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Fixed & mobile broadband

3G in Europe

3G shapes up
Pieces of the 3G puzzle begin to fall into place: faster speeds,flat-ratepricing, crumbling ivalled gardens
by lain Morris ITS F A I L U R E to excite customers has
made 3G an expensive puzzie for European operators to solve. Trying to piece it together has left them scrabbling in the dark for much of the seven years since they paid exorbitant license fees for their 3G spearum. But over the past few months operators and analysts alike have begun to sound more cautiously optimistic when they talk of 3G. Robert Grindie, a research analyst with Dresdner Kleinwort Investment Bank (DKIB), claims to feel more confidence in 3G now than he has for many years. "Since text messaging took off seven years ago, there's been a year-on-year slowdown in the growth rate of non-voice services," he explains. "But recently there's been stabilization and even acceleration over the last couple of quarters. I'm pretty optimistic that things are happening and we might see an improved trend." While mobile data services other than SMS still generate only a tiny fraction of any operator's revenuesaround 6 percent for f / Vodafone in its

1H07 earningsanalysts like DKIB's Grindle clearly believe a convergence of market and technological developments could spur 3G to greater heights in the months to come.

Faster speeds
One important development has been the launch of HSDPA, a relatively simple upgrade to 3G that can boost bandwidth from 384kbps to as much as 7.2Mbps in lab conditions. Operators in more developed markets have been busily rolling out HSDPA for the past couple years, but only now is coverage reaching a level that makes it an attractive proposition for a consumer. Amit Nagpal, head of mobile for Analysys, a telecom consultancy, says that in terms of data speed HSDPA is finally delivering what originally was promised to 3G customers seven years ago. So far, the main audience for HSDPA has been the traveling laptop user, Vodafone now claims to have sold 1.8 million of its Mobile Connect HSDPA data cards in Europe and says the customer base for the product has risen by more than 74 percent since this time last year. Priced In the UK

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Telecommunicatioru January/Febniary 2008

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Fixed & mobile broadband


3G standardhas been able to penetrate the so-called CE3 of the Czech Republic, Hungary and Poland, where it now has a broadband market share of between 13 percent to 18 percent, up from 6 percent to 13 percent just a year ago. The phenomenon is down to several factors, Mate-Toth says. For a start, the number of mobile-only households in these three countries is relatively high at 30 percent to 50 percent of total households, compared with an EU average of about 22 percent at the end of 2006. Second, 3G is being rolled out quickly: it now covers about 30 percent of the CE3 population and is forecast to cover 70 percent to 80 percent by 2010 to 2012. Third, there has been an aggressive push on HSDPA by Magyar Telekom, the Hungarian incumbent, which now claims to offer a 7.2Mbps service in Budapest. Finally, HSDPA pricing has dropped to a level competitive with fixed broadband. I The latter is particularly apparent in Hungary, where Vodafone is offering HSDPA at 15 (US$22) a month, almost half the cost of rival DSL services. Credit Suisse thinks Magyar Telekom wilt respond with more proactive marketing of its own HSDPA service '

3G in Europe
and sees mobile's share of the Hungarian broadband market rising to 25 percent by 2010 (see Broadbar^d adoption in CE3, page 16).

at around 25 (US$50) per month, it costs the customer little more than many DSL packages. What also impresses DKIB's Grindle is iHSDPA's low cost to Vodafone. Because its rollout requires little more than a software upgradeas opposed to installation of new base stationsit can be done on just incremental capex."in practical terms this could see Vodafone mobile data revenues increase and yet capital intensity [capex to revenue ratio] fall in the short to medium term,"Grindlesays. As Vodafone deploys HSDPA in new conurbations, and as its speed edges up (to a theoretical maximum of 14.4Mbps, according to DKiB), Grindle expects the operator's capex as a proportion of revenue to fall from 14.5 percent at year-end 2007 to 14 percent by year-end 2008, and just 13.1 percent by year-end 2009. On the demand side, the prospects for HSDPA are even sunnier in Central and Eastern Europe markets, where evidence suggests it is beginning to substitute for DSL. In a recent report by Credit Suisse, an investment bank, research analyst Istvan Mate-Toth expressed surprise at how quickly mobile broadband including HSDPA as well as CDMA2000, a rival

Flat-rate pricing
The price advantage of HSDPA over fixed broadband is not exclusive to the CE3. In Portugal, broadband consumers can now buy an HSDPA service for about 20 (US$29) a month. Credit Suisse says, while fixed broadband still costs more than 25 (US$36) a month. In Austria, the differential is even greater; An HSDPA service from Telekom Austria costs less than 20 (US$29) a month, while DSL services in the country are priced at around 30 (US$43} a month. Indeed, in its recent earnings announcement,Telekom Austria suggested mobile broadband was cannibalizing revenue from its DSL business. Earlier this year it launched aonPur, a highspeed naked DSL product with unlimited usage, to mitigate the impact of HSDPA. Vodafone does not expect HSDPA to have quite such a dramatic effect in a market like the UK, where only 13 percent of households are "mobile only," compared with 39 percent in Austria, and broadband penetration has now risen to 41 percent, compared with just 21 percent in Austria (figures are from the European Commission's E-communications

3G boost in consumer hands


iPhone contract in Europe, but Apple finally struck agreements with 02 in tbe More affordable handsets with better functionality and design have given UK, Orange in France and T-Mobile in Germany. Vodafone has spent much time 3G a mucb-needed boost over tbe past year or so, a Vodafone spokesperson lauding tbe advantages of its new HSDPA bandset range in response. says. "What two years ago would bave been the size and shape of a 2.5G handset Tbe iPhone also bas been attacked for being too expensive, especially in is now typical for a 3G handset,"he says. "Tbe cost of those handsets has also tbe UK, wbere it carries a price tag of 259 (US$540). "The U.S. is one of those come down." markets wbere people will spend a few hundred dollars foi a new gadget," says Amit Nagpal, bead of mobile for telecom consultancy Analysys. "Tbere are Crucially, an increasing number of 3G handsets can now work on HSDPA many people in the UK who will do that, but I'm not sure as a proportion it's networks. The GSM Association, a lobby group for the industry, claims 120 anywbere near as many." handsets are compatible with the high-speed 3G standard. Devices like tbe Nokia N95, designed so customers can use Nokia's Ovi Intemet services easily, At press time, various newspaper reports suggested 02 UK had fallen well have received a huge amount of publicity. short of some ambitious sales targets in the run-up to Christmas. It is possible that a muddled business model has worked to O2's disadvantage. Exorbitant t no handset has been as hyped as Apple's iPhone. In the United States, prices keep customer away, wbife O2's revenue-sharing deal with Apple AT&T, its exclusive distributor, claims to bave sold more than a million last (details unknown) has bad a margin-whittling effect in mucb tbe same way as quarter, and Dresdner Kleinwort, an investment bank, says data usage among handset subsidies do for UK customers on post-paid contracts. tbose iPhone customers is more than double the average. Yet the iPbone is not even 3G-compatible, relying on a combination of WiFi and EDGE, a so-called On one front, at least, there could be a reversal of fortune. Randall 2.5G standard, to provide data connectivity. Stephenson, CEO of AT&T, bas confirmed that a 3G<ompatible iPhone will become available in the U.S. in 2008. Tbat suggests it will soon follow in the UK. That sbortcominqif it can be described as sucbhas given the iPbone some bigh-profile critics. Vodafone CEO Arun Sarin, for one, has been openly "I'm sure 02 would be keen on having a 3G iPbone,"Nagpal says."Tbat disparaging about tbe data performance of the iPhone. Some of this is probably would allow 02 customers to browse the Internet on the operator's 3G network, sour grapesVodafone was originally seen as the prime candidate for the instead of using a partner's WiFi network [for higb-speed connectivity!,"

Janiiary/Februiiry 2(K)8 Teiecommumralions

Fixed & mobile broadband

3G in Europe

Broadband adoption in CE3


Czech Republic
Broadband penetration (households^ Broadband connections (000s) J^^ D5L connections (000s) ^ _ J H I Cable connections (OOO^fll^^^H H O AC M connectiQnHHI SP/D A Source: Credit Suisse (2007 2007E 32% 1,280 671 2010E 65% 2,600 1,199 678 723

Crumbling walled gardens


Hungary
2007E 38% 1,440 707 622 211 201OE 65% 2,600 1,020 939 240 Besides rolling out HSDPA and introducing flat-rate tariffs, operators have revamped their service offerings. Instead of pushing more of their proprietary services, this has often involved toppling the walled gardens that have. In the past, prevented their customers from using services developed by third parties. Vodafone, for one, now says that greater openness by operators is helping to galvanize interest in 3Ga big admission from a company whose Vodafone Live! portal originally was seen by most analysts as typical of the wailed-garden approach. "Network operators have spent a lot more time opening up their walled gardens, where they were providing proprietary services of their own," says a company spokesperson. "Now there's a whole array of services on the Vodafone Live! portal that people are accustomed to using on their PCs at home." The potential danger of such a model is that operators sell fewer own-branded services and are forced to share incremental revenues with increasingly powerful and assertive third parties. For that reason, some analysts have been highly critical of Vodafone's recent agreement to sell Ovia range of music and content services developed by Finnish vendor Nokia. In the UK, mobile operator 02 similarly has been attacked for striking a deal with Apple to sell the iPhone (see 3G boost iri consumer hands, page 15). Newspaper reports have suggested Apple is leeching up to 30 percent of O2's airtime revenues for the privilege. But many see such agreements in a more positive light."The 3G operators are recognizing that it's better to have a small piece of a big pie than a big piece ofa very small pie," Analysys'Nagpal says. DKIB's Grindle is equally upbeat on such moves."l find tbe expression dumb pipe'very harsh on the operators,"he says."If people want to pay Vodafone a few pence a day to search Google, it's revenue that wasn't there before. It might be a modest increment, but it can still be extremely profitable." There is an argument that operators are better off as dumb pipes. Dean Bubley, an analyst with Disruptive Analysis, argues in his blog that most of Vodafone's recent growth has come from traffic revenues. His analysis of the company's accounts leads him to believe that its "pipe" revenues have grown from 46 percent to 54 percent of European data revenues over the past year, while its valueadded revenues correspondingly have fallen. "Once again, this illustrates my belief that mobile content is really pretty unimportant, compared with communications or context," Bubley writes.*

Poland
2007E 30% 4,350 2,652 1,102 596 201CE 65% 9,425 6,291 2,371 1763

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Household Survey pbWshed in April 2007). Nevertfieless, it sees the collapse in 3G pricing that has accompanied the launch of HSDPA, and particularly the move towarcJ flat-rate pricing, as an important piece in the 3G puzzle. Why has flat-rate pricing taken so long to arrive? Partly, Analysys'Nagpal says, because HSDPA has only now given operators the capacity to cope with the increase in data usage that such a business model could trigger. "If people had used 3G a lot [before HSDPA], it would have been detrimental to the quality of the service," he says. Tellingly, flat-rate pricing is growing in prevalence as HSDPA coverage expands. Usage caps are still common, especially in markets like the Czech Republic, Hungary and Poland, where 3G coverage is still a comparatively low 30 percent of the population. Vittorio Colao, Vodafone's deputy CEO, reckons ultra-low flat-rate tariffs allowing unlimited usage could invite a deluge of data traffic that overburdens the network. In the UK, Vodafone's own unlimited-usage mobile broadband service is still priced at a slight premium to fixed broadband offers. The operator claims 50 percent to 60 percent of its available 3G capacity is being used in dense urban areas. But capacity constraints are not the only reason operators might shirk full flat rates. In France, mobile operator SFR recently launched a new range of HSDPA phones on a tariff scheme called Illimythics. For 39 (US$56) per month, customers get 120 voice minutes and what SFR calls"unmetered Internet access" with a 24-month contract. The monthly fee rises to 49 (US$70) for 180 minutes and 69 (US$99) for 350 minutes. On the same day it was unveiled, Jean Bernard Levy, CEO of SFR owner Vivendi, claimed Illimythics was evidence of the operator's commitment to flat-rate data tariffs. Yet Illimythics has already drawn plenty of flak for not being truly flat rate. "The terms and conditions include many limitations to the unlimited usage of mobile data,"saysVtncentPou!bere,anOvum analyst, in a research note. "For example, unlimited browsing is only allowed for brows-

ing on the WAP portal and Internet sites [and not for some] downloads and other services." Like others, SFR seems reluctant to risk taking the full plunge at a time when data revenues still form sucb a small percentage of its turnover. Flat rates are an end game: If they do not spark an explosion of interest in 3G, operators might find they have backed themselves into a corner. "It's about confidence in the market," DKIB's Grindle says. "When you launch a new product you want to find the right price level, and maybe at the beginning it's more of a niche product, But clearly [operators are] recognizing this is something a lot of people want and there could be a good elasticity response."

"3G operators are recognizing that it's better to have a small piece of a big pie than a big piece of a very small pie"
Amit Nagpal, Analysys

Telecommunicalions January/February 2008 wmv.telecommagazine.com

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