have it provided by The Long Term Credit Bank of Japan, a state company, in return for this state agent obtaining a sizeable blocking or controlling equity stake.

JAPAN MARKET DRIVERS

SUPPLY SIDE:

Investment drivers

1. Growing mobile market and network congestion:

In Japan fixed line Internet penetration is low, but mobile penetration is relatively high at 47% of the population. The mobile market is still growing rapidly in Japan, and the market is not advanced as Europe where penetration is at 60%. There is already however, network congestion, and this is the reason why network operators are looking to the next generation of mobile technology to relieve over congested networks, and are investing in 3G technologies and building new 3G networks. One operator J-Phone is investing $5.74 billion in building it’s 3G network. New revenue sources have already been established in Japan through upgrading the existing 2G network, enabling the launch of mobile data services in Japan, primarily mobile internet access and email services. For example network operator NTT DoCoMo decided to overlay existing circuit switched voice networks with packet switched ‘always on’ Internet technology to ease congestion in the short term to start offering some sort of mobile data service, whilst building it’s 3G network. Network Operators will be driving mobile data services forward commercially to recoup the network infrastructure investments.

2. Internet Access Costs:

In Japan it currently costs approx. £400.00 for a fixed line phone and only £37.97 for a mobile phone, this has been one of the inhibitors for fixed line internet usage in Japan. The low cost of entry for users has been, and continues to be a key driver in the take up of mobile data services. Mobile data revenue already accounts for over 15% of mobile revenues since the introduction of mobile data services less than 2 years ago.

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3. Low Level of Handset Subsidy and a Rising ARPU:

In Japan, handsets (PDA’s) are not subsidised heavily up front by network operators, although once outdated they are sold at a discount. This is largely because there are not too many players competing in the Japanese mobile market. The average revenue per user (ARPU) has risen since mobile data services were introduced and is currently at a monthly level of £47.46.

Regulatory Drivers:

In contrast to most other countries in the world, the Japanese government gave the three 3G licences away to operators at zero cost. This is because the government wants to see 3G networks delivered quickly and become a driver for the otherwise declining Japanese economy. The government also wants to enable widespread low cost Internet access, and mobile data network operators offer the best opportunity for this to happen.

Technology Drivers:

Historically, technology introductions in Japan have been relatively successful. Japan’s circuit switched voice only PDC network is compatible and on a par with the GSM network in Europe. Japan has since moved ahead of the rest of the world in terms of the commercialisation of wireless data technologies, through upgrading it’s existing PDC network, and being an early adopter and developer of 3G networks. It is forecast to maintain a leading position for at least the next 5 years.

Over the last two years, three key 2.5G technologies have been very successfully introduced in Japan. All of them are precursors to 3G:

1. i-mode i-mode is a brand name launched by NTT DoCoMo in 1999 for mobile data connectivity. The PDCP technology used and developed by NTT DoCoMo is effectively a data-only overlay technology on existing PDC circuit switched networks (TDMA and GSM compatible). The technology allows ‘always on’ device connection. i-mode operates as a closed network and all i-mode content is hosted exclusively on i-mode servers, but the internet, and hence email services, can be accessed through a packet switched network which NTT DoCoMo has over-laid on the closed network.

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Figure 3: NTT DoCoMo’s i-mode architecture

(Source: NTT DoCoMo)

Content in i-mode is formatted in compact HTML (cHTML), and so has a low entrance threshold for content designers. Users can send and receive emails up to 500 bytes in length (250 Japanese characters) although mail attachments are not supported. i-mode technology is easily adapted to GPRS, GSM and all global 3G technology standards such as CDMA or UTMS. NTT DoCoMo already plans to launch i-mode in Europe in 2002 using GPRS networks.

2. Ezweb

EZweb is a data service brand launched in 2001 by the Au Group network operator. The technology, developed by the operator, uses a combination of both circuit and packet switched technologies. The Ezweb browser supports the HDML development platform and Internet access is easily enabled. Users can send email up to 510 bytes in length (205 characters), but download up to 4000 bytes in length. Melody and image attachments are both possible.

3. J-Sky/J-Navi

J-Sky and J-Navi are two data service brands released by network operator J-Phone. The technology is available only on J-phone’s circuit switched networks, and is another mobile data technology available currently to Japanese consumers, launched in 2000. Content is delivered on mobile markup language (MML), developed by J-phone. It is compatible with the HTML development platform but uses less bandwidth than HTML and hence is more network efficient. Users can send and receive emails up to 6000 bytes in length with attachments.

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J -Phone is the only operator who has successfully launched a location based service in the mobile data market. Launched in 2001, J-Navi is the J-Phone location based service, which was developed with US company Xmarc.

Sun Microsystems have been working on a very versatile Java based mobile development platform. This would be a boost for network operators as Java is more versatile than HTML and would be a better facilitator of secure online transactions. NTT DoCoMo’s i-mode service is best placed to demonstrate the benefits of a Java enabled platform. It could be introduced early in 2002.

All three network operators are building 3G networks which will eventually be globally compatible with all other 3G network operators across the world. The technology being used by the Japanese operators is code division multiple access (CDMA) which will be fully UMTS compatible. With all 2.5G services operational, the first 3G services were due for launch Summer 2001 by NTT DoCoMo but these have been set back to October 2001. The Au Group is the laggard with 3G services planned to begin in the second half of 2002. Whilst all these 3G networks will start operating at 64kbs, with time, and as networks are developed, they should quickly increase to 384kbs and eventually up to 2mbs.

Product & Services Drivers:

Ease of Content Design

NTT DoCoMo have a dominant position in the market, largely due to the success of i-mode and are already a world leader with 25 million mobile data service subscribers. Much of the success of i-mode has been attributed to the ease of content design. i-mode is designed in compact HTML (cHTML) and has been very easy for content designers to use. All three of the 2.5G technologies enable relatively simple content design and aggregation. There are over 3000 i-mode developers and 20,000 i-mode sites available to subscribers.

NTT DoCoMo can now actually dictate the development of technology enablers to suppliers. For example a specific i-mode handset is being produced by one manufacturer with a specified i-mode button and screen size. Application developers must follow strict i-mode guidelines .

Mobile Data Applications

1. Mobile Internet Access:

i-mode operates as an ‘always on’ data service, and users experience anytime, anyplace, internet access. The usefulness of content has been one of the largest drivers of the take up of mobile data services. I-mode insists that partner i-mode site developers change the content of their sites at least once every day to keep content interesting and relevant. 80% of i-mode subscribers

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pay an additional subscription fee to receive tailored information such as horoscopes or weather reports.

2. Email:

Email is a very popular mobile data service, despite being limited in terms of the number of characters that can be used. Both Ez-web and J-Sky allow users to attach images and melodies to emails.

3. Customised Infotainment:

A whole range of tailored Internet based content services will be available to the user and delivered via mobile portals. The key to this service to date has been the delivery of the right content to the right user to encourage loyalty to the portal. As previously cited i-mode have already turned this into a very popular and successful revenue stream. In Japan there has been an explosion in the take up of mobile data services amongst young people who particularly want to download games, or images of their favourite pop stars, or the latest ringing tones. These are then frequently emailed to their friends.

4. Mobile Professional Applications:

Mobile data will have the effect of unchaining people from their desktops. Within 3 years most laptops will come with a mobile internet or intranet device to allow remote knowledge management, create mobile offices, mobile application hosting and mobile e-commerce (m-commerce). Currently i-mode and other services are used by the business community, but security will need to improve and data speeds increase before these applications will really take off.

5. Location Based Services:

J-Phone’s J-Navi service is the first ever location based mobile data service. Within the first 48 hours from J-Navi’s launch, over 2 million requests had gone in to the service, which simply listed businesses and services in any given location. J-phone are expecting the service to break-even in 6 months. The popularity of this service demonstrates the future potential for location-based services. Advancement of this service with 3G technology will enable the network operator to pin point the exact location of a mobile terminal at any time. This application has huge potential as it can be applied to machines as well as people. For example a person shopping in any given vicinity can be alerted to sale items in a neighbouring shop.

6. Voice & Rich Voice:

Voice will continue to be an important service offering with 2.5G and 3G technologies, and will drive further penetration of the Japanese market. High-speed data rates will enable the addition of videophone and other multimedia capabilities to existing voice services.

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A stream of partnerships will emerge as the technologies are rolled out. I-mode already have AOL Japan as one of its external content provider partners. Sony are working on games which will be able to be played on a PDA when out and about, and on a Sony Playstation at home.

DEMAND SIDE:

Consumer & Cultural Drivers:

1. Japanese Culture

‘Young people have a different attitude towards personal relationships, instead of having one good friend they prefer to have 200 mobile friends’ - Masahiro Yotsumoto, Research Director Dentsu Institute for Human Studies (March, 2001).Because of the number of people involved that young people want to keep in touch with, they use email for quick, polite, but friendly messaging, even if it only says ‘thinking about you’.

In Japan the number of young people owning PC’s is low compared to many European countries or the US, but US teenagers are far less mobile than Japanese ones. In Japan there is a real lack of privacy in the home, and therefore many view their mobile or PDA as their home base location, their own private space.

I-mode is very much firmly based in the idiosyncrasies of Japanese society, and appeals to every sector, young, old, male, female, business, and social user. For example many of the idle i-mode images are colourful animations, reflective on Japanese folklore and culture, with which they are familiar from childhood.

Japan is a nation who enjoy technical gadgets. Many leading edge technology solutions have emerged out of Japan over the last 50 years, particularly pioneering electronic devices. Japan has a very strong sense of national pride and will pride itself that it is a leader in 3G technology, and particularly as the world is watching as it leads the global roll-out of 3G services.

Network operators have played down the hype on PDAs, but many of the handsets currently available in Japan are very attractive, sophisticated and customised (i.e. with special i-mode buttons) for mobile data and rich content delivery. These devices are way ahead of any other products similar anywhere in the world.

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2. Content is Useful

i-mode works as an ‘always on’ packet switched data delivery service. This gives the user immediacy. Data speeds are low but the applications and content is useful, and the user only pays for what is downloaded. Browsing is free.

Content has proven to be a key consumer driver. ‘The package of content that we put together was the killer application that helped i-mode take off’ Toshiharu Nishioka, Manager of DoCoMo’s Gateway Business Department (May, 2001). ‘Content will need to be tailored to the evolving needs of users and the limitations of what 3G can do’ Kiyoyuki Tsujimura DoCoMo head of global business (May, 2001). I-mode and other service providers have already identified what they believe to be the mass market killer applications, and distributed their services successfully. i-mode is now the largest ISP in Japan with over 40 million web page views a day.

Economic Drivers:

1. Pricing and Billing Platforms

Japanese Network Operators offering data services are already achieving a higher average revenue per user (ARPU) than pre-data mobile services. The average ARPU is approximately £47.00 per user per month. The service charges are not high however. A user pays a flat subscription fee for monthly service, and then additional subscription fees for specific infotainment delivery, such as the latest share prices daily or a regular traffic update. Other revenue is generated through the number of kilobytes downloaded, or through voice calls. The services are not perceived to be expensive, but as value for money, because their usefulness outweigh the cost, and thus perceived value has been created.

Successful billing infrastructures have been implemented by all three network operators for pre-paid and post paid customers. M-commerce is easy and successful, and is all billed via the subscriber’s phone account.

JAPAN MARKET INHIBITORS:

SUPPLY SIDE:

Commercial & Investment Inhibitors:

1. Investment Recoupment

Despite it’s rapid take up and popularity, it is forecast that it will take i-mode four years to make a profit on services, let alone recoup the cost of building 3G networks. J-phone will spend an estimated $5.74 billion building it’s 3G

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network, which will be ready for launch in June 2002. The service and network costs are high and payback on investments could take over 10 years. All this without having to pay for the initial licenses.

2. The Economy

The Japanese economy and stock market is very depressed, and the country has failed to stimulate economic growth over the past 10 years, despite all sorts of fiscal policy implementations. The stock market is at same level as it was 18 years ago. This is an unfavourable market for companies to have to raise network investment capital. I-mode shares are 50% down since the beginning of 2001, and this is despite its rapid growth and success.

Regulatory Inhibitors:

1. Spectrum Limitations

There are limitations on the amount of radio bandwidth spectrum available to be used for mobile data services. The implications of this are that it will not be possible to do everything for everyone simultaneously, or at every phase of the roll-out, especially video or music, which need high data speeds and bandwidth to be transmitted successfully.

2. Health and Safety

Japan is a densely populated country and there are going to be health and safety issues arising through 3G mast and base station deployment. 3G masts have already been developed which can support 3G technologies and existing CDMA networks. These masts are currently being tested. If these tests prove successful then there will not be a great number of additional 3G masts required which could take this issue off of the environmental agenda. If the tests prove unsuccessful then tens of thousands of new 3G masts will be required. Mast look ugly and emissions can be high, and potentially harmful to those living nearby, which will present issues for network operators. There are still uncertainties about the long-term effects caused by the use of mobile devices. No concrete evidence has been produced to support the theories that there are adverse side effects from using them, but if any is demonstrated to be produced, then it would cause problems for the whole mobile industry.

Technology Inhibitors:

Network operators are experiencing frustrating delays in building 3G networks. The first 3G network was planned to be launched by NTT DoCoMo in May 2001. This has now been put back to Autumn 2001. The main source of delay is handset manufacturers. Handsets are not available on time, when they are needed, which causes a bottleneck, and when they do arrive they have not been fully tested. The product cycles have been cut too slim because of the demands of the network operators, and quality has been

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sacrificed. 1,200,000 Sony handsets were recalled in June 2001 at a cost to Sony of $100 million. Any recall reflects poorly on the network operator, as well as on the manufacturer, and the brands involved suffer as a result. ‘The mobile world saw this as a setback, because Japan had been the model of what had been done right, and has now experienced what can go wrong, namely handset glitches and delays’ Jeff Giesea, Senior Analyst, Fierce Wireless. (June 2001). All Japanese operators regard the development of handset technology as a key to their success and a driver in the uptake of mobile data services, but handset bottlenecks could be the humbling of the Japanese, with the world watching the development of the first 3G network.

Product & Service Inhibitors:

Because of the rapid introduction of new technologies, product and service lifecycles are becoming ever shorter. This implies that network operators have to co-ordinate the supply chain to ensure that handset manufacturers, content, software providers, aggregators, and network infrastructure builders, can develop and deliver on time. The rate of change will also intensify competition and therefore while first movers will gain a competitive advantage, if they move first and get it wrong, then this could prove to be a costly setback – letting in others who didn’t have that cost.

DEMAND SIDE:

Consumer & Cultural Inhibitors:

Consumers have already experienced network problems. Handset glitches and recalls of over a million handsets erodes customer confidence in ongoing service delivery. NTT DoCoMo upgraded their network in August 2001 to iron out some of the initial glitches they were experiencing. One only needs to look at the poor network implementation and service problems experienced with WAP in Europe to recognise the consequences, in terms of adverse consumer confidence and delayed service take-up.

NTT DoCoMo plans to roll out it’s i-mode brand in many other countries. This could prove to be a failure because i-mode has been developed from within, and around, Japanese culture and may not be transportable. It may, on the other hand, prove very successful. Roll out in Europe is to start in 2002.

Business applications are known to be insecure on i-mode. This could delay the take up of remote working and virtual office applications, including business-to-business m-commerce.

Economic Inhibitors:

Japan is still in the depths of an economic recession, and if this deteriorates further the consumer is going to feel further the effects in their pockets. This

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would slow down the take up of mobile data services, and the ARPU, which is currently at a high level, could fall.

D. Market Segmentation

Market segmentation can be analysed from 2 different perspectives; The reasons why people are subscribing to mobile data services, and handset preferences.

Mobile Data Services Used & Reasons:

Figure IV.2.2 : Wireless Internet usage in Japan (Source: NTT DoCoMo)

In Japan, email accounts for the highest mobile data usage apart from voice-services. Mobile banking and finance accounts for the content category most often accessed; entertainment accounts for the highest server traffic. This is either because larger files are downloaded or more time is spent on-line.

However, this would appear to indicate that the greater value transactions are the financial services transactions. Nevertheless, it must be remembered that many such transactions are to check either one’s bank balance or a stock quote.

DoCoMo reports that there are currently 828 companies providing i-mode information services, comprising 1,480 official i-mode compatible web sites and 40,000 independent i-mode web sites (sometimes called unofficial sites). There are now as many i-mode users in Japan as there are AOL users in the United States., which is a phenomenal penetration, given the relative populations of [120 million and 260 million respectively (?)]

One of the most important factors behind the success of i-mode is the relationship between the operators and the content providers. Entertainment is by far the most popular content category, accounting for 64 percent of all usage. The entertainment group is also the second largest group in terms of number of sites available, second only to mobile banking and finance sites. The entertainment category is quite large, as it includes such Japanese

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favourites as melodies, image download, as well as games, fortune telling, and TV and movie guides.

Mobile banking is the group with the largest number of sites available, as it accounts for 42 percent of the total number of official sites. However, this must be looked at in perspective,; the mobile banking sites accessed only account for 4 percent of the total number of sites accessed.

According to InfoCom Research, more than 82 percent of the people who subscribe to i-mode do so because of the email function. It is well worth noting that web browsing is actually not a top priority for mobile users when subscribing to i-mode, with only 28 percent of the survey respondents listing home page browsing as a primary reason to subscribe.

Although email is the most popular application for mobile phone users, it is interesting to note that voice calls still hold a slight lead over email in terms of mobile usage. Revenue from voice traffic is still the main source of income for mobile operators. Data traffic generated by email also accounts for a significant portion of the revenues. According to a research done by NTT DoCoMo, email usage is positively correlated with voice usage. The increase in usage of email actually drives up the amount of voice call traffic.

Figure IV.2.3: i-mode content categories accessed by percent of Server Traffic

(Source: NTT DoCoMo, 2000)

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Figure IV.2.4: Primary reasons why Japanese Subscribe to i-mode(Source : NTT DoCoMo)

Of the reasons why Japanese subscribe to NTT DoCoMo’s mobile data service i-mode, it is interesting to note that of the 58% of reasons relating to email, only 19% of these are specifically related to mobile or anytime email. Other reasons relate to the cost of sending email using other mediums, or general email services that are not mobile data specific. This is because the costs of accessing email otherwise are high, and Japan has a very low penetration of fixed line Internet connectivity.

User Handset Preferences:

A survey of i-mode users undertaken by NTT DoCoMo highlighted the following as key issues to business and youth subscribers when choosing a handset/PDA.

1. Business Subscribers:

Long battery life – 300 hours expected. Colour, weight and aesthetic appeal. In most cases, colour first and

then weight. Business people are conservative when it comes to colour and black, white, and silver are their most popular ‘colours’.

Portability in a shirt pocket for a male user. Females prefer protective covering over keys. Large device screens are preferable for ease of reading.

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2. Younger Subscribers (15 –24s)

Handsets reflect personal taste and are fashion statements. Red, white and pink have proved popular colours.

Consumer taste is reflected in ringing tones. Handsets must be capable of downloading hit pop melodies; younger users will not purchase without this.

Devices must be portable and light Users tend to use devices during off-peak hours and handsets with a

red display indicator when the device is activated is preferred. Most handsets offer a choice of display indicator colours.

Younger users tend to send longer messages than business users and therefore prefer large screens.

E. The Way Ahead

Future Marketing Strategies

Marketing Strategies for the short term

Existing digital network operators are currently introducing upgrades, the resultant service to be known collectively as 3G; the existing services being retrospectively classified as 2.5G to map it on to European offerings. Data downloading at 9.6kbits per second will be introduced.

At the moment equipment and software manufacturers are pursuing product developing strategies by designing and producing hand-held devices which combine mobile phones with full internet access and PDA features. We would expect these enhanced product features to be attractive to business users initially, and we expect to see segmented price skimming strategies introduced, with the full cost of the devices being born by users. However to be really useful they need faster download capability, at least 56kbits/sec, as is commonly available on the internet. This will not be available for some time

Packet based billing will continue, with special tariffs and product features being developed for them to make it attractive for such devices to replace the digital mobile phones, PDAs, and lap top computers of users, and so make mobile communications and mobile data use through one small, composite, device truly possible.

However, the three 3G operators, consisting of NTT DoCoMo, KDDI Group (a consortium of three digital networks DDI, KDD, and IDO), and J-phone, are introducing 3G with different software protocols which means that the same web page will have to be written three times for each different network, or a software translator (an overhead) will have to be applied which will introduce download delays, or web pages will have to be tied to a specific network and available only through a network portal. This approach, which is both brand oriented and an attempt at customer lock-in, will probably back fire, as

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customers will come to realise the restrictions that are being artificially applied to them. This will surely affect take up.

We would expect lifestyle segmentation to drive product development and marketing at later stages of the industry life cycle.

Marketing Strategies for the longer term including 3G Market Development:

Marketing strategies will initially be synonymous with the business strategy of customer retention as 3G development and roll-out is undertaken. Initially this will not be a very cash consumptive operation, as low bandwidth networks are to be used on existing masts. Maximum data transmission speeds of 9.6kbits/second will initially be rolled out, which is derisory. We would expect consumers to shy away from this service and to stay with what they have got (i-mode and equivalents) until higher data transmission speeds, of at least 100 kbits/second, are introduced. This will be interesting for NTT DoCoMo as i-mode has 25 million current users as at July 2001. We feel that they will have to buy customer transfer to the new 3G services, in order to create critical mass, as the immediate customer advantages will be negligible.

The subsequent introduction of higher data transmission speeds will be a cash consumptive exercise for all involved, and will lead to large cash calls on shareholders. Even so, a future data download rate of 343Kbits/sec will fall significantly short of the full world-wide 3G specification of 2Mbits /sec.

Business alliances developed for i-mode and its equivalents will continue to be important. Rapid product and network development to duplicate that which exists, and risk mitigation, will be the over-riding objectives.

Marketing segmentation for directing effort will only be important after the successful transfer of customers from 2.5G has been achieved. Thereafter, all efforts will be deployed at making the business user segment truly independent of any fixed office, so that service business, which will become the mainstay of the Japanese economy, (after manufacturing is slowly transferred to Korea, the Peoples Republic of China, and Indonesia, which are lower cost manufacturing areas), may become virtual and prevalent. Introductory price skimming strategies will be used as the offsetting cost savings of eliminating fixed office environments will be enormous. Downtown office space costs in Tokyo and other Japanese cities is the highest in the world. Coverage will initially be limited to those areas frequented by mobile business users, e.g. cities and major towns, main rail routes, aircraft, and people transit termini, resting and meeting points, reflecting the very high use of public transportation, and finally motorways.

First-to-market with fully-functional-business-features will be very important as personal references and technical write-ups will affect take-up. Once the business user has been accommodated by fully functional data access, manipulation, storage, and transmission features, then market growth will be

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the objective. This will be delivered by adopting special tariff rates for this segment.

Other segments will then be tackled. These will be matrixed on lifestyle division on the one hand, and personalisation, content aggregation, and transaction type on the other. Each will require specialist software and tariffs, and will be introduced on a phased basis. Each resultant segment offering will probably require a different mix of distribution partnerships, alliances, and JVs, but will still be controlled through network portals, whose importance seems set to grow.

3G will not be treated as a necessary utility until after it has successfully replicated the existing 2.5G networks and facilities, and introduced more features and transactions types.

Already, further network enhancements, to be called 4G, are being mooted, as it has been realised that 3G will, for Japan, be something of a damp squib. These further enhancements, which should see across-network roaming and the break down of exclusive portal access and control, should then open up the full potential of the Japanese mobile networks.

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SECTION 3 – JAPANESE MARKETING MIX

As has already been mentioned earlier in this report, Japan is on the cutting edge of the commercialisation of wireless data technologies. Data services makes up 10-15% of total revenue.

However, it has been particularly difficult to obtain information relating to the Marketing Mix in Japan -- specifically, Promotion and Distribution – from desk based resources. Company reports and analyst briefings tend not to consider these matters in detail, if at all.

Virtually all commentary on the Japanese market has focused on the success of i-mode. As success has been attributed mainly to factors other than the marketing mix and distribution, discussion of these matters (in English) is virtually non-existent.

Actual expenditure on promotion is bundled up in ‘Cost of Sales’ and we have been unable to find a more detailed discussion of related issues. Due to the language barriers, it has also been difficult to obtain and analyse Japanese advertising. The comments made are, therefore, very general, based more on personal experience and anecdotal evidence than actual facts or information gathered.

There is, therefore, not enough information for an organised, detailed, discussion of the issues outside of Japan, but we have done our best.

A. PRODUCT

Japan Network operators/providers:

In contrast to most other countries in the world, the Japanese government gave away the three 3G licences to operators at zero cost – i.e. through a “beauty contest”. This was because the government wants to see 3G networks delivered quickly and become a driver for the otherwise declining Japanese economy. The government also wants to enable widespread low cost Internet access, and mobile data network operators offer the best opportunity for this to happen.

There are three mobile data network operators in Japan who have been awarded 3G licences;

NTT DoCoMo

NTT DoCoMo is the dominant player in the market and is well protected from new comers. It commands a 59% mobile data market share, largely due to the popularity of i-mode. There were 18.5 million subscribers to i-mode by January 2001, and this figure had passed 25 million by August 2001. Its FOMA 3G trial was due to start in June 2001. The trial was advertised and was to utilise 4000 handsets. 143,000 people subscribed to the trial.

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NTT DoCoMo continues to face funding issues because of stakes in poor performing subsidiaries in other countries, such at AT&T Wireless (in the USA) and KPN Mobile (in the Netherlands). This has contributed to NTT DoCoMo being caught up by competitors who might appear better funded. It has lost 5% market share to others over the last 12 months.

NTT DoCoMo’s i-mode brand was launched in 1999 and is the company’s mobile data service. To access the service a user presses an i-mode button on the handset and the device switches from a circuit-switched voice service to an ‘always on’ packet-switched data service. i-mode is very popular with email and infotainment users.

NTT DoCoMo’s dominant position has enabled the company to dictate the development of the technology enablers of the i-mode concept. This includes networks, terminals and applications.

Congestion on NTT DoCoMo’s network was a key factor that made it decide to develop a proprietary packet-switched overlay (the PDCP standard) on its circuit switched PDC network, which also carries the traffic for the i-mode service. NTT DoCoMo further set the terminal specifications that handset manufacturers had to comply with, including specifications on screen size and even a specific i-mode button. Application developers must follow guidelines on the type of content that they can produce and on how they must do it.

When NTT DoCoMo launched its i-mode service, more than 70 different services were already available. Its i-mode services were modeled on AOL’s early closed portal approach, with the operator controlling the content providers and customer billing.

J-Phone

J-phone, (Japan’s third largest MNO), is majority owned by Japan Telecom, the main Japanese national telephone carrier, and Vodafone. Vodafone holds a 46% stake in J-phone, but is attempting to raise it to 66.7% to give it control. J-phone packages mobile data services under it’s ‘J-sky’ brand. J-Phone is leading edge on the technology front, offering the most advanced handsets (e.g. with built-in camera), and is used as a platform to ‘test-drive’ many sophisticated services.

The mobile data service allows users to attach images and melodies to emails. Another J-phone service, J-Navi, was launched in May 2000. This service lists specific businesses and services in specific locations, and being location based, lists local information specific to a users position. In it’s first 48 hours in service it received more than 2.2 million enquiries, and the service broke even within 6 months. J phone services use circuit-switched technology and have over 5 million subscribers. J-phone has a 17% mobile data market share (April 2001).

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Au Group

Kddi/Au group entered the Japanese mobile data market in November 2000, being the merged acquisitions of KDD, DDI and IDO telecoms groups. Its mobile data service, Ezweb, allows users to access the internet, and send emails. Users can attach images and melodies to emails. It currently has 5.6 million subscribers and commands an 18% market share of the mobile data market (April 2001).

Figure IV.3.1 Breakdown of customers between services Source: Durlacher UMTS Report, April 2001

Application Technology drivers

Historically, technology introductions in Japan have been relatively successful. Japan’s circuit switched voice-only PDC network is compatible and on a par with the GSM network in Europe. Japan has since moved ahead of the rest of the world in terms of the commercialisation of wireless data technologies, through upgrading it’s existing PDC network, and being an early adopter and developer of 3G networks. It is forecast to maintain a leading position for at least the next 5 years.

Over the last two years, three key 2.5G service product technologies have been very successfully introduced in Japan. All of them are precursors to 3G:

i-mode I-mode is a brand name launched by NTT DoCoMo in 1999 for mobile data connectivity. The PDCP technology used and developed by NTT DoCoMo is effectively a data-only overlay technology on existing PDC circuit switched

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networks (TDMA and GSM compatible). The technology allows ‘always-on’ device connection. I-mode operates as a closed network and all i-mode content is hosted exclusively on i-mode servers, but the internet, and hence email services, can be accessed through a packet switched network which NTT DoCoMo has over-laid on the closed network.

Content in i-mode is formatted in compact HTML (cHTML), and so has a low entrance threshold for content designers. Users can send and receive emails up to 500 bytes in length (250 Japanese characters) although mail attachments are not supported. i-mode technology is easily adapted to GPRS, GSM and all global 3G technology standards such as CDMA or UTMS. NTT DoCoMo already plans to launch i-mode in Europe in 2002 using GPRS networks.

Figure IV.3.2: NTT DoCoMo’s i-mode architecture (Source: NTT DoCoMo)

Ezweb

EZweb is a data service brand launched in 2001 by the Au Group network operator. The technology, developed by the operator, uses a combination of both circuit and packet switched technologies. The Ezweb browser supports the HDML development platform and Internet access is easily enabled. Users can send email up to 510 bytes in length (205 characters), but download up to 4000 bytes in length. Melody and image attachments are both possible.

J-Sky/J-Navi

J-Sky and J-Navi are two data service brands released by network operator J-Phone. The technology is available only on J-phone’s circuit switched

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networks, and is another mobile data technology available currently to Japanese consumers, launched in 2000. Content is delivered on mobile markup language (MML), developed by J-phone. It is compatible with the HTML development platform but uses less bandwidth than HTML and hence is more network efficient. Users can send and receive emails up to 6000 bytes in length with attachments.

J -Phone is the only operator who has successfully launched a location based service in the mobile data market. Launched in 2001, J-Navi is the J-Phone location based service, which was developed with US company Xmarc.

Sun Microsystems have been working on a very versatile Java based mobile development platform. This would be a boost for network operators as Java is more versatile than HTML and would be a better facilitator of secure online transactions. NTT DoCoMo’s i-mode service is best placed to demonstrate the benefits of a Java enabled platform. It could be introduced early in 2002.

All three network operators are building 3G networks which will eventually be globally compatible with all other 3G network operators across the world. The technology being used by the Japanese operators is code division multiple access (CDMA) which will be fully UMTS compatible. With all 2.5G services operational, the first 3G services were due for launch Summer 2001 by NTT DoCoMo but these have been set back to October 2001. The Au Group is the laggard with 3G services planned to begin in the second half of 2002. Whilst all these 3G networks will start operating at 64kbs, with time, and as networks are developed, they should quickly increase to 384kbs and eventually up to 2mbs.

Table IV.3.1 Comparison of Japan’s Mobile Data Services

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Handset Manufacturers

Japan's handset industry is a rat's nest of tightly managed, closed-door, vendor-client relationships involving manufacturers, the network operators, retail distributors, channel partners, and outsource makers. The operators define the technical specifications and serve as wholesalers, ultimately control what phones are available on the consumer market and at what price, and the manufacturers have so far been unwilling or unable to break out of this situation.

The Japanese market had been dominated by the “Big 3” – Nokia, Ericsson and Motorola, however, with the onset of i-mode and the progression towards 3G, the situation has changed. There are numerous other manufacturers, and Matsushita, NEC, Fujitsu and Mitsubishi are the main threats to their Western rivals.

Most of the manufactures supply the three main network operators and thus the consumer has a wide variety of choice and is not tied into an operator-manufacturer relationship. As most handset models are available in two to four colour variations, it gives even more freedom of choice.

Figure IV.3.3 Mobile Phone Brands sold in Japan 2000

It has been said that Japan’s low-cost, trendy-coloured handsets with their high-resolution full-colour screens and high quality audio, have done to

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mobiles, what Swatch did to watches31. However, not all has been rosy for the industry because about one third of all handset models fail in the first few weeks of introduction.

The world is watching anxiously as the Japanese network operators experience frustrating delays in building the 3G networks, the ones they have been promising. The main source of delay is handset manufacture. Handsets are not being made available on time, when they are needed, which causes a bottleneck, and when they do arrive they have not been fully tested. The product cycles have been cut too slim because of the demands of the network operators, and thus quality has been sacrificed. For example, Sony has had 1,200,000 handsets recalled in June 2001 at a cost to Sony of $100 million. Any recall reflects poorly on the network operator, as well as on the manufacturer, and the brands involved suffer as a result. “The mobile world saw this as a setback, because Japan had been the model of what had been done right, and has now experienced what can go wrong, namely handset glitches and delays”32. All Japanese operators regard the development of handset technology as a key to their success and a driver in the uptake of mobile data services, but handset bottlenecks could be the humbling of the Japanese, with the world watching the development of the first 3G network.

NTT DoCoMo’s market research feedback suggested very early on that i-mode users wanted the possibility of longer email messages, larger displays and faster data transmission speeds. Despite the many successes of handset manufacturers predicting consumer preferences in Japan, there have been notable failures:

Sharp's SH601em, supplied to NTT DoCoMo, accommodated emailers' needs, enabling storage of long messages of up to 10,000 characters. The display panel is three times larger than the other handsets. However, it weighed 125 grams and proved too heavy for most Japanese. In addition, its email functions appeared complex.

Pioneer's J-PE01, supplied to J-Phone, is the handset with the biggest panel display, 40 mm x 100 mm. To launch calls, users use the electronic pen, touching over the virtual key buttons that appear on the panel display. This model suffered from three disadvantages. It weighed 122 grams and was also considered too heavy. More importantly, people often misplaced their pen, and the panel display was easily scratched.

INEC and Panasonic had started to supply a model called 302 Hyper to NTT DoCoMo. This offered packet data service at 28.8 Kbps. Even with this significantly faster data speed, the 302 hyper handsets obliged subscribers to carry a PC, a modem card, and the operations manual with them. Sales proved disappointing and the product line was discontinued.

31 I-mode in Europe – Entertainment and Content for the European Audience32 Jeff Giesea, Senior Analyst, Fierce Wireless. (June 2001)

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One thing that can be deduced from the supply and demand of handsets in Japan, is that the public are very demanding and have high expectations. Any handset not meeting the requirements are made obsolete very quickly. The high turnover of handsets is reinforced by the fact that the handsets are at rock bottom prices and users are actively “encouraged” to throw away handsets rather than buy a battery for them, for example. (A battery can cost more than the handset itself).

 

 Figure IV.3.4 Handset Examples

 DoCoMo 503 series (JAVA enabled)

Handset weightBattery

(standby)Battery (talking)

Screen color comments

F503iS hyper ... ... ... ... JAVA (iAPPLI)

SO503i 115g 210 h 140 mins65,536 colors

(TFT)JAVA (iAPPLI)

N503i 98g 460 h 135 mins 4096 colors JAVA (iAPPLI)

F503i 77g 430 h 135 mins 256 colors JAVA (iAPPLI)

P503i 74g 400 h 140 mins 256 colors JAVA (iAPPLI)

P503iS 98g 440 h 145 mins 256 colors JAVA (iAPPLI)

D503i 81g 380 h 130 mins 4096 colors JAVA (iAPPLI)Table IV.3.2 JAVA i-mode handsets:

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162

Handset weightBattery

(standby)Battery (talking)

Screen color comments

R691i (GEOFRE

E)

99g 430 h 120 mins grayscalewater resistant

P209iS 84g 380 h 135 mins 256 colors ...

D210i 71g 500 h 125 mins 256 colors ...

D209i 74g 400 h 120 mins 256 colors ...

P210i 59g 400 h 140 mins 256 colors ...

N210i 92g 500 h 135 mins 256 colors ...

F210i 65g 500 h 135 mins 256 colors ...

R209i 63g 430 h 120 mins grey scale ...

KO210i 70g 350 h 120 mins 256 colors ...

ER209i 77g 310 h 130 mins B&W ...

N502it 105g 460 h 130 mins 256 colors ...

P502i 69g 300 h 125 mins grey scale (4) ...

N502i 98g 420 h 120 mins grey scale (4) ...

D502i 84g 350 h 130 mins 256 colors ...

SO502i 73g 210 h 120 mins grey scale ...

SO502iWM

120g 200 h 100 mins 256 colors walkman type

NM502i 77g 270 h 130 mins B&W (discontinued)

P821i 82g 210-340 h115 mins -

6.5 hgrey scale (4) Doccimo

N821i 105g 290-600 h120 mins - 7

hgrey scale (4) Doccimo

SH821i 76g 220-400 h110 mins -

7.5 h256 colors Doccimo

Table IV.3.3 Non-Java i-mode handsets

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Handset weight ... ... Description Comments

FOMA N2001

105g ... ...color screen, multitasking

simultaneous I-mode and voice

FOMA P2101V

150g ... ...color screen, video camera

two-way video

FOMA P2401

50g ... ...

PC-Card (for data

transmission from PC)

downlink: 384kps, uplink:

64kbps

Table IV.3.4 Handsets for the 3G/FOMA test phase: © 2001 by Eurotechnology Japan K. K. These handsets, and PC-card are at the moment in testing among approx. 4000 test users in Japan.

FOMA N2001 (NEC) Functions: voice, I-mode, simultaneous voice and I-mode FOMA P2101V (Panasonic) Functions: voice, I-mode, simultaneous voice and I-mode, built-in video

camera for two-way video PC-datacard FOMA P2401 (Panasonic) PC-card connection card for insertion into the PC-card slot of

PCs and similar data terminals. Data transfer only, no voice function (except in case of internet telephony application within PC)

 

Figure IV.3.5 Example of a 3G Handset

B. POSITIONING

Brands

Japanese MNOs are to introduce 3G networks later this year (October 2001) and NTT DoCoMo’s i-mode has been so successful on 2.5G that it has become the global benchmark for the mobile internet, and by far and away the dominant brand in this Japanese market.

KDDI and J-Phone, two other large mobile operators in Japan, have advanced quickly in the mobile internet space, and are jockeying for the number two position.

These 3 brands dominate the mobile data landscape in Japan.

C. PROMOTION

NTT DoCoMo’s position in Japan is unique. They are the dominant operator in the mobile market (controlling approximately 60% of the market) and are well protected from the entry of newcomers. Its dominant position has enabled the company to dictate the development of the technology enablers for the i-Mode concept.

These unique circumstances will no doubt have had an impact on promotion strategy and spend.

Spend

With competition relatively low (only 3 key players) it is unlikely that NTT DoCoMo have had to spend a disproportionate amount on promoting i-mode, whereas the other two networks would have had to invest more in raising awareness for their own brands and encourage people to switch.

Hardly any information has been obtained on actual campaigns.

I-mode is most popular among young users, 24 to 35 years of age, who are usually the most avid online users in any market. It is likely that media and creative choices were therefore designed to appeal predominantly to this audience.

The heaviest i-mode users are women in their late 20s, which represents a large consumer segment with higher disposable incomes. DoCoMo has pressed into service the local actress Ryoku Hirosue to target the younger women, and also uses 40-something actor Tamura as an icon for older customers.

Campaigns

NTT DoCoMohas recently unveiled details of the advertising campaign that will accompany the commercial rollout of its 3G service, branded FOMA. The company has enlisted leading Japanese R&B singer Hikaru Utada to front the campaign. DoCoMo’s management believe the image projected by Miss Utada of budding potential, innovation, and international appeal fits well with the perception they wish consumers to have of the FOMA service. In addition the chanteuse’s soaring popularity in Japan, where her last album broke national sales records, will ensure the advertisements have a broad appeal.

In tandem with the new advertising campaign DoCoMo will begin offering Hikara Utada’s songs on the FOMA platform via its mobile music distribution service M-stage Music. The service is already available to the operator’s PHS subscribers but will be introduced on its enhanced i-mode platform from 25 July on a trial basis. Subscribers using M-stage Music are able to download songs to their handsets in MP3 format.

DoCoMo is on schedule to launch FOMA – which stands for Freedom of Mobile Multimedia Access – commercially from 1 October. The company has been trailing the service since 30 May with 4,500 so-called monitors who are testing enhanced i-mode, high speed data and videophone services.

DoCoMo have managed to generate a "positive feedback cycle": good content attracts users, which in turn attracts more content, and so on. It has been observed that as a result of the positive end user experience, word of mouth has been the single most influential promotion channel for I-mode. Additionally, NTT DoCoMo has been able to set the terminal specifications that handset manufacturers had to comply with, including specifications on screen size and even a specific i-mode button. This shrewd thinking has ensured that DoCoMo owned what is arguably the most valuable piece of promotional real estate – the handset keypad.

J-PhoneThe most recent campaign has enlisted the services of Hide Nakata, captain of the National Soccer team and all around personality in Japan. The brand new TV and regular media campaign centres on a "Be Yourself" theme, with Nakata giving a monologue on the need to choose (things) not just to be different but because they fit ones lifestyle. The key message is ‘Look beyond DoCoMo’ as J-Phone is trying to encourage consumers to switch to its superior product. Nakata is gradually replacing actress Fujiwara Norika.

While the above information is very limited, it does seem to suggest a trend of ‘personality’ endorsements of various services to give a halo-effect.

KDDIThe only information found on KDDI’s promotional activity is that ‘it is this year focusing on making AU a fashion label’33.

Promoting 3G

We expect the existing promotional tactics to be used with 3G, but majoring on a less congested radio spectrum and enhanced download times. All future development of i-mode by way of additional features and services will, we think, be limited to the 3G carried-across implementation of I-mode. KKDI and J-Phone are expected to do likewise in a follow-my-leader environment.

D. PLACEMENT/DISTRIBUTION

We have been unable to source any accounts/reports on the nature of the distribution framework of mobile data services in Japan. Even the ‘where/ how can I buy’ sections of Japanese operator web sites were not helpful, as the content is designed for Japanese consumers only, and is therefore only available in Japanese.

We know that NTT DoCoMo has a substantial chain of retail outlets selling i-mode products throughout Japan’s main urban areas where i-mode is availableWe can reasonably assume that, structurally, the distribution system has retail and wholesale elements – i.e. operators have their own retail stores, but they also sell through independent retailers. There is some evidence to suggest that this is in fact the case. The following paragraph has been found on an i-mode discussion board on the web. This was in response to a posting question asking how one can get i-mode:

‘…You need to obtain an i-mode enabled NTT-DoCoMo handset directly at one of the many DoCoMo shops or at shops which sell DoCoMo handsets and contracts. You need to enter into a service agreement for DoCoMo's cellular phone service and you need to chose the additional i-mode option…’ As i-mode is sold on contract rather than PAYG basis, it is likely that virtually all distribution is through specialist shops who are able to offer the requisite advice and set up the necessary credit application procedure.

Distribution of mobile phones without i-mode is likely to be through a wide variety of retailers, while contract phones are sold through specialist shops.

33 www.MobileMediaJapan.com

E. PRICING

NTT’s affordable pricing scheme is designed to encourage uptake. DoCoMo’s revenues come from i-mode subscriptions and from carrying packets of data.

To use i-mode you have to have a basic mobile phone subscription with NTT-DoCoMo. On top of the basic subscription costs you have to pay 300 YEN (approx. £1.20) per month for i-mode use. This is all you pay if you never actually use i-mode. However, when you start using I-mode you incur additional charges. There is a basic data charge of 0.3 YEN per data packet transmitted. Each packet equals 128 bytes. Packet transmission charges are calculated according to the volume of data transmitted, not the transmission time, and are based on the total number of packets transmitted per month.

As an example, looking at the basic i-mode-Menu, the standard DoCoMo welcome screen, or user interface, will cost about 2.7 YEN (£0.1.5p). A news page download will cost 17 –18 Yen (£0.10p). A mobile banking balance enquiry 20 Yen (£0.11p), and a funds transfer 60 Yen (£0.34p). Checking a share price would cost 27 Yen (£0.15p), whereas downloading a ringtone would cost 18 Yen (£0.10p).

In addition there are other charges for using email and for premium subscription services. i-mode mail charges depend on the number of characters, and can be between 1 – 5 Yen (£0.006 - £0.03) for sending and 1 – 2 Yen (£0.006 - £0.012 ) for receiving.

These are the costs of data transmission only. In some instances, users may have to pay for the content as well. Many (but by far not all) of DoCoMo's "official" partner sites are pay sites. These sites will have a public free area for basic information, but most of the content will require that your register and pay a monthly charge to the site. Charges are on the order of £0.6 - £2 per month and per site. Content charges are billed by DoCoMo on behalf of the content providers.

Increasingly, DoCoMo is generating revenue from e-commerce – collecting commissions on transactions over the network. For example, DoCoMo adds a 9% fee to the £0.70 charge paid by users for downloading one of the 15 different Bandai characters.  It should be noted that i-mode enabled phones are subsidised. Typical total costs (including DoCoMo's charges) when switching to i-mode are on the order of £40.

Overall Marketing Mix

The key-success factors of Japan’s mobile internet services have been discussed elsewhere in this document, but they can be summarised here in order to see them in the context of the Marketing Mix:-

High mobile phone penetration (60 million mobile subscribers);

Packet-based networks provide always-on connectivity. This provides customers with the benefit of immediacy;

Speeds are low (i-mode only offers 9.6 kbs), but applications are useful;

The prices for services are relatively low. I-mode customers may pay up to £3 per month for a service channel (although many service channels are available at no cost to the end-user). The price of traffic itself is low as well. NTT DoCoMo have charging capabilities that allows it to bill per byte, and the price per byte is low;

Handsets are relatively cheap, and are subsidised slightly;

Low-usage of fixed-line internet access due to low PC penetration at home and high local loop access charges;

Japanese people love gadgets. The youth segment in particular shows significant interest in mobile internet services. Killer applications include messaging, ringing tones and wallpaper downloads;

Efficient micro-billing system via the mobile phone bill. Micro-billing system makes it easy for subscribers to pay for value added, premium sites, and attractive for site owners to sell information to users;

Uses cHTML, which makes it easy not only for developers but also for ordinary consumers to develop content, giving explosive growth of content.

In particular, the rapid growth of NTT DoCoMo’s i-mode can also be attributed to NTT’s market leading position, its first mover advantage, its extensive content, affordable pricing, and the decision to stick with the familiar phone, rather than the personal digital assistant (PDA) or other device.

The following table, Table IV.3.1, summarises the state of the Japanese market and the segments aimed at.

It can be argued that the success of mobile internet in Japan, and the i-mode platform in particular, can be attributed more to business strategy and the unique circumstances of the Japanese market, rather than to brilliant manipulation of the marketing mix.

Operator NTT DoCoMo

Au Group/ KDDI

J-Phone Group

Tu-Ka

Market Share (Mobile)

59% 18% 16% 7%

Market Share (Data)

64% 19% 17%

Mobile Internet service

i-Mode EZWeb J-Sky

Current Network

Packet Switched

Circuit &Packet

Circuit

Speed 9.6 Kbps (28 Kbps on DoPa)

9.6 Kbps 9.6 Kbps

Targeted user segment

Universal Business People

Young women Young women

Phone Usage Standard Plan (monthly)

4,500 Yen 4,400 Yen 4,500 Yen 4,500 Yen

Mobile Internet basic fee (monthly)*

300 Yen + 0.3 Yen per packet

200 Yen + 0.27 Yen per packet

2 Yen per download request. No monthly fee.

Receiving email**

1 – 2 Yen

Sending email

1 – 4.2 Yen

Table IV.3.5: Main Mobile Data/Internet Services in Japan*100 Yen = £0.60. This is data transmission cost only, not including cost of content.**Actual cost depends on number of characters, which can be between 20 – 250.

SECTION 4 JAPANESE MARKET BUSINESS MODEL

The Model

This model has been devised to try to establish the vulnerability of the whole industry and to see if the payback periods mooted of between 3-5 years are reasonable. The model has been built in MS Excel, and it is parameter driven.

We have adopted a non-accounting approach, but have got as close as we can to a cash flow model without using forecast accounting data. However, key variables have been extracted from the published financial reports of NTT DoCoMo for Japan for 2000, and prorated accordingly for the Japanese industry, and average multipliers for key ratios have been derived from market data (see Marketing Mix)

Forecast data for the market size has been taken from published reports (see the sections on Marketing and Market Structure).

The objective of the model has been to determine the true annual cash flow EBITDA from operations, excluding the investment required in 3G infrastructures for a 10 year period, and then to present value (PV) those at an assumed WACC. Similarly, the annual investment required in the 3G infrastructures have been determined, and these have also been PVd at the same WACC.

By subtracting one PV from the other we can see if a PV profit is made or not – in other words does the industry have any surplus value over the 5-10 year period to justify the investment decisions.

The model is set out overleaf, and year 2000 EBITDA for the model is almost that of the summation for the Japanese mobile industry, and so the model has been taken to be a good enough fit for our purpose.

There are some significant potential errors in the model; e.g. the percentage level of government revenue sharing is unknown, and could be significantly more than shown, but this has been commenced earlier than expected (i.e. it has been shown as enjoying a share of 2.5G revenues). Also, the percentage of income sharing with content suppliers is unknown, but this has been shown to rise with time as the data content percentage rises with transfer to 3G. As, initially, 3G data rates will not be any higher than for i-mode, users may not transfer to 3G without a financial inducement, so handset subsidies might start to apply.

It is interesting to see, on the basis of the parameters used, that the whole Japanese mobile industry gives rise to a positive annual EBITDA in all years up to 2007, and the PV of all EBITDAs over the next 10 years is positive, and the PV of the 3G investment required can be matched and a contribution is made to amortising the historic investments in infrastructure – i.e. the 3G investment pays back itself, and creates an excess.

One broad conclusion of this for Japan is that the break even for 3G alone will take approximately 3 years. However, this is not true, as revenues from existing 2.5G services, particularly i-mode, are in effect being diverted to pay for 3G investment.

Although this total analysis looks very encouraging, it is vulnerable to a sustained high level of monthly charges per handset and users continuing to receive nil subsidy on handsets/devices. Sentiment might change in these elements when knowledge of UK 3G charging reaches the wider Japanese public.

Table IV.4.1 Japan Market Model

All figures in £ converted at 175Y

88% of Japanese population from here on

47.46 p.m. revenue

2.0% p.a.growth thereafter

Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Population 130,000,

000 132,600,00

0 135,252,000 137,957,040 140,716,181 143,530,504 146,401,115 149,329,137 152,315,720 155,362,034 158,469,275 161,638,660

24% 14% 13% 11% 10% 9% 2% 2% 2% 2% 2%Handsets in use 60,000,

000 74,600,00

0 85,400,000 96,300,000 107,100,000 117,900,000 128,832,981 131,409,640 134,037,833 136,718,590 139,452,962 142,242,021

Year on Year Increase 10,000,000

14,600,000

10,800,000 10,900,000 10,800,000 10,800,000 10,932,981 2,576,660 2,628,193 2,680,757 2,734,372 2,789,059

Cash FlowTotal Mobile Revenues £M

34,171

42,486 48,637 54,845 60,996 67,146 73,373 74,840 76,337 77,864 79,421 81,010

Income Sharing Government %

0.0% 2.5% 5.0% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5%

Income Sharing Government £

0 -1062 -2432 -4113 -4575 -5036 -5503 -5613 -5725 -5840 -5957 -6076

Income Sharing % 10.0% 12.5% 15.0% 17.5% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%Income Sharing £ -3417 -5311 -7296 -9598 -12199 -13429 -14675 -14968 -15267 -15573 -15884 -16202

Maintenance of Infrastructure

-2961.9 -3813.9 -4665.9 -5517.9 -5517.9 -5517.9 -5517.9 -5517.9 -5517.9 -5517.9 -5517.9 -5517.9

15%Total Promo Spend at -1709 -2124 -2432 -2742 -3050 -3357 -3669 -3742 -3817 -3893 -3971 -4050

5.0%

Handset Subsidies Increase

-400 0 0 0 0 0 0 0 0 0 0 0

Previous Base % Transfer

0% 10% 15% 15% 15% 15% 15% 15% 15% 15% 15% 15%

40Handset subsidy turn base

0 -240 -448 -512 -578 -643 -707 -773 -788 -804 -820 -837

Employees 160000 198933 227733 256800 285600 314400 343555 350426 357434 364583 371875 379312Av Employee Salaries 30000 30750 31519 32307 33114 33942 34791 35661 36552 37466 38403 39363Overheads -16800 -21410 -25123 -29037 -33101 -37350 -41834 -43737 -45727 -47808 -49983 -52257

3.5EBITDA 8883.62 8524.85 6241.71 3323.76 1975.18 1813.28 1467.55 489.05 -506.11 -1571.93 -2712.11 -3930.57PV EBITDA at WACC of

£8,884 £7,750 £5,158 £2,497 £1,349 £1,126 £828 £251 -£236 -£667 -£1,046 -£1,378

10% £24,517 TOTAL PV

D&A Requirement

Fixed Assets at entry 19,7462.G upgrades3G Licences3G infrastructure 5680 5680 5680Total to amortise 19746 5680 5680 5680 0Capital Investment 19746 5680 5680 5680 0 0 0 0 0 0 0 0Cum Infrastructure Capital

19746 25426 31106 36786 36786 36786 36786 36786 36786 36786 36786 36786

PV of D&A £19,746 £5,164 £4,694 £4,267 £0 £0 £0 £0 £0 £0 £0 £010% £33,871 TOTAL PV

Diff PV of EBITDA and D&A

-£9,354

PART V: COMPARISON OF THE UK & JAPANESE MARKETS

In drawing these comparisons, we have referred to, but been minded not to repeat, the information contained in the individual report parts, namely PART II Analysis of The UK Market, and PART III Analysis of The Japanese Market. Please refer to these parts for the detailed information.

We have been careful here only to draw out the main differences between the two markets where we believe that these differences will have an effect on product and service development and deployment, life cycles, take up rates, penetration, cost of deployment, and overall profitability.

Accordingly, this part of the report is much shorter than the other two main parts.

SECTION 1 COMPARISON: DEMAND

A. Today & Tomorrow

In both countries, as advanced wireless systems and networks develop, there will be a growing burden of software and hardware changes needed in systems to meet customer demands for new and faster services. It is not likely that third-generation wireless networks (3G) will be a single (or simple) implementation. The Japanese are in the advantageous position with regard to developing and implementing better systems, as they are already further down that path with their current 2.5G systems, which they have merely to duplicate, then enhance.

B. Demand

Developing a Market for Services

The following are the common goals which have to be achieved by both UK and Japanese network operators in relation to 3G mobile data services:

Standards must solidify.

Unlike earlier generations of wireless technology, 3G was meant to be a uniform standard world-wide -- but it isn't. This discrepancy among standards will be a nuisance for users who will want to use the same handsets anywhere in the world. These differences will cause a serious setback in 3G development. Multiple standards (there are at least three) will trigger replicated development effort that wastes valuable technical talent and siphons off investment capital. When it comes to manufacturing components and equipment, varied and changing standards will hamper true global economies of scale and lead to user equipment shortages.

In the wireless industry, base standards (for frequencies) depend on government licences and on associated licence conditions and form governmental regulation.

Marketing Project: Summer 2001: London Team; UK & Japan: 3G Page 175/206

Internationally, the same frequency bands have been allocated to 3G, but there are gaps in some regions, and even where they are the same, the standards imposed by governments are different. In Japan, the communications handshake, housekeeping routines, and transmission envelope protocols are different, too, but these are selected by the network operators, who seem to believe that differentiation at this level assists them to retain customers. In reality, it may inhibit demand and delay take up by users.

The price should be right.

The underlying 3G hardware and software, which will enable the network and data services to function, needs to be produced at a low cost so that a mass market can be encouraged. It shouldn't take long to overcome the initial cost barriers once the fundamental technology is in place. Lowering costs to achieve the right end user market price will require capital commitment, and manufacturers will attempt to time their investments according to the anticipated growth in market demand. This in turn will be governed by the geographic radio coverage and service features available when compared with the local 2.5G services Do the groundwork.

Service providers must invest heavily to establish the 3G infrastructure. This includes backend equipment to store information, wireless web portals to guide users, and applications that will drive an eventual insatiable appetite for wireless data services.

Activate base stations.

Service providers must install new base stations and upgrade existing stations to make them capable of handling 3G data transmissions.

Handsets will follow.

Once the first 3G base stations are established, 3G handsets should become available. There will be a period of initiation - hopefully short - followed by rapid ramp-up as users discover and demand 3G services, thus fuelling demand, especially in Japan where users must have the latest technology.

C. Substitute Goods

The Japanese have access to alternative technologies similar to those which are available in the UK. The main differences are concerning the services to be provided to users in both countries in relation to mobile data. WAP is currently the service used by wireless mobile phone users to access the internet in the UK, and I-mode is the non-internet data service used by Japanese customers. Both

Marketing Project: Summer 2001: London Team; UK & Japan: 3G Page 176/206

WAP and I-mode have connection speeds at 9.6Kbps but i-mode seems faster because users are permanently connected on-line. GPRS by being always-on will increase the speed that will allow WAP users to access WAP internet content, but the content available is limited compared to that available to i-mode users in Japan. If 3G services prove to be expensive for users in the UK then WAP and/or i-mode (as targeted by NTT DoCoMo in the UK by way of joint ventures with current mobile operators) under GPRS will be an alternative to full 3G services in the UK.

D. Complementary Goods

In the coming years, technology will not be the sole differentiator between mobile network operators, particularly with regard to mobile data. Instead it should be seen as an enabler of advanced mobile services, which will themselves be an important differentiator between operators. These services will be used to attract customers, increase the average revenue per user (ARPU) (through premium services) and reduce churn rates in both the UK and Japan.

Multi-media input, both static and refreshed, will be key to satisfying user needs and wants. Complementary service providers of these will find that a burgeoning market develops for their outputs and that fierce competition between portals, owned by network operators, will ensue.

E. Market Size

The UK market for mobile voice communications penetration is greater than that for mobile data communications, while the opposite is true for Japan. Japan is a very technophilic nation, with product hold-times after purchase being as little as six months, regardless of the personal investment. The UK is more service feature oriented and total cost of ownership aware. The markets are therefore not equivalent as to state, phase of development, segmentation or penetration, and so direct comparisons of volume and values is rather meaningless.

However the chronology of features and service of 2.0G, 2.5G, and 3G in each market may be similar, and so a study of the Japanese roll out of thee later technologies will probably be most helpful to the UK network operators.

The forecasts for mobile data volume on 3G for both Japan and the UK are pure conjecture, and are based on projecting the experiences of voice take up in the UK and the use of i-mode data services in Japan. However, these forecasts have been instrumental in driving up the auction price for the 3G licences in the UK, based on valuing, on a present value basis, the annual ARPU as a never ending and rising stream of income, while average debt rates remain abnormally low.

Marketing Project: Summer 2001: London Team; UK & Japan: 3G Page 177/206

Japan’s demand for 3G devices appears to be consumer driven whereas that of UK will be supplier driven. Japanese network operators did not pay as much for their licences (nil) as UK operators did for theirs (£22billion) and therefore the total costs of infrastructure and licences which the Japanese need to recoup will be less per operator than for the UK . This will therefore be done in a shorter time for the Japanese market, or at a higher unit service price for the UK operators. Japan’s suppliers will most likely make a profit, and sooner rather than later, while those of the UK might not even break-even.

Forecasts for both countries show that data usage will rise to approximately 50% of all connections and load within 5 years, while at the same time penetration of handheld devices will rise to 88% of each population (approximately 100% of all population between the ages of 10 and 75). These appear to be over optimistic unless unit access prices are lower than those of today.

Hans Snook, Chief Executive of Orange, recently told the press that the amount that they have paid for their own 3G licence will, in the future, appear to have been insignificant – however we must wait and see if this is turns out to be true, and if the consumer ends up paying for the UK’s 3G licence costs as an indirect governmental communication tax. This will, no doubt, be another occasion in which the UK’s consumers end up paying more for something than the resident of another G7 country consumer pays for an equivalent service.

F. Latent Demand

Consumer education.

The introduction of 3G wireless in the UK will present intensive marketing challenges. Customers need to be educated about new service options and convinced of their usefulness. Since it may be some time before new services are viewed as essential, providers will have to experiment with different types of offerings until they hit on those that consumers and businesses want. Until then, 3G wireless will remain a supplier-pushed technology rather than one pulled by user demand. In this sense the user demand in the UK might be considered to be latent – unlike for Japan where users are already aware of the types of data services that can be provided.

It's all about the applications.

Innovative software developers are creating the next big crazes in wireless entertainment, ranging from video and audio streaming to multi-player interactive games. While we have some idea what these applications will be, no one knows for sure exactly what they will be and what the demand levels will really be until the infrastructure is in place and delivery begins. Once high-demand applications are identified, new types of wireless equipment may combine phone networks, computers, and entertainment systems. This new equipment may not only

Marketing Project: Summer 2001: London Team; UK & Japan: 3G Page 178/206

provide the applications that drive 3G demand, but also be a force that changes life in the 21st century, just as telephones, TVs and PCs did in the 20th century.

We believe that Japan will remain ahead of the UK in this development an that the intense competition between NTT DoCoMo and J-Phone will continue to drive innovative development and .latent demand in Japan. The ideas behind the successful developments in Japan will then be imported and applied in the UK market for mobile data.

Marketing Project: Summer 2001: London Team; UK & Japan: 3G Page 179/206

SECTION 2 COMPARISON: MARKET STRUCTURE & SHARE

A. Historical Development of the Market

The UK and Japanese markets developed differently. The UK mobile market went through a rapid expansion phase in the 1980s when car-phones were heavily promoted in the business user segment. This rapid car based mobility expansion phase never took place in Japan. They were thus very well placed, with no large overhanging heavily-invested-user base, to build up rapidly the use of truly mobile cheaper handsets, both analogue and digital in turn, when the services became available, across major Japanese conurbations

Saturation of the mobile voice networks in Japan led to the early development and deployment of packet-switching as a means for message (data) sending between mobile units. Its take up rapidly gave rise to dedicated mobile data services (including e-mail) via network owned portals, which delayed the alternative connectivity of users to the Internet at home and in the office.

However, Japan, by missing out these two relatively explosive growth phases in the UK (car phones and PC internet links), has ended up in a more advanced state of technological and service development and deployment for mobile communications, including that of data usage. They are currently at the stage of 2.5G, while the UK is only at 2G.

B. Current Position

Current Operators

All the Japanese mobile network operators have successfully rolled out mobile data services and are operating 2.5G networks, with certain killer applications driving the market, email being the largest one of all. All three operators in Japan are building their networks and the first 3G network is due for launch at the beginning of October 20011. NTT DoCoMo is the dominant data player in Japan and this is very much due to the success of the i-mode brand with subscriber figures now over the 26 million mark2. NTT DoCoMo plans to launch the i-mode brand in the UK and Europe in spring 2002 to compete with GPRS and WAP services in operation there. The other two mobile data network operators in Japan have also both successfully implemented mobile data services, including the first location-based service.

The UK market, in contrast to Japan, currently consists of 4 main players who are all offering mobile data services, packaged with voice services. All four 1 announced by NTT DoCoMo in The Times, 4th September 2001226 million subscribers reached at end of July 2001 as advertised by NTT DoCoMo in FTIT, Financial Times, 5th September 2001

Marketing Project: Summer 2001: London Team; UK & Japan: 3G Page 180/206

network operators have recently launched GPRS services (in spring 2001) which are in their early market stages. These services will replace WAP, which has to date failed to penetrate more than 1% of the UK market. GPRS is an ‘always on’ technology and promises to deliver much more than WAP in terms of access speeds, and the billing model is based on data downloaded and not the time on line. It is similar to i-mode technology in that it allows the user to have both voice and data access from the same handset. The leading UK mobile telecoms player is Vodafone, although there is only 8 percent separating the leader from the laggard, One2One. BT Cellnet announced at the beginning of September 2001 that it is re-branding as mmO2. All UK network operators have announced that they will be launching 3G services in 2002 and BT will be the first when it launches a showcase 3G service on the Isle of Man in the Autumn (2001).

Both NTT DoCoMo and Vodafone have interests in both the UK and Japanese Markets. Hutchinson successfully bid for a UK 3G licence and will be a new market entrant into the UK market when it builds and launches its 3G network. Hutchinson previously held a large stake in Orange with BAE during its development stage and before it first became a public company. Hutchinson currently operate mobile networks in other countries and NTT DoCoMo is a 20% shareholder. Vodafone have a 46%34 stake in J-phone in Japan and will be learning important lessons in that market which will fare them well for the UK launch of 3G. Of all the players, NTT DoCoMo is best placed to exploit both markets with their vast experience with i-mode - to date the most successful mobile data service in the world. However, Vodafone has over 200 million customers world-wide through their different partnerships and minority and majority shareholdings in companies such as J-phone, and Mannesmann in Germany. They have vast experience of mergers and in making partnerships work. They are well placed to set up good strategic partnerships and alliances. Through the size of the world-wide corporation Vodafone commands huge bargaining power with suppliers.

Virtual network operators, such as Virgin and Sainsbury’s will not exist in the UK during 3G development and roll out as they are only tolerated during market growth stage, when real network operators use affinity marketing to increase their penetration at a lower net margin per user added.

34 Currently bidding to acquire a further stake in Japan Telecom to take that stake to 66.7% and give it control over both Japan Telecom and J-Phone- The Times 18th September 2001

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C. Environment

PEST ANALYSIS

For the UK, the overall result of the assessment is Neutral, while that for Japan is Positive. Given Japan’s more advanced state of services with 2.5G, this bodes well for their 3G implementation.

PORTER’S FIVE COMPETITIVE FORCES

For the UK, the overall result of the assessment is negative, while that for Japan is positive. Given Japan’s more advanced state of services with 2.5G, this bodes well for their 3G implementation, while it is ominous for the UK.

MARKET DRIVERS & INHIBITORS

Commercial & Investment

1. Internet Penetration Levels

Internet penetration in the UK is higher than Japan and the cost of entry is very low for fixed line users in the UK compared to Japan. This has been a huge mobile communications market driver in Japan as everyone can get low cost internet access through the mobile data services, as a substitute product, whereas fixed line access to the internet is prohibitively expensive. In the UK ‘surfing the net’ implies infinite, rich content delivered at high speed. This has never been part of Japanese life and therefore expectations of slower mobile internet access are very different, and in no way disappointing.

2. Mobile Market Maturity

The overall mobile market penetration in Japan is 47% and still growing. This growth is being fuelled by the take off of mobile data services, and saturation level is not expected to be reached for another 3 years. In the UK the market has reached saturation, with penetration levels forecast to be 76% of population by the end of 20016. Handset manufacturers have recorded lower shipments in Q2 2001 than for the same quarter last year and also when compared with Q1 of 2001. Market saturation is putting pressure on prices for operators and prices are falling for call charges and replacement handsets. The average revenue per user (ARPU) in Japan is rising and for mobile data operators is at £47.46 whereas in the UK it is falling and is currently at £25.40. The ARPU is forecast to rise in the

64 Mintel Market Intelligence, January 2001

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UK as the market for mobile data services takes off. In the UK handsets have been heavily subsidised at launch, whereas in Japan they haven’t. This presents a problem for UK operators as they are now looking to the replacement handset market as a key source of revenue, but the market will not be sustainable if prices rise, so they will probably have to keep subsidising handsets to stay competitive and retain customers.

NTT DoCoMo have indicated that the cost of 3G handsets will be almost twice as expensive as existing models. Costs forecast are 39,000 – 60,000 yen (£230 - £360) for 3G handsets, and the basic monthly contract charge will be in the range of 7,000 – 15,000 yen (£40 - £80) per month.

At these costs, NTT DoCoMo will be relying heavily on business subscribers in the initial introductory phase of 3G services as the main source of revenue. The state of the economy will affect how large the business subscriber base will be at any time. A big fear is that the increased price of 3G services will prevent current i-mode and other current mobile data service users from transferring over to 3G networks at least until data speeds are significantly faster at 500 kbps plus or more, in order to give the user a recognisable advantage.

3. Pre-pay market

Much of the growth in the UK mobile market has been fuelled by the take off of pre-pay phones. The UK pre-pay market is significant in comparison in Japan. The pre-pay market reaps lower profits for network operators, although it has opened up many new customers. Many people on the more profitable contract tariffs have switched over to pre-pay tariffs because they can save money if usage is small or spasmodic. This will have to be a feature of the 3G tariff structure in the UK, but a business model has yet to be defined, and is almost irrelevant in Japan.

4. National Economic Health

The Japanese economy is in poor shape in contrast to the UK, which is faring better than most Western countries in a global economic downturn. The UK continues to experiencing a rising level of disposable income with consumer confidence currently at its highest level for decades (probably fuelled by rising house prices on the back of low interest rates making people feel more wealthy than they are when all things are taken together). This has fuelled the growth of ownership of mobile phones across a wider socio-economic group in the last 3 years. Whereas in Japan disposable income levels are lower, are static, and if anything will decline as the economy deteriorates further. This situation does not look set to improve for two or three years.

5. Stock Market Sentiment

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Stock market sentiment in both countries is poor, particularly towards the telecom industry where it is estimated that over £1000 billion world-wide has been lost over the last 2 years3 because the expected explosion in Internet traffic never materialised. This dwarfs the amount lost through the bursting of the dot com bubble. Investors are understandably sceptical, therefore, about the forecast explosion in the mobile data market. However, in Japan the mobile data business model is still working, which is keeping some positive sentiment going amongst mobile telecoms companies, but almost every Japanese and UK IT and Telecoms company has had its value slashed by 50% or more in the last 18 months. The recent terrorists attack on 11th September 2001 on New York may well trigger a world-wide recession and depress the UK and Japanese stock markets even more as investors seek a safe harbour35.

The Investment levels in 3G licences and network infrastructure that are being made are huge in both countries. The Japanese operators were granted free spectrum access under a government revenue sharing scheme but UK operators have been laden with the high cost of UMTS licensing costs, at £22 billion. It is estimated that the cost of building networks will be over £5 billion for every operator. NTT DoCoMo has spent £5.78 billion building its 3G network36 to date. In the UK operators are exploring network sharing opportunities to reduce the costs of building individual 3G networks. Cost savings of up to 30% could be achieved if network sharing is implemented successfully. The sharing relationships could end up being complex and difficult. T-mobile, owners of One2One, have almost completed network sharing negotiations with BT Cellnet (mmO2). The payback time on 3G investment is an unknown quantity at this time, but in both countries it is estimated at between 5 –10 years, at a minimum, with rapid growth, and more with sluggish growth, even doubling to between 10-20 years.

Regulatory

The governments of both Japan and the UK recognise that the availability of wide spread Internet access will stoke economic activity, through the creation of new opportunities, new business models, and new mobile working practices leading to increased efficiency and productivity. Of the two countries Japan is more in need of this than the UK given its current economic state. This is largely the reason why the Japanese licences were granted on a revenue sharing basis with the Government, rather than being auctioned.

1. Health and safety

The ongoing health issues relating to emission of harmful levels of radiation arising from the use of handsets, and the positioning and number of masts could

35 Financial Times 5/9/0135 The Times 13th September 200136 as published in The Times, 4/9/01

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have a huge impact on the available data services, and impact every level of the value chain. UK and European legislation is likely to be stricter than that of Japan.

Technology

1. WAP v i-mode

The main technological difference between the UK and Japan over the last 18 months has been between WAP in the UK, and i-mode in Japan. The services both promised great things but have contrasted each other in many ways.

WAP was originally promoted as an amazing mobile Internet access technology, with much pre-launch hype about what the technology would enable. At launch WAP was a complete flop in the UK because of its charging model, its slow dial up and Internet access speeds, and its poor content. The number of WAP pages are limited and are very difficult to design. Take up of WAP has been slow and it has a poor reputation in the market place. By contrast Japan’s i-mode, using ‘always on’ packet switched technology, was originally based around useful content. The content was based on a restricted variant, cHTML, of the IT language of the traditional Internet, which has made it easy for software developers to create ‘unofficial’ sites and content. As of 2000, the service offered 25,100 content sites, 1,100 of which were official and 24,000 unofficial.8

Whereas WAP users access the Internet less than once a week, i-mode users view 300 to 400 Web pages a month.8 I-mode is now a larger ISP in Japan than AOL is in the US.

The success of i-mode has driven the demand for mobile data services in Japan for all operators, and has given Japan a big lead in the race to launch not only 3G networks, but 3G network data services. Already through i-mode, EZ web, J-Sky, and J-Navi Japanese operators have demonstrable revenue streams with Internet portal partners and have created successful alliances and partnerships with handset manufacturers, content designers and aggregators. By controlling aspects including handset specifications and the interface, branding, and content, the Japanese operator’s service has become the branded value chain. In the UK both network operators and content providers are vying for ownership of the consumer, and it appears that a fragmented value chain will evolve.

2. Technology Glitches and Quality Control

Both the UK and Japanese markets have been dogged with technology glitches, when new technology has been introduced. Both markets have experienced significant levels of handset recalls, particularly the more recent sophisticated 8 (Source: Tarifica)8

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and complex i-mode and J-phone handsets in Japan. WAP’s reputation in the UK was quickly established as a poor technology standard because of network connection glitches, frequently leading to phones disconnecting during a call. i-mode has also had bad publicity about its network performance over Summer 2000 although Shiro Tsuda of NTT DoCoMo stated at the beginning of September that ‘many technical problems in the 3G systems have been resolved’ 20019. Vodafone made a statement to the UK analysts on 6 th September saying that it would only guarantee 3G network data speeds at levels below those of the internationally agreed standard definition of 3G services10. This is because the developing network technology is slower than originally forecast.

Japanese network operators offer users far more sophisticated and technically superior handsets than UK operators, in terms of the look and technical capabilities, and most of them have a colour screen as standard. UK handsets are of a poor standard in comparison.

Technology cycles are becoming increasingly shorter in both markets. WAP was introduced in 1999, GPRS was introduced in 2001 and 3G will be launched in 2002 in the UK. In Japan I-mode was launched in 1999 and 3G will be launched in 2001. The shorter technology cycles are putting handset manufacturers and network infrastructure builders under immense pressure to deliver quality, tested, and fully functioning products on much shorter lead times than previously. The main bottleneck to the introduction of 3G services in both the UK and Japan has been cited as handset manufacturers. This is because they cannot deliver quality tested products on time. If they do deliver on time, then as they may be unreliable, the products are being recalled at a huge expense to all parties involved, not just in monetary terms but also in terms of reputation and credibility. Lead time responses are set to get ever shorter, and it is inevitable that this is going to be a problem for all everyone involved in the 3G market place.

Product and Service

1. Killer Applications: SMS v email The largest driver of both the UK and Japanese mobile data markets has been mobile messaging services. In the UK SMS text messaging has exploded and gone through a period of exponential growth. In Japan mobile data services have enabled many users access to the Internet for the first time and the use of mobile handset to Internet email has grown massively. Of the two applications, email is the better, as it uses the global medium of the internet, can be accessed by users from a variety of both mobile and fixed line terminals, and enables document, image and voice attachments. SMS on the other hand can only be accessed from other SMS enabled terminals and can be used for text messaging only, and for basic images.

9 Announced in The Times, 3rd September 2001.10 Published in the Financial Times, 7th September 2001.

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Vodafone are developing a technology enabler with GPRS to allow SMS messages to be received as emails. Eventually email will become the global universal standard, with much enhanced attachment capabilities. Multi media messaging with video streaming will be some time off yet, as the data speeds required for these application capabilities are very high.

2. Location based services

Japan is the only country with an operational location based service. The service has already proved its popularity by the number of subscribers. This will continue to be a growth driver in Japan. These services will be launched in the UK with 3G.

3. Infotainment

Infotainment has proved highly successful in Japan, but unsuccessful in the UK. WAP’s poor capabilities are blamed for the low take up of infotainment, and the lack of useful content with this service has inhibited growth. I-mode prides itself on the tailoring of relevant and interesting content to the specific user, which seems to be a winning formula.

4. Business applications – mobile office

Both the UK and Japan see the mobile office applications as being a key driver with the introduction of 3G services. Security is paramount, as is reliability of service for the business user. Anytime, anyplace, communication will make virtual offices a reality. NTT DoCoMo expect this market to be the first to really take off when it launches its 3G services in October 2001 in key cities.

Culture

Culture has been a large driver of the take up of mobile data services in both countries. In the UK, SMS has become a fashionable, cheap way for teenagers too stay in touch with each other. SMS allows images to be forwarded to another user, which again has been a great hit with younger users. I-mode appeals to all segments of society. NTT DoCoMo has based elements of i-mode on the relatively recent techno-heritage of Japanese society. The Japanese are a nation who enjoy technological gadgets, whereas the UK is not. The UK level of fixed-line Internet penetration has been much higher than in Japan, and this has lead to customers in the UK having expectations about the quality of mobile data services, which largely have not been met. In Japan user do not have the same level of expectations, and are therefore not disappointed with low download speeds.

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Japanese young people like to keep in touch with many friends, maybe as many as two hundred, rather than just a few very close friends, which a young person in the UK would tend to do. Japanese people live in close quarters and many people share a living space. Their mobile phone therefore becomes their private space, or their ‘virtual home’. This is very different to living arrangements in the UK. A much higher percentage of people commute longer distances in Japan than in the UK, which means they are a lot more mobile and spend more time in transit. Mobile usage would therefore naturally be higher than in the UK.

D. Segmentation

User preferences in both Japan and the UK indicate that SMS and email capabilities are two of the main services sought by users when purchasing phones. The size, weight, colour, and style are also very important which is an indication as to how much of a fashion accessory the handset has become in both countries. This will be a very important consideration when new 3G handsets are being designed and developed. The UK currently has a higher percentage of younger mobile users than in Japan. This can be attributed to the launch and take up of pre-pay mobile services since their launch in the UK in 1997.

Users can be segmented in either country by age group, family member type, class of use (e.g. business, social, pleasure), and class of information (data) accessed. They will also be able to be segmented by joining mechanism (i.e. distribution method of handset).

E. The Way Ahead

Marketing Strategies for the short term

Both the UK and Japanese mobile networks are being upgraded; the UK to 2.5G, the equivalent of which already exists in Japan, and Japan to a reduced throughput 3G standard. The markets are thus out of phase, with Japan being ahead of the UK.

We expect the strategies that have been adopted in the past in Japan to roll-out 2.5G to be adopted in the UK for its 2.5G implementation.

The environment for Japan is more positive than it is for the UK, and we would expect to see Japan maintain its technological and data service lead.

Marketing Strategies for the longer term including 3G Market Development

While the UK will be developing and rolling out 3G, with associated market development strategies as used in Japan being deployed in the UK, Japan will be

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going for mass penetration and market dominance, and then pausing for breath while consolidating prior to considering 4G upgrades as market development.

It is interesting to note that Vodafone, one of the UK 3G licensees, has a 60% 37

stake in total in one of the Japanese 3G licensees (J-Phone), 39.7% held directly and the rest through its 45% stake in Japan Telecom, presumably to learn the real lessons first hand rather than wait for later industry analyses.

Industry commentators38 speculate that the lessons learned in the roll out of 2.5G in Japan may also be applied in the roll out of 3G in the UK, but not in the same closed-shop/limited-one-stop-shop portal manner. The suggestion is that UK Network Operators should choose the bits that they are good at doing, and then form alliances with other companies to do the rest, based on value-chain analysis across the whole supply chain, but to try and control access to the rest via their own portals, which will be a wide window on to the world. In other words, form open-one-stop-shop portals as facilitators, and use their billing systems as payment aggregators to make life easy for the user.

37 Financial Times 11 September 200138 The McKinsey Quarterly 2000 Number 3, M-Commerce: An Operator’s Manual

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PART V SECTION 3 MARKETING MIX COMPARISON – UK and JAPAN

A. PRODUCT

Not only are Japan and the United Kingdom vastly geographically separated, they are also vastly culturally separated.

In Japan the number of young people (and older people) owning PC’s is low when compared to the UK and many other European countries. PC penetration into the homes is still minimal. There are a number of reasons for this lack of penetration, but two are particularly important:- in Japan there is a real lack of privacy in the home, and therefore many view

their mobile or PDA as their home base location, their own private space; the high costs of fixed line connections.

Even though there is a great percentage of the UK population that commute to work by some form of local transport, they are still less in comparison than their Japanese counterparts. The Japanese also spend greater periods of time commuting. Thus, due to these longer commuting periods, more time can be devoted to ‘productive’ use of their mobiles or PDA’s. Japan is a nation who enjoy technical gadgets, and many leading-edge technology solutions have emerged out of Japan over the last 50 years, particularly pioneering electronic devices .

These differences are the more obvious ones. There are many more differences, and listing them would be beyond the scope of this report. However, those mentioned for Japan, build a platform of user expectations, which filters right down to the component suppliers of the gadgets.

Differences aside, one common goal that both countries are seeking, is the deliverance of 3G. In order to compare their respective paths towards 3G, we have to look at the current situation that is prevalent in each country. The current technology and services available is the springboard into 3G. Thus this comparison would involve comparing the UK market that has had exposure to WAP (and now GPRS), to the Japanese market, which has been exposed to i-mode (as well as WAP).

Network Operator Services

I-mode is very much firmly based in the idiosyncrasies of Japanese society, and appeals to every sector, young, old, male, female, business, and social user. For example many of the idle i-mode images are colourful animations, reflective on Japanese folklore and culture, with which they are familiar from childhood. Thus a high value is placed on customer orientation – with extra emphasis targeting the youth market and thus being driven by entertainment-based services.

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In the UK, WAP usage is mainly confined to business users, as it has been marketed mostly to business, and can therefore often be thought of as “boring”.

Most of the UK youth can’t really afford the cost of downloading content or viewing content on the internet from their WAP enabled mobile phones. This is because WAP services (which are circuit-switched) charge for the duration that the call is being made and not just for the content downloaded (as with i-mode which is a packet-switched, “always-on”, connection). Thus in the UK it is cheaper to communicate with SMS or through fixed-line internet usage.

The two figures, Figure V.3.1 and 2, below give the World and European comparison between WAP and i-mode, and show the dominance of i-mode.

Figure V.3.1 WAP and i-mode: World’s Wireless Internet Users (Nov 2000)

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Figure V.3.2 i-Mode v WAP users (Nov 2000)Korea and Italy are believed to be WAP users

Handsets

There is not only the difference in services offered between WAP and i-Mode, but there is also a physical difference between the handsets that are used.I-mode handsets in Japan have large full colour (256 colours) displays and can display animated full colour gifs (a file type visual image) and ten lines of text or more. European (and hence UK) implementations of WAP today have handsets showing only four lines of text, in black/white, without visual images. This line and image restriction is not a limitation of the WAP protocol itself (as Japanese WAP implementations demonstrate) but rather a limitation of present day WAP implementations in Europe (including the UK). WAP-implementations in Japan do include full colour visual images and many other features not found in European handsets at present.

All is not lost for the UK, though. There has been a lot of talk about GPRS and its “upliftment” (of the current perception in the UK) of internet content delivered through mobile devices. However, since all but the early WAP enabled devices will also technically support GPRS, then WAP and GPRS could well be synergistic and be widely used together.

There has been a slow roll out of GPRS in the UK. This is partly due to the delay in availability of the handsets. One must not forget that the culture in the UK is not conducive to quick change, or at least not too quickly. Both users and operators prefer to adopt an attitude of “sit back and observe”, (whereas Japan

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are renowned for being early movers), and then decide on their direction. Most users will get by with their current devices. Also it must be remembered that with each change or progression towards 3G (i.e. GPRS/2.5G), there is a financial outlay for a new device. This must be met either by the user or the operator/service provider.

Comparing the differences stated, we can conclude that the Japanese will have an easier springboard into 3G. The preconception of WAP being that of the next “tidal-wave” in technology, (i.e. “Internet on the move”39), and its failure to uphold this deliverable, together with the bad initial user experience, and now the retained negative association of it, will cause the UK network providers and associated enablers to have a lot more work to do for a successful 2.5G and 3G roll-out .

The real business differences between today’s UK WAP implementation and Japan’s i-mode are more in the way these services are marketed and advertised; the business models and charging models; the handsets, battery life, and display qualities. These differences are determined and underpinned by the cultures of the country and hence the user expectations.

Given the commercial success of i-mode in Japan, it is not beyond reasonable belief that some of the services provided by it will be translated into similar services under PGRS in the UK under 2.5G and 3G technology. In the longer term, youth culture, which tends to be such a commercial influence around the world, and which is ever more becoming aligned across all countries as conservative attitudes of parents are waning, may well be the unifying driving force of service and goods delivery in both countries. This may well overtake the common held expectation that business users’ requirements will be the main technology driving force of 3G implementation.

B. POSITIONING

Both markets are characterised by the strong bands of the main operators, five in the UK and three in Japan. These brands, which have been positioned in the past to assist with segmentation promotion of the digital mobile voice and data business services, will continue with 2.5G and 3G roll-out in an attempt by the operators to obtain brand loyalty and customer loyalty during transition to 3G.

39 * Anreas Pfeiffer, Pfeiffer Report – April 22, 2001 (WAP flop muddies 3G waters)

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C. PROMOTION

Spend

It is impossible to draw meaningful comparison of Promotion as we have no information on media choices, budgets etc for Japan.

Creative styles and approaches will obviously be different to cater for different cultures.

Campaigns

The focus of the advertising is also different. Marketing of WAP-based services in the UK presently focuses on business applications (banking, stock portfolio, business news, flight booking), while marketing of WAP-based services and i-mode in Japan focus on fun and everyday life-style: restaurant guides, games, images, ringing melodies. This reflects the fact that mobile internet in Japan is much more mainstream.

Market dynamics will also have an impact. Competition in the UK is fiercer – there are more operators, none of which have a dominant share, the maximum being Vodafone with approximately 30%+, but declining from a higher percentage. This means that all networks have to work harder to build their brands and grow their market share. In Japan, NTT DoCoMo with approximately 60% is under constant attack from J-Phone and KKDI.

Promoting 3G

It is likely that spend on data services promotion is much higher in Japan, as the contribution to the bottom line is much greater than in the UK, and that this will continue with 2.5G and 3G roll-out, and may well follow suit in the suit.

D. PLACEMENT/ DISTRIBUTION

The UK and Japanese distribution systems are similar in terms of the underlying structure. In both markets, network operators sell handsets and network connections direct to the public through their own stores, as well as indirectly through specialist stores. In both markets, prepay phones are available through a much wider network, while contract based connections are restricted to the specialists.

Not enough information has been obtained on the Japanese distribution system to allow a more detailed comparison.

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E. PRICING

Network tariffs

We have only managed to find detailed tariff information for NTT DocCoMo’s i-mode. The following comparison is therefore based on i-mode pricing only.

It is difficult to decide what to compare i-mode pricing with, as it is different to anything available in the UK. As i-mode is currently carried over a GPRS network in Japan, it might appear to make some sense to try to compare it with WAP, which is also currently carried over a GPRS network in the UK.

However, WAP is a protocol while i-mode is a complete wireless internet service. Therefore comparing WAP with i-mode is somewhat like comparing Rolls-Royce Jet Engines (a manufacturer of part of a transportation product) with British Airways (a user of the finished transportation product while delivering a service – the shipment of passengers and goods). Such a comparison would, in marketing terms be meaningless. In spite of this, we shall try and draw out the similarities between WAP in the UK under GPRS and i-mode in Japan.

Pricing Policies

Pricing policies and prices are quite similar, although a direct comparison is difficult. In both countries, operators charge a basic monthly fee plus per second airtime for voice calls. I-mode and GPRS are charged as an optional extra to the voice contract, with a monthly subscription. Monthly subscription is lower in Japan, but it is worth noting that some UK operators offer a GPRS tariff which includes 1Mb of inclusive data (albeit for a much higher monthly fee). No evidence of such tariff option has been found for Japan, although it may well exist. Data downloads are charged according to file size. I-mode charge for ‘data packets’, with each such packet constituting 128 bytes, whereas GPRS in the UK is charged per Kb(1024 bytes).

Table V.3.1 highlights the key differences.

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Table V.3.1 Pricing Differences between WAP and i-mode services*estimate for welcome/ menu page** based on maximum size email

Both countries offer pre-pay tariffs, however neither i-mode nor GPRS is available on such a tariff. WAP over GSM is available on pre-pay basis in the UK, although it is not clear whether this is the case for WAP in Japan.

The differences reflect the fact that the Japanese market is more mature, and Japanese consumers are used to paying i-mode charges. In the UK, consumers don’t yet know what things cost, which is why operators offer tariffs which include ‘free’ data.

Pricing 3G

The introduction of 2.5G and 3G services in the UK will lead to experimental pricing methods. 2.5G experience will be very influential on 3G pricing models. If NTT DoCoMo succeed in introducing i-mode into the UK (by completing licensing arrangements for the use of their technology with European operators to attack the market with, or by themselves as an additional operator on 2.5G GPRS), then the service types, levels, and pricing introduced will affect the pricing algorithms in the UK used by all operators.

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SECTION 4 Market Business Models

The following are the salient pints from the analysis of both markets and the individual market business models:-

1. Orange, a latecomer 2G UK licence operator has not declared a positive PBT to date since inception (as they have been buying business through giving handset subsidies to distributors and customers), although they have been at pains to declare positive EBITDA in the current year. Cumulative retained losses after tax are £1,420 Million

2. Vodafone, one of the first two mobile operators in the UK has made estimated cumulative retained profits after tax of £963 Million

3. Orange and Vodafone currently account for approximately 55% of the UK mobile operators, so the UK industry in aggregate has estimated cumulative retained losses of £831 Million;

4. NTT DoCoMo of Japan has cumulative retained profits after tax of £3,679 Million

5. NTT DoCoMo accounts for approximately 60% of the mobile operators in Japan, so the Japanese industry in aggregate has estimated cumulative retained profits of £6,132 Million;

6. previous capital investments in 1G and 2G wireless networks have not yet been totally written off in the UK or Japan. These aggregate to £7,182 for the UK, and £19,746 Million for Japan;

7. the price of 3G licences in the UK has been high at £22 billion in total, compared with nil in Japan, (but with a revenue split with the Japanese government in the future), and there is a feeling that they paid too much for them. Infrastructure costs for 3G are forecast at £5 billion per operator in the UK and £5.5 billion in Japan;

8. break-even for 3G for the UK is forecast to be between 5-10 years with a rapid roll-out, but might be 10-20 years if roll-out is delayed or slow;

9. from our own model we calculate that the PV of the total EBITDA for all mobile network operators for the next 10 years for the UK at a WACC of 10% is £(2,148) Million. This will make no contribution at all to covering the amortisation of the balance of the existing networks of £7,182 Million nor the expected investment in 2.5G network upgrades of £6,000 Million, 3G networks of £25,000 Million, and 3G licences of £22,000 Million. Network sharing in the UK might be one way of reducing the infrastructure burden.

10.break-even for 3G for Japan is forecast to be between 3-5 years with a rapid roll-out, but might be 5-10 years if roll-out is delayed or slow;

11. from our own model we calculate that the PV of the total EBITDA for all mobile network operators for the next 10 years for Japan at a

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WACC of 10% is £24,517 Million. This will amortise the PV of the 3G infrastructure costs of £14,125 Million, and make a contribution of £10,492 Million to covering the amortisation of the balance of the existing networks of £19,746 Million.

Japan is the better 3G mobile wireless data market infrastructure to invest in.

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PART VI CONCLUSIONS

A. Conclusions

In drawing conclusions, we have concentrated on answering the three questions posed in the introduction. Each question has been restated in turn, as a heading, before the conclusion reached is stated.

What will be the determinants of success in a 3G mobile data market place? In both countries the following will apply:-

the availability of money for investment; technology roll-out (masts, transmitters, receivers, relays, software, handsets)

must be provided on a timely basis, work first time, and be co-ordinated with handset/device availability and content/data availability ;

ability to cater for all forms of access devices as they become available and to connect them easily and compatibly;

speed of indexing and fast access to data including that of downloads; portals, as a customer service, giving access to data content in all its forms,

but aggregated by subject; content aggregation; combined billing systems for service, data download, and information access

fees; any-place wireless coverage with no blind spots in roll-out areas; technicians in all disciplines to sort out problems as they arise; effective customer marketing including heavy advertising spend; effective distribution and motivation of device and service contract channels.

How might a mobile communication market structure change with the introduction of 3G?

supply chains will change, as will customer added value production. Network operators will attempt to become portals and control access to content, and to charge for it. This already happens in Japan, and will become a feature of the UK. Patching of content through portals and the provision of a one-stop-shop billing system that collects and reallocates the revenue to the correct supplier will be key;

partnerships of network operators, content aggregators, and content providers will be formed, extended, broken, and reformed;

for self-selected users, information which is not advertising, and which is proprietary, or which has been collected at a cost, will be charged for, albeit at low unit rates, and will no longer be supplied free;

free-content portals, but whose business model is based on advertising revenue will project advertising and special offers on to user

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terminals/devices based on their purchasing history, lifestyle, and current location;

distribution channels for devices and service contracts will merge with portal provision in order to capture a customer and hold on to them;

TV news-feeds currently available by subscription service, will be supplied as part of the portal services. Normal TV programs will become available as a feed to devices through portals;

Low capitalised service/content companies will try to ride on the coat tails of higher capitalised companies, based on selling and delivering their know-how.

As marketers, could we justify the investment in 3G licences and infrastructure in each market?

The salient facts to be taken into account are:-

capacity restrictions are driving the additional investment in 2.5G in the UK, and will do so for 3G (in both countries). If investment is not made, then user volume/traffic will transfer to other operators who develop capacity. Extra capacity will bring enhanced services;

Orange, a latecomer 2G UK licence operator has not declared a positive PBT to date since inception (as they have been buying business through giving handset subsidies to distributors and customers), although they have been at pains to declare positive EBITDA in the current year. Cumulative retained losses after tax are £1,420 Million

Vodafone, one of the first two mobile operators in the UK has made estimated cumulative retained profits after tax of £963 Million

Orange and Vodafone currently account for approximately 55% of the UK mobile operators, so the UK industry in aggregate has estimated cumulative retained losses of £831 Million;

NTT DoCoMo of Japan has cumulative retained profits after tax of £3,679 Million

NTT DoCoMo accounts for approximately 60% of the mobile operators in Japan, so the Japanese industry in aggregate has estimated cumulative retained profits of £6,132 Million;

previous capital investments in 1G and 2G wireless networks have not yet been totally written off in the UK or Japan. These aggregate to £7,182 for the UK, and £19,746 Million for Japan;

the price of 3G licences in the UK has been high at £22 billion in total, compared with nil in Japan, (but with a revenue split with the Japanese government in the future), and there is a feeling that they paid too much for them. Infrastructure costs for 3G are forecast at £5 billion per operator in the UK and £5.5 billion in Japan;

break-even for 3G for the UK is forecast to be between 5-10 years with a rapid roll-out, but might be 10-20 years if roll-out is delayed or slow;

from our own model we calculate that the PV of the total EBITDA for all mobile network operators for the next 10 years for the UK at a WACC of 10% is £(2,148) Million. This will make no contribution at all to covering the

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amortisation of the balance of the existing networks of £7,182 Million nor the expected investment in 2.5G network upgrades of £6,000 Million, 3G networks of £25,000 Million, and 3G licences of £22,000 Million. Network sharing in the UK might be one way of reducing the infrastructure burden.

break-even for 3G for Japan is forecast to be between 3-5 years with a rapid roll-out, but might be 5-10 years if roll-out is delayed or slow;

from our own model we calculate that the PV of the total EBITDA for all mobile network operators for the next 10 years for Japan at a WACC of 10% is £24,348 Million. This will amortise the PV of the 3G infrastructure costs of £14,125 Million, and make a contribution of £10,223 Million to covering the amortisation of the balance of the existing networks of £19,746 Million.

Based on such unreliable medium to long term forecasts as are available in the public domain, and without carrying out more detailed research ourselves, on balance, as marketers, we would find it hard to justify the investment in 3G licences and infrastructure.

We believe that the network operators in the UK have their own unpublished forecasts, which are more optimistic than those given, but involve changes to charging and subsidies which might be unpalatable to the users if published now, and take into account network sharing and initially reduced data transmission rates

We feel that all the existing licence holders have taken the view that this is a strategic corporate decision for them, and not simply a marketing decision, and in real-option terms is the price that has to be paid now, regardless of the cost, to have an option on a future existence. They would thus survive to be able to provide 4G services and those communication facilities that will meet the eventual user needs of The Next Twenty Years (see PART III, Section 1 Demand, final sub-heading). These future services, which may well be provided by fewer network operators than at present, perhaps by a duopoly or even a state monopoly in the UK as a result of insolvencies of operators, will be the ones that eventually pervade all our lives and which should provide a future pay-back of all historic cumulative investment in all mobile networks, even if 3G itself doesn’t.

B. Lessons Learned

These are project related, rather than subject related, and are:- Realise early on that this project is as much about working with disparate

people as it is about marketing research; In this multi-person MBA project, where students come from different firms

and professions, understand that there are no organisational power levers. (Kakabadse et al, Working in Organisations, Penguin Books, 1988, pp 211-248 ) .

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That the only commonality of purpose was the need to finish the project to complete the module to get a high common module grade. Progress was entirely dependent on the willingness of the participants to want to meet the project objectives with the same intensity as if it were their own individual assignment, and to recognise that without their effort, and that of their co-operators, the project, and their mark, would suffer;

Be aware that interest and energy levels will rise and fall over the project timetable, and that consistency of steady applied effort is paramount;

Continually plan, act, review, and plan again, both forwards and backwards, and record in written minutes the joint decisions made, and the next actions required;

Start early, and hold regular planning and review meetings, as even though as we did, from the first week, we found that we could not complete the project within the original time span;

Establish early-on the means by which information reviewed by one person could be made available to others;

Allocate sections and countries to specific persons at the outset in order to establish clear responsibilities;

Balance the workload across the personnel, and be willing to reallocate sections and subsections when it becomes apparent that the first work load content estimates were inaccurate;

Have back-up for every person at all times; Start by having an agreed written introduction, background, and history, to act

as a back drop for everyone, so that they can adopt a common approach and writing standard;

Agree the bullet point content of a section before writing of it commences, and try to avoid overlap of content.

Never underestimate the time that it will take to edit the written sections into a common form and standard of English, and to produce in final bound paper form;

If one person can be spared to provide overall administrative capability in order to keep the overall finished report format in mind, to receive electronic versions of written document sections, to edit draft versions to a common standard and to return them, to become the final electronic report compiler, and to be available to assist section leaders at short notice, then it will pay multiple dividends;

Finally, choose a simple product in a simple marketplace with few competitors, yet with lots of information in both countries, in order to simplify the project and reduce the overall workload.

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PART VII GLOSSARY OF TERMS

2G 2nd generation 2.5G 2.5th generation 2.75G 2.7th generation 3G 3rd generation. Mobile technology according to IMT-2000 standard

(eg. UMTS in Europe).4G future mobile technologiesARPU average revenue per userB2B Business to businessB2C Business to consumerBluetooth Technology enabling seamless voice data connections between a

wide range of devices through short range two way radio CDMA code division multiple accessCHTML compact HTMLDSL digital subscriber lineGIF graphics interchange format GRPS General packed radio serviceGSM Global system for global communicationHDML handheld device mark-up languageI-Mode leading Japanese mobile data service provider, owned by NTT

DoCoMoIP Internet ProtocolJPEG Joint photography expert group LAN Local area networkM2M Machine to machine communicationMPG Multi-player gamePAN Personal area networkPDA Personal digital assistantRAN Radio area networkSMS Short message service TCP/IP Transmission control protocol / internet protocol TDMA Time division synchronous code division accessUMS Unified messaging serviceUMTS Universal telecommunication system UWB Ultra wide bandVPN Virtual private networkWAP Wireless application protocolWASP Wireless application service provider W-CDMA Wideband code division multiple access WISP Wireless internet service providerWLAN Wireless LANXHTML Extensible HTMLXML Extensible mark up language

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PART VIII BIBLIOGRAPHY and REFERENCES

‘UMTS Report – An Investment Perspective’, Durlacher, April 2001

‘The UMTS Third Generation Market – Phase II: Structuring the Service Revenue Opportunities’ UMTS Forum Market Report No. 13, April 2001

‘Mobile Phones and Network Providers’ Mintel Market Intelligence, April 2001

‘I-Mode in Europe: Entertainment and content for The European Audience’, PBI Tarifica, June 2001

The Link Price Guide, August/September 2001

‘Mobile Phones and Health’ Department of Health, Dec 2000

The Times

The Financial Times

‘M-Commerce: An Operators Manual’, The McKinsey Quarterly, No. 3, 2000.

‘Mobile Portals: Mobilize for Scale’, The McKinsey Quarterly, No. 2, 2000.

‘Multimedia Messaging: The 3G Revenue Generating Application’, Logica, April 2001

‘3G: Is the Message Clear?’, Logica, April, 2001

BT Annual Report, 2001

Orange Annual Summary, 2001

‘Data on 3G – An Introduction to the Third Generation’ Mobile Lifestreams, February 2001

‘The UMTS-GSM Co-Sitting Problem’, MFC Net, May 2001

‘Mobile Regulation: Oftel Strikes Again’, SG European Cellular, July 2001

‘Introduction to UMTS’, Quotient, July 2001

Fame: Financial Accounts for Orange Holdings UK Ltd, and Vodafone Plc for 2000

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These are the initial web sites that we visited. Each web site contained documents and/or gave rise to many other web-sites which contained documents or links to documents, all of which we scanned, read, printed or downloaded. These are legion and have not been listed individually.

www.tnty.com

www.cellularnews.com

www.carphonewarehouse.com

www.emccccc-database.com

www.marketresearch.com

www.zdnet.com

www.arcgroup.com

www.intekom.com

www.mobileoffice.co.za

www.iis.ee.ic.ac.uk

www.eurotechnology.com

www.mobilemediajapon.com

www.bwcs.com

www.3g-generation.com

www.the3gportal.com

www.3g.co.uk

www.3gnewsroom.com

www.ft.com/understanding3g

www.nttdocomo.com

www.totaltele.com

www.umts-forum.org

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www.japan.net

www.qualcomm.com

www.mobile3g.com

www.cellular-news.com

www.anywhereyougo.com

www.nokia.com

www.cnn.com

www.iii.co.uk

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