Article re-printed with kind permission from 3G Strategies for Operators - Q1 2001, Issue 4

Recently Rob Conway, CEO of the GSM Association, Bernd Eylert, Chair of the UMTS Forum, Alan Hadden, President of the Global Mobile Suppliers Association and Rene Van der Hulst of Lucent Tecnologies looked backed over the past 12 months and considered the challenges and opportunities faced by the wireless industry as it moves towards 3G networks and services.

Rob Conway CEO GSM Association

Bernd Eylert Chairman UMTS Forum

Alan Hadden President Global mobile Suppliers Association

Rene Van der Hulst VP GSM Product Management Lucent

3G strategies for operators: The past year has been extremely eventful for the industry. Do you have any personal highlights?

Rene Van der Hulst: The industry has certainly developed at a pace. UMTS spectrum was successfully auctioned in many key markets, and the GSM market opportunity increased with AT&T and the development of the Brazilian GSM market. Industry pundits shot down WAP - but a closer look proved to bring a significant upside potential for Arpu, especially as user-friendliness improves with the introduction of GPRS.

Alan Hadden: There's no doubt that Anatel's decision to opt for 1.8 GHz was one of the highpoints of the past 12 months and that the licensing process will attract keen interest and investment groups worldwide. The other major event was the decision by AT&T to deploy a GSM/GPRS system nationwide. Taking these two decisions together, this will complete the global GSM footprint.

I was also extremely impressed by 3GPP's Release 99 specifications. That 300 often extremely complex technical specifications could be completed in a single year is a testament to the industry's commitment to getting 3G deployment on course, on time.

Perhaps the other major change we've seen in the past year has been an acceptance in the market for non-voice services. This can be seen in the incredible number of SMS messages -around 20 billion every month -and close to 18 million subscribers to i-Mode in Japan.

Rob Conway: During 2000 the GSM Association embarked on a series of important initiatives, which we believe, will prove of significance to both our members and consumers. In June 2000 we launched the GSM Global Roaming Forum, a precedent-setting industry initiative that is building the blueprints to facilitate interstandard roaming. This will allow customers to roam the world seamlessly across any wireless system with the GSM global network at its core. We've had a great deal of cooperation from groups like GSM North America and the Universal Wireless Communications Consortium and our aim now is to ensure that technology standards technically co-operate as much as they compete. Basically, we believe that roaming is at the heart of GSM's success and we want to bring our roaming expertise to the world.

As Rene and Alan say, Brazil's decision to select GSM and reserve 1900MHz for third generation services was a momentous decision. The Association has been working on this for a few years with a campaign spearheaded by GSM South America, our regional interest group. It's going to change the whole complexion of the region. We are already seeing this with GSM network launches in Bolivia, Peru and Venezuela. This is influencing other parts of Latin America. For example, Telcel Mexico is planning to deploy GSM. We are also seeing expansion of GSM in North America with Rogers Wireless and Cingular.

Finally, the other big issue for our membership has been the implementation of GPRS. The first commercial networks have already been launched in Hong Kong and Singapore, and all the technical groups within the Association have been working hard to ensure GPRS roaming is in place in the course of 2001.

Bernd Eylert: It's gratifying to see that the 3G licensing process remains firmly on track to guarantee the first network launches in 2002, and even earlier in some cases like Japan. A major milestone was reached at the World Radio communication Conference in Istanbul in June 2000, where administrations reached accord on extension bands for IMT-2000. This ensures that we will have sufficient spectrum available on a globally harmonised basis to support the growth in demand for 3G services over the next ten years and beyond. We have also seen pivotal decisions in territories such as Brazil to allocate their 1800MHz spectrum to 2G, freeing up 1900MHz spectrum for 3G in line with other regions. Finally, with almost universal acceptance of IMT-DS [WCDMA] as the preferred FDD radio access method for IMT2000 we now have a de facto technology standard that reduces the 3G cost base for operators and manufacturers alike.

3GS: As we move into the new data era, what would you regard as the strategic imperatives facing operators in mature and developing markets en route to 3G?

Rob Conway: Well, the way forward for existing second generation network operators is to evolve networks to offer 3G type services through the GSM family of technologies, from GPRS to Edge or from GPRS to 3GSM. A key issue here is about the standardisation of services. The Association firmly believes that one of the main reasons for GSM's roaming success is because a basic standard of services was defined which behaved the same on any visited network. In addition, 2G needs to progressively support 3G services rather than having each call drop back to the lowest common denominator. For example, 2GSM would struggle to handle a call that involved video streaming. Ultimately 2GSM and 3GSM will simply be different radio access technologies that use the same GSM core network, so this situation will not arise. It will also be critical that 2G networks are able to support 3G roamers, in terms of 'inter-generational roaming'. I think this will be essential if an operator's 3G-business model is to hang together. And to ensure universal GSM service, it is essential that 3G networks are able to carry 2G voice calls so that where there is no 2G network but there is a 3G network, a GSM subscriber with a multi-mode handset can still make a call.

Alan Hadden: As I've said, we are already beginning to see a move in the market from voice to data. And coming up with new and innovative ways of developing revenue streams from data has to be a key priority for operators in mature markets. This means laying the service foundations today for the service portfolios of the 3G world. As far as operators in developing markets are concerned, well many of the new entrants will be able to launch their first networks with GPRS - we are already seeing this in South America. This will give them a head start at gaining market share.

Rene Van der Hulst: The key issue for operators will be how to make money out of UMTS quickly. The fastest time to market, commercial quality network and differentiated value services will be essential if operators are going to establish a viable market share and be able to grow Arpu. The high cost of acquiring users means that customer loyalty and minimising churn will be focus areas as users are attracted to 3G services. These operators have the benefit of being able to go through the learning experience of introduction of data services with GPRS without the significant risks of investments in UMTS, which the more mature markets face. So they can learn from GPRS - and be ready to exploit the opportunities the market offers. Also in developing markets localisation of mobile data services and the education of the customer base in anticipation of these services are essential to enable future growth.

3GS: With so much focus on 3G and enhanced GSM technologies is there a danger that both trade organisations and manufacturers will forget the needs of operators and consumers in new markets? And how significant is mobile internet for such markets?

Rob Conway: Developing markets have always been of paramount importance to the Association - after all, these are the areas in which fixed infrastructure tends to be outdated, in disrepair or short supply. It's of particular pleasure to me personally to know that in some regions some people have made their first ever call via a GSM network. Former GSMA chair Michael Stocks works in Africa and has always emphasised the potential of the region to our membership. Developing markets are also of particular interest to current chair Jim Healy. What's interesting is that as GSM grows as an industry, the prices of products and services fall and become more affordable to people in places with poor communications infrastructure.

Alan Hadden: In the GSA's view, the vast majority of services are independent of developed or undeveloped markets. The mobile internet is here today and, in developing markets delivers information and business opportunities the same way it does in mature markets.

Rene Van der Hulst: Although developing markets may have been overlooked in the past, I do not think the current market conditions will forgive any group that does not listen to what the consumer is saying. Certainly the operators are being driven by the need to increase revenue and decrease churn. This basic market dynamic is the same whether we are talking about a mature or developing market. As far as manufacturers and trade organisations are concerned we all need to work with the operator to help the market develop and grow independent technology. The delivery of useful data to a mobile device be that mobile internet or any other form of data, is an extremely significant driver of future growth for any network, again in- dependent of technology.

3GS: What is your view of the high licence costs in Europe? What impact do they have on business models and rollouts?

Bernd Eylert: There's no debate that the sums raised in some countries were a lot higher than most observers anticipated. Indeed, it's inevitable that some markets - notably the UK and Germany - have attracted a high premium on the cost of 3G licensing, reflecting partly their desirability as 'hot spots' for operators keen to launch high volume, profitable services. However, it's important to look at the big picture to see these very high figures are the exception rather than the rule. Indeed, it's the case that some countries that anticipated earning large amounts of money through auctions realised far less than they were expecting. The UMTS Forum has always cautioned that a high upfront payment should be avoided.

Rob Conway: There is a balance between obtaining revenue for governments and encouraging innovative, value enhancing services. That balance needs to be reasonably struck, as financial resources are finite. Clearly, competition must ultimately be the driving force.

Alan Hadden: Yes, some licence costs in Europe have been high, but I suspect that there has probably been too much focus on this issue. After all, most of the companies concerned have been around for a while and license costs have been factored into their business models. Undoubtedly some operators and investors will have a better ability than others to control capex, but overall where we've seen high licence costs I think it can be taken to be an indication of confidence in the future of the market.

Rene Van der Hulst: We have to accept that where there is real competition in an open auction the price will be pushed higher. However recent licensing experiences have shown that operators are reconsidering their position to be active in all their desired markets. High licence costs will be driving consolidation of the market for pure network operators on one hand, and a diversification of service providers on the other. To some extent we already see that with the increasing popularity of the MVNOs [mobile virtual network operators]. I will be very surprised if the operators will not demand that the infrastructure providers become more serious in implementing open interfaces, especially on the application layer, if they want to tap into the potential of the wealth of application developers.

3GS: Outside the industry, there's no doubt the launch of WAP services has been perceived as something less than a success. Are there lessons to be learned?

Rene Van der Hulst: The WAP experience was promoted as the mobile internet and failed to deliver that proposition to consumers. It didn't deliver the same user experience; it wasn't as friendly and quick. We think that operators and the industry as a whole can learn from the overselling of WAP. Looking back, and hindsight is a wonderful thing, WAP should have been promoted as data on the move rather than being promoted as the internet on the move. But it is important to think about WAP as a first step to data on the move. Now that the industry is refocused on the user experience and anticipating that GPRS will bring a solution to some of the issues, which were holding WAP, back, I think of WAP as a good, under-utilised technology, that will prevail.

Alan Hadden: There's no doubt WAP at 9.6kbps can be slow for some applications, but for others like email it's perfectly adequate. The point is that to date WAP has been a trial. However, the combination of GPRS and WAP together with innovative content will bring the first real successes in the very near future.

Rob Conway: I think it's very early days. The analogy with the fixed line internet is worth considering. Back in the mid-1990s, the few people that were using the internet regularly had to cope with 14.4kbps modems and extremely sluggish access times. But within a few years the world was in the throes of an internet boom. I think that's where we are with WAP today. The important point is that WAP isn't about bringing the PC experience to the mobile terminal; it's about deploying the internet to exploit the intimacy, immediacy and mobility of the wireless phone. We see WAP as taking a new leap forward with GPRS.

Bernd Eylert: It's important not to connate WAP - which is essentially a specification for presenting limited amounts of information on wireless terminal devices - with high speed bearer services like UMTS. WAP has kick started a whole raft of new non-voice services in Europe, and it's inevitable that it will evolve. It's more than likely that features and functionality found in proprietary solutions like i-Mode will inform and enrich future iterations of the WAP standard.

3GS: The wireless industry seems to have been slow at drawing application developers into its community. Is this situation changing? Is this an important issue?

Alan Hadden: We are taking a lot of initiatives now in GSA - for example we launched the New Ventures Program to promote dialogue and the exchange of ideas between GSM/3G suppliers and start-up application developers. By enabling suppliers and application developers to meet in a neutral setting and exchange views on their respective needs and concerns, we hope to be able to support and contribute to the development of a diverse and successful future services market.

Rob Conway: It's an extremely important issue. We believe that in the new mobile data world operators and application developers have a great deal to learn from one another. As the GSM Association is uniquely positioned to enhance the relationship and cooperation among these communities. We believe that it is critical that our operators work closely with applications developers to provide the best services to our end users. For this reason, our Services Group will be running workshops in the first half of 2001 to help the applications community understand the potential of working with the GSM operator community, while at the same time introducing our membership to key players in the applications community.

Rene Van der Hulst: The situation is changing. UMTS provides a huge opportunity for application and service developers as operators look for differentiation. Many of the operators are having to rethink their approaches to application development, and I am sure many of them are looking at new ways of working, perhaps taking the newer internet model rather than the traditional teleco model as a starting 'Point. It is imperative that infrastructure providers, terminal and appliance providers and billing and customer care solution providers' work together on solutions that work end to end.

3GS: On the subject of applications, there has been considerable discussion of 3G service portfolios over the past year. Are we any closer to identifying the new revenue streams that will be critical to the success of 3G networks?

Bernd Eylert: People's future use of mobility will certainly be characterised by personalised service profiles. It's the view of the Forum that there will be no one 'killer application' for 3G but instead a 'killer cocktail' or 'killer pizza' of services, encompassing elements of multimedia messaging and infotainment -plus, of course, transactional capabilities.

Alan Hadden: Once again, I go back to the importance of the content and application community. It's clear that new product releases from this sector will provide enhanced platforms for a wide range of new and innovative services in a variety of areas. But in a generic sense, if you're looking for killer applications it's likely the entertainment sector will turn out to be the winner. We as an industry are working with applications developers and we see a lot of interest in that area.

Rene Van der Hulst: Yes, we are closer. There are many new ideas from content and application developers that will provide operators the opportunity to present a suite of applications, what could be called Bernd's killer cocktail, rather than one application to meet their subscriber's profile. The three main profiles are lifestyle for the residential/home user, business for the business user and telemetry for the transport industry. In addition, as the new applications are becoming more tangible, the market is becoming more creative in terms of thinking beyond the boundaries of the more traditional applications. When I see the excitement in the eyes of the people playing with the prototypes I know that what we have seen so far is only the beginning.

3GS: In the past year it has been difficult to avoid discussions about the operators' place in the value chain. Is it a legitimate fear that, having spent a fortune on spectrum and network rollout, operators may be set to lose the lion's share of revenue to third parties?

Alan Hadden: This process is still on going. It is still too early to draw any firm conclusions. There's a lot of talk about who sits where in the value chain. But the point is that the value chain is lengthening and there's no doubt GSM operators are in a good position for the mobile data era. However, the winners will be those who are prepared to make the changes necessary to make the most of these new opportunities. Those that don't risk losing out. But there's no doubt in my mind that there are many new opportunities both for operators and third parties.

Rene Van der Hulst: The i-Mode experience is a good example of how operators can boost Arpu through data based services. All parties in the value chain need to maintain a viable business for 3G to work and clearly nothing is possible without the operator. It is true that operators (and their financiers) are taking the biggest business risk. But there are a number of ways in which the value chain could be reinvented to offset some of the risk, namely using the installed infrastructure to co-exist with MVNOs. This process allows an installed infrastructure to be utilised to its maximum potential. Also partnering with content, application and service providers will give rise to complementary rather than competitive alliances and partner- ships. Both examples will re-define the traditional value chain.

Bernd Eylert: While the characteristics of the value chain will certainly change out of all recognition over the next 10-15 years, the most important point is that the overall size of the cake will continue to get larger and larger. Arpu will climb with the advent of non-voice services, and don't forget either that the overall market size and penetration rates will continue to grow at least as fast as they are doing right now. Predictions for the magic 2 billion global subscriber break point are continually being brought forward. There are plenty of revenues to be earned by everybody in the value chain, operators included.

This article first appeared in 3G Strategies for Operators - Q1 2001, Issue 4