[LINK] Telcos Wasted Billions on Bandwidth, Media Release
Sun, 22 Oct 2000 09:09:24 +1100
Tom Worthington wrote:
> 20 October 2000, Oxford, UK: Telecommunications carriers who invested
> billions of dollars in next-generation high bandwidth wireless licences
> have wasted their money ....
For a less black and white view of the future ...
The wireless gamble
Oct 12th 2000
>From The Economist print edition
Telecoms companies in Europe are in the process of making what may prove to
be the biggest gamble in business history. Over the next three or four
years, they will invest more than $300 billion bringing together the two
hottest technologies of the moment: the mobile telephone and the Internet.
This mind-boggling sum will be split, more or less evenly, between the
money they are paying to governments for licences to use the necessary
spectrum, and the cost of building new broadband networks to transport data
at high speed. Elsewhere in the world, although fervour for the potential
of the mobile Internet is just as intense, the stakes are not yet so great.
In Asia, Japanese and South Korean firms have been given their new licences
free of charge, while in America, forever, it seems, the mobile laggard,
the vital spectrum has still to be released. What makes this a leap in the
dark of such titanic proportions is that nobody knows if consumers will
want the new services-or even exactly what they will be.
Although managers speak smoothly of knowing their business and of doing
their sums before bidding in spectrum auctions, investors are becoming
edgy. Shares in most big telecoms companies have tumbled as fears have
grown and debts have mounted. This week saw a particularly sharp sell-off
in the shares of mobile-phone makers. Operators such as Deutsche Telekom,
France Telecom and British Telecom have all suffered credit-rating
downgrades, with the threat of more to come. Telecoms bonds are trading at
far wider spreads than those of other corporates.
If you build it, will they come?
Rising debts are the biggest worry. But another is the underwhelming
consumer response to the WAP (wireless application protocol) phones
released earlier this year, which provided an early taste of the mobile
Internet. Slow connection speeds and dull services have resulted in a mere
2m frequent users, not the 10m confidently expected. Mobile-phone operators
may know their existing business. But, as even Jorma Ollila, the boss of
Nokia, the world's biggest mobile-phone maker, concedes, the industry is
entering "uncertain waters" (see article).
To be fair, what is coming will make today's WAP phones seem ridiculously
clunky. As early as next year, upgraded networks and handsets, known as
2.5G because they are a bridge between today's second-generation voice
networks and third-generation (3G) systems to come, will offer faster
speeds and better quality. The operators hope these will whet the appetites
of customers so much that they will be panting for the extra capacity of 3G
when it arrives. But simply reciting such mantras as "you can never have
too much bandwidth", or "if you build it, they will come", is no substitute
for a credible business plan.
When equipment makers and telecoms operators try to explain how money will
be made from 3G, they do little to allay the doubts of investors. The
mobile-phone industry is careful not to claim that handsets will replace
PCs for surfing the Internet. But it claims that there will be huge
interest in services that exploit what is different about the mobile phone:
that it is always with you. Services based on knowing who you are, where
you are, what sort of information you want and exactly when you want it,
are touted as "killer applications". Telecoms companies even have hopes of
becoming surrogate banks, as customers use mobiles as "electronic wallets".
But there are two huge problems with this vision. The first is that time-
and location-specific services are likely to be low in value. How much
would you pay to be guided, say, to the nearest petrol station or to
receive personalised messages, such as updates on your share portfolio?
Something, certainly, but perhaps not very much-and the money may go to the
provider, not to the utility that connects him to his customer. The second
is that services this simple do not need as much bandwidth as 3G provides.
Yet for their investments in 3G to stack up, within seven or eight years
the companies need to be earning at least half their revenues from
transactions and from data traffic.
What, then, might profitably soak up some of the huge increase in capacity
that 3G will bring? Well, say optimistic operators, how about movie clips
for kids or video-conferencing for business people on the move? The trouble
is that mobility requires handsets to be small and light. And even with a
colour display, tiny screens are still tiny screens.
Good for Europe
So is this a disaster in the making? Not for everybody. In the first place,
some companies may turn out to win their gamble. Vodafone, in particular,
is using its superior financial muscle to clear advantage. Also, there are
already signs in Europe of a wave of innovation among would-be service
providers being triggered by the certainty that 3G is coming. Just as
consumers can sometimes surprise by rejecting technology (eg, WAP), they
can also surprise by embracing it (eg, short messaging). Things that seem
far-fetched now can, remarkably quickly, become an everyday habit. A decade
ago, nobody would have dared predict the pervasiveness of today's mobile
phones. And while the cost and risk of 3G is frightening (and made doubly
so by the auctions), the alternative for such high-flying firms as Nokia
and Vodafone of learning to live with near-saturated mobile-voice markets
and declining user revenues would have been worse.
The European spectrum auctions have resulted in a massive transfer from
shareholders to governments. As a consequence, some of Europe's more
financially stretched telecoms elite may have to break themselves up to pay
their 3G bills, but customers and even shareholders should benefit from
greater efficiency. Because operators cannot afford to sit on their
expensive licences, Europe will get 3G systems quickly and at competitive
prices. Only Japan, driven by capacity shortages and the phenomenal success
of NTT DoCoMo's i-mode Internet service, is likely to get 3G any sooner.
If 3G proves the doubters wrong and the mobile Internet takes off, then,
for once, Europe will be ahead of the United States in the adoption of a
glamorous new technology-though both will lag Japan, whose firms also look
destined to compete fiercely for handset sales. But the importance of this
should not be exaggerated, nor should the wider impact on productivity. No,
the real drama remains the sheer size of the gamble for Europe's prized
mobile industry and the appalling uncertainty of the outcome.
When the age of the Vikings came to a close, they must have sensed it.
Probably, they gathered together one evening, slapped each other on the
back and said, Hey, good job.