3G MOBILE WIRELESS DATA

UK & Japan
Which Way Next?
Marketing Project Report

Submitted by
The London Project Team
September 2001

1
 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 Dempsey

Justin 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...........................................................................................59
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
NOKIA 3G Tariffing End User Study – by Nokia Networks 3G Research Centre
April 2001..................................................................................................................103
D. PLACEMENT/ DISTRIBUTION....................................................................105
E. PRICING...........................................................................................................108
NOKIA 3G Tariffing End User Study – by Nokia Networks 3G Research Centre
April 2001..................................................................................................................112
SECTION 4 UK MARKET BUSINESS MODEL...................................................115
PART IV ANALYSIS OF THE JAPANESE MARKET..........................................118
SECTION 1 JAPANESE MARKET DEMAND.......................................................118
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

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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
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
...................................................................................................................................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

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. 20
3
Mainly text messaging and ringtone and icon downloads.
4
UMTS 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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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:
• 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

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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.

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

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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.

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;

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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
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.

13
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

14
 - 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.

15
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

16
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.

Services 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.

8
The UMTS Third Generation Market – Structuring the Service Revenues Opportunities – Report No.9

17
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

18
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

19
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.

20
 - 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.

21
 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.

22
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.

23
 - 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.

24
Figure II.3: Mobile Services Overview

25
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

26
 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.

27
 - 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 ensure
widespread 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

28
 - 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:

29
 - 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.

30
- 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.

31
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).

32
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.

33
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.

34
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.

35
Table II.4: Service availability by device types based on current device
definitions

Figure II.6: Mobile Multimedia Devices

36
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

37
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.

38
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.

39
 30

25

20

Business
15 Adult
Y outh

10

0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Business 0.3 0.5 1 1.5 1.7 2 3.5 5 8 15

Adult 0.2 0.3 0.6 1.2 1.5 1.8 3 4.7 5 7
Y outh 0.1 0.2 0.8 1.4 2 3.5 5 10 15 25
Years

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.

40
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

41
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.

42
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

43
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.

44
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

45
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

46
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;

47
(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 6th 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:

48
The results were:-

Licence Awarded to Amount paid

Licence A TIW UMTS (UK) Limited £4,384,700,000

Licence B Vodafone Limited £5,964,000,000
Licence C BT (3G) Limited £4,030,100,000
Licence D One2One Personal £4,003,600,000
Communications Limited
Licence 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.

49
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 networks 11. 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.

50
- 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.

1999 2000 2001 2002 2003 2004 2005

Connections
(in 000s) 23,947 41,097 49,205 52,249 53,305 53,662 54,549

Voice
revenues
(£ millions) 6,657 9,202 11,341 11,526 10,900 10,050 8,818

Data revenues
(£ million) 276 692 1,348 2,145 3,365 5,231 8,544

Total revenues
6,937 9,894 12,689 13,671 14,265 15,281 17,362
Voice ARPU*
(£/month)
23.6 20.9 18.9 17.2 15.6 13.6
Data ARPU*
(£/month)
1.78 2.5 3.5 5.3 8.2 13.2
Total ARPU*
(£/month)
25.4 23.4 22.4 22.5 23.8 26.8

Table III.1.3 Current & Forecast Data and Voice revenues for the UK
Source: 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.

51
 Current and Forecast UK Voice and Data Revenues:
1999 -2005

18,000
16,000
14,000
12,000
10,000
£ Million
8,000
6,000
4,000
2,000
0
1999 2000 2001 2002 2003 2004 2005
Data Revenue
Year
Voice Revenue

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.

52
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,

53
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.

54
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

55
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.

56
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.

57
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 % change

1998 -2000

58
 000 % 000 % 000 %
Vodafone
BT Cellnet 4,875 38 7,939 33 11,663 29 +139.2
Orange 4,043 31 6,947 29 10,244 26 +153.4
One2One 2,163 17 4,895 20 9,835 25 +354.7
1,920 15 4,157 17 8,324 21 +333.5

ot 13,001 100 29,938 100 40,066 100 +208.2

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

BT Cellnet Vodafone Orange One2One

000 % 000 % 000 % 000 %

1998 3,503 35 3,700 36 1,676 17 1,270 13

1999 3,930 33 3,674 31 2,445 21 1,807 15
2000 3,554 28 4,102 32 3,077 24 1,915 15

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*

000 % 000 % 000 % 000 %

1998 540 19 1,175 41 487 17 650 23

1999 3,017 25 4,265 35 2,450 20 2,350 19
2000 6,690 24 7,561 28 6,758 25 6,409 23

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

59
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/-ve

1 Government attitude towards e-commerce and the +ve
delivery of on-line services in UK
2 Commitment to making licences available at suitable +ve
frequencies (the old black and white TV frequencies)
3 Health and Safety issues surrounding use of mobile -ve
phones
4 Government wish to make UK centre of European e- +ve
commerce to boost service economy to counter reduction
in manufacturing economy
5 Competition policy (UK & EU) will thwart consolidation -ve
and mergers in UK and across Europe of licensed service
providers.
6 EU controls on pooled investment in networks will delay -ve
introduction of full national coverage

Economic Situation: Overall Negative

Item Description +ve/-ve

1 Investment needed to build/ configure masts and -ve
transmitters/receivers might take another £16B and may
not be available through borrowings, .
2 Market sentiment is adverse for rights issues and -ve
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.
3 General risk of economic downturn, based on following -ve
the USA whose forward economic situation looks parlous
4 Savings ratio is low at the moment, and consumer spend +ve
level is high, but this could reverse

Sociological Issues: Overall Positive

Item Description +ve/-ve

1 More people are working from home as their base and +ve

60
 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 +ve
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
3 Peer group pressure is high amongst young people aged +ve
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
4 People without mobile phones, and eventually without +ve
mobile data devices, will be thought of as weird or out of
touch, and so stigma will apply to laggards
5 The interference of user specific advertising/offers which -ve
are location sensitive and relevant will be felt by many to
be intrusive

Technological Issues: Overall Positive

Item Description +ve/-ve

1 Smaller & lighter devices will make them more attractive +ve
to carry and so increase take up.
2 Combined devices such as phone and PDA in one device +ve
will make them more appealing to people, as fewer
devices will need to be carried to function fully while on
the move
3 Delivery mechanisms for data will extend +ve
4 Radiation will be lowered through re-siting of ariels on +ve
hand-held devices away from the brain, perhaps
downwards
5 Internet access and private network access from mobile +ve
devices will proliferate

Environmental Issues: Overall Negative

Item Description +ve/-ve

61
1 The number of masts required to give 3G coverage will -ve
make them unattractive, and environmentalist will fight
against an increased density of them
2 The amount of electromagnetic waves generated from -ve
always-on devices and large data traffic volumes will
continue to raise health issues, particularly if carried in
breast pockets

62
PORTER’S 5 COMPETITIVE FORCES: OVERALL NEGATIVE

1
1
CUSTOMERS
1

2 NEW 3 4
ENTRANTS COMPETITIVE SUBSTITUTES
RIVALRY

5 SUPPLIERS

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

63
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

64
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

65
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

£bn Index £bn at Savings
1995 Prices 1995 Prices Ratio

1995 507.0 100 454.9 10.3

1996 520.3 103 472.5 9.4
1997 540.4 107 491.4 9.3
1998 541.0 107 511.0 5.8
1999 560.4 111 533.6 5.1
2000 575.4 113 552.5 4.5
2001 (est.) 595.6 117 569.1 5.6
2005 (fore.) 663.8 131 626.4 7.0

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

66
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.

67
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.

68
Figure III.2.4 Progress of data rates with time and generation

Figure 111.2.5 Data Speeds in The Real World

69
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.

70
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

71
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

72
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

73
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

74
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

75
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 2001
15
7/8/01 3G.newsroom.com

76
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:

77
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

78
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.

79
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:-

Feb 2000 Jan 2001 % point change

Base: adults aged 1402 1585 2000 - 1
15+ % %

All 47 66 +19

Men 51 68 +17
Woman 43 64 +21

15 –24 60 84 +24
25 –34 64 81 +17
35 – 44 59 82 +23
45 –54 46 66 +20
55 –64 36 56 +20
65+ 15 28 +13

AB 54 71 +17
C1 50 71 +21
C2 48 67 +19
D 46 64 +18
E 24 43 +19

80
 London 52 67 +15
South 54 68 +14
Anglia/Midlands 48 68 +20
Yorkshire/NE 46 69 +23
North West 45 57 +12
Scotland 40 65 +25

Lifestyle:
Pre-family 61 83 +22
Family 61 81 +20
Empty nesters 48 69 +21
Post family 23 39 +16

Special Groups:
Benefit dependants 16 33 +17
Budget families 62 83 +21
Better-off families 69 89 +20
Empty nesters 58 78 +20
Working managers 73 86 +13
Working women 59 81 +22

Table III.2.5 Mobile phone penetration in the UK, by demographic sub-group

consumer type
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.

81
By Contract Type: Pre pay and Contract for each consumer type

1999 2000 2001 % change

(est.) 1999 -2000
000 % 000 % 000 %

Prepay Phones 8887 75 14,850 90 16,957 95 +91

Contract Phone 2,963 25 1,650 10 893 5 -70

Total 11,850 100 16,500 100 17,850 100 +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

Pre-pay Contract
Base: adults aged 15+

All 67 32

Men 66 35
Woman 69 30

15 –24 78 24
25 –34 65 36
35 – 44 60 40
45 –54 61 38
55 –64 73 26
65+ 77 19

AB 53 46
C1 62 38
C2 71 30

82
 D 84 18
E 87 12

London 57 41
South 70 31
Anglia/Midlands 66 34
Yorkshire/North East 79 20
North West 72 28
Scotland 70 29

Lifestyle:
Pre-family 65 36
Family 68 33
Empty nesters 63 36
Post family 75 23

Special Groups:
Benefit dependants 85 11
Families on a tight budget 80 21
Better-off families 51 49
Better-off empty nesters 55 45
Working managers 43 56
Working women 64 36

Table III.2.7: Mobile phone penetration in the UK, by type of package

Source: 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 weight 28

Special offer 26
SMS text messaging 26
Brand 15
Pre-pay package 15
Battery Life 14
Received as a gift 13
Personal recommendation 12
Can use phone abroad 11
Latest model 9
Came with free accessories 7
Dealer advice 6
Different dialling tones 6
No aerial/small aerial 6
Vibrates when rings 6
Large display screen 5
Removable/chargeable covers 4
Colour 4
Other features (clock, calendar, calculator) 4
WAP/Internet capability 4
Built in charger 3
Flashes when rings 2
Voice activation 2
Don’t know 4
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

92
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 accounts
17
5.3 million registered accounts

93
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
reassuring
Powerful – 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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 Performance

Real Abstract

Virgin

Value

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

95
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 56.9
Mobile phone handsets 56,086 21.4
Mobile phone retailers 32,201 12.3
WAP handsets 22,320 8.5
Mobile phone accessories 1,740 0.7
Online retailers 526 0.2

Total 261,755 100.0

Table III.3.1 Total Promotional Expenditure by Sector 2000

Source: 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.

1996 1997 1998 1999 2000 % change

£000 £000 £000 £000 £000 1996-2000

Vodafone 16,697 11,016 19,901 25,775 46,416 +178.0

One2One 13,834 24,215 38,835 46,662 33,638 +143.2
Orange 18,806 18,660 27,478 26,154 26,016 +38.3
BT Cellnet 12,666 16,895 25,980 29,412 15,881 +25.4
Virgin - - - 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

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

97
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 2000
Advertising Spend Revenue (£m) Advertising/ sales
(£m) ratio (%)

BT Cellnet 38 3031 1.27

One2One 35
Orange UK 21 2173 0.95
Virgin Mobile 16
Vodafone UK 47 3458 1.35

Table III.3.3: Advertising to Sales Ratio

Source: 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.

19
The Times, 13th September 2001
20
Campaign 20 April

98
 Spend (£m) 2000 1998 1997 1996
Company Brand Press TV Radio Cinema Outdoor Total

BT Cellnet 38.42
BT Cellnet 0.08 0.40 2.03 2.51 0.00 0.00 0.00
Mobile
Internet
Genie – 2.50 0.70 1.44 4.64 0.00 0.00 0.00
Mobile
Internet
Total (data 2.58 1.10 3.48 7.15
services)
One to One to One 6.80 21.00 5.03 2.35 35.18 49.50 39.95 24.33
One
Orange Orange 8.70 6.40 3.30 2.94 21.34 22.08 27.82 18.45
Communica
tion
Services
Virgin Virgin 5.40 7.55 1.24 1.31 15.50 4.35
Mobile Mobile
Vodafone Vodafone 11.50 12.88 5.75 1.09 3.53 46.80 13.45 3.60 3.81
Network
Services
Table III.3.4: Media Spend Channel Breakdown
Source: AC Nielsen MMS 2000. Rounded to nearest 100k.

Campaigns

ORANGE
Orange 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 ONE
Integral 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.

99
One2One launched a further range of television adverts in September 2000
with the theme 'Welcome 2 your world'. Later in the year, One2One launched
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.

VODAFONE
Vodafone’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.

100
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,
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 CELLNET
BT 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.

101
Promoting 3G

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

102
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.

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

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

103
 Turning strangers into Turning acquaintances into
acquaintances friends
Neutral branding Actual branding

Communication Launch on June 1 £m

Tools
Advertising Focused TV Focused TV 15
campaign Campaign
Sponsorship Sponsorship of World Cup TV coverage 10
Public events supporting sponsorship 0.5
Focused press Heavyweight 4
Press
Sponsorship of Goal of the 1
Month
Focused Online campaign 2
Ambient/Outdoor campaign 2
Recruitment in content specific 0.5
media
Recruitment campaign on 0.3
PDAs
PR Announce 'free' Invite Allocate Distribute
preview apps
devices for 10k
people
eBay
auctions
for
previews
Events Announce Invite Allocate Where the Fun begins concert - June 1 1
concert apps
Launch 5 a side Competition starts Competition 1
competition finals
Launch Music Music Events start 1
Events
Launch Gaming Gaming events start 1
events
Viral activity Fantasy Football game Fantasy Football game 1
launches launches
Music trivia 0.3
quiz
Viral campaigns start for Football, Music 1
and Games
Demonstrati Hutch Web portal 2
on launches
AvantGo service 0.2
launches
iTV Channel 3
launches
Retail stores open
Field Marketing starts 2
CRM Offer mailed to all Follow up mailings to unconverted 1.2
prospects prospects
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.

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.

104
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
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 123 250 455

Vodafone Retail Services 250 260 370
The Link (Dixons) 90 127 226
The PocketPhone Shop** 46 132 168
DX Communications* 130 140 150

105
The Mobile Phone Store 30 90 137
Orange 13 82 137
The Mobile Phone Centre*** 80 90 98
BT Shops 105 98 96
Phones4u 45 74 81

Total 912 1,343 1,918

Table III.3.6: Major specialist mobile phone retailers23 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.

23
chains with more than 50 outlets

106
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
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 % change

000 % 000 % 000 % 1998-2000

Specialist
2,214 43 5,214 44 7,260 44 +227
multiples*
Electrical/genera
1,030 20 2,252 19 3,465 21 +236
l multiples
Mail order/direct
772 15 1,659 14 1,650 10 +114
sales
Supermarkets 309 6 830 7 1,155 7 +274
Others** 824 16 1,896 16 2,970 18 +260

Total 5,149 100 11,850 100 16,500 100 +220

Table 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, Internet
Data may not equal totals due to rounding
Source: 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

107
encourage purchasing of new handsets or contracts. The newer Internet-only
retailers include e2save and Kondor, while established specialist retailers
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-

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

108
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
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.

109
Network talk plan monthl talk time std call charges (p) text data mobile web Inclusiv
y
charge Included p mth Peak off message *calls (WAP/ e
data
£ Mins per min per s
pence pence GPRS)
pence per
min 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 Net12.99 200 evening/36 2 12 10
200 Time
My Net15 wend
600 evening/36 2 12 10
600
Net 100 18 wend
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 you3.99 2p per Kb none
use
Value Bundle 7.99 0.39p p Kb 1Mb
PAYG 25 10 10 10

One2One
Contract One2One 20 9.99 20 25 2 10 10
Talk & Text 15 500 off pk + 50 10 10
Anytime 75 17.5 txts
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/34 2 12 12
Leisure 200 14.99 wend
200 evening/15 2 12 12
Vodafone 20 12.99 wend
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 1Mb
PAYG 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,

110
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 Pricing
Flat-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 Pricing
Metered 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.

Metered Unmetered
Data volume Value Location
Time Based based based based Flat Rate
Applications
Access X X X X X
Voice X X X X
Email X X X
Instant Messaging X X X
Content X X X

Table III.3.9: Pricing Options for Various Mobile Applications

Source: 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

27
NOKIA 3G Tariffing End User Study – by Nokia Networks 3G Research Centre April
2001
28
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.

112
the least preferred tariff structure (also the one that people are less likely to be
familiar with).

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

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successful data services uptake must be value-based pricing. Although the
underlying infrastructure will remain a key parameter in determining the
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.

115
Table III.4.1 UK UNITED 88% of UK
Market Model KINGDOM population
from here
on
25.7 p.m. 2.0% p.a.
revenue thereafter
Year 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 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
Increase
Cash Flows:
Total Mobile 9894 12689 13761 14265 15281 17362 17709 18063 18425 18793 19169 19552
Revenues £M
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 -1077.3 -1677.3 -3222.3 -4467.3 -5727.3 -5727.3 -5727.3 -5727.3 -5727.3 -5727.3 -5727.3 -5727.3
Infrastructure
15%
Total Promo -495 -634 -688 -713 -764 -868 -885 -903 -921 -940 -958 -978
Spend at
5.0%

Handset -600 -906 -348 -163 -329 -675 -113 -115 -117 -119 -122 -124
Subsidies
Increase
Previous Base 25% 25% 25% 25% 25% 25% 25% 25% 20% 25% 10% 5%
% Transfer
200
Handset -898 -1604 -2057 -2231 -2313 -2477 -2815 -2871 -2343 -2987 -1219 -622
subsidy turn
base
Employees 40132 51469 55817 57862 61983 70424 71832 73269 74734 76229 77753 79308
Av Employee 25675 26317 26975 27649 28340 29049 29775 30520 31282 32065 32866 33688
Salaries
Overheads -2576 -3386 -3764 -4000 -4392 -5114 -5347 -5590 -5845 -6111 -6389 -6679
2.5
EBITDA 2764 2577 1618 -163 -2064 -2709 -2491 -2562 -2056 -2729 -997 -443
PV EBITDA at £2,764 £2,343 £1,337 -£122 -£1,410 -£1,682 -£1,406 -£1,315 -£959 -£1,157 -£384 -£155
WACC of
10% -£2,148 TOTAL PV

116
 D&A
Requirement
Fixed Assets at 7182
entry
2.G upgrades 4000 2000
3G Licences 22500
3G 8300 8300 8400
infrastructure
Total to 29682 4000 10300 8300 8400
amortise
Capital 7182 4000 10300 8300 8400 0 0 0 0 0 0 0
Investment
Cum 7182 11182 21482 29782 38182 38182 38182 38182 38182 38182 38182 38182
Infrastrucure
Capital

PV of D&A £29,682 £3,636 £8,512 £6,236 £5,737 £0 £0 £0 £0 £0 £0 £0

10% £53,804 TOTAL PV

Diff PV of -£55,952
EBITDA and
D&A

117
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.

Mobile Internet Subscribers in Japan, 2000-2005

2005

2004

2003
Year

2002

2001

2000

0 10 20 30 40 50 60 70 80 90

2000 2001 2002 2003 2004 2005

Value 27.5 45.8 62.6 72 78.4 83.5

Millions

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.

121
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-Mode
I-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,

122
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-

123
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

124
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-mode

i-mode subscriptions exceeded 26,398,000 as of August 12, 2001.

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

Note: Amounts are truncated.

125
Figure IV.1.4 continued: I-mode subscribers, monthly

126
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

127
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.

128
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).

Total Mobile Data Customers (Jan 2001)

EZ Web
5,659,700
17%

J-Sky
i-mode 5,010 900
18,573,000 19%
64%

Figure IV.2. 1 Total Mobile Data Customers, Japan

Source: 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/-ve

1 Government attitude towards e-commerce and the +ve
delivery of on-line services in Japan
2 Commitment to making licences available at suitable +ve
frequencies
3 Health and Safety issues surrounding use of mobile +ve
phones will be ignored
4 Government wish to make Japan centre of SE Asian e- +ve
commerce to boost service economy and to spread
influence wider in SE Asia
5 Competition policy encourages closed market and will +ve
thwart penetration by external operators and will thwart
takeovers by overseas players

ECONOMIC SITUATION: Overall Negative

Item Description +ve/-ve

1 Investment needed to build/configure masts and +ve
transmitters/receivers will be small for low transmission
speed 3G. Masts can be used for later speed upgrade .
2 Current economic downturn has lasted for several years, neutral
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.
3 Historically high household debt borrowings against over -ve
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.
4 Savings ratio is low at the moment, (as debt burden -ve
servicing gives low net household disposable income),
but consumer spend level is low

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SOCIOLOGICAL ISSUES: Overall Positive

Item Description +ve/-ve

1 People have less time to do all the things that they want +ve
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
2 People have many medium level friendships (perhaps as +ve
many as 200) who need to be kept in touch with
3 Peer group pressure is high across all people aged +ve
between 13 and 65, and text messages, which are cheap
and less demanding to service than voice traffic is very
desirable
4 People without mobile phones, and without mobile data +ve
devices, are thought of as weird or out of touch, and so
stigma applies to laggards
5 The interference of user specific advertising/offers which +ve
are location sensitive and relevant will be enjoyed

TECHNOLOGICAL ISSUES: Overall Positive

Item Description +ve/-ve

1 Smaller & lighter devices will make them more attractive +ve
to carry and so increase take up.
2 Combined smarter devices such as phone and PDA in +ve
one device will make them more appealing to people, as
fewer devices will need to be carried to function fully while
on the move
3 Delivery mechanisms for data will extend, taking +ve
advantage of packet-based billing on 2.5G i-mode and
competitors
4 Radiation will be lowered through re-siting of ariels on +ve
hand-held devices away from the brain, perhaps
downwards
5 Internet access and private network access from mobile +ve
devices will proliferate, built on existing 2.5G experiences
with i-mode and competitors

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ENVIRONMENTAL ISSUES: Overall Positive

Item Description +ve/-ve

1 The number of masts required to give Japanese low +ve
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.
2 The amount of electromagnetic waves generated from +ve
always-on devices and large data traffic volumes will
continue to raise health issues, but will be ignored for the
sake of convenience

PORTER’S 5 COMPETITIVE FORCES: OVERALL POSITIVE

1
1
CUSTOMERS
1

2 NEW 3 4
ENTRANTS COMPETITIV SUBSTITUTE
E RIVALRY S

5 SUPPLIERS

Figure IV.2.1: Porter’s 5 Generic Competitive Forces

135
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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 i-mode System Architecture

Data
Network
i-mode

Information servers
Providers DoCoMo's
Billing packet
DB
Network
(PDC-P)
Internet
User
DB
IP
DoCoMo's
CDMA
network

IP

Voice Network

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

144
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

145
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:

Wireless Internet Usage in Japan

Surf the WEB

22% Voice call
40% Voice call
eMail
Surf the WEB
eMail
38%

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.

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The entertainment category is quite large, as it includes such Japanese
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.

i-Mode Content Categories Accessed by % of Server Traffic

Gourmet/receipes

Travel/traffic/maps Percent of server traffic

Content Category
Town information/admin

Dictionary/convenient
tools

M obile banking/Finance

Shopping/living

News/Weather/Information

Entertainment

0% 10% 20% 30% 40% 50% 60% 70%

Figure IV.2.3: i-mode content categories accessed by percent of Server Traffic

(Source: NTT DoCoMo, 2000)

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 Primary Reasons Why Japanese Subscribe to i-Mode
Browsing home
pages email
To contact friends
7%
8% 21%
To kill time
8%

Cheaper email
Voice
9%
19%
Can send email Mobile email
anytime Ability to send email 10%
9% to non i-mode
phones
9%

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

150
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).

Total Mobile Data Customers (Jan 2001)

EZ Web
5,659,700
17%

J-Sky
i-mode 5,010 900
18,573,000 19%
64%

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

155
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.

i-mode System Architecture

Data
Network
i-mode

Information servers
Providers DoCoMo's
Billing packet
DB
Network
(PDC-P)
Internet
User
DB
IP
DoCoMo's
CDMA
network

IP

Voice Network

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

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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.

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.

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Table IV.3.1 Comparison of Japan’s Mobile Data Services

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.

Top Mobile Phone Brands sold in Japan, 2000

Motorola Mitsubishi
Others
12% 1%
Ericsson 19%
9%

Samsung
9%
Panasonic
8% Nokia
LG Electronics Philips 31%
5% Siemans NEC 2%
2% 2%

Figure IV.3.3 Mobile Phone Brands sold in Japan 2000

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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
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

31
I-mode in Europe – Entertainment and Content for the European Audience
32
Jeff Giesea, Senior Analyst, Fierce Wireless. (June 2001)

159
 with them. Sales proved disappointing and the product line was
discontinued.

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)

Battery Battery
Handset weight Screen color comments
(standby) (talking)
F503iS
... ... ... ... JAVA (iAPPLI)
65,536 colors
SO503i 115g 210 h 140 mins JAVA (iAPPLI)
(TFT)
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)

160
Table IV.3.2 JAVA i-mode handsets:

161
 Battery Battery
Handset weight Screen color comments
(standby) (talking)
R691i 99g 430 h 120 mins grayscale
(GEOFRE water resistant
E)
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 ...
SO502iW
120g 200 h 100 mins 256 colors walkman type
M
NM502i 77g 270 h 130 mins B&W (discontinued)
115 mins -
P821i 82g 210-340 h grey scale (4) Doccimo
6.5 h
120 mins - 7
N821i 105g 290-600 h grey scale (4) Doccimo
h
110 mins -
SH821i 76g 220-400 h 256 colors Doccimo
7.5 h

Table IV.3.3 Non-Java i-mode handsets

162
Handset weight ... ... Description Comments
FOMA color screen, simultaneous I-
105g ... ...
N2001 multitasking mode and voice
FOMA color screen,
150g ... ... two-way video
P2101V video camera
PC-Card (for
downlink:
FOMA data
50g ... ... 384kps, uplink:
P2401 transmission
64kbps
from PC)
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 DoCoMo
has 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-Phone
The 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.
KDDI
The 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
available
We 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 Au Group/ J-Phone Tu-Ka
DoCoMo KDDI Group
Market 59% 18% 16% 7%
Share
(Mobile)
Market 64% 19% 17%
Share
(Data)
Mobile i-Mode EZWeb J-Sky
Internet
service
Current Packet Circuit Circuit
Network Switched &Packet
Speed 9.6 Kbps (28 9.6 Kbps 9.6 Kbps
Kbps on
DoPa)
Targeted Universal Business Young women Young
user People women
segment
Phone 4,500 Yen 4,400 Yen 4,500 Yen 4,500 Yen
Usage
Standard
Plan
(monthly)
Mobile 300 Yen + 200 Yen + 2 Yen per
Internet 0.3 Yen per 0.27 Yen per download
basic fee packet packet request. No
(monthly)* monthly fee.
Receiving 1 – 2 Yen
email**
Sending 1 – 4.2 Yen
email
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 All figures in 88% of
Market Model £ converted Japanese
at 175Y population
from here on
47.46 p.m. 2.0% p.a.growth
revenue thereafter
Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Population 130,000, 132,600,00 135,252,000 137,957,040 140,716,181 143,530,504 146,401,115 149,329,137 152,315,720 155,362,034 158,469,275 161,638,660
000 0
24% 14% 13% 11% 10% 9% 2% 2% 2% 2% 2%
Handsets in use 60,000, 74,600,00 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
000 0
Year on Year Increase 10,000, 14,600,00 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
000 0
Cash Flow
Total Mobile Revenues 34,1 42,486 48,637 54,845 60,996 67,146 73,373 74,840 76,337 77,864 79,421 81,010
£M 71
Income Sharing 0.0% 2.5% 5.0% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5%
Government %
Income Sharing 0 -1062 -2432 -4113 -4575 -5036 -5503 -5613 -5725 -5840 -5957 -6076
Government £
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 -2961.9 -3813.9 -4665.9 -5517.9 -5517.9 -5517.9 -5517.9 -5517.9 -5517.9 -5517.9 -5517.9 -5517.9
Infrastructure
15%
Total Promo Spend at -1709 -2124 -2432 -2742 -3050 -3357 -3669 -3742 -3817 -3893 -3971 -4050
5.0%

Handset Subsidies -400 0 0 0 0 0 0 0 0 0 0 0

Increase
Previous Base % 0% 10% 15% 15% 15% 15% 15% 15% 15% 15% 15% 15%
Transfer
40
Handset subsidy turn 0 -240 -448 -512 -578 -643 -707 -773 -788 -804 -820 -837
base
Employees 160000 198933 227733 256800 285600 314400 343555 350426 357434 364583 371875 379312
Av Employee Salaries 30000 30750 31519 32307 33114 33942 34791 35661 36552 37466 38403 39363
Overheads -16800 -21410 -25123 -29037 -33101 -37350 -41834 -43737 -45727 -47808 -49983 -52257
3.5
EBITDA 8883.62 8524.85 6241.71 3323.76 1975.18 1813.28 1467.55 489.05 -506.11 -1571.93 -2712.11 -3930.57
PV EBITDA at WACC £8,884 £7,750 £5,158 £2,497 £1,349 £1,126 £828 £251 -£236 -£667 -£1,046 -£1,378
of
10% £24,517 TOTAL PV

D&A Requirement
Fixed Assets at entry 19,746
2.G upgrades
3G Licences
3G infrastructure 5680 5680 5680
Total to amortise 19746 5680 5680 5680 0
Capital Investment 19746 5680 5680 5680 0 0 0 0 0 0 0 0
Cum Infrastructure 19746 25426 31106 36786 36786 36786 36786 36786 36786 36786 36786 36786
Capital

PV of D&A £19,746 £5,164 £4,694 £4,267 £0 £0 £0 £0 £0 £0 £0 £0

10% £33,871 TOTAL PV

Diff PV of EBITDA and -£9,354

D&A
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 174/205
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 175/205
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 176/205
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 177/205
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 178/205
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 2001
2
26 million subscribers reached at end of July 2001 as advertised by NTT DoCoMo in FTIT,
Financial Times, 5th September 2001

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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 5/9/01
35
The Times 13th September 2001
36
as published in The Times, 4/9/01

Marketing Project: Summer 2001: London Team; UK & Japan: 3G Page 183/205
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

Marketing Project: Summer 2001: London Team; UK & Japan: 3G Page 184/205
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 6th 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

Marketing Project: Summer 2001: London Team; UK & Japan: 3G Page 187/205
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 2001
38
The McKinsey Quarterly 2000 Number 3, M-Commerce: An Operator’s Manual

Marketing Project: Summer 2001: London Team; UK & Japan: 3G Page 188/205
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)

Marketing Project: Summer 2001: London Team; UK & Japan: 3G Page 190/205
 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

Marketing Project: Summer 2001: London Team; UK & Japan: 3G Page 191/205
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)

Marketing Project: Summer 2001: London Team; UK & Japan: 3G Page 192/205
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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Item UK Japan
Vodafone Cellnet DoCoMo
WAP/ GPRS 1 WAP/ GPRS 2 WAP/GPRS 1 WAP/GPRS 2 iMode
Monthly fee £3.99 £7.49 £3.99 £7.99 £1.20
Data packet Kb Kb Kb Kb (1024 bytes) 128 bytes
Packet cost 2p 0.5p 2p 0.39p 0.12p
Cost per Kb 2p 0.5p 2p 0.39p 0.96p
Free Data 0 1Mb 0 1Mb (1024Kb) 0
Pre pay option? No No No No No
Page download* 2-4p 0.5 -1p 2-4p 0.4-0.8p 1-2p
email** 5p 1.25p 5p 1p 3p
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.

Marketing Project: Summer 2001: London Team; UK & Japan: 3G Page 195/205
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

Marketing Project: Summer 2001: London Team; UK & Japan: 3G Page 196/205
 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.

Marketing Project: Summer 2001: London Team; UK & Japan: 3G Page 197/205
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

Marketing Project: Summer 2001: London Team; UK & Japan: 3G Page 198/205
 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%

Marketing Project: Summer 2001: London Team; UK & Japan: 3G Page 199/205
 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.
• 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 ) .

Marketing Project: Summer 2001: London Team; UK & Japan: 3G Page 200/205
• 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 technologies
ARPU average revenue per user
B2B Business to business
B2C Business to consumer
Bluetooth Technology enabling seamless voice data connections between a
wide range of devices through short range two way radio
CDMAcode division multiple access
CHTML compact HTML
DSL digital subscriber line
GIF graphics interchange format
GRPS General packed radio service
GSM Global system for global communication
HDML handheld device mark-up language
I-Mode leading Japanese mobile data service provider, owned by NTT
DoCoMo
IP Internet Protocol
JPEG Joint photography expert group
LAN Local area network
M2M Machine to machine communication
MPG Multi-player game
PAN Personal area network
PDA Personal digital assistant
RAN Radio area network
SMS Short message service
TCP/IP Transmission control protocol / internet protocol
TDMA Time division synchronous code division access
UMS Unified messaging service
UMTS Universal telecommunication system
UWB Ultra wide band
VPN Virtual private network
WAP Wireless application protocol
WASPWireless application service provider
W-CDMA Wideband code division multiple access
WISP Wireless internet service provider
WLAN Wireless LAN
XHTML Extensible HTML
XML Extensible mark up language

Marketing Project: Summer 2001: London Team; UK & Japan: 3G Page 202/205
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

Marketing Project: Summer 2001: London Team; UK & Japan: 3G Page 203/205
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

Marketing Project: Summer 2001: London Team; UK & Japan: 3G Page 204/205
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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