Third-generation mobile telephony: corporate and commercial success

Manuel Becerra

22 March 2003

Will UMTS really replace GSM? Operators’ and customers’ opinions are mixed. The arguments for and against.

It would seem that, at last, third-generation mobile telephony (UMTS) is about to become a reality. Several European operators, including Telefónica and Deutsche Telekom, have announced that before the end of 2003 their UMTS technology-based systems will become functional, and 3G services will be commercially available to the general public. Telephone manufacturers (Nokia, Siemens) also say they are ready to offer the market new UMTS broadband terminals for the digital transmission of voice, text, data, images and video. Thus, little time remains before we discover if expectations sparked by this new technology will be met. Soon we will learn what the corporate and commercial results of UMTS are to be.

Meanwhile, arguments in favor of 3G’s commercial success are fairly solid. Technologically, UMTS is superior to GSM, mainly - but not only - due to its broader bandwidth. Apart from permitting faster access to the Internet and its associated services, video transmission will also be possible. There is no doubt that new services will be developed and the telephone will be used for more than just communicating with people.

However, there are also sound arguments against UMTS’s commercial success. Though by the time 3G is finally consolidated it should be cheaper and more efficient than 2G (GSM), the qualitative jump from a GSM to a UMTS phone is inferior to the value customers get with purchase of their first mobile, which for most was second-generation GSM. Nearly all users, particularly in the residential market, use their mobiles for talking or sending SMS text messages - because messages are cheaper than phone conversations in real time. Taking into account that 65 percent of users prefer the pre-payment option to a contract and are sensitive to the service’s price, it is reasonable to assume a large proportion of the market will not change to UMTS if it involves higher cost for the terminal’s purchase and use.

[*D Added Services *]

On the other hand, success in terms of demand would be guaranteed if customers were prepared to pay more for the added services UMTS offers. Unfortunately, independent studies show this is probably not the case. When asked if they are prepared to pay for 3G-associated services, users reply that they are reluctant to do so. In the light of these results, many experts fear UMTS will repeat the failure of Internet companies which tried to radically change users’ habits and make them pay for something they did not really want. Free, yes – fee, no. After all is said and done, does the average user really want to send or receive videos while on the move? If not, GSM, and its natural evolution, GPRS, would be sufficient to cover the services users demand.

However, operators maintain that market studies asking customers if they would pay for something they don’t know about and have never seen are misleading. After all, at the end of the 90s, when GSM was introduced, nobody could have predicted the success of SMS text messages. Seen from this perspective, it is safe to say that the technology must first be introduced, then a use found for it - one customers value and are ready to pay for.

Commercial success is one thing. Corporate triumph will ultimately depend on whether enough customers switch from GSM to UMTS in a relatively short time. If only part of today’s GSM market adopts UMTS, the heavy investments needed to deploy and maintain the new UMTS infrastructure alongside that of GSM will not be justified. Only in Spain was this initially estimated at €17,000 million, or €570 for each of the 30 million GSM contracts existing in 2001, compared with average earnings – EBITDA – of €150 per customer that year. If this is the case, expect the numbers not to add up for companies in the sector, if they include new-customer acquisition costs and the exorbitant figures from the license auctions in those European countries that chose that route (€8,000 million for each of the six licenses granted in Germany), or the equivalent fees imposed in other countries, such as Spain, though they were later reduced.

Operators have been forced to bet heavily on UMTS as a means of increasing turnover per customer in the medium term, even considering it an essential requirement for maintaining a presence in the sector. Seen from a different angle, with an infrastructure based on the GSM system and its limitations, it would be impossible to develop new services; consequently, commercial success of UMTS has never been seriously questioned.

Probably, the final results will lie somewhere between the boundless optimism that reigned before the granting of licenses, and the resigned pessimism which appeared after the new economy’s financial bubble burst. While migration from GSM to UMTS occurs gradually, operators will have to find new forms of growth, a task to which they have been devoted for nearly a decade, with disparate results. After the unfortunate incursion of many phone companies into the world of the Internet, television and contents services, some have decided to offer services with a high value-added, even bordering on consultancy (e.g. T-Systems of Deutsche Telekom).

The basic fixed copper-wire telephone network (PSTN) has lasted decades with only occasional non-revolutionary improvements. By contrast, GSM was introduced barely 10 years ago and may soon be overtaken by UMTS - though it would seem to have more life ahead of it than UMTS’s defenders would augur. Irrespective of GSM’s extraordinary success as a technology that fuelled mobile telephony, it will be hard to repeat the years of rapid growth seen at the end of the 90s. It seems unlikely that UMTS will enjoy the same success as GSM. It is risky to perceive constant renovation of the basic technology (experts are already talking about 4G) as the best way for operators to grow and compete, rather than the search for complementary services based on an existing network, such as SMS text and the phone message mailbox. In other words, companies that depend on a network must focus on its continuous management, either by adding new points (customers) or by stimulating its use through connections with other networks and complementary services.

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