Decisional Case

-

EXHIBIT-1

UK Cellular Licence Audion ,

Building

networks At 80% UK population penetration as of December 31, 2002, mobile phones were well into the mass market. Cellular operators were beginning to introduce third generation (3G) technology almost three years after the sale of spectrum for 3G telephony (see glossary, Appendix 1). The argument for 3G was that it would enable faster access to the Internet and to associated services like news, stock prices and trading, buying tickets, and traffic information, using always 'on' packet switched technology. Analysys, a UK-based consultancy, predicted that there would be 480 million 3G subscribers worldwide by 2006. For existing and new wireless operators, the changing landscape was throwing up new challenges. First, license awardee, Hutchison had launched 3G services in the UK in March 2003, operating under the name '3', and had pre-sold 40,000 sets and expected to get more than 500,000 customers by December 2003. None of the established operators (Vodafone, Orange, 02 and T-Mobile) would be launching 3G services before the end of2003. Second, a new wireless technology called Wi-Fi (also known as the Institute of Electrical and Electronic Engineers (IEEE) 802.11 b) was causing concern among wireless operators; Wi- Fi enabled customers to obtain wireless Internet access at speeds upto 2 Mbps through 'hotspots' at airports, hotels, coffee shops, college campuses, corporate facilities, convention centres, etc., such a service was supposed to have been provided by 3G. However, fIxed line telecom fIrms like BT and small service providers were rolling out Wi-Fi in a big way. In the UK, the fIve 3G licences had cost the operators a combined total of £22.5 billion I, with the cost of setting up a 3G network estimated at a further 5-8 billion per network (see Exhibit 1).

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1 ~•..••. II ••

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..

-

Licensee

Amount Paid

TIW (Hutchison 3G)

£4.38 billion

Licence A: 35 MHz

Vodafone

£5.96 billion

Licence B:30 MHz

Spectrum'"

mm02

£4.03 billion

Licence C:25 MHz

T-Mobile

£4.00 billion

Licence D: 25 MHz

Oranqe

£4.09 billion

Licence E:25 MHz

*The more the spectrum can deliver.

(in terms offrequency

allocation)

the higher the (capacity) that the cellular operator

Thus, operators were faced with multiple challenges. They had to hold onto their existing customers who were on Global System for Mobile Communications (GSM) or General Packet Radio Services (GPRS). They had to migrate customers to 3G (Vodafone, Orange, 02 and T-Mobile) without loosing customers or get customers to switch to 3G (3). The history of the migration from analogue to GSM during the mid-90s suggested that the transition would provide a strong opportunity for networks to encourage switching. This was, after all, how, Orange had, in part, risen to market success. The operators also had to decide their approach to Wi-Fi and where it fIt into their marketing plans for the future. Evaluating the marketing approach to date and developing and implementing a clear marketing plan for the future to attract and retain customers profItably was going to be an important challenge in the forthcoming 12-24 months. An operator would need to position itself by developing a clear idea of where the competition was, where the competition was going, and how it would differentiate itself from the competition through its marketing and service strategy. What marketing strategies and tactics would an operator use as a result of the present market trends and competitor analysis? How could it leverage its existing market position (if already operating in the UK) and resources? What position would it aim to develop in the minds of consumers and business customers?

UK industry development In 1982 the UK Government awarded Cellnet and Vodafone licences to provide fIrst genera tion (i.e. analogue) cellular telecommunications services. Cell net was owned 60% by British Telecoms (BT) and 40% by Securicor but became 100% BT owned in 1999 and changed its name to BTCellnet, which was spun offfrom BT in November 2001 to become mm02.2 Both licensees launched analogue services in January 1985, followed by second generation digital (i.e. GSM services in 1992 (Vodafone) and 1994 (mm02)). In 1991 three PCN licences were awarded to Unitel, Microtel and Mercury. Mercury and Unitel merged and the resulting company, a partnership between Cable & Wireless and US West, launched the 'One 2 One' service in September 1993. One 2 One was taken over by Deutsche Telecom in 1999 and renamed as T-Mobile in 2002. Microtel had evolved into Orange pic, which was launched in April 1994. Owned initially by the Hutchison Group of Hong Kong, Orange was bought by Mannesmann of Germany in November 1999. However, in February 2000, Mannesmann was acquired by Vodafone. Both UK and European competition authorities cleared Vodafone's takeover of

EXHIBIT-1

UK Cellular Licence Auction Licensee T-Mobile Vodafone mm02 Orange TIW (Hutchison

3G)

Building

networks At 80% UK population penetration as of December 31, 2002, mobile phones were well into the mass market. Cellular operators were beginning to introduce third generation (3G) technology almost three years after the sale of spectrum for 3G telephony (see glossary, Appendix 1). The argument for 3G was that it would enable faster access to the Internet and to associated services like news, stock prices and trading, buying tickets, and traffic information, using always 'on' packet switched technology. Analysys, a UK-based consultancy, predicted that there would be 480 million 3G subscribers worldwide by 2006. For existing and new wireless operators, the changing landscape was throwing up new challenges. First, license awardee, Hutchison had launched 3G services in the UK in March 2003, operating under the name '3', and had pre-sold 40,000 sets and expected to get more than 500,000 customers by December 2003. None of the established operators (Vodafone, Orange, 02 and T-Mobile) would be launching 3G services before the end of2003. Second, a new wireless technology called Wi-Fi (also known as the Institute of Electrical and Electronic Engineers (IEEE) 802.11 b) was causing concern among wireless operators, Wi-Fi enabled customers to obtain wireless Internet access at speeds upto 2 Mbps through 'hotspots' at airports, hotels, coffee shops, college campuses, corporate facilities, convention centres, etc., such a service was supposed to have been provided by 3G. However, fIxed line telecom fIrms like BT and small service providers were rolling out Wi-Fi in a big way. In the UK, the fIve 3G licences had cost the operators a combined total of £22.5 billion 1, with the cost of setting up a 3G network estimated at a further 5-8 billion per network (see Exhibit 1).

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£4.03 £4.09 billion £4.00 C: E: 25 25 £5.96 £4.38 Licence Licence B: A: 30 35 MHz MHz MHz 0: MHz Amount Paid Spectrum·

"'The nwre the spectrum can deliver.

(in terms offrequency

allocation)

the higher the (capacity) that the cellular operator

Thus, operators were faced with multiple challenges. They had to hold onto their existing customers who were on Global System for Mobile Communications (GSM) or General Packet Radio Services (GPRS). They had to migrate customers to 3G (Vodafone, Orange, 02 and T-Mobile) without loosing customers or get customers to switch to 3G (3). The history of the migration from analogue to GSM during the mid-90s suggested that the transition would provide a strong opportunity for networks to encourage switching. This was, after all, how, Orange had, in part, risen to market success. The operators also had to decide their approach to Wi-Fi and where it fIt into their marketing plans for the future. Evaluating the marketing approach to date and developing and implementing a clear marketing plan for the future to attract and retain customers profItably was going to be an important challenge in the forthcoming 12-24 months. An operator would need to position itself by developing a clear idea of where the competition was, where the competition was going, and how it would differentiate itself from the competition through its marketing and service strategy. What marketing strategies and tactics would an operator use as a result of the present market trends and competitor analysis? How could it leverage its existing market position (if already operating in the UK) and resources? What position would it aim to develop in the minds of consumers and business customers?

UK industry development In 1982 the UK Government awarded Cellnet and Vodafone licences to provide fIrst generation (i.e. analogue) cellular telecommunications services. Cell net was owned 60% by British Telecoms (BT) and 40% by Securicor but became 100% BT owned in 1999 and changed its name to BTCellnet, which was spun off from BT in November 2001 to become mm02.2 Both licensees launched analogue services in January 1985, followed by second generation digital (i.e. GSM services in 1992 (Vodafone) and 1994 (mm02)). In 1991 three PCN licences were awarded to Unitel, Microtel and Mercury. Mercury and Unitel merged and the resulting company, a partnership between Cable & Wireless and US West, launched the 'One 2 One' service in September 1993. One 2 One was taken over by Deutsche Telecom in 1999 and renamed as T-Mobile in 2002. Microtel had evolved into Orange pic, which was launched in April 1994. Owned initially by the Hutchison Group of Hong Kong, Orange was bought by Mannesmann of Germany in November 1999. However, in February 2000, Mannesmann was acquired by Vodafone. Both UK and European competition authorities cleared Vodafone's takeover of

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or mooile services is not expected to abate for at least another nve years, the year 2001 saw tl nrst setback for many years to the mobile phone industry. Worldwide sales of mobile handse fell from 420 million in 2000 to 395 million in 2001, though sales recovered to 435 millie units in 2002. Most analystS expect penetration to go up to 140% in the more develope economies where each person has, on an average, more than one handset or other access devie 3G finally made its debut. NTT DoCoMo in Japan introduced limited 3G services in Septen ber 2001; in the UK mm02 trialled a 3G service on the Isle of Man with 30 transmission tov ers and 200 handsets in December 2001 through May 2002. TIW Hutchison had a 'soft' con mercial3G launch in the UK in March 2003.

IlJIrL provides cnronolOgic"alpenetration ngures3• Penetration growth decreased sharply in 2001 relative to the previous two years, when purchase of subsidised pre-paid packages had produced large increases. In early 1998, London-based consultancy, CIT Research, expected market penetration of the UK population (then about 15%) to grow to around 23% by 2005. The operators and industry analysts, however, were far more optimistic predicting that by year 2005,75% of the UK population would use a mobile phone. That level exceeded by December 31,2002.

EXHIBIT-2 EXHIBIT-3

Mobile Subscribers in the UK since 1985 As at

47,500 24,000 40,040 46,680 14 224 540 54 16 26 67 54 450 76 40 43 873 33 40 177260 113510 95860 70 120 47,500 12,450 6,580 8,460 46,680 13,000 1,870 3,430 6,810 3,380 1,430 5,410 3,980 3,510 3,060 2,000 1,960 1,400 1,230 Total Growth 1,140 24,000 40,040 (000) (000) (%) (000) Digital Analague

The World's Top Cellular Markets by Subscribers as at December 31, 2001

120 860 260 510 1,370 1,230 1,140

.

Country

Source: Reuters Business Briefing, FT Mobile Communications,

30 40 60 65 42 50 44 28 49 56 50 35 30.

1999)

('000) Dee Austria Netherlands France USA Switzerland Portugal Germany Denmark China Sweden Norway 31,2000 Spain Italy Finland

UK Japan

63.4* 73 61.5* 62.5 39.5* 48 9121,000** 6.9 45 3.1 3popula9 31-3178 67 40 40,041 24,000 37,200 34.4* 58.2* 29,000 25,000 4,480 7,840 Subscribers 120,000 85,000 3,796 4,400 2,100 130,000 46,680 Penetration tion lation tion Dee Dee Dee 31-2001) 3,000 6,800 Subscribers Penetration Penetration 2000) 28,000 3,360 ('000) Dee 31,2001 (% (% of of popula(% of popu-

Press notes.

Source: FT Mobile Communications / Global Mobile, EMC World Cellular Database.

*

May 31,2000.

**

Of this, 10 miUion were on first generation analogue (AMPS) networks. CDMA and TDMA networks as well).

All others shown are GSM net-

works (or only in the USA, 3 The UK Government spectrum digital

capacity

networks.

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analogue

ather digital reports

£ 110

subscribers

same customer.

thai almost

it intended

1999,

use. By

had been discouraged

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migration

had migrated

and Vodafone

fram joining process

usually

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had switched

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analague

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by 2005

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by high prices for both handsets

and tariffs.

to encaurage Vodafone,

were due to be renewed.

brand switching.

from the analogue

operators;

system

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of either mm02

for instance,

this had been significantly

was complete.

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their anatogue

the time their contracts

as an opportunity

costs for the network

per migrator.

to digital

networks

mm02

new customers

marketing £50)

to phase out analague

to migrate,

hod used this migration

substantial

support

By 2000,

1996 that

had been persuaded

praviders

to digital incurred

plus additional

in

far alternative

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network

suggested

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announced

available

1996 to

The 1999,

or Vodafane.

had paid a digital

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the

The adoption of Global System for Mobile Communications (GSM), the most widespread cellular telephony standard has facilitated 'international roaming', where a subscriber in one country can make and receive calls over cellular systems in another country. GSM has proved popular for mobile communications worldwide, with 600 million GSM users now connected.

Coverage and service quality

VUCTc-..s-l~ers<maJ. Communication Network (PCN) emented at a higher frequency, around 1800 MHz (1900 MHz in the USA). This means that PCN's signals have a shorter range, requiring more base stations to achieve the same coverage as GSM, but also have a greater call-handling capacity.4However, GSM is likely to continue to be a major presence till 2005. Appendix 2 illustrates how technologies have been evolving.

mm02 and Vodafone had started with a substantial lead over the PCN networks in terms of geographic and population coverage. Today, all four established players cover a minimum of 98% of the population. mm02 spent £1 billion on its network of base stations between 1996 and 2001 to increase geographic coverage, add capacity, enhance quality and, especially, to introduce a wide range of new voice and data services. Orange and T-Mobile provide a facility on their websites for visitors to check their quality of coverage in any of9,000 UK postal blocks. Hutchison's 3 had a 3G coverage of only 50% of the UK population at the time oflaunch, but

With the flattening of voice revenues, and the large investments in 3G licenses, operators were looking to generate more revenues from data services. By December 2002, data revenues constituted between 10% and 15% of total revenues of operators population - primarily SMS and emails.

provided voice coverage allover the UK by carrying calls on mm02's network when outside its 3G mast coverage area. In December 1996, mm02 and Vodafone secured the right to use the GSM 1800 MHz

Competition in the UK market Exhibit 4 shows the number of subscribers for each network. Differential advantages of coverage and price have largely been eroded with the build-out of networks and rapid competitive reactions to pricing initiatives. Vodafone and mm02 were the strongest in the business market with Orange playing catch-up and TMobile in fourth position. T-Mobile's share of business customers is 6% and it has 10% of the 5 million customers in the UK who spend more than £60 a month on their mobile bills. Vodafone is perceived as the market leader, even though Orange has surpassed it in the total number of subscribers. TMobile has historically been seen as a low cost provider that did not have good voice quality (this despite Virgin Mobile scoring high on voice quality ratings while being on the same network as TMobile). Orange is seen as an innovative fIrm that is the customer champion. mm02 (formerly Cell net and BTCellnet) appeared to have had the most diffuse image in the past among customers, though its 02 campaign was perceived to be better focused. The 02 brand is reported to have been particularly successful in attracting customers in the 18-35 year age bracket. With the launch of Hutchison's 3, a widely held view is that the UK market is not large enough for fIve operators and a Mobile Virtual Network Operator (MYNO) to survive and prosper.

spectrum to supplement their 900 MHz spectrum. Through this they also expected to achieve expanded geographical and enhanced 'in-building' coverage and better call quality, as shown by the agreement between Vodafone and Racal Telecom to combine their expertise and provide the corporate market (medium and large businesses) with an integrated package of mobile and fIxed line voice and data services. With the UK population now effectively 100% covered by all four networks5, operators have started to advertise their international roaming agreements as a differentiator. Initially, Orange and T-Mobile had very few roaming agreements because the PCN Digital Cellular System (DCS 1800) technology they used was less common internationally. To overcome this, they launched dual-band handsets in 1997 that allowed customers to use both a PCN network at 1800 MHz and a GSM network at 900 MHz. Such dual-band phones could be used abroad, based on roaming agreements that Orange and T-Mobile established, bringing them almost in line with what the two earlier incumbents offered. Actual network quality now varies little between networks, but perceived service quality is an important driver of customer retention and acquisition. Although many users are still tied into contracts lasting a year or more, dissatisfaction with service is likely to lead to brand switching. Exhibit 5 describes some usage patterns for mobile phone users.

EXHIBIT-4

UK Subscribers - Year Ending December 1992-2001

# At year

550 710 660 60 850 700 410 620 260 140 2,270 490 890 One20ne All Networks Vodafone 1,020 1,810 10,970 2,390 2,730 4,040 6,960 1,730 10,220 1,400 11,660 12,799 4,870 7,940 40,040 4,100 1,920 46,680 9,330 8,320 14,900 2,160 9,830 2,181 3,940 5,740 7,120 12,9901,190 24,000 mm02 2,440 2,880 end Virgin Orange

1,260 1,510

47,500

EXHIBIT-5

Consumer Profiles6 Casual user

Mostly off-peak and locally, as a point contact when you're out and about, which tariff would suit you best? One 2 One's new Up 2 You Standard is great value for money and there is no expiry date of your call time. One 2 Anytime only 2 pence a minute Due to its charging

continues

to be good value for contract

once you've exceeded

your inclusive

users and offers off-peak

minutes. Virgin's service does well too.

pattern, a few long calls will cost you less than a larger number

ange's JustTalk with new peak and off-peak

rates depending

of short calls. Or-

on the cost of your voucher

better deal than the previous ones.

Source: ICC Key Note,

Press

Notes. OFTEL Market Information.

Source: (2000), The price is right, Mobile Choice, Issue 49, December 2000, Pg 37-40., Financial Times, January 24, 29, 30, 2002. 4 In urban areas. the base station requirements advantage

in urban areas.

of

peN and GSM networks are similar.

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5 All operators are still investing in base stations hi/ihl nfthA cI,uvol h•.•I__ .J~__ ._~"" ~_-J.'_ •

to increase

calls at

its aeoarnnhir

(no ~nnM."'·- --_ ..•_,,-

is a much

Baeed on 800 mine locaf'oR-peak, 400 mine national oR-peak, 120 mine local peak and 60 mlns Iiatinal peak ':'ach month!

~~ mine local off-peak, 30 mln'natlona' off-; local peak and 5 ,/~minsnational ,!peak each mo••th One 2 One Up 2 You Set.lIda",

1

U5 Virgin

Vodalone Pay as you Talk One 2 One Anytime Vodalone Business Call Saver Virgin

138.00 154.75

Vodalone 750 Call Saver oranae Talk 500

Higher user For heavy use, time profile favours flat rate tariffs such as One 2 One's Precept. One 2 One's prepay tariff, Up 2 YouStandard, performs excellently again. Precept does offer additional benefits, which may be worth the extra for a heavy user.Virginperforms well in this category too, as ifyou are using the cheaper call rate of 5 pence a minute. Another option isVodafone Businesswith Call Saver which will give you potentially better coverage than currently available with One 2 One.

al of!-pea~, of1.-pe~. 120 mins k. and 120 mine121?mlns n~tional natUJnal peak eachllnonth

Emergency only The new trend for prepay phones to have no expiry dates to their vouchers really helps those who just want a mobile to sit in the glove compartment of their car or bottom of their bag for emergencies. Our example shows you just how cheap it is to be safe, not sorry.There is of course the usual consideration of coverage in your area to take into account - ifyou cannot use the phone where you need it, you willbe frustrated. Finally,you may also use the phone more than you expect. Both Virginand One 2 One's call rates fall,the more callsyou make, while Orange call costs are lower ifyou buy a £50 voucher and Vodafone offers a higher user tariff.

10»

One 2 One Anytime One 2 One Precept 360 One 2 One Precept 150 Virgin

Business User The mobile as a main business number, One 2 One's Precept 720 offers great value. Virginalso performs well as does One 2 Anytime. However, Precept offers you additional benefits such as a second number for priority calls,which could prove valuable to business users. Consider also the cost of calls being made to you at a mobile number. Orange offers a geographic number for your mobile at a cost of £17.63 a month, and incoming calls are charged at 9.4 pence a minute. One 2 One offera free 0800 number. Connection cost is £58.75 and the monthly cost is £8.83. Incoming callsare 17 pence peak and 10 pence off-peak.

Pricing Increasingly competitive tariffs have been one of the main forces driving the growth of the UK market. In particular, Orange and T-Mobile have tried to use price as a differentiator, with varying success. Initially, Orange was the only network to offer inclusive airtime with a monthly subscription and to charge on a per second basis. However, its competitors soon followed. For example, mm02 responded by cutting its digital tariffs, increasing the length of its off-peak periods, and introducing 'per second' billing. Nevertheless, the fact that Orange was the first to introduce these innovations has contributed to its positive brand associations among UK consumers. T-Mobile launched as One 2 One in 1993, aimed at non-business users. Management claimed it was not positioned to compete head-to-head with the two incumbents, but rather was attempting to break BT's dominance of the domestic telephone market. Price was an important element of its marketing mix. At launch, T-Mobile offered free off-peak local calls. All peak calls were charged at 25 pence a minute, while off-peak national calls cost just 10 pence per minute. In September 1995 the offer of free off-peak local calls, long considered 'suicide' by analysts, was withdrawn and subscribers were offered the choice of three tariffs (bronze, silver and gold) all providing free weekend local calls. The tariffs were changed again in July 1997, when the company decided to address more seriously the business users, given its network expansion. In September 1996, Vodafone introduced PrePay for analogue customers only, an innovative package which was the UK's first mobile service with no contract or bill since customers paid in advance for use of their mobile. Also in 1996, during the busy period leading to Christmas, T-Mobile introduced the 'All-In-One' package, where customers paid a one-off fee of £199 and received a handset, connection to the Bronze Service, and twelve months' line rental. T-Mobile extended its servirp in Allm.cr 1QQ7 , ••:.\.. _•• _> L ., .. - 11 1

:lIlows two poones (WItllCfilterent phone numoers)robe run off one account, as well as ]ustTalk, its pre-paid service. In October 1997, Orange introduced lower charges for international calls; after signing agreements to buy bulk spare capacity from network operators like Energis, international calls from the UK cost 20% less than BY's standard rates. The pre-paid service boomed through 1998, 1999 and 2000 and is primarily responsible for the expansion in the customer base in the UK - unlike Finland where 99% of customers are contract-based. Pre-paid has helped take the phone further into the mass market. *Revenues (£s)mobile 2001/0202 2000/0101 1999/0004 2000/0104 2000/0102 2000/0103 2001/0201 1999/0003 1999/0001 1999/0002 Personal users now significantly outnumber business users although business users still account for almost 50% of revenue.

EXHIBIT-7

Cellular Services: Average Call & Fixed Charge Revenue per Subscriber 49.4 62.8 64.4 59.3 55.4 64.3 70.2 0.3 60.5 63.4 67.5 70.4 72.2 75.5 83.6 77.6 75.8 7.6 All 62.5 5662.1 58.5 1.3 80.85 80.56 69.55 67.6 75.4 Operators One 2 One Year-wise69.07 77.1 68.9 71.2 2.6 6.1 mm02 Vodafone Orange 1998/9904

Both airtime and handset prices (Exhibit 6), and average revenue per user (ARPU, Exhibit 7) have been falling over the years. Price competition and the increasing proportion oflowerspending domestic subscribers in the market, have lead industry analysts to predict that the combined revenue of the four players in the UK market will rise only 10% in real terms over the next ten years. Pre-paid schemes have been an enormous success and already comprise the majority of customers for all the networks. In 2000, 80% of new subscribers bought pre-paid schemes. While the pre-paid customer was an attractive proposition since the acquisition cost was far lower than for a subscriber (£70 vs. £230), their ARPUs were also much lower. For the half year ended September 30,2001, Vodafone's ARPU for contract customers and pre-paid Customers were £300 and £160 respectively on an annualised basis.

EXHIBIT-6 *Orange Average Calls and Fixed Charge Revenue per Subscriber prior to Q4 1999100 will be subject to revi-

Evolution of Prices in the UK Industry

sion in the Q 1 2000101 publication.

This is due to the omission of pre-pay revenue data. Average retail revenue

per subscriber figures do not take into account the network's differing usage profiles.

Nominal Airtime Prices (Indexed)

45 125 40 111 66 48 76 59 100 89 62 63 35 96 98 95 60 92 84 30 104 67 69 74 45 50 58 65 87 85 36 67 81 78 2000 1998 Company 1991 1999 1992 1997 1996 1995 1993 1994

100 132 106 1990

price, £

Source: Reuters Business Briefing, Keynote report. NOTE: Handset prices are subsidised to encourage new subscribers.

Source: OFTEL Market Information, September 2000, Financial Times, January 29, 2002, Operator sites.

From June 1,2001 Vodafone started selling General Packet Radio Service (GPRS) phones (beginning with the Motorola Timeport T260) to consumers through retail outlets offering the bundled option of GPRS 1 for the more frequent Web Access Pattern (WAP) user which includes 1 MB (1,024 Kbits) worth of data transferral for £7.49 per month. With an average WAP page measuring between one and two Kbits, GPRS1lets customers access between 500 and a 1,000 WAP pages per month. The other option is the non-bundled GPRS price plan at £3.99 per month, paying for WAP access pro-rata at two pence per Kbit. mm02's consumer GPRS service (corporate GPRS service was in place from June 2000) was launched in May 2001 with the following price structure . • Basic Service: 3.991 month. Data download at 2p IKb . • Value Bundle: 7.99 1 month. Allows free download of 1Mb per month. Additional data charged at 3.99 1 Mb (2.5p/Kb). Shunchiro Mishima, vice-president of business development for DoCoMo's US subsidiary had noted during 2001 that consumers are charged for cell phone content in much the same way as TV 'pay-per-view.' The content charges show up in the subscriber's monthly bill and DoCoMo gives 91 per cent of the content fee to the content provider, pocketing the remaining nine per cent. At the time oflaunch in March 2003 in the UK, Hutchinson's 3 offered the following pricing plans, both of which are based on the customer having a 12-month contract with the phones being sold in the £399-£450 range ( 635- 715). The handsets available are NECe606, NECe808 and Mototola A830. r ·1

11-

._.,~rnn,-'nncmQes

prerruersnlp

goaJS':"'A1ter

the tree minutes are up, voice calls cost 15 pence a minute and video calls cost 50 pence a minute). • £99.99 a month (2,000 minutes a month of voice calls, 200 minutes of video calls and 100asevents similar above).from a chargeable calendar list. After free minutes are up, prices are Working on 'average' usage, 02 thinks that residential users wanting to access the Web, download music, play games and indulge 1995-1996 in multimedia e-mails can expect to be charged 100h.1007 1993-1994 1994-1995 1999/00Q4 1999/00Q2 1999/00Ql 1999/00Q3 1999/00Q1 1999/00 Q1 Call MinutesInland (millions) 1999/00Q4 around £40 per month. T-Mobile charged users £20 a month for 350 picture messages on its All CallsRoaminq Whilst Abroad Outgoing (Multimedia Messaging Service Type (MMS) orInternational Picture Messaging Service, launched in June 2002.7 of call Incoming call prices: The price of an incoming call to a mobile phone can be very different from that of the same call if it is made from the mobile phone to the fixed line phone (Exhibit 8). For this reason, it is sometimes cheaper to call a fixed line telephone from a mobile phone than the other way around. 8 Most consumers tend to be unaware of this fact. Exhibit 9 provides data on the number of call minutes by a network operator. Following a Competition Commission investigation, Office of Telecommunications (OFTEL) announced on January 22, 2003 that the four main mobile network operators (MNOs) will be required to reduce the charges for making calls to their networks. The Commission supported OFTELs view that customers are paying too much to call mobile phones and that the MNOs - 02, Orange, T-Mobile and Vodafone must cut their termination charges for these calls.

Termination charges are those charges which an operator makes for connecting calls to its network, and are paid by consumers in the retail price to call a mobile phone. The operators should make a one-off cut of 15 per cent before 25 July 2003, and then charge controls ofRPI - 15 percent for 02 and Vodafone, and PRI - 14 per cent for Orange and T-Mobile, should be imposed from July 2003 to March 2004 and for two further years. OFTEL estimates that the average fixed line consumer should benefit by£18 a year by 2005-6, and that a typical peakrate call from a fixed line to a mobile phone should come down by about 2.5 pence per minute by July 2003.

EXHIBIT-8

Incoming Call Charges = Cost of Calling a Mobile - Charges per Minute, December 2001: Calls

Weekends Mon-Fri 4.40p 7.41p 2.29p 6.98p 4.40p 15.59p 18.44p 16.52p Mon-Fri 16.18p 19.97p Off-peak 23.14p 19.02p 16.52p 21.67p

Source: What Gel/phone. February 2002.

7 New Media Age, July

25,

2002,

8 Note that the pricing in most markets, inctuding the UK operates on the 'catting party pays' principte unlike some other markets (e,g,. USA and India) where the called party also pays, This and the lack of a national standard are the two main factors that havp. .•/"",orl dawn mobile oenetmtinn in tho '"''

EXHIBIT-9

Mobile Phone Statistics, as at 31stMarch, 2000 Cellular Network Operators: Call Minutes by Type of Call by Operator

- - ~- -

')2,018 11 <1-1,593

1- ~AL 1730 306 91,767 361,459 129 1420 1828 571,379 1Total 61,016 81,828 43 753 61 22 62 23 69 11 12 18 17 16 49 57 69 76 82 88 24 26 28 31 21 137 662 985 770 786 958 649 904 493 56-78 92 93 75 119 164 180 173 One20ne Vodafone 644 785 79 3,294 650 1,513 1,706 1,661 1,778 1,353 1,194 1,678 1,584 6,663 2,360 2,065 1,801 1,393 1,478 1,683 1,791 1,302 1,051 1,281 1,053 1,405 1,662 1,756 2,473 2,169 1,627 1,726 1,915 1,559 Vodafone 1,469 T-Mobile 1,154 1,075 5,469 7,582 1,292 4,761 4,956 5,727 6,919 7,848 4,481 4,314 mm02 1,358 1,564 949 Orange Orange mm02

1992-1993 UK Calls

1998/99Q4

All Operators

targeted new corporate subscribers. Orange also established relationships with selected service providers. It provided one point of contact for subscribers who could call freephone helplines for assistance, such as feature usage and billing information .

Mobile phone use patterns National Opinion Polls (NOP) conducts an annual survey of mobile phone usage and attitudes. Toplines of the August 2002 findings were: • 86% of 14-16 year olds and 24% of7-10 year olds have mobile phones. The 25-54 year old group provides the largest revenue chunk to the operators . • The market continues to be biased towards South of England - 50% in South, 30% in Midlands, 20% in North. • Women now comprise a majority of mobile phone owners.

Satisfaction

with services

Despite the overall forecasts, anecdotal and survey-based evidence suggested that many current subscribers were disappointed with the service being provided. While complaints about coverage had gone down with time, users were still not satisfied with the quality of the calls and were looking for new services on their mobile phone. However, call reliabilities have increased. A survey conducted by OFTEL in September 2001 found that more than 97% calls to and from mobile phones were successfully connected and completed.' The following tables (Tables 1 and 2) provide a comparison of satisfaction levels and use patterns across three years.

Comparison of Satisfaction Levels

Table/1

1999

~ ~

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8

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~

~~

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~ ~ ~ ~~ ;: 6)' t3 ~9:: c 0) § l::l3 0') -9 l....:.Q ~~~~~ ~.~~ ~~ CI):::a...

~ ~§ -.l~ -..l..c:8 :--..... ,:3

,:,:gti:~~

,g-:EC)<::>~ .t:::o - C\I Q) '"

-

-

-

<>:

2000

• Just a little above half • Satisfaction with mobile service was were very satisfied with high, with 93 per cent of residential custhe network; the remain- tomers satisfied with the service they reing 43%, especially 12%, ceived. Customers appeared to be aware who were very unhappy of the rapidly developing market and the would be open to change. increasing range of deals available, knowLevel of churn in the indus- ing that there may be cheaper deals now try should therefore in- than when they first got their mobile. Customers were also satisfied with the crease. range and quality of information available • Network coverage was to help them choose." a sore point, despite oper• Mobiles were being used in place of ators claiming total coverage. Only 46% were satis- fixed phones in an increasing number of fied with the coverage, situations: the home fixed phone was already being used; to use free call minutes; number considerably to make savings on specific numbers or at lower in North. certain times of the day. • One-third of users • One in 20 people asked had put off found tariffs confusing albuying a mobile phone because of difficulthough 20% were baffled. ties in working out the best deal • 40% of users found • One in 10 said cost was a barrier to calls more expensive than them getting a mobile phone expected, dissatisfaction • One in 7 put off changing network or naturally highest among package because of difficulties in com15-24 year olds and above paring the services and prices offered by 55-year olds.'o different ~pHers.'2

-------~------

.26% of individual users in Europe used their phones for less than 5 minutes everyday compared to 6% of business users. • 19% of individual users used their phones for more than 30 minutes everyday . .Average daily use in Europe was 21 minutes and the largest segment was in the 5-10 minutes daily use. That accounted for 32% of all cellular users. .90% of users in their first year of cell phone use spent less than £30 compared to 44% of users who had been using it for more than four years.

2001 • There was dissatisfaction with roaming charges among UK customers. UK customers paid higher international

.According to this report, almost 25% of customers left their previous provider because they had a promotional offer from a competing service provider.13

roaming charges than customers in other countries. • Usage among children, 7-16 year olds now was more than 52% of that age group. • Business users were increasingly using Wi-Fi as an alternative wireless network at airports, hotels, and other public places, especially in the US.

13 strategy

2001

2000

1999

• 40% of cellular users in W. Europe expected to use their mobile phones for all voice traffic in the future, with only onethird convinced that they would still use a fixed telephone. • However, cellular operators would need to work hard to develop the right pricing plans to exploit this opportunity price levels remained the most common complaint among users in the region, with 50% of churn motivated by cost.

Report. May 1999. Report. May 2000.

16 OFTEL News (200 77 hHn .•... L/www

• The research took in responses from Taylor Nelson Sofres's 13,000-strong panel of users in Europe and the US, during April and May 2001. The awareness of 3G services was highest in Germany (44 percent) and lowest in the US (10 percent)." • The report says that around 80 per cent of existing mobile phone or Internet users in Europe, and 89 percent of US mobile phone or Internet users were 'unaware' or 'poorly informed' on wireless Internet technology - the mainstay of the expected 3G services. • Even among users who were aware of what 3G could do for them, interest levels were relatively low - on an interest scale of 1 (low) to 6 (high) - the average for 13 markets in the US and Europe was a shade over 3. Across all markets, male mobile phone or Internet users under 35 years of age showed the highest level of interest in using 3G wireless Internet services. • Only six per cent of mobile phone users in the US said they send a text message at least once a week. This percentage was extremely low in comparison with most European markets, with 56 per cent in UK, 55 per cent in Germany and 58 per cent in Belgium. Interestingly, while text messaging in Europe was most popular among those under 25 years of age, in the US its popularity was evenly spread across those under 50 years of age.

Inc. (ABI) Report. April 2000.

I). "Latest OFTEL Consumer

fm:nfrA.f:: rnm

• 61% of small businesses and 85% of medium businesses had at least one mobile phone. 80% of SMEs used post pay packages. ,•

• The US appeared to have a different perspective. Only one out of 500 people had decided to give up residential wireline telephone service to go completely wireless at home. Slightly less than one per cent had even considered such a change, based on a survey of 1,200 individuals living in US households in the first quarter of 2000.'5

Analytics

Intelligence

• 16% used mobile telephony as their main telephone.

• The youth market was taking the lead in landline substitution, with almost half of those aged 16-24 years planning to use only their mobile phone for voice calls. By contrast, only around onethird of users aged over 45 years had the same plans."

14 Strategy Analytics 15 Allied Business

• 77% of UK customers used pre pay packages.

Research, ' December.

p.

14-15. (http://www.ottel.gov.

uk/consumer/research)

-------···15"]T"'n~n"'On
one-third of UK companies which provide employees with mobile phones and businesses are most likely to consider mobile applications for e-procurement, supply chain, CRM, fleet management and sales force information. Appendix 4 describes some recent industry practices. Appendix 5 lists some recent highlights from some UK networks.

E X H I BIT

Sample Roaming Call Charges for UK Operators (in minutes) (Calls from Outside the UK to a UK Number as at January 31, 2000)

,---T-Moblle

Country

local Network

mm02

Vodafone

Netherlands

0.29 (Libertel)

0.99

1.17

1.17

France

0.34 (5FR)

0.99

1.09

0.94

Ital

0.34 (TIM)

0.99

1.02

0.65

0.56 (Telecom D1)

0.99

1.09

0.97

0.55 (Proximus)

0.99

1.09

0.89

David Taylor, UK commercial director at Orange commented: "The mobile phone market has moved into the same category as the financial service industry in an incredibly short space of time. In the same way that people do not review their mortgages, credit cards or bank accounts, consumers are buying mobile services and never changing them, no matter what." Confusion has bred apathy with almost three quarters of people saying that mobile operators offer too many tariff options with more than a quarter citing confusion as the key factor for not reviewing their service plan. Persistent reports of potential health hazards of using wireless phones was a disincentive for customers to use mobile phones. In the 15 months to March 2003, operators had also begun to aggressively promote picture messaging or MMS, a service that allows users to send small pictures to each other and that can be viewed on the handset in the same way that they send text messages. The arrival of 'camera' phones like Nokia's 7630, Sony Ericsson's T68i, etc., was expected to accelerate adoption of the service. Charles Dunstone, chief executive of Carphone Warehouse, said demand for camera phones was outstripping supply. In the run up to Christmas, the mobile phone retailers sold as many camera phones and camera attachments as they could get hold 0£20 UK Sweden Germany Italy France

- 1 1 ( a)

Source: Company information and INTUG (Peak times call including VA T. Prices are approximate as commission charges and exchange rates vary.

E X H I BIT

- 1 1

------------(b)

OFTEl Price Index for Pre-pay International Roaming by Visited Country, Based on Two Cheapest Deals During 2001 100 100 100 100 100 100 100 46 51 42 49 49 38 6356 57 49 58 73 65 68 76 44 57 81 48 56 71 100 42 44 72 43 43 Holland 81 France CountrySweden USA Germany Average Spain Italy

The business user Some observers argue that the real prize as the industry boom continues is still the relatively price insensitive, high volume, peak user and, in general, this means the business user. Industry analysts suggest that operators should target these high-value users to maintain long-term profit levels. They predict thatARPU could fall to just £165 for consumers, and this is in fact the case for pre-paid phones.

Source: OFTEL News, Issue 54, December 2001, p. 13.

The corporate customer is estimated to spend between £750 and £1,000 a year compared to between £250 and £350 for the average private individual. Corporate users tend to use more peak rate and roaming calls. International calls originating from mobile phones are growing. International roaming prices tended to be much higher and have become the subject of an OFTEL investigation (Exhibits 11(a) & 11(b)) - with customer groups alleging that the operators were ripping off customers. According to a corporate survey by Institut de l'Audiovisuel et des Telecommunications en Europe (IDATE) for Cap Gemini Ernst & Young, in mid 2001, about

18 7a.,hftp://www,orange,Co,uk/cgi_ •

Churn and network switching Orange claims to have benefited from a lower annual 'churn' rate 2\ of around 12% against an industry average of 30%. Loyal customers are extremely valuable as the cost of acquiring a customer is high (advertising, handset subsidies, connection bonuses, introductory price-offs). It has been estimated that a 1% reduction in the annual churn rate benefits the company by £ 1530 per existing subscriber. Multiplying this figure by a subscriber base of millions, it is obvious why a low churn rate is important. Effective from January 1, 1999, number portability was es-

LI;IccnICnrWlTIrcne operators to DOOstcompetition. Under this, sub-

scribers can keep their phone numbers if they switch networks. To counter churn, operators have launched loyalty programmes.

Future outlook Falling equipment prices and tariffs and increased competition will continue to increase the use of mobile phones. However, the UK market at 80% penetration is now reaching saturation and most increases in revenue will come from increased usage of present services, the advent and adoption of new services and ownership of multiple mobile devices.

Voice quality All operators are working on enhancing voice quality. In February 1999, mm02 became the first mobile operator in the world to offer Clearcall technology free of charge to all digital customers. Clearcall cuts background noise by up to 75%, amplifies callers' speech and reduces acoustic echo.

Many Western operators were looking to emulate the success ofNTT DoCoMo's i-Mode service in Japan, easily the most successful mobile Internet type service in the world. However, it was unclear to what extent the drivers ofi-Mode's success could be replicated in the West (See Appendix 6). Mobile phones were also being used for direct marketing. For example, in November 2002, a UK wireless marketing company signed a deal to secure the first national mobile marketing campaign across multiple operators with a single short code. The campaign, for Elektra Entertainment Group artist Missy Elliott, promoted her new album Under Construction, supported by a big cross-media campaign. The deal signified the adoption of SMS by a big US media brand and showed the benefits the European mobile marketing sector could reap. British Airways (BA) used an SMS campaign to promote trips on BA during rugby matches during March 2003. Roaming: The success of GSM roaming had demonstrated the value to the market of handsets that could connect with different networks. Further development would lead to the introduction of multi-standard handsets able to connect to any local network and, at a later stage, handsets that would automatically select the most economical call routing.

Services in vertical markets Operators have added content and services such as stock prices and traffic information to their offerings. Orange aims to be a major Internet access portal site. It has an alliance with SunNetscape-AOL TimeWarner and has launched news, sport, travel, weather and entertainment information services from these and offers content providers. Orange also has offered Wildfire, a voice activated intelligent virtual assistant. Rudimentary banking services are already available on the mobile handset. The benefit to the customer is convenience. For the banks, this channel also offers potential cost savings. In 2000, Logica found that a retail bank transaction cost $1.07 on an average at a branch, while telebanking calls cut the cost to $0.54. Logica estimated a mobile banking transaction could be effected for $0.16. The cost of handling cash for just the banks, let alone, for example, the rest of the UK economy was over $1.6 billion a year. In the UK, Woolwich and Halifax were the first to launch banking services over the mobile Internet during the year 2000 using WAP. Halifax collaborated with mm02 to launch the service. Barclays offered WAP banking through Vodafone. Consulting firms and cellular equipment providers, among others, have suggested a large potential market for m-commerce .22 Vodafone offers Vodafone Interactive that enables users to customise the services they want to receive through their phone. Customers can top up their 'Pay As You Talk' credit, send SMS messages, check their bank balance, and use personal assistant services. For corporate customers, Vodafone has its 'Managed Gateway' scheme on WAP that enables the customers to develop their own set of services such as customer services, 24-hour operational support, site statistics, security, identity of caller via calling line identification (CLl) and dual branded sites for their customers, i.e., Vodafone is acting as a web hosting service provider on the mobile Internet. Operators are offering different service initiatives. In February 2003, Orange, Telefonica Moviles, T-Mobile and Vodafone announced that they would provide a new Mobile Payment Service aimed to deliver an open, commonly branded solution for payments via mobile phones, designed to work across all operator networks and across country boundaries and would seek to complement existing industry solutions. The aim is to provide the opportunity to purchase a wide range of digital and physical goods and services with their mobile phones using an easy, secure solution. In November 2003, Orange launched Orange Fleet Link that enables fleet controllers to obtain driver and vehicle information, such as vehicle location, alarms and real time status reports. wirelessly, between the vehicle and the office.

22 For example,

a January

m-commerce revenues nn/" ?o/ "'~ ~"'I-"'-~-'

200

of $230

I,

Strategy Ana/yfics

billion.

Report says that by 2006,

The report also adds, however.

worldwide,

that wimlll."<

325

million

nllh"",/,o M4m'MC

people

will generate

M4 U/,o4/U,,., Mn"

,,-

Third generation wireless network 3G (also called Universal Mobile Telecommunications System (UMTS) and Wideband Code Division Multiple Access (W-CDMA) in Europe) promises information (email, file transfer) and moving video images to be delivered to the handset. UMTS potentially offered data rates of384 Kbps compared to 9.6 Kbps for GSM. Infrastructure providers like Nokia, Ericsson and Motorola were pushing for the 3G technology to tap the emerging wireless data market. An all new 3G network in the UK providing 99% population coverage would mean around 15,000 base sites as compared to the approximately 10,000 base sites that the operators had for their GSM networks. At the pessimistic end, at least two mobile network operators (Vodafone and Telecom Italia Mobile) had suggested that even 2.5G technology would not happen in large numbers till early 2002 - a prediction that has come to pass.23 Nokia, the largest manufacturer of handsets (36% market share worldwide as at December 31,2002) announced its first GPRS handset only in February 2001 and by January 2002, GPRS handsets were still not available in large volumes though three of the five operators were providing GPRS services. Japan launched the first 3G service, called FOMA, using W-CDMA in September 2001 with 4,000 users in the Tokyo area. However, DoCoMo had revealed that only when used by a few users at a time does W-CDMA do everything its designers promised in terms of data throughput rates. The limits of available radio spectrum meant that the technology could not simultaneously provide the very high data speeds needed for video and sound transmission to large numbers of users over long periods. As the industry migrated to the 3G cellular technology, Hutchison would be allowed roaming facilities on the existing networks of cellular operators to begin with. It had negotiated an agreement to roam on the mm02 network for its GSM and GPRS services. Dual mode handsets that worked on both the existing GSM network and on the new 3G network were an important requirement for quick uptake of 3G services. Hutchinson started to pre-register consumers in December 2002, attracting 90,000 names in Italy and 40,000 in UK by March 10,2003. Exhibits 12(a) and 12(b) show 3G network cost estimates and Western European subscriber breakdown by technology.

The lodestone

in 3G for different firms was the content

that customers would buy over 3G

because of the high rates of data access. According to Lars Becker, chief mobile marketing company, "Any new medium, from the printing press elled by adult content - cinema in the 1920s, video recorders in the 1990s. It's the same pattern." Paul Meyers, managing director ofWippit,

3G Network Cost Estimates 1.3 0.1 0.8 2.0 2.0-3.0 n.a. 28.9 2.7 38.0 50.8 0.5 23.1 20.0 4.0 1.4 0.4 2.1 2.0 3.2 2.8 1.7 Nominal 4.1 48.7 15.9 28.8 3.5 7.7 Cost of Licenses The Cost of European 3G (Euro) bn Capital Expenditure*

executive of Flytxt, a to the Internet, is fu1970s, DVDs in the a music distribution

specialist, agreed: "The one thing that we know people will pay over the odds for, because not something they think about with their heads, is pornography or flirting services. While servers happily assert that 'girls, games and gambling' are the triple drivers for Hutchinson's network, 3, pours on cold water. "No, this is not part of our plan," according to 3's Matt cock. "Our research says this is not what people want. What they want is football."

it is ob3G Pea-

Market structure The

UK Government

required that the fifth 3G license holder would have guaranteed

roaming

rights on one of the existing networks. Hutchison agreed to lease existing mm02 network facilities at a price for each customer that is a discount to the retail tariffs of mm02. The cost of setting up the 3G network has been estimated at 5-8 billion per network. Exhibits 12a & 12b provide estimates of setting up 3G networks (by all operators taken together in those countries and with at least 90% population coverage) in the different countries and relative penetration of different mobile technologies. While this competition is more pertinent to equipment suppliers like Nokia and Ericsson, cellular operators would also need to make choices about the instrument that they wanted their customers to use (Exhibit 13).

EXHIBIT-13

Mobile Virtual Network Operators * Highest estimated cost excluding any possible synergies

Telekom Imagine Deutsche Hutchison Colt Telecom France Telecom General MotorsEnergis Hutchison Kingston BskyB B2

** Pending Sources: Schroder Sa/oman Smith Barney: HSBC.

EXHIBIT-12(b)

----------

Western European Subscriber Breakdown % Share

by Technology

2000

2002*

2005*

99

67

30

27

30

5

40

(as at December 31) GSM GPRS HSCSD w-CDMA(3G) *Estimate

Source: Forrester Research Survey of 22 Operators.

(MVNOs); Potential Players

Ireland Sweden Countries Extend UK multi-platform strategy for delivering France, MVNOas aexisting possible alternative to bidding Italy Considering Motive MVNO MVNO route activity to fill and gap network in European partner license ifand announced coverage Complement to use fixed offering, with the objective of Expansion Planning toof operate opportunities onbroadband 3G network for in-vehicle inPartner which itproprietary, is the majority competiGermany Opportunity to network totelematics, carry mobile existing fixed broadband services: this com after withdrawal from E-Plus UMTS Spain Expanding scope of its resale activities. (for resale): Eircell .... ,.for Company consortium branded content. Partner: Vodafone Internet traffic for 3G stakeholder. Partner: TIW 3G pany islicenses also involved inwhich a consortium forservice a 3G license offerinq converged services particularly to business customers tive response to Ford, is already biddinq a mobile provider

(Sweden) One.Tel Sense Tiscali Tele2Mobile Tesco J. Sainsbury VirginGroup

UKand UK Australia.Activitiesin other countries are under review. Nordic uK=6aseaMVNO specialising in international roaming Netherlands. UK,Australia, consumer-orientated Carphone VirginGroup MVNO designed services. toreselling extend Operational value chain in the MVNOintended Italy J. entry Sainsbury asresale (above) means of establishing a it 2G mobile business in Expansion Europe-wide of activities into other consumer segments outside its Exploitco-branding and cross-selling opportunities for other Market opportunities with new license were 3G license. Partners: KPNMobiel (Netherlands); UKplans under Plans to actWarehouse as MVNO in all countries where already provides Extension of fixed activities and alternative tocountries bidding for ___ •..•-._ Asfor -va'n'O'(l~"'" UK discussion established elsewhere network to MVNOs S.E.Asia,US France, fixed service. Partners: Sonofon in Denmark; not Partners: coverage. T-Mobile(UK); Partner: Orange C able Singapore Telecom (S.E. A sia) & WirelessOptus (Australia); core business of food retailing limited. Partners: Sonofon (Denmark);Telenor(Norway);Telia advance consortium. of obtaining Partner: Omnitel a 3G license Pronto as part ifit is of obliged the Andala to open its minutes. Service control is sub-contracted to Icelandioperator ValueTelecom

The Wi-Fi challenge In the 18 months to February 2003, wireless 'hotspots' (at airports, hotels, railway stations, convention centres and coffee shops in particular) had started offering wireless connectivity to road warriors. These hotspots used a technology dubbed as (IEEE) 802.11 b (also called wireless fidelity (Wi-Fi» that allowed laptops users to connect to the Internet at speeds upto 10 Mbps without wires or line of sight requirements using a wireless local area network (WLAN) card. Wi-Fi is, thus, faster than 3G. Wi-Fi in its current form can run as fast as 10 Mbps. In practice, it often runs between 512 kilobits per second (Kbps) and 2 Mbps. The actual speed is limited by the rate of its wired feed (the paradox ofW-Lans is that they require a feed that is almost always a high-speed wire). 3G runs at about 384 Kbps. Even with WLAN cards costing between 50 and 70 and new laptops which are Wi-Fiready, Wi-Fi is an inexpensive incremental option to get wireless access that provides full keyboard, full screen and un-tethered Internet access. Mobile operators play down the WiFi threat and with one voice maintain that it will be 'complementary' to 3G services.24 However, in January 2003, when BT announced ambitious plans for its WLAN services, Dave Hughes, director of its mobility services division, was less benign, "3G will be important, but what is it going to be for, other than voice" he asked? BT said it had started 80 hotspots across the UK with 400 predicted by mid 2003 and 4,000 by 2005.

Source: Analysys Documents. 2000.

Intel was also targeting wireless-enabled LANs as a high growth market; it believed that WLAN would turn round not only its own moribund revenues but also revitalise the weak PC and communications sectors. In pursuit of this goal, Intel launched the Centrino chip in March 2003. According to Andy Grove, chairman ofIntel, "Centrino was second only to the introduction of the Pentium," and Intel was putting its money where its mouth was. It had earmarked $300 million in promotional money to push Centrino. "Covering even a large country like the USA with WiFi would cost only $2-3 billion," said Sean Maloney, head ofIntei Communications Group - a relatively inexpensive national infrastructure of wireless hotspots, compared with the tens of billions of dollars the mobile communications companies had spent to build nationwide networks and buy licences. In more densely urban areas, such as London or New York, the cost could be less than $1OOm. Supporting Intel's contention was the fact that laptop computers were the fastest-growing segment in the PC market.

Virgin's launch of its virtual service using the T-Mobile network was indicative of future providers having the opportunity to ride on the networks established by existing operators. Virgin used the extra bandwidth that was available in the part of the spectrum that has been allocated to T-Mobile. The twist in its offering was that it did not subsidise handsets at all - and not having had to set up a network from scratch, it could offer relatively low call charges. The higher the time usage, the lower was the per minute charge with Virgin.

Connecting broadband users was 10 times cheaper with Wi-Fi. Thus, by promoting the building of hotspots, combined with Centrino laptops that already come with WiFi was almost a 'free' feature, Intel was seeding fertile ground for future chips sales in PC and communications. Firms like the book store group Borders, the coffee chain Starbucks, Marriot Hotels and MacDonald's were building hotspots for public access. International airports, leading hotels and university campuses offered Wi-Fi access.

New mobile phone instruments like the P800 from Sony-Ericsson and the NEC e668 were mobile video phones and personal organisers as were instruments like the Palm VII and the Handspring Visor, which were initially just Personal Digital Assistants (PDAs). Equipment providers were grappling with two issues in the transition to 3G. The first was the need to provide multi mode handsets that would be able to handle existing second generation (2G) networks and would work on 3G services where available - because in its initial years 3G would not provide good coverage. The second issue was that of convergence of the mobile phone instrument with the PDA. Ericsson's P800 and Handspring's Treo are in the vanguard of this movement.

Fixed mobile convergence

Finally, there was also the issue of Mobile Virtual Network Operators (MVNOs). Virgin Mobile was one such operator in the UK. High costs of obtaining the licence and of setting up 3G networks would encourage the incumbent networks to recoup part of their investment through sale of space on the spectrum to MYNQs. Simultaneously, different firms would consider becoming MYNOs as they expanded their business operations. Exhibit 13 lists potential MYNOs in Europe. There was a pessimistir vip", tr~~ ~- -.. C_L

t

The convergence with, and the possible substitution of fixed telephony by mobile services was another issue. If customers could enjoy all the additional utility that mobility offered, combined with prices similar to or lower than fixed services (and with similar reliability), many would stop using the fixed network. A recent survey reported that 20% of business managers already thought of their mobile handset as their primary phone as opposed to a fixed line. At this stage, no mobile network had enough capacity to handle all a nation's voice traffic. However, mobile operators were probably not interested in the total market, but rather in the more lucrative parts, which already comprised the bulk of their services. Relative prices of mobile services as compared to fixed line services remained an issue for European operators as can be seen from Table 3.

1997 1996 1998 0.14 0.17 0.47 0.52 0.56 0.12 0.13 0.39 0.43 2000 0.11 1999 1995 Category 0.17 0.64 Source: Strategis Group: European Operators' Operating

I"

Benchmarks 1999-2003.

Fixed Revenue per minuteCUS$) Mobile Revenue per minute CUS$»

Developing and implementing a marketing plan with a clear positioning strategy was going to be crucial for the operators. Given the present positions of each of the operators, how were these likely to evolve over the next 12-24 months to include the transition to 3G services and the competition with Wi-Fi?

1.

2.. 3.

As one of the operators. how would you analyse the competition to refine and change your own marketing and positioning strategy? What kind of advertising and pricing would you use to beat the competition? Why? What competitive strategy will you adopt to maximise value?

Airtime: Actual time spent talking on the cellular telephone. Analogue: The first technology used for mobile phones. A simple system which uses radio signals to carry voice in the form of a continuous wave. Not available in the UK after 2005. Base station (or cell site): The ground-based aerials, transmitter and receiver equipment used to communicate with mobile phones and the mobile switching centre. Code Division Multiple Access (COMA): A wideband system developed

by California-

based Qualcomm that spreads multiple conversations across a wide segment of the frequency spectrum. Each call is assigned a code that distinguishes it from other calls simultaneously transmitted over the same frequency. It claims to offer superior voice quality and more capacity and coverage than an equivalent GSM system. Cell: The basic geographic unit of a cellular system and the basis for the generic industry term

'cellular'. An area is divided into overlapping small 'cells', each of which is equipped with a low-powered radio transmitter/receiver. The cells can vary in size depending upon terrain and capacity demands. As the user moves between cells, the call is automatically handed over from one cell to another. Circuit Switched Technology: When two people are talking or sending data to one another - that line is fully engaged and cannot be used for anything else. In contrast, in Internet Protocol (lP), two people may be talking to one another and also be simultaneously using the connection for receiving and sending emails, or for downloading data. DCS 1800: A digital network based on 1800 MHz. Also known as Personal Communication Network (PCN) and used in Europe. DCS 1900: A digital network based on 1900 MHz. Also known as Personal Communication Services (PCS)and used in the USA. Digital: The current type of technology widely used, offering clearer call quality, eliminating eavesdropping and allowing a range of innovative features, such as SMS. Enhanced Data Rates for Global Evolution (EDGE): Refers to an intermediate technology between GSM and 3G Universal Mobile Telecommunications

System (UMTS) that offer

higher data throughput rates than GPRSwith transmission speeds upto 384 Kbps. GPRS (General Packet Radio Services): Refers to the intermediate technology using software overlays (2.5 G of 21/2 generation) that will provide packet switched data over mobile phones. This will enable mobile phones to be used simultaneously for voice calls as well as for Internet access. It is 'always on' and provides transmission speeds upto 115 Kbps. Global Standard System for Mobile Communications/Groupe Speciale Mobile (GSM): A digital network based on 900 MHz. It is a standardisation body created in 1982 to specify a digital radio communication system in Europe. High Speed Circuit Switched Data (HSCSD): Is a circuit switched protocol (technology) based on GSM that enables transmission of data at speeds upto 57.6 Kbps by using four radio channels simultaneously. Orange launched its HSCSD service in the autumn of 1999. Nokia is the main provider of PCMCIA ca[ds~fol"-its IdSc.c;:D ,..1;~",±~LL..~~MlJb_."-'~.·

-

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In 1984, AT&T, owner of Bell Labs where cellular technology was first developed in 1947, exited the mobile phone business, believing that the market would never develop enough to be viable. Ten years later AT&T paid $12.6 billion for McCaw Cellular Communications. Today, AT&T is the largest cellular operator in the US. New technologies have had a significant impact on the telecommunications industry and have resulted in the development of mobile telephony as a complement to - and in some areas as a superior alternative to - fixed telecommunications.

Integrated Services Digital Network (ISDN): Provides the digital connection between user network interfaces (i.e., the connection between two network elements). Office of Telecommunications (OFTEL): The UK telecommunications and supervisory body.

industry's regulatory

Personal Communication Network (PCN): A variant of GSM using 1800 MHz. Also known as DCS1800, it has been adopted in Europe, but was initially launched in the UK.

Cellular radio was developed to make more efficient use of the radio spectrum. Whereas the early radio telephone systems used a single high-powered transmitter to reach 40 miles from the base station, cellular divides the coverage zone into smaller, overlapping cells rather like a honeycomb. A radio tower called a cell site or base station containing radio transmitters and receivers serves each cell. These transmitters and receivers communicate with portable handsets located within the cell. The band frequency is sub-divided and non-adjacent cells can use the same frequency band, thus greatly increasing the call-handling capacity of the system. Base stations are connected by fixed microwave or cable links to computerised switching centres, which are in turn connected to other switching centres and networks.

Personal Communication Services (PCS):A variant of GSM using 1900 MHz. Also known as DCS1900, it has been adopted in the USA. Personal Identification Number (PIN): This is a personal number that may be used to prevent access to the SIM by unauthorised users. Public Switched Telephone Network (PSTN): A fixed line telephone network, e.g. BT or AT&T, or Deutsche Telecom or France Telecom network. The network works through 'switches' (usually at a telephone exchange) that directs and manages the telephone traffic.

All cellular calls begin as radio waves. When the user makes a call, those waves are received at the nearest base station. The base station transmits the waves to a mobile switching centre (MSC) which then routes the call instantly to its destination. Because of the nature of radio waves, the clarity of a call (or the ability to maintain a call) may be affected by such factors as

Roaming: The ability to make and receive calls when abroad, using a digital mobile phone. Using a mobile phone abroad will usually depend on the customer passing a credit check. SIM Card: The small card with a microchip inside a mobile phone that holds the customer's service details.

topography, a faulty or unextended antenna, or the weather. Each base station handles calls in a specific geographic area. As the user travels, a call in progress is automatically handed overfrom cell to cell.

Short Message Service (SMS): This is a feature of digital mobile phones, where SMS compatible handsets can send, and also accept and display text messages of upto 160 characters transmitted from a variety of sources.

Cellular telephony began on analog technology. Because digital systems have much greater capacity than analogue systems using comparable bandwidth, the world has largely switched over to digital technology.25 'Time Division Multiple Access' (TDMA) is the transmission technology used by most digital systems; TDMA can be implemented using various standards including Global Standard for Mobile Communications (GSM) and Personal Communications Network (PCN), a variant of GSM. The first digital cellular network based on the Pan-Europ~an GSM standard was launched in 1992 - 11 years after the launch of the first analogue network. GSM has been adopted across Europe and most other parts of the world with two notable exceptions - the US, where analogue systems are still present and the digital system chosen is the US-developed Code Division Multiple Access (CDMA)26,and Japan which has developed its own digital system, Personal Digital Cellular (PDC) system and also has extensive analogue networks. The presence of multiple standards has slowed adoption in the US and has prevented a 'seamless' cellular experience across the world.

Switching Centre: The part of the network that switches, routes and controls call charging and accounting. (Extended) Total Access Communications System (ETACSand TACS):The UK standard for analogue cellular phones. Time Division Multiple Access (TDMA): The frequency is divided into eight timeslots and each timeslot is capable of holding one conversation. A channel is a defined sequence of TDMA timeslots on a set radio frequency to give one-way transmission. A base station transceiver has eight channels. Universal Mobile Telephony System (UMTS): A third generation mobile phone technology that is based on Internet Protocol technology and that will enable packet switched flow of data and voice at rates upto 2 Mbps under ideal conditions.

In the next generation of cellular technology popularly called 3G, W-CDMA is expected to be adopted in almost all markets of the world, including the four most important markets currently - Western Europe, USA, Japan and China. This is expected to facilitate transition to and adoption of 3G technology.

Wireless Access Protocol (WAP): Refers to the intermediate technology using software overlays (2.5 G of 21/2 generation) that will provide packet switched data over mobile phones. This will enable mobile phones to be used Simultaneously for voice calls as well as for

25 Cellular systems logue signals.

Internet access. It provides data access speeds of upto 128 Kbps. In practice, the speeds achieved are closer to 14.4 Kbps.

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c arges pence per message. However, there are a large number of alternative For web-to-mobile personal a freefrom service, whilst complainant networkmessaging operators) Genie to sendoffers messages P-Cs.to~UX.mohiJe_hand.

other without wires and line of sight within limited distances (-20 meters) and i important emerging standard in wireless connectivity between different electr; devices.

. "",.~~~-•."'.,...one--rc::"'""senaing the same message to a ,eTe-ct-e-a'-~-g-ro-u-p-o"'f""m-o7b~ile handsets), the complainant offers a reduced rate service. Some competitors do exist, but Genie is not one of the alternative suppliers; for content provision including mobile alerts, Genie offers a free service, as do a small number of larger players such as Yahoo! The complainant does not offer such a service.

Vodafone: •

competition. OFTEL concluded that even if any cross-subsidy were to be established, it would not be considered unfair under the terms of mm02's license and closed the case. This was a setback for MVNOs like Virgin.

Eurocal/: Enables Vodafone to charge customers a single rate of euro 0/8 per minute w, making or receiving calls on any Vodafone partner network on Benelux, UK, Germe Greece, Italy, Austria, Portugal, Spain and Sweden. Announcement was made in Janu 2001 and it was operational in March 2001.

•

Genie (www.genie.co.uk)wastheglobalmobilelnternetdivisionofBTOpenworld.BT.s mass market Internet business. It delivered content via its web and WAP portals to fixed and mo-

Joint Venture with Cap Gemini: Will enable Vodafone to offer corporate custom, mobile access to corporate intranets and to deliver solutions for vertical indus sectors like banking and transportation. It was announced in November 2000.

•

100 million proportionate customers in January 2002 worldwide - with 12 million in tl UKmm02:

•

GPRS Coverage: First off-the-block, from October 2000.

•

Banking: In July 2000, mm02 in partnership with Intelligent Finance, a division of Halife pic, started offering banking services over mobile phones using WAP. This initiative er abled mm02 to obtain many new customers and to move WAP phones into the market.

•

Tested 3G services in October 2001 through its subsidiary Manx Telecom on the Islt of Man.

•

BTWireless rebranded as mm02 in November 2001 after the demerger of BTWireles~ from BT, but the UK subsidiary continues to trade as BTCellnet.

On August 3, 2000, OFTEL concluded that even if the relevant market definition was extremely narrow, it did not appear the Genie's free messaging service had an adverse effect on

bile devices around the world, and aspires to be the world's leading mobile Internet portal. It delivered mobile Internet access solutions to network operators. The Genie platform has been developed with Microsoft, Phone.com and LookSmart as core technology partners. Content partners include Yahoo, 365 Corporation, Lastminute.com, AOL. Freeserve, Excite and Guardian Unlimited. It launched the UK's first free access Mobile Internet Service Provider - Genie Internet - and then, with mm02, the Mobile Internet Phone, the first working, commercial WAP (Wireless Application Protocol) pre-pay service in the UK. Genie then developed a mass-market global portal, applications and solutions in collaboration with national operator partners - SmarTone (Hong Kong), Telfort (The Netherlands), Viag Interkom (Germany) and StarHub (Singapore). As at April 2001, it had more than 4 million subscribers. With the de-merger of mm02, it was folded into the 02 operations.

Appendix 5: Some Recent Highlights from Each of the four UK Networks

•

Peak/Off-peak: In October 2000, Orange started giving its customers the option of defining a slot of four hours of their choice as their own off-peak hours of the day. Orange 'Just Talk' customers who decided to choose their own off-peak hours received fixed off-peak between 11 p.m.-7 a.m., plus an additional four hours from one of the following time bands: (1) Morning: 7 a.m. until 11 a.m., (2) Lunchtime: 11 a.m. until 3 p,m. and (3) Afternoon: 3 p.m. until 7 p.m. It followed Vodafone with its own 'rationalised' international roaming call pricing from February 1, 2001.

•

HSCSD: Based on a circuit-switched

the user has a dedicated

offered GPRS coverage across the L

Appendix 6: How Applicable is the Japanese Experience with i-mode in the UK?

Orange:

technology,

mm02

circuit(s)

assigned to the data call being made. It allows the user to have a predictable data _ rate. HSCSD employs a new channel coding scheme that increases the channel bit rate from the existing 9.6 Kbps /14.4 Kbps to 28.8 Kbps. Other UK network operators do not at present provide HSCSD - nor do they plan to. In December 2001, Or ange quietly launched GPRSand hopes to start 3G services in late 2002.

T-Mobile: •

Pricing: First to offer contract calling rates on prepaid phones (10 pence/2 pence per I minute).

•

Connectivity to Devices: First to successfully demonstrate connectivity and interworking between a Bluetooth-enabled Palm Pilot and a phone on the Onp. ? nn~ network. Bluetooth enables diff,::>ron+ ~I- -'.-

The phenomenal success of i-mode, which had taken Japan by storm since its launch in February 1999 was driven by its use for downloading pictures, sending text messages and emails, and obtaining information about tickets, programmes and bargains. NTT DoCoMo, the largest Japanese mobile phone operator, had more than 30 million users in January 2002. The use of i-mode is at least partly the result of contexts specific to Japan. For example, there are as many mobile handsets in a Japanese commuter train as in any other rich economy. Yet in Japan, the telephones are silent. Instead of speaking into sleek silver gadgets, users were busy sending e-mails or downloading pictures of their favourite pop stars. Unlike the current billing system in the UK, where a customer was billed by time spent on the phone or online, the i-mode application is 'always on' and customers are billed by the amount of data downloaded. On the other hand, Europe's WAP and Internet phones had failed to make an impact. The more European telecom shares were hit by skepticism about WAP and worries about the debt taken on to pay for new investment, the more European operators turned to Japan for inspiration and hope. Hence the importance of understanding the reasons for i-mode's success - and the worrying possibility that Western excitement about wireless Internet services may be based on several i-mode myths. I-mode did have technical advantages. It chose to use a v;:,ri:::>n+ ~+ Wo' of thp. Int,::>rno+ r~+h~ ••. 1.-.__

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.,

'i'npetitor to scnoors to its J-Sky Internet service even though it used circuit-switched technology. DoCoMo's rates were very affordable. Services such as the popular dial tone downloading service orthe virtual dating game costY300 (£1.90) a month, the same as a weekly magazine. There were 1,200 i-mode sites that had been officially recognised by DoCoMo and 30,000 unauthorised or voluntary sites. DoCoMo was able to encourage content providers to set up sites for i-mode by making it easy and relatively low risk for them to do so. Its centralised billing settlement service freed the content providers from having to bill thousands of different customers for only Y300 or so a monthY DoCoMo pocketed 9% ofthe payments that customers made, with the rest going to the content providers.

27 Financial

Times, December

6, 2000,

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16, "When_SUcce.<.<_AnnQN~ _J

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