G Services and Applications

3.3Market Demand – is there a need for 3G?

A study of revenue opportunities for 3G by the UMTS Forum (which includes forecast data produced by Telecompetition) assumes that by 2010, 3G will comprise 28 per cent of cellular subscribers worldwide, yielding revenue of $322 billion per year (based on assumptions regarded as conservative)³⁶. The UMTS Forum study forecasts that revenue from non-voice services will compensate for the expected decline in average revenue per user from voice services, which is expected to fall sharply by 2010.

Work by Pyramid Research reinforces the UMTS Forum's predictions. Pyramid forecasts that by 2003, fewer than 10 per cent of mobile subscriptions will be for 3G service. This figure is predicted to exceed 20 per cent by 2005, suggesting that 3G will not take off until 2004 or 2005. At that time, mobile Internet-related revenues will account for approximately one-third of total revenue. In some regions, 3G will be slower to gain a foothold. In Brazil, for example, it is expected that by 2005 only 3 per cent of mobile subscriptions will be 3G, partly due to fact that licences were awarded later and partly because demand is less mature.

As Europe is concluding the process of spectrum allocation for 3G technologies, operators are facing a number of dilemmas relating to the high cost of licences (in some countries) and the large investment required for network deployment. Many analysts predict financial difficulties for 3G licensees. Though the valuation methods for spectrum auctions have been subject to considerable debate, metrics used by investors and analysts to valuate operators in the marketplace have not changed; the ROI (Return on Investment) continues to reign as the foremost preoccupation. Perceptions of the potential for ‘recouping’ investment varies depending on whether demand-pull or technology-push is considered the primary driver for 3G growth.

Many past observations have been discredited, as lessons from the 2G experience are coming to the forefront. Corporate strategy based solely on increasing the subscriber base, for example, has proven to be a double-edged sword for operators, since pushing subscriber levels past a 10-20% threshold³⁷ has actually led to increased subscriber acquisition costs. Some analysts believe that long before 3G networks are completed, alternative solutions in the range of 2.5G technologies will replace them; the ends may not necessarily justify the means (or the costs necessary to achieve 3G). More neutral observations point to waves or cycles of success, one being Forresters’ prediction that operating profits will disappear in 2007 and take six years to return, leading to business failures and massive industry consolidation.³⁸

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On the other hand, now that over twenty countries have awarded 3G licenses and over 70 3G infrastructure contracts³⁹ have been signed, it would seem that Europe is well on its way to offering 3G services. Although anticipated infrastructure and handset delays are expected, coupled with incremental returns on investment for operators, these factors will only postpone the adoption of 3G rather than signal its end. Service launches have been postponed even by those expected to be the first to ‘roll-out’ 3G in 2001: Japan, South Korea and on the Isle of Man. However, most observers are confident that 3G will be deployed. The majority of carriers around the world expect to evaluate their own 3G options well into 2002 and begin deployment in late 2002 or early 2003.

Therefore, while there is widespread confidence that we are migrating to the 3G space, this will occur much later than first expected. (Section 3.5.2).

Box 3.2: Revenue Forecasts for mobile services
Despite its limited share of total service revenue to date, 1999 was a good year for mobile data in many markets. SMS growth was rapid, and while it is still a long way from being a mass market, many believe that the mobile data market will continue to grow. By 2004, mobile data in Western Europe will be a principal driver of increasing revenue, accounting for approximately 33% of mobile services revenue, up from 3% during 1999. A recent study into the service revenue opportunities over the next decade for the 3G mobile market, conducted by the UMTS Forum, predicts a Compound Annual Growth Rate for three key 3G services – namely Customized Infotainment, Mobile Intra/Extranet Access and Multimedia Messaging Service – of over 100% during the forecast period, with total revenues for these 3 forecast services of over US $164 billion by 2010.

Further evidence of the strong growth of the market lies in the expanding user-base, as forecast by ITU. The number of mobile phone subscribers worldwide is forecast to reach almost one billion by 2001, and will exceed the number of fixed-lines worldwide during 2002 or early 2003.

Company		Countries of Presence	Associated Companies
	Vodafone – Airtouch	Spain, UK, Netherlands, Germany, Italy, Portugal, Switzerland, Poland, Sweden, Belgium, Austria	Airtel, Vodafone, Libertel, D2 (Mannesman Mobilfunk), Omnitel, Telecel, Swisscom, Polkomtel, Europolitan, Proximus, Tele.Ring
	France Telecom (w/Orange)	Netherlands, Germany, Italy, Austria, Portugal, Switzerland, Poland, Sweden, France, Belgium, UK	Dutchtone, Mobilkom, Wind, ONE (Connect), Optimus, Telecel, Orange, Centertel, Orange, Itineris, Mobistar, Orange
	Hutchison Whampoa	UK, Italy, Austria, Sweden	TIW, Andala , Hutchison, HI3G Access
	Telefonica	Spain, Germany, Italy, Austria, Switzerland	Telefonica, Group 3G, Ipse, Telefonica, Group 3G
	Deutsche Telecom	Netherlands, Germany, Austria, Poland, UK	BEN (3G Blue), T-Mobil, Max Mobil, PTC Era Plus, One2One
	British Telecom	UK, Netherlands, Germany	Cellnet, Telfort, Viag
	Sonera	Finland, Spain, Germany, Italy	Sonera, Xfera, Group 3G, Ipse
	KPN	Germany, Netherlands, Belgium	Eplus, KPN, KPN

As in developed countries, the development of appropriate business and revenue models for the delivery of 3G services will be the primary driver of the success or otherwise of 3G in developing countries. One problem for the successful introduction of 3G in developing countries is the relatively high cost of 3G service for consumers in those countries⁴⁰. This is probably the largest single barrier to the effective develop­ment and use of new telecommunication technologies. Increasing the number of users on the new network (and thus sharing the high up-front cost of network development among the maximum number of users) is one means of reducing the average cost of the service through spreading the fixed costs of service. But this will not be easy to do in economic circumstances that are likely to support only limited market demand.

The special problems of developing countries also make the appropriate licensing of 3G operators crucially important. How can governments ensure that the most suitable operators most qualified and able to develop the service cost-effectively are allocated the licences? Would a ‘hybrid’ system of licence allocation (discussed later) be relatively more suitable since this would allow the special developmental objectives of the country to be taken into account? The difficulties of developing countries in regard to the development of 3G services are examined further in the case studies that complement this paper.

Box 3.4: Case Study of 3G in Ghana

Despite being the eighth biggest cellular market in Africa, with 130,000 mobile subscribers at the end of 2001 (up from a figure of 70,000 in 1999), one of the biggest problems faced by operators planning to introduce 3G in Ghana is the low level of economic activity and the small scale of the domestic economy which makes it hard to justify the financial investment. With a per capita income of $390 per annum, only a few individuals and corporations are likely to subscribe to 3G to enable the operators to recoup their investments. Mobile subscribers comprise only 31 per cent of telephone subscribers and revenue from the telecommunications sector as a whole in 2000 was only $200million, less than 1 per cent of the cash generated from 3G auctions in the UK, for instance.

In the case of 3G, it is likely that content revenue will constitute a significant proportion of total revenue collected. However in Ghana and other African countries, content revenue can be expected to form a much smaller proportion of the total revenue for the services delivered to business users and other residential users. This is because the market for content development is still in its infancy in Ghana. Most African countries are more likely to depend on content developers in Europe and America until capacities and skills are developed to fill the shortage.