Subject: [NEXTEL-1] BW Online November 21, 2002 Europe's Clueless Wireless Operators

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NOVEMBER 21, 2002

EURO-TECH

By Andy Reinhardt

Europe's Clueless Wireless Operators

Technology that doesn't work. Absurd roaming limits. Confusing prices. Addressing these problems and more is essential

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With their balance sheets weighed down by debt and stocks weakened by skeptical investors, it's no surprise that European wireless-telecom executives have been feeling under the gun. Most are responding by pulling in their horns -- tightening operations, cutting capital spending, and paring back on marketing expenses.

This back-to-basics push is starting to yield results. Cash flows are up, debt levels are declining, and the share prices of many European telecom companies are showing signs of life. Indeed, 4 of the top 15 performers on BusinessWeek's recent IT 100 were European wireless companies: Britain's mmO2 (OOM
), Spain's Telefónica Móviles, and Russia's Vimpelcom (see BW Online, 11/25/02, "VimpelCom's Wireless Russian Frontier") and Mobile Telesystems. Markets rewarded these carriers -- and punished telecom as a whole less than other tech sectors -- because their operating profits and investment returns are more predictable these days than cyclical categories such as semiconductors, software, and computers.

Slowing subscriber growth and pitched price competition continue to drive down average revenues per user for most European telecoms, however. As a result, overall mobile-service revenues in Western Europe will increase this year by only 4% compared with 2001, predicts Analysys Research. And here's the unpleasant truth: European telecom execs have only themselves to blame. Most of them have consistently failed to take advantage of major revenue-enhancement opportunities.

TRADE-UP LURES.  The most obvious problem is a failure to quickly work the kinks out of new technologies. According to researcher Strategy Analytics, 73% of the 110 million mobile phones sold this year in Europe will be replacements. Indeed, wireless companies depend on a steady stream of snazzy new technology -- such as color-screen, digital-camera phones -- to lure customers into trading up to newer models. Features are also key to driving demand for data services, which big carriers are relying on to offset sagging revenues from voice services.

So why have carriers been so consistently slow off the mark? Take the interim generation of networks known as 2.5G, or general radio packet service (GPRS). Operators have known for more than three years that 2.5G -- so called because it's a bridge between today's second-generation digital systems and the zippy third-generation systems of the future -- was on its way. Most began rolling it out 15 months ago. But they've only just begun to permit roaming between different carriers and countries. And wireless analyst Phil Kendall of Strategy Analytics figures that only about half of the thousands of bilateral agreements necessary for full roaming have been signed at this point. "Operators are shooting themselves in the foot and losing potential revenue," he says.

Indeed, Analysys Research predicts that GPRS will generate less than 1% of European operator revenues this year, or about $800 million. Consumers who look like natural customers aren't signing up for the service. Strategy Analytics figures that fewer than 10% of the people who have purchased GPRS-enabled handsets in the past 18 months have activated GPRS service.

PER-BYTE RUIN.  Lack of roaming isn't the only problem. Another sticking point is prices that are often too high, confusing, and changeable. Take mobile operator Orange. One of its British plans costs $39.75 per month for 10 megabytes of data -- whether e-mail, Web pages, or online gaming -- while another plan costs just $9.55 for the same amount of data.

In any event, analysts say, most consumers don't grasp the notion of buying access by the megabyte. Indeed, Danish researcher Strand Consult warns that simple per-byte pricing could be ruinous to the carriers' business models. On the one hand, Strand notes, the emergence of vastly cheaper instant messaging over GPRS could "completely cannibalize" the juicy revenues operators now rake in from text messaging. But charging at the same rate to download, say, a three-minute video clip could cost customers as much as $24, effectively killing off any demand for such services.

Strand advises carriers to price GPRS services according to understandable terms: Here's what you get if you pay x amount of money. An alternative would be to go to some sort of flat-rate billing. The problems with GPRS aren't the only area where carriers have dropped the ball. Consider these other major misses:

• Interoperability of multimedia messaging. Has the industry learned from past mistakes? No such luck. If anything, a new feature called multimedia messaging service, or MMS, which allows customers to send each other digital photos and sound files, is even more messed up than GPRS. Forget roaming or sending photos from one country to another -- you can't even send a multimedia message from one carrier to another within most countries.

Worse, in some cases you can't send an MMS from one brand of phone to another within a single network. Analysts rightly worry that such bungled compatibility will be a big negative for the acceptance of MMS, which carriers have been counting on to start boosting their data revenues in 2003.

• Where's the content? Three years after the first generation of so-called wireless access protocol (WAP) mobile-data offerings flopped, many European carriers still haven't figured out how to get into the information business. The success of NTT DoCoMo's i-mode in Japan should have made one thing clear: To encourage development of a wide variety of exciting content and services, carriers have to be willing to spread the wealth. DoCoMo (DCM
) keeps only 9% of the revenues from its content services and passes the other 91% back to the originators. That has helped spur the creation of thousands of services.

In Europe, some greedy and clueless carriers tried initially to reverse that ratio. Bad move. Content companies lost interest or went out of business. Now, with its new Live! wireless-data service, giant Vodafone (VOD
) is setting a new, more generous standard: It will keep 40% of the revenues and pass 60% back to content originators. However, it remains to be seen whether 60% will be enough to sustain the vibrant content offerings carriers need to draw users to the wireless Web.

• Where's the marketing? Carriers were understandably gun-shy after falling on their faces with first-generation WAP services. But by now, they ought to be flogging the hell out of services that use GPRS. After all, most analysts agree, getting customers hooked on mobile data now is an essential step to building demand for the faster and richer 3G services just around the corner.

Some operators are finally sticking their necks out. Vodafone and Orange recently unveiled new packages of data services that could do for the wireless Web what AOL did for the Internet in the 1990s -- make it safe and accessible for average folks. Both companies plan to promote their new services aggressively (see BW, 11/25/02, "Wireless Web, Take Two"). But most carriers, even those with fully deployed GPRS networks, still aren't making much effort to lure customers.

• Embracing choice. What many wireless customers want, of course, is the ability to switch easily from one carrier to another to get the best service and value. But the carriers have made switching services difficult in order to hold onto customers. What they're forgetting is that easier switching also facilitates rivals' customers shifting to them.

Nowhere is this clearer than in the battle over number portability. Today, customers who moves from one carrier to another usually have to give up their phone number and get a new one. Now, most European regulators are forcing mobile carriers -- over their objections -- to let customers keep their numbers when they switch providers. Rather than resist this change, carriers should see it as an opportunity. Under the current system, the hassle of changing numbers means that price-slashing is the only thing that will lure most customers into switching.

Now that regulators have stepped in, carriers have a chance to compete more on service and features than on price -- which should mean higher margins. To sweeten the deal, they need to add features such as the new "over-the-air" backup offer from Orange, which lets customers store a copy of their dialing directory and other personal information on servers in Orange's network.

COURAGE AND FORESIGHT.  The same goes for user-interface standards. Today, switching from one phone to another, or from one carrier to another, requires learning new menus and screen designs. The differences -- maddening as they are -- rarely add any value to the user experience. They're really just designed to slow customer dropoff.

Nokia's (NOK
) effort to license its user interface broadly across the industry and Microsoft's (MSFT
) parallel bid to propagate phones based on a shrunken-down version of Windows, could help ease the transition for consumers. But carriers need to join the fight with alternatives of their own.

Addressing all of these issues will require courage and foresight on the part of carriers. But they really have no choice. At some point, cutting costs and locking in customers will no longer be a viable strategy, and the pendulum will shift back toward top-line growth. Carriers making that shift first will flourish. Those that hesitate will be lost.

Reinhardt covers Continental telecom from BusinessWeek's Paris bureau
Edited by Thane Peterson

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