Thursday, April 24, 2003

3G arrives, or does it?

In 2000, probably the key moment in telco and tech boom idiocy occurred when five telecommunications companies paid a total of 22.48 billion pounds for so called "3G licences" - licences to operate the next generation of mobile phones in Britain. This new technology was supposed to provide much higher data speeds over mobile phones than did traditional 2G services, thus enabling things like video phones, photo messaging, and a myriad of other applications that hadn't been invented yet. Everybody got caught up in the hype, and astounding sums of money were paid.

Since then, we have had the bursting of the bubble, an acknowledgement that nobody much could come up with business models to make 3G financially viable, the ackowledgement that the original schedules (many required by law) for the setting up of 3G networks were unrealistic because the technology (UMTS or W-CDMA) mandated for use in Europe didn't work, the Japanese mobile operator NTT DoCoMo (which was first to launch a service using W-CDMA) had to recall its phones twice, and the competing American technology CDMA2000 did work and got a head start in Japan, Korea, and the US, as well as one or two other places.

Of the five licences, four were issued to the existing mobile phone operators in the UK: Vodafone, BT Cellnet (now O2), One2One (Now T-Mobile) and Orange. These companies concluded that they were going to need 3G licences to compete with each other, and if they didn't get one each they were doomed. A variety of other companies also entered the auction. From a game theoretic point of view, the auction was extremely well designed, as it forced the incumbent operators to pay the same price that the new entrants paid, and there was a lot of competition to be the new entrant.

In any event, the fifth licence was awarded to a consortium led by the Hutchison Whampoa conglomerate of Hong Kong.

Now the history of Hutchison in the British mobile phone business is interesting. In the 1980s, Britain had two analogue mobile phone operators. These were BT Cellnet, the mobile subsidiary of the former wireline monopoly, and Vodafone, a new company that was founded to operate mobile phones. BT did not run its business especially well, so Vodafone took the lead in the market. (In most markets, the traditional phone company took the lead initially and in fact still has the lead, due to already having market presence and customer relationships. In the early 1990s, the British market upgraded to digital GSM. Each of the two analogue operators was given a digital licence, and two new digital licences were issued. One was to One2One, which was then a subsidiary of Cable and Wireless, which in the form Mercury Communications was at that time the principal competitor to BT in wireline busineses. The other was to Hutchison, which set up its network to trade under the name Orange.

One2One achieved the fate of third and fourth operators in most markets. It lagged in network coverage, and tended to only pick up low value customers. Orange on the other hand was marketed far better than any of the other networks. It launched later than One2One, but had national coverage when it did so. It promoted itself as a premium service, and offered good customer service.

And this worked. In terms of premium customers and a reputation for service, Orange didn't take too long to outpace Cellnet. Eventually it caught up with Cellnet in absolute customer numbers, pushing Cellnet into third place. (Eventually One2One was also able to do this, pushing Cellnet (later O2) into fourth place, creating a situation where despite all its advantages, the (now demerged) mobile subsidiary of the former telco monopoly is staggeringly in fourth place in the market. Cellnet/O2 is considered a classic case of just mindblowingly bad management). Orange was extremely valuable, and Hutchison eventually sold it to the German operator Mannesman $15 billion dollars. Essentially, in 1992 nobody realised how valuable second generation mobile licences were going to be. This, combined with the fact that Orange was managed and marketed extremely well meant that Hutchison made a huge profit. (Mannesman was later acquired by Vodafone. As Vodafone was not allowed to own two British mobile networks, it was compelled to sell Orange, and Orange was then ultimately sold to France Telecom. The Orange brand were perceived as such a good brand, that France Telcom then rebranded all the other mobile networks that it owned with the "Orange" name, including the one in France.

However, at the time of the auction of 3G licences in 2000, Hutchison decided that it could do the same thing again for 3G services. However, Hutchison decided to do this in a much larger number of countries than before. As well as buying a licence in the UK, Hutchison also bought licences in Australia, Austria, Denmark, Hong Kong, Ireland, Israel, Italy and Sweden. Their strategy is to roll out new networks in all these countries. They are doing so under the brand name "3", and this roll out has just started. They are selling advanced multimedia mobile phones, providing voice calls, picture messaging, internet services, video phone calls, and the like.

Because 3 are a new entrant, if they want any customers at all, they have no choice but to roll out their 3G networks. This is contrary to what most of the other operators are doing at this point. Most of the other operators are stretching their 2G GSM networks as far as they can go in order to provide picture messaging and similar services, and are delaying the 3G roll out because of the high capital costs of building it. They can get most of the revenues that they think they might be able to get at the moment from a 3G network from GSM data services running over GPRS, and this can hopefully help them pay for the 3G licences which they now regret buying. 3 on the other hand either roll out the 3G network or they have no business. Which is why 3 are the first operator to launch a UMTS 3G network in the UK. They have been advertising the network quite hard in the last couple of months, with the emphasis being particularly on their phones' ability to do video phone calls. This makes a certain amount of sense, as theirs is the only network that can do this.

In any event, I yesterday walked into a branch of Phones4U in Tottenham Court Road. Phones4U sell phones operating on all mobile networks, and I have received good customer service from them in the past. (I purchased my last new phone from them, and the salesman did a particularly good job of selling me a deal that was right for me rather than merely one that was expensive). The shop contained a display of a number of phones running on the new 3 network, and publicity material about what they could do. A salesman walked up to me and started a conversation.

"Tempting, isn't it?"
"No. Well, I think I will wait six months to see how it goes".
"Okay. But they are good"
"I think I will wait a little while to see if they work".
"Oh, they definitely work. Do you want a demonstration?"

The salesman then went off and got an actual phone, as distinct from the dummies that were on display. He fiddled with it for a while. He then apologies, and said that they were new and the problem was with him and not the phone. He went off and got another salesman. The other salesman fiddled with the phone a bit, before telling me that they could not demonstrate the video phone calls to me right now because the network was congested. However, if I would like to come back in 15 minutes, it might be working then.

I didn't come back in 15 minutes. I might come back in a couple of days, though. As for what happened, there are several interpretations. Firstly, the "network congestion" explanation was ludicrous. It is a brand new network, and there is lots of spectrum. Part of the point of 3G is that it is supposed to be less susceptible to congestion than 2G. Also, 3 would be lucky if their customer numbers are in three figures at this point, so for the network to be congested, it would have to be so inefficient that "congested" in fact meant "The technology doesn't work". As for other explanations, simplest is simply that the salesmen were not very familiar with their new product, and didn't really know how to make it work. This would fit perfectly with telling me to come back in 15 minutes. The salesman would have then spend the 15 minutes trying to figure it out. A second possibility could be that network coverage is poor, and the phone couldn't connect to a 3G network. UMTS phones are designed to connect to a 2G network if they cannot find a 3G network, so it might be that the phone was working for simple but not difficult operations for this reason. This would not necessarily indicate anything wrong with the technology, but it would mean that it is fairly useless for now. (If you look at this coverage map this is illustrated but not explained. The yellow bit, with "voice and pictures" is a GSM network being roamed onto, and which belongs to someone else. The bit labelled "video" is the genuine 3G network).

A final explanation is that the technology genuinely still does not work, and that the unending teething problems of UMTS are still ongoing. If so, this would be bad for Hutchison, and bad for anyone who hopes to ever generate a return on the enormous amount of money spent on 3G licences. If this is so, it could mean that Hutchison is also doing the other operators a favour. By being compelled to launch first, it can iron all the bugs out on their behalf.

In any event, my net response was to not be very impressed. With licences and networks and stuff, something like 30 billion pounds has been spent on 3G in the UK since 2000. And if this is all we have to show for it, it isn't very impressive.

No comments:

Blog Archive