Intelligence Centre

Mobile content generally took a backseat to mobile Internet at this year’s Mobile World Congress. The term mobile entertainment seems to have fallen out of fashion (even though operators continue to push these services under their mobile Internet umbrella) while progress on mobile TV seems to have stalled as a result of uncertainty over technologies and business models.

Over the last 12 months mobile advertising has been touted as a universal panacea for the mobile value-added services sector. However, this was not in evidence in Barcelona and, if anything, the (short term) potential of mobile advertising was downplayed at the event. SMS/messaging-based advertising was identified as a sector with strong potential for mobile advertising but issues relating to the placement of adverts and underlying network infrastructures remain unresolved.

Location and navigation were strong themes again this year. Navigation capabilities were pushed on a number of devices but, in the longer term, greater potential is seen in overlaying subscriber data on top of location information. However, this potential can only be unlocked if operators work together to overcome interoperability issues.

Nokia and Microsoft had, arguably, the biggest presence of any mobile content and applications providers in Barcelona. There were less smaller/niche mobile entertainment providers than in recent years, reinforcing the view that the sector is in the process of becoming dominated by major Internet, entertainment and handset brands.

Operators are caught in a quandary currently with no easy answers with regards to what they need to do to give their customers a mobile Internet experience. On one hand they realize that the experience that they offer their customers has to be as streamlined and as close to what consumers expect from their online experience. But on the other hand, they realize that it is extremely difficult to monetize such an experience beyond selling basic access. It is likely that exclusive arrangements with “best of breed” sites will become the norm with operators charging (additional) monthly fees to access these services.

In the messaging space, ‘sweating the assets’ was a mantra for many operators as they seek to make the most of the investments they have already made. This means creative ways to reduce churn or increase traffic/minutes. Voice SMS, voice to text and utilizing MMS as a media channel rather than just plain picture messaging were all important themes in Barcelona. Mobile operators generally are now viewing messaging as a business in its own right, rather than an add on. Many messaging vendors reported that their meetings this year were with ‘C’ level executives at operators rather than in previous years when they tended to meet with engineers.

Mobile banking and payments have been generating considerable interest over the last year or so, partly as a result of the GSM Association’s own initiatives in this space. The focus is very much on emerging markets and developed economies with large communities of migrant workers. Vodafone is one operator that is keen to learn from mobile banking deployments in parts of its footprint, such as Kenya and Afghanistan, and apply them group wide. France Telecom is involved in several projects in Africa, in partnership with different banks.

While much of the talk in the corridors and along the aisles in the exhibition halls at Mobile World Congress was about the perilous state of the mobile network infrastructure sector, the focus of the vendors themselves was HSPA+ and 3G LTE.

Operators are intent on squeezing everything they can from HSPA and Australia’s Telstra, a mobile broadband pioneer, said it would open a 21mbps HSPA+ service in the fourth quarter of 2008.

Migration from HSPA+ to LTE was a major issue for operators and infrastructure vendors played down any lingering expectations that LTE could have as big an impact on operator capex as, for example, WCDMA. Migration to LTE will be a slow evolution over the period 2010 to 2015 and beyond. Early pilots of LTE will be towards the end of 2010.

A number of operators lent their support to LTE in Barcelona including Vodafone, China Mobile and AT&T. There was a general feeling that with operators turning up the pressure to deliver LTE in 2010 or 2011, the window of opportunity for mobile WIMAX to steal a time-to-market advantage may be closing. Many CDMA2000 operators are also now turning their attention to LTE because of the demise of UMB as an alternative 3.9G technology. These operators are increasingly driving the timetable for LTE because, unlike WCDMA operators, they do not have an evolution path to HSPA+ which can provide significant enhancements before the new radio network technology is commercially available.

There was some uncertainty about the scale of investment and network upgrade that might be needed to upgrade to LTE. It is a completely new radio technology and interface but infrastructure vendors are tending to downplay the extent to which it requires the building of a totally new network. In a briefing with analysts France Telecom said it expected LTE to require little more than ‘swapping out cards’ from base stations rather than the rolling out of a new network.

Despite the vendor enthusiasm for next generation networks, there is an acceptance that operators will not roll out LTE nationwide. Ericsson, for example, promoted enhanced EDGE which will support speeds of up to 1mbps.

Backhaul and femtocells were the other key network topics in Barcelona. Many operators are already having to invest in backhaul because of the massive surge in traffic levels off the back of mobile broadband connections. Operators are looking for cost-effective backhaul solutions but some of the mobile broadband pioneers – including Singapore’s M1 and Telstra – are starting to lay down fibre rather than investing in interim solutions. There is a general trend among operators to replace leased lines with DSL/Ethernet connections for mobile backhaul.

While 2007 was the year that the femtocell concept seeped into the consciousness of the mobile industry, 2008 will see the first operator trials. A number of operators have expressed interest in femtocells including Vodafone and Telefonica/O2 but there remains huge uncertainty about price and performance levels. France Telecom said retail prices would need to be below Euro100 for femtocells to be viable but some operators were being quoted wholesale prices of up to Euro300 in Barcelona. In terms of timing, operators expect that it could take 6-12 months to refine the software in femtocells and to address issues relating to interference.

A number of vendors lent their backing at the MWV to the concept of ubiquitous networks and multi-protocol, multi-band infrastructures. Infrastructure manufacturers including NSN, Huawei and Ericsson all expressed an interest in creating integrated mobile towers that will enable access to different cellular technologies. Chipset manufacturers such as TI, Qualcomm and NXP have also demonstrated multimode and multiprotocol chipsets using software-defined radio (SDR).
The overall health of the mobile infrastructure sector was a big talking point at the Mobile World Congress. Speculation about the potential merger of Motorola’s and Nortel’s infrastructure businesses coincided with the show while a JV between Alcatel Lucent and NEC in developing LTE solutions was announced in Barcelona.

Apple may not have had a physical presence at the Mobile World Congress but its influence was everywhere – in the touch screen displays of new mobile devices, in the widget strategies of operators and device manufacturers, the use of accelerometers and in a range of different mobile music offerings.

Sony Ericsson’s Xperia X1 was the device of the show and the one which drew heavily from the iPhone for its proprietary touch screen user interface. Its main rival was the Nokia N96 – the successor to the N95 – which does not have a touch screen. LG and Samsung also unveiled new touch screen devices.

Nokia’s aggressive push in mobile content services, and self-redefinition as a media/ company, as opposed to plain old handset maker, has not so far sparked similar copycat tactics from rival OEMs. We spoke to the likes of Samsung, Sony Ericsson and Motorola, all of whom were keen to stress their desire to work alongside operators on the mobile content front.

LG did unveil an ‘unlimited music’ phone in partnership with MusicStation vendor Omnifone but this is being pitched as an operator-friendly service given that music needs to be downloaded over the air. This is in contrast to Nokia’s ‘Comes with Music’ device which also includes a year of music bundled into the price of the devices but which – along with most other devices - allows users to side load content from their PCs.

A number of devices showcased navigation capabilities but one interesting variation on this was the idea of ‘geotagging’ photos and adding metadata to them.

‘Gesture’ recognition and accelerometers were another theme in Barcelona, the industry drawing its inspiration from Wii games consoles and from the iPhone. Applications include games - as demonstrated by NTT DoCoMo - that allow the use of the mobile handset like a Wii console; the ability to ‘throw’ content from a phone to a TV screen (gesture recognition) and the ability to turn off a phone’s alarm clock simply by turning it upside down.

Other device trends include: the trend towards multiple input methods – Qwerty keypads, optical mouse and touch screens; better audio quality, as evidenced by a tie-up between Samsung and Bang & Olufsen and Sony Ericsson’s decision to embed FM transmitters in its W980 handset; and increased memory storage capability with Nokia’s N96 offering 16 megabytes of embedded memory plus 8 megabytes of expandable memory.

Broadband devices
Building on the success of mobile broadband was a major theme at Barcelona this year. While most of this success has been built on the sale of USB modems there is now a strong push towards the embedding of HSPA modems in laptops.

Ericsson said that it expected 50% of all new laptops to have an embedded module by 2011 but that prices needed to fall to $30 to achieve this. There was considerable interest in Qualcomm’s Gobi platform as a ‘global’ module that can work on 3.5G networks worldwide.

As far as form factors are concerned there were some new examples of devices that sit somewhere between a smartphone and a laptop on display in the exhibition.

Mobile handset software
Perhaps one of the least expected tie-ups in the mobile software space was between Sony Ericsson and Microsoft whose operating system will sit on the Xperia X1 smartphone.

There was also considerable interest in the continued emergence of mobile Linux as an operating system. The LiMo foundation announced a number of new members and unveiled 15 commercial handset models while a handful of chip makers demonstrated devices running Google’s Linux-based Android platform.

Mobile Internet
Mobile Internet has now re-emerged as the ‘umbrella’ term for mobile operators’ strategy towards delivering non-voice, non-messaging services to the consumer market. Almost without exception mobile operators are claiming to embrace the open Internet but at the same time, they continue to strive to develop their own services in specific market segments.

The preferred model now appears to be a portal that allows customers to click straight into the open Internet but one which also contains direct links to operators’ own services. TeliaSonera, for example, demonstrated a toolbar on the top of its screen that guided people to its own preferred content (ie that content for which it derives revenues, be they paid-for services or ad-supported content). This approach becomes particularly complex when operators partner with other third party service/content aggregators.

Informa Telecoms & Media spoke to both Vodafone and Orange about their agreements with Nokia’s Ovi Internet services brand. Vodafone said that it was happy to promote similar types of service (eg music, navigation) from different providers (including Vodafone) and that it would leave the consumer to decide which one to choose. Orange said that a ‘win-win’ could be achieved with Ovi, even when they were promoting rival services, because under its deal advertising revenues from Ovi services would be shared by the two companies. Furthermore, Ovi operator partners have requested a direct click into their own services from the Ovi portal.

With regards the pricing for mobile Internet services, there now appears to be a consensus that flat-rate pricing is the way forward. Many operators believe that this is one of the key factors behind the success of the iPhone measured in terms of data usage.

Mobile broadband
Moving onto mobile broadband, operators continue to report strong mobile broadband growth. Their concern now is upgrading and improving different parts of their network. Whether or not mobile operators will be able to withstand the onslaught from P2P traffic and video is becoming a major concern for them. The need to upgrade backhaul networks has moved from a medium to a short-term priority with several operators now looking to deploy fibre to move traffic in urban hotspots.

Regulation
The overall mood of the mobile operator community was positive in Barcelona. This follows a strong set of financial results for the fourth quarter of 2007 and encouraging growth in mobile broadband and mobile data generally. However, one group of operators that are clearly not so happy about the status quo staged a major press event at the Mobile World Congress to highlight their collective unhappiness with mobile regulation in Europe. The ‘Mobile Challenger’ group of operators comprises those operators which are not part of one of the major operator groups in Europe. It includes Bouygues Telecom, 3 and E-Plus. They are unhappy with the current state of regulation in areas including number portability and mobile termination where they believe incumbent operators hold an unfair advantage.

Roaming regulation was also a topic of discussion among the mobile operator community. EU commissioner and mobile-operator persona non-grata Viviane Reding held an impromptu press conference at the event and reiterated the Commission’s determination for regulatory-led price cuts for SMS roaming at the end of this year if operators fail to act by then. Reding said that she was prepared to dictate the wholesale and retail prices operators charge for data roaming, as she did last year for voice roaming calls.

Operator groups have taken steps to reduce the price of data roaming – new initiatives were unveiled by the Challenger Group and T-Mobile to reduce wholesale and retail prices respectively, but there was no progress on SMS roaming. Clearly SMS roaming is such a lucrative business for mobile operators that it pains any of them to be the first to unilaterally reduce price levels when there is little evidence of price elasticity. Reding said that she will take stock of all data roaming prices July 1, a date she dramatically termed ‘the moment of truth’ for operators.

Sometimes you can glean more from the companies and themes that fail to make an appearance at the Mobile World Congress than those that do have a strong presence.

Notable absentees from the event this year were Apple – although this was not particularly surprising given Apple’s track record of attendance at trade shows generally. More surprising perhaps was the limited presence from Google particularly given its involvement in Project Android and in the mobile sector generally.

On the vendor side very little mention was made of IMS although ‘IP transformation’ generally was a theme. UMB was totally absent from the show and the only issue here is whether Qualcomm officially abandons the next generation mobile network initiative or allows it to slowly wither. Mobile TV technologies – and in particular DVB-H – were conspicuous by their absence and the only mobile TV announcement of any note was of a joint MBMS initiative from Orange and T-Mobile.

WiMAX was by no means absent from the show but there was certainly less support from the major infrastructure vendors than in previous years. Most surprising was the absence of mobile WiMAX devices, especially from Motorola which has been such a keen backer. Given the aggressive timetable for LTE, mobile WiMAX really needed to have a greater visible presence at the show in order to demonstrate its time to market advantage.

Flush from the success of mobile broadband (HSPA) USB modem sales, mobile operators and device manufacturers will be demonstrating new handsets and faster speeds at this year’s Mobile World Congress in Barcelona.

Most HS(D)PA traffic is being generated by laptops, but mobile device vendors will be showcasing new form factors and user interfaces that bring the Internet onto the mobile phone.

Over the last 12 months the mobile industry has started to believe that the Internet is the next killer application for the mobile phone. Network speeds are now fast enough to give an experience that compares favourably with consumer DSL. ‘Operators have made the bold and sensible move towards flat-rate pricing so it is now up to the handset manufacturers to develop user interfaces that make the Internet a good experience on a mobile phone’ says Mark Newman, Chief Research Officer at Informa Telecoms & Media. ‘UI will be a big theme at this year’s show along with new devices that sit somewhere between a laptop and a mobile phone’, he adds.

Having accepted that the Internet holds the key to the future of the mobile business the industry now needs to create a fertile, open environment for the creation of new applications. The fragmented approach towards mobile operating systems is a major barrier and the support for open source has started to gain serious momentum. Further support for open source can be expected in Barcelona.

Monetizing the mobile Internet is going to be as big a challenge as creating the right user interfaces. The industry has higher hopes of mobile advertising but – as became clear from discussions at the World Economic Forum in Davos last month – a business model still needs to be developed. Different approaches and business models around mobile advertising – location-based advertising for example - will be on display on the show floor. New initiatives from leading global Internet and media brands can be expected in Barcelona.

With the rapid take-up of mobile broadband services mobile operators are having to start thinking about how to route traffic to and from the Internet without putting undue pressure on their capex budgets. Cellular backhaul has become a major challenge for operators and a number of different solutions are being explored. Even femtocells are being touted as a potential solution. Last February saw the first demonstrations of femtocell technology and this time we can expect femtocells to become one of the core product offerings of the large infrastructure vendors. With the benefit of femtocell technology we expect to see mobile operators pushing more aggressively into the connected home and enterprise space.

One of the big themes of last year’s show was the supposed time to market advantage of mobile WiMAX over 3G LTE – the next-generation of cellular networks. A number of vendors at this year’s event will try to demonstrate that LTE is getting close. We expect plenty of LTE demos on both FDD and TDD. However, vendors in both camps face the challenge of demonstrating that the two technologies – both of which require new network builds – offer enough benefits over HSPA to justify operator investments.

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Click here for Informa Telecoms & Media’s Need to Know guide, a resource for journalists attending Mobile World Congress 2008

This invaluable guide includes:

- Data and statistics on the global mobile markets
- Details of where to find us, and speak with our analysts attending the event

We’ve been following with great interest the debate on data roaming charges in Europe. The latest person to dive into the debate is Ed Richards who heads up UK telecoms regulator Ofcom. He notes that it can cost four times more to send an SMS in a European country other than your home market. Data roaming, meanwhile, is prohibitively expensive and a serious obstacle to business, according to Richards. European mobile operators are aware of the high data roaming charges and the inevitability of mandated price cuts if they can’t put their own house in order by the end of the year. But getting every operator in the region to agree to price cuts is a different matter altogether. Wholesale prices are agreed on a bilateral basis which would mean each operator in each of the EU’s 25 countries having to reach a pricing agreement with each operator in each of the other 24 countries. In a bid to short-circuit price cuts on a bilateral basis, a group of leading European operators approached the competition authorities in Brussels last year with a proposal to set a price ceiling. But as this piece below shows, Brussels does not always talk with one voice.

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Key Points
- A group of large European operators have been snubbed by the European Commission’s Directorate General for Competition (DG Comp) over a plan to set a price cap for wholesale data roaming rates.

- If rates don’t come down, the European Commission’s Information Society may step in to regulate international data roaming rates within the European Union, with action possible Summer 2008.
Initial indications are that data roaming rates would be reduced by the same amount as voice roaming calls - around 60%.

- Operators may argue that they are caught in a classic ‘catch-22′ situation - if they act together to bring down rates for date roaming they would be accused of acting in collusion. And if they don’t act, then the European Commission looks likely to intervene.

- But Informa Telecoms & Media argues that the threat of intervention should spur operators to act unilaterally to lower data roaming prices.

- We believe that operators should seize this opportunity and aggressively target mass-market uptake of data roaming services within the EU by lowering prices.

Market Status
The European Commission said in June that it was going to regulate voice roaming and gave notice to mobile operators that it would also pay close attention to mobile data roaming rates, including SMS and advanced data roaming.

Sticking to its word, the EC subsequently launched studies into prices charged by operators for SMS and data roaming. The European Regulators Group (ERG) started its own detailed data-gathering exercise in October and a full report on prices for data roaming is expected to be delivered in December.

The possibility that the EC will regulate data roaming is important to operators because a reduction of potentially 60% in data roaming prices would clearly impact revenues.

To thwart the possibility of intervention, a group of major European operators including Vodafone and T-Mobile approached the European Commission’s Directorate General for Competition (DG Comp) during 3Q07 with a plan to agree on a maximum wholesale price for data roaming rates. DG Comp is the division of the Commission that looks at cartels, monopolies and anticompetitive behaviour by companies in the European Union.

The operators tabled an informal proposal to reduce the cost of data roaming in Europe to the Commission, but DG Comp told the operators that if they agreed a cap among themselves they would be investigated for anticompetitive practice.

Apart from Vodafone and T-Mobile, the precise identity of operators involved in the proposal is unclear, but a source close to T-Mobile says that all the big mobile groups have got together to try and resolve data roaming problems.

The involvement of the GSM Association (GSMA) in the proposal is unclear, although it is understood that the larger operating groups would not have approached the Commission without raising the matter with the trade body first.

Background
Operators, in particular the large pan-European ones, will want to avoid the EC doing what it did with voice roaming, and imposing regulation to bring down the price of making and receiving calls while abroad in the European Union.

However, the EC perceives that its intervention to regulate the mobile industry has been vindicated with voice roaming, which it sees as a resounding success. The EC says that consumers are now paying on average 57% less when making a call abroad and are paying average 60% less for receiving a call.

Indeed, touting the success of the Eurotariff, the EC has said that by end-August, about 200 million EU mobile users had already switched to the Eurotariff. The findings are part of a study by the ERG into the effects of the roaming-rate cap.

According to the ERG study, all operators confirmed that their customers had been contacted by the required July 30 deadline regarding the availability of the Eurotariff, even though a few national regulators are still following up on customer complaints about a lack of transparency of some of the offers made.

Clearly, European operators want to try and prevent the European Commission from intervening again.

The EC has long said that it has been monitoring data-roaming prices, and the latest move is an indication that preliminary investigations have led it to believe that prices might need to come down.

Brussels bullish
At Informa Telecoms & Media’s mobile roaming event in Vienna in October, Stephen Banable, of the Commission’s Information Society and Media directorate-general, was aggressive in his language on data roaming.

Banable said that the EC was “keeping an eye on this area,” and underlined that Viviane Reding has called on the industry to act to bring down prices. He said that the EC wouldn’t “just regulate”, but would come forward with specific proposals, as well an impact assessment and consultation. Banable said that he expected there to be lots of debate in the European Parliament over the issue of data roaming prices, and that the question of data will come to the agenda by year-end, early next.

The Commission is due to report in December 2008 on whether regulation should be applied to data roaming, after recently pushing through the Eurotariff roaming cap for voice charges.

In addition, the EC is preparing a report to the European Parliament - due at the end of 2008 - on the effects of the introduction of the Eurotariff on competition, on the question of whether national prices have changed as a result, and on the development of prices for SMS and data roaming.

Attempts by major operators to reduce data roaming charges would no doubt please EU telecoms commissioner Viviane Reding, who has campaigned hard to lower roaming rates within the framework of competition law.

The Commission has not yet set the criteria for regulating data roaming. Some observers in the industry expect Brussels to apply a cap solely to wholesale roaming rates, in order to bring down retail rates. The Commission is also expected to initiate a per-megabyte cap.

Bu it is more complex to work out retail pricing for roaming because of bundles. The EC examines operators’ websites, and the ERG is inspecting bundled services. But the EC concedes that it doesn’t have any clear answers on how it will assess those packages from a regulatory point of view.

Potential impact
But the blow from the impact on operators of the EC’s moves to cap the price of mobile roaming calls within the EU, although widely feared, was successfully cushioned by the reduction operators made to their existing roaming tariffs before regulation came into effect.

Certainly, there will be a shortfall in revenues as a result of the cuts, but not the severe revenue hit many expected. Still, with full implementation of the Eurotraiff not required until end-September, the full impact of the regulation will not be expected until at least year-end, or possibly even next year.

In Europe, HSDPA is beginning to drive the mobile broadband market, but data roaming rates do not reflect domestic charges. To secure the growth of this market, which is under intense competition from Wi-Fi and other technologies, operators need to act to lower data roaming rates.

Timeline for acting
Operators appear to have a small window in which to address wholesale data charges. They are due to bilaterally negotiate their charges for 2008 by year-end on the basis of the inter-operator tariff (IOT).

The IOT is a wholesale tariff for roaming services introduced in October 1997. It replaced a complex system of charges based on calculations that included the retail price of a foreign network’s national tariff. Under the IOT there is a benchmark charge for data roaming of €10 (US$14.70) per megabyte, but operators can negotiate the price.

It seems unlikely that operators will want to continue to meet repeatedly to tinker with IOTs when it is more convenient to hammer them out for the next year at a single point in time.

Settling the tariffs can be complex and time-consuming. One obstacle is that larger operating groups such as Vodafone can offer HSDPA roaming across their own networks at a reasonable price.

But it seems unlikely that operators would want to meet repeatedly to tinker with IOTs, when it is much more convenient to set them out for a year at a single meeting.

The complex and time-consuming nature of agreeing on IOTs makes it unlikely that operators will be able to thrash out lower rates before the EC opts to regulate.

Informa Viewpoint
The EC has portrayed itself as the guardian of consumer interests, and won a major PR coup with the Eurotariff. It would dearly like to repeat this success, and will certainly seize on the opportunity to do so.

As such, Informa Telecoms & Media believes that operators must brace themselves for regulation of mobile data roaming prices in the European Union. This is because we believe that operators are attempting to lower data roaming rates in the wrong way.

Operators should know that any attempt to collectively lower data roaming rates will lead to charges of collusion from the EC’s DG Comp.

Operators cannot possibly be unaware of the likely consequences when even the EC’s voice roaming regulation was carefully formulated to avoid the charge that it allowed or gave rise to collusive behaviour.

Informa Telecoms & Media believes that operators have only one choice to head-off regulation of roaming rates by the EC. And that is to unilaterally lower the prices they charge end-users.

It is incredible that operators haven’t learnt from the process that led up to the EC’s voice roaming regulation. For some reason, operators look set on repeating history by allowing the chain of events that led to EC intervention on voice roaming rates to repeat themselves.

As it did with voice roaming the EC has given operators ample warning that if they don’t act to bring down the prices charged to end-users for data services when roaming it will intervene and regulate them.

And as with voice roaming, operators seem unable to hear what the EC says and to act on it. Put very simply, operators need to lower data roaming prices or face EC intervention to set the prices they can charge.

How can ops avoid collusion charges?
Informa Telecoms & Media believes that, as with voice roaming rates in the run up to the June deadline for the introduction of the Eurotariff, when one operator reduces rates, the rest will follow.

Each of the large European operators, Vodafone, T-Mobile, France Telecom and Telefonica O2 fell over each other to match the reduced roaming rates they each introduced before June 6.

Informa Telecoms & Media believes that this process would repeat itself if one major European operator acted to reduce data roaming rates.

If one were to reduce prices, the others would follow, which would likely be enough to stop the EC from setting a formal ceiling on operators’ data roaming prices.

Impact assessment
It is difficult to assess the impact any reduction in data roaming tariffs would have on operators. There is evidence to suggest that the introduction of the Eurotariff didn’t lead to an increase in usage, which would have gone some way to offset the lower prices operators could charge.

But Informa Telecoms & Media believes that data roaming may be different, and that a reduction in prices would be much more likely to lead to an increase in usage. This is because data roaming rates are currently prohibitively high, unlike voice roaming rates, which were merely very expensive.

As such, we believe that a reduction in data roaming rates to a reasonable and affordable level would probably lead to an increase in use, which could unleash mass-market adoption of data use while abroad.

Business users in particular would definitely use mobile broadband services more often when roaming is the rates came down in price, while holiday users would also be more likely to use data services.

Indeed, some services such as sending an MMS, for instance, or carrying out a video call would be more appealing to roamers than they are to in-country users.

Paul Lambert

We’re expecting a lot more HSDPA mobile phones to come onto the market this year. The big question is how competitive these will be - in terms of retail prices - with 2.5G and 3G devices. Research by Informa Telecoms & Media indicates that the average selling price (ASP) of an HSDPA handset will be around $400 in 2008, more than twice that of a 3G handset. Will mobile operators try to pass these higher costs onto end users? If so, they’d better have some pretty good marketing messages up their sleeves?

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The segmentation of the handset market is creating huge differences in handset requirements in terms of components and as a result the price differential continues to widen between basic phones and low feature phones on one hand and feature rich phones and smartphones on the other. The price gap between these two groups might split the handset market into two main price clusters - the low-cost market and first-class and premium handsets.

Mobile handset ASP by market segment
Globally, the ASP is expected to continue to decline sharply until 2008. This erosion of ASP is attributed to a number of factors including:

* The increasing competition among device vendors as described earlier in this chapter.
* The desire to sell greater volumes in the low-end segment, particularly in emerging markets - mainly China, India, Africa and parts of Latin America. Although, in these regions the mobile phone penetration level is still low, and so have the potential to could generate volume sales, subscribers generally have a low disposable income and cannot afford to buy expensive high-end models.
* The still-low penetration levels of 3G services in the Americas and Africa, while some key regions such as India and China have not even launched these services yet. On the other hand, a number of features and technologies related to 2.5G services are now becoming commoditised (for example, colour displays, camera, ringtones, Java and intelligent text input), which means the price is the main differentiator for selling these devices.
* The decreasing cost of maturing technologies will significantly help in reducing the overall BOM as economies of scale build, which will in turn have an impact on the ASP of the mobile handset (see early sections of this chapter and Chapter 9 for more details)

Mobile handset vendors are adopting two main strategies to slow the decline of the ASP. The first is through marketing; vendors are seeking to increase the loyalty to and value of their brand, encouraging consumers to pay a premium for their devices. At the same time, in order to offset the growing volume of low-end devices that erode the ASP, vendors are looking to release increasing numbers of advanced devices offering advanced features that can command a high ASP. This trend will be encouraged by the takeoff of mobile broadband services in developed regions including Europe, North America and the developed countries in Asia Pacific, which will mainly boost the ASP for feature rich phones and smartphones. The increased penetration of 3G services in Latin America and Africa and the launch of these services in China and India, hopefully by 2008, will have also a great impact on stabilising the overall ASP, but this will mainly be associated with feature phones.

To tackle the falling ASPs, device vendors are now trying to push a number of new features to the end user including advanced codecs for enabling quality music and video playback on the phone, Bluetooth, WLAN, enhanced user interface, navigation systems and others. As consequence the worldwide ASP across all segments of the mobile handset market is expected to stabilise at around US$116-120 after 2008.

In addition to falling ASPs, convergence is threatening to rewrite the rules within the mobile handset value chain. The introduction of new technologies threatens to undermine the position of not only mobile network operators, but also of device vendors if they do not respond. The potential to offer more compelling experiences on mobile devices is encouraging new entrants, such as Apple, Google and several less well-known vendors, to enter the lucrative mobile handset industry, which might increase competition and put more pressure for vendors to lower their ASPs even at the high-end segments of the market.

Informa Telecoms & Media believes that over the next two years the handset industry is heading towards a period of increased competition and lower margins. The margin across all the mobile phone vendors is expected decrease from an average of US$22 in 2007 to less that US$15 in 20012. The result of this will be increased consolidation and diversification by handset vendors to sectors outside, but related to, the mobile handset market.

The ASP for basic phones is estimated at US$42 in 2007, a 20% drop from 2006. Although, sales of basic phones will be driven by emerging markets, a number of consumers will be replacing their basic phones with higher capability feature phones. Consequently sales of these phones are expected to decrease over the years and are unlikely to exceed 94 million units in 2012 representing only 6% of total sales. After 2009, the lack of demand of these devices will force manufacturers to upgrade their product to more attractive feature phones because margins for basic phones will very thin - in the range of US$3.50. After that year, the basic phone market will become a niche market that will be addressed only by established manufacturers that can manage to attract demand from various operators in emerging markets.

The ASP for low feature phones has currently reached an average of US$74 down from almost US$97 in 2006. Because of the tough competition in this market segment, the average vendor margin for these phones is expected to decline over the years and will hardly exceed US$6 after 2009. By 2012, the ASP of these devices is expected to be almost half the 2006 figure, less than US$50.

The gap between the ASP of feature rich phones and low feature phones continues to widen. Low feature phones require less complex terminal software and low performance hardware, including memory, processing and screen resolution. In contrast, feature rich phones come with advanced hardware and software sets and incorporate a multitude of rich features including advanced UI, sophisticated codec for music and video playback, Wi-Fi, Bluetooth, GPS, HTML browsing, higher generations access network or SIP functionality, which make them more expensive. The most expensive components of feature rich phones include the wireless modem, the multimedia framework and the display. Additionally, because these phones handle a number of high-end features, they traditionally incorporate advanced software solutions.

Mobile handsets ASP by wireless access network
In 2007, the ASP of 2G handsets is estimated to have fallen to US$38 (~24.2% year on year decrease), the ASP of 2.5G handsets to US$116 (~23% year on year decrease), and the ASP of 3G handsets to US$217 from US$318 in 2006 (~32% year on year decrease).

The handset ASP for 3.5G and higher generations is still very high as current demand is weak and also because these devices are designed to support true mobile broadband services and therefore embed very high-end application features, which require advanced hardware and software designs. The ASP of this category of devices is expected to remain very high for the foreseeable future, only declining an average 7.5% year-on-year until 2009-2010. After this period, mobile broadband services are likely to reach mass market which will significantly help the ASP to come down to the affordable limit. The ASP of 3.5G devices (largely HSDPA and EV-DOrA initially) is likely to go below the US$300 barrier in 2011 and below US$250 in 2012. After this date, the ASP of these devices will decline sharply over the years and it will beat the US$100 mark in 2014 or soon before. However, the overall ASP for 3.5G+ handsets (including HSUPA, HSPA+, CDMA EV-DOrB, LTE, UMB or multimode WiMAX-cellular devices) is likely to remain high.

The explosion of mobile video on the Internet and the rise and rise of social networking was the biggest single story in the communications sector in 2007. There’s no reason to believe that growth will not continue apace in 2008/ But the big breakthrough that Internet firms and telcos alike are waiting for is the discovery of a business model that supports the colossal traffic burden that they are having to bear. This piece of analysis from our Broadband Editor Rob Gallagher looks at the merits of some of the different business models that are likely to come to the fore in 2008.

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The online video market exploded in 2007, with 230 million, or a quarter of all Internet users, visiting the website of market leader YouTube in October. This growth has been matched by a rise in the number of services available, as other Internet startups, major broadcasters and consumer- electronics giants have entered the market with an array of novel models.

For even the most established providers, 2008 will offer the first indications of which models will prove commercially viable. A key area of interest is advertising, which several providers hope will bring in enough revenues to support their bandwidth- hungry free video services. Bob Ivins, an executive vice-president of research firm ComScore, likens today’s online video providers to website owners in the mid-1990s and their experiments with banner advertising: there’s no doubt that online video is popular, but it is not clear how to profit from it.

A number of leading providers are openly experimenting with new advertising models. YouTube this month launched a programme that offers the most popular and prolific posters of content to its site a share of the revenues from adverts placed next to their videos.

“Those partners who are regularly producing videos with over 1 million views are earning several thousand dollars per month,” the Google-owned company says of a 100-user pilot launched earlier this year. YouTube expects to sign up “several hundred user partners” in the coming months, through which it says advertisers will be able to target a more relevant audience for their products.

Joost, a peer-to-peer-based streaming service still in beta, has been showing adverts from more than 30 major brands, including Coca-Cola, HP, Intel and Nike, in between programmes since May. The venture-capital-backed startup, which was founded by Skype’s creators, did not return requests for an interview on its progress and plans.

Babelgum, a startup backed by FastWeb founder Silvio Scaglia, provides an insight into the targets ad-funded providers may need to meet. Valerio Zingarelli, Babelgum’s CEO, says the service will have to attract “no less than 1 million” users shortly after its planned spring commercial launch in order to prove attractive enough to advertisers.

Telecoms operators are also trialling ad-funded online video. At the end of last month, UK incumbent BT began offering visitors to its BT Vision Download Store website the chance to rent certain films free in exchange for sharing their demographic information. This information is used to show viewers targeted adverts from auto club RAC, Norwich Union, the Territorial Army and others while they watch the films.

Video 2.0

Many also plan to build their businesses by taking advantage of other “Web 2.0″ trends, such as social networking and open application programming interfaces (APIs).

Babelgum is undergoing a major overhaul that will see the startup’s service become more like popular Internet portals and tools than traditional TV and video platforms. This would appear to be an effort to outdo Joost and YouTube, which already let users create their own channels and share videos with friends.

Social networking is also on the agenda of iPlayer, the BBC’s online video service. The UK public broadcaster is understood to be planning to allow iPlayer users to create their own channels and share their viewing interests in other ways, starting in 2H08.

The potential of combining online video with community has not escaped the attention of the web’s social-networking incumbents, however.

Earlier this year, Facebook and MySpace launched YouTube-like video-sharing services that members of the social- networking sites can integrate into their profile pages. And last month Bebo launched Open Media, a service that enables its members to create “personal video profiles” using videos from major content providers, such as CBS, MTV, the BBC, Yahoo and ITN.

Both those with online-video or social-networking origins are putting some store in open APIs, which allow developers to knit elements of the providers’ services into their own websites and applications.

YouTube launched an open API earlier this year and was followed by Facebook and Joost this autumn and Bebo this month. Babelgum plans to launch an open API in the second half of next year.

Joost has provided an indication of how online video providers might use the strategy to attract advertisers. Coca- Cola last month released the first commercial “widget” for Joost. The Coke Bubbles software component enables users to post comments on specific moments in video content, which others can see when they watch the scene.

Multi-platform moves

Many online video providers are also moving beyond the PC-based web to make their services available on TVs, portable media players and other devices.

YouTube can already be viewed on a TV via Apple’s Apple TV home-networking device, Users of online retail giant Amazon’s Unbox service can download video bought from the service directly onto TiVo personal video recorders. Likewise, customers can access US online video-download and -streaming service CinemaNow via a range of special broadband- enabled TVs from computer manufacturer HP.

A number of consumer-electronics manufacturers are coming from the opposite direction. Microsoft this month introduced film downloads for its Xbox 360 video-games console in the UK, Canada, Germany, France and Ireland, following the launch of a similar service in the US in November 2006.

Sony, meanwhile, is reportedly planning to put an online video feature in the latest instalment of its Gran Turismo auto-racing game for its PlayStation 3 (PS3) console that will enable users to buy related documentaries, digests and other programs.

It is not clear how successful these attempts to use the open Internet to bypass traditional TV and video-on-demand will be. Steve Jobs, CEO of Apple, reportedly admitted earlier this year that Apple TV was a “hobby” compared with its three main businesses, the Mac, the iPod and iTunes. He estimated that the current addressable market for bridging the gap between online video and the TV set could be just hundreds of thousands of users.

Many players are taking a less confrontational multi-platform approach. Sony last month announced that Korea Telecom’s IPTV service would be accessible via the PS3, while operator users of Microsoft’s Mediaroom platform can extend their IPTV services to the Xbox 360.

The BBC, meanwhile, is planning to extend the iPlayer to conventional TV services starting with Virgin Media’s cable-based platform around the turn of the year. A growing number of online video providers are also white-labelling their content for use on IPTV and other platforms, says Annelise Berendt, a senior analyst at research firm Ovum.

Perhaps the elephant in the room is a collaboration between Google and BSkyB announced last December. Web-advertising giant Google, through its ownership of YouTube, is by far the leader in online video, while BSkyB has considerable experience in traditional TV advertising. So far, the arrangement has seen Google provide its user-generated video, e-mail, search and targeted-advertising tools to customers of BSkyB’s broadband service. The longer-term goal is to merge the two’s web and TV advertising platforms.

We’re spending a lot of time at Informa Telecoms & Media puzzling over the evolution of the mobile Internet. How different is this going to be from the fixed Internet? Is there a whole separate and parallel eco-system for the mobile Internet? And if so, is this merely a transitional phase before we end up with just one Internet. One (very large) operator I was speaking to recently said he thought that the potential existing for the mobile industry to change the Internet by exploiting the potential of camera phones, location technology and different form factors. The big challenge, he said, was creating an attractive environment for applications developers to use these new functionalities.

This piece below written by Dan Winterbottom, our principal analyst covering the mobile applications space gives a good idea of just how enthusiastic social networking sites are about exploiting the potential of mobile.

Social networking has experienced an explosion in popularity online; by the end of 2007 there are expected to be 230 million active memberships to such online sites. MySpace, Facebook, YouTube and Flickr are some of the main networks online, but there are many different variants, catering for a huge variety of different tastes and activities. Recently, both the social networking industry and telecoms and media industries have started looking at how such services and user-generated content can be commercialised on mobile. Twitter is just one of a raft of new mobile social networking services that are taking the model of Facebook and MySpace and making it more immediate and portable. Companies like Radar, Zannel, loopt and Jaiku are allowing people to create networks of friends that stay in touch primarily through their mobile phones.

However, the traditional Internet heavyweights are not conceding the mobile space to the upstarts. MySpace recently introduced an ad-supported mobile version of its site and Facebook also has expanded into mobile, allowing users to update their profiles from mobile devices and to be alerted when they receive messages from their friends. Facebook also recently unveiled a mobile platform to encourage its 80,000 developers to extend applications to phones it also has teamed with Research In Motion (RIM) to put its service on BlackBerry smartphones. People can tag and upload photos and send Facebook invitations from their BlackBerry’s address book. Facebook’s mobile user base is growing faster than the website. As of the end of October, Facebook’s 4 million distinct active users across its mobile line-up generated more than 300 million page views.

Not wanting to miss out on the action, Google recently bought mobile social networking start-up Zingku and blogging site Jaiku, supplementing the 2005 acquisition of Dodgeball.com, another mobile service that shares information about a user’s location and helps them find friends in their local area. And at the start of November, Google finally put paid to all the rumours about an actual Google phone or device. Instead, what they did announce was Android, an open platform for mobile devices that looks likely to drive the development of more interesting and context-aware social applications for mobile. This comes on the back of the release of OpenSocial in which Google teamed with MySpace, LinkedIn and other social networks on a platform to spread social software applications across the Internet.

Although many view the mobile just as an extension to online social networking apps, in some cases, this couldn’t be further from the truth. AirG, which manages social-networking communities on Sprint Nextel, AT&T, Virgin Mobile, Boost Mobile and other carriers, says 59% of its 20 million unique users around the world don’t own or have easy access to a home PC. This is an exceedingly interesting statistic given the unique hurdles that mobile users have to overcome to achieve the same result as someone using a PC. Inputting text is time consuming, despite innovations such as predictive text and foldaway keyboards. Navigation around large images or pages is nigh-on impossible with the small real-estate to play with on the tiny screen on most mobiles. But mobiles do have a few key factors that allow them to fulfil certain functions that many consider core to the success of networking applications. The ease with which users can take pictures or video clips and then upload them is far greater than doing the same using a PC. The general immediacy and convenience that mobile devices allow also goes a long way to alleviate the failings of the experience. Being able to add reviews, comments, images or video from a restaurant, gig, movie or sports event is really where mobile comes into its own. And as technology improves, issues such as the clunky text input will become less of an issue. Spinvox, a company that made its name converting voicemails to text messages has turned its attention to the world of mobile blogging. Users can simply say what they want to see as text on their blog and the service (for a small fee) will ensure the message is posted up within a few minutes.

Along with the Internet giants, mobile operators are also very keen to get in on the party for some very obvious commercial reasons. Production costs associated with user-generated content are very low (if anything at all), the services are exceedingly sticky and serve to reduce churn and usage of such networks will drive an increase in data traffic.

In North America, MVNO Virgin Mobile USA announced in June 2007 a partnership with Facebook to offer a new application called “My Mobile” on the new Facebook platform. AT&T Wireless, Sprint Nextel and Verizon also built on their partnerships with Facebook to allow their users to post messages to their Facebook profiles via SMS text messaging. In Canada, the functionality is supported by Bell Mobility, Aliant, Solo, Fido, Rogers, TELUS, SaskTel, and MTS.

In Europe, Orange and Bebo announced in April 2007 the availability of Bebo Mobile for the operator’s subscribers. Orange has an exclusive on the service in the UK. In February 2007, Vodafone announced a marked move away from an operator controlled walled garden, supporting open mobile internet experiences and working with a multitude of partners: internet players like MySpace, Google Maps, eBay and YouTube. MySpace said the tie-up with the UK’s largest operator was its first extension into Europe’s mobile sector, but it certainly wasn’t the last. T-Mobile, also in the UK, noted that 85% of the Web page views on its youth-oriented Sidekick devices went to MySpace. Perhaps driven by this demand, the operator has launched a MySpace Mobile application that has real-time alerts and a custom interface. The app is free until the end of the year, after which usage is expected to cost US$1.99 per month.

In Asia, Singaporean mobile operators M1 and StarHub signed a deal in July 2007 allowing the latter’s customers to gain access to M1’s mobile video platform, MeTV. Under the network sharing deal, MeTV will be made available to StarHub customers from the third quarter of this year. M1 launched the new service in January this year and has so far signed up more than 50,000 users that upload their videos via MMS-enabled handsets for other users to view and download. The service entails a revenue-sharing model with end-users that allows them to make money with videos by earning S$0.05 (US$0.03) in cash every time someone downloads the video.

PCCW in Hong Kong launched its first quadruple-play service offering, a Flickr-like photo and video community called “snap”, allowing users on the Internet, mobile, broadband TV and residential fixed-line service to view photos and videos. The service is free of charge with 100MB of storage capacity. Customers can also choose to sign up a paid subscription plan (HK$38 per month) to get 5GB storage capacity and 20 free photo prints every month.

Perhaps the most aggressive carrier in the mobile social networking space has been Helio, the MVNO startup jointly owned by EarthLink and South Korea’s SK Telecom, which has focused on high-end, tech-savvy users. The company offers an embedded MySpace application on its handsets that is optimized for Helio and allows for media uploading. More than 70% of Helio users access Helio’s MySpace service on their phones. Helio also offers geo-tagging of Flickr pictures using GPS, as well as a Buddy Beacon service that shows where your other Helio friends are using a map. But does going for such a niche market work? It would appear so, if ARPU is any measure of success. Helio’s average revenue per user is nearly US$90, compared with the industry average of about US$50. However, with only US$200 million in annualized revenue and 140,000 members, Helio is a minnow compared to its rivals. And although the MySpace partnership was a key differentiator for Helio when they launched, the social networking site can now also be accessed from AT&T, Sprint and T-Mobile handsets.

As with most mobile content types, one of the key issues that needs to be addressed is that of pricing. Although a significant amount of mobile operators offer flat-rate data pricing plans, the number of subscribers that use them is currently limited. The result of this is that many users have to pay confusing data charges to access their social networking sites from their mobiles. Advertising is one way of attempting to reduce the cost of the end user, but that has yet to be fully successfully transferred to the mobile market; the limited screen real estate stifles internet-type advertising and users are far most sensitive to marketing on their mobiles so care has to be taken so as not to alienate or annoy users. Mobile operators are in the position to wrap up data charges within the cost of content (as they do when content is purchased from their portals). This means that can offer a one-off subscription fee that will cover all the associated data charges. For example, Orange UK recently announced an extension of its relationship with Bebo, where users get unlimited use of the site via their phones for a flat rate of £3 ($6) per month.

However, given the huge range of social networking sites out there, it is very unlikely that mobile operators will strike up such partnerships with more than just a handful of sites, leaving users of sites outside of the top ten forced to either pay expensive data charges, or to migrate across to all-you-can-eat data price plans.

Taking all of this into account, the future of mobile social networking looks generally rosy. However, there is one key fact that may well stifle the growth of this industry unless addressed in the near future- 3G networks are simply not designed for two-way data traffic. Downloading data is not a problem, and in the majority of cases this occurs at a reasonable speed over existing networks. But upload speeds are much slower and the more people that start to send images and video to sites such as YouTube and Flickr, the slower it will get. So there exists a vicious circle of sorts that will likely have negative ramifications going forward. The mobile industry wants and needs more people to start using data applications such as social networking tools. But the more that do, the worse the experience will potentially become, with the worst case scenario being that people are turned off from mobile applications and simply stop using them.

One solution to data network congestion has been for operators to keep prices high, effectively making using rich media too expensive for most customers. But this hardly represents a long term solution and such unnecessary stifling of the market simply serves to perpetuate the view that mobile services are overpriced. In the longer term, the evolution to 4G networks will ultimately solve this problem, giving users near equal up- and downloading speeds. But until then, mobile operators need to examine just how well they are prepared for an increase in the number of their subscribers wanting to upload data heavy content. It is highly unlikely that partners such as MySpace and Facebook would be pleased to learn that prices are kept artificially high as a way to hide network limitations.