For those in the US who oppose early-termination fees, I have two words: iPhone 2.0.

The retail price of the 3G version of the iPhone will start at $199 thanks to a subsidy of several hundred dollars by AT&T, which was not allowed by Apple to subsidize the first version of the device. The reason for the new subsidy: AT&T and Apple see this as a necessity to drive mass-market adoption of the device because US mobile customers have shown repeatedly that they would prefer to pay less for a device even if that means signing up for a two-year postpay contract with a costly fee for early cancellation.

Despite the obvious preference shown by mobile phone buyers for subsidized pricing, one aspect of the subsidization practice, early-termination fees, has repeatedly come under fire in class-action lawsuits and public laments by self-described consumer-advocacy groups. The FCC has received more than 3,700 complaints about the fees during the past two years. For that reason, the commission is now pondering taking action to regulate ETFs on a federal level.

During an FCC-sponsored public meeting on June 12, consumers, public-policy wonks, mobile operators and others were allowed to speak their peace regarding the application of ETFs to customers who break service contracts. ETFs go hand in hand with US mobile operators’ subsidization of handsets as an inducement to get customers to sign long-term contracts. Customers who break those contracts are charged ETFs of about $200, more or less,, though the two largest operators, AT&T Mobility and Verizon Wireless, now prorate their ETFs over the length of contract.

Alan Plutzik, attorney with Bransom, Plutzik, Mahler & Birkhaeuser, and counsel of record for the Wireless Consumers Alliance, testified that in a class-action lawsuit against Sprint Nextel, the numbers revealed that some 2 million Californian mobile customers have been charged ETFs, meaning by extrapolation that 40-50 million people nationwide have been charged ETFs.

Consumer advocate Pamela Gilbert, an attorney with Partner, Cuneo Gilbert & LaDuca, contended that ETFs “force consumers to choose between staying with a carrier that doesn’t meet their needs” or paying a penalty to end their existing contract in order to get service from another network that can meet their needs.

I agree that there were issues in the past when people signed up for mobile service only to find that it would not work in their neighborhood. I suffered that fate when I agreed to move from AT&T Wireless’ TDMA network to its GSM network, which was so full of coverage gaps and traffic issues that I hardly made a mobile phone call for a year (and I eventually switched operators because of the problems). But with major operators offering 30-day trial periods for new users, people who sign up for mobile service in the US these days should be able to get a pretty good idea of whether their mobile will work where and when they need it to before they commit to a long-term deal.

“I sincerely feel actually that we do not need early-termination fee contracts. As a country, these are not as common as the normal way of doing business. Normally you purchase a product and then you pay for service,” testified Anne Boyle, chair of the Nebraska Public Service Commission.

“What?” I said out loud when I heard Ms. Boyle’s comment (fortunately, I was watching the proceedings from my home via the Internet). Installment contracts and early-termination fee arrangements are rampant in US consumer-goods marketing. I have satellite TV service from DirecTV, and it has an early-termination fee attached to it. I think I’d have to cough up $200 if I were to cancel the service before I’ve used it for two years. Similarly, the health club contract that I signed up for a couple of years ago and, regrettably, never actually leveraged by working out, had an ETF attached to it. Even though I only worked out once in 12 months, I knew I’d be nailed with an ETF if I canceled the contract before a year was up (and I kept wishfully thinking that I’d actually make it to the gym sometime during those 365 days).

The Competitive Enterprise Institute, a non-partisan public policy group that backs free enterprise, has come up with more examples of ETF use in other industries, including apartment rentals and automobile leases. “In all of those cases, we expect consumers to figure out for themselves what is and what is not part of the contract they’re signing. As long as any potential fees are disclosed at the time of the agreement, they’re simply part of the deal,” said CEI in a press release.

So, it’s pretty clear that ETFs are not unique to the mobile industry. But that’s not to say that some of the industry’s related practices haven’t been downright sneaky. I had been off contract with my current mobile provider for a couple of years, when, in May 2007 I decided to alter my rate plan. I had the same old phone and same old phone number, I just wanted a different airtime package. Imagine my surprise when I discovered that simply changing the service plan resulted in me suddenly being on a new two-year contract. Had the salesperson at the store explained this to me? No. Not a peep was uttered. I didn’t bother to complain because I hadn’t planned on switching networks anyway, and because I had been on the network for so long, I qualified for a substantial subsidy on a new handset. So, I subsequently went ahead and bought a new subsidized handset since I’d already unknowingly locked myself into a two-year contract anyway.

However, operators are now starting to let customers change their rate plans without causing their contract terms to be extended. So, again, that problem appears to be resolved.

Speaking at the FCC meeting, Christopher Guttman-McCabe, vice president of Regulatory Affairs for mobile industry trade group CTIA, contended that removing ETFs from industry practice would also remove options for lower priced service and devices. In the absence of subsidies and related ETFs, “customers’ out-of-pocket costs are higher,” he said.

Similarly, CEI contends that long-term mobile contracts with cancellation fees “help more people afford a higher quality range of products.”

Yet Chris Murray, senior counsel, Consumers Union, argued that subsidies and ETFs don’t’ save consumer’s money. Instead, he said, they “rob consumers of the benefits” that an open marketplace would bring.

According to Murray, the average handset subsidy is only $14.33, but ETFs are more than 12 times that subsidy. Further, Murray termed the ETFs “junk penalties,” because operators bury expenses such as costs-of-acquisition, marketing costs and more in them, meaning the fees are not calculated based on the actual cost recovery related to a customer’s breach of contract.

On that note, I would argue that however ETFs are calculated or assessed, from a customer’s perspective, they’re usually cheaper than the full value of a service contract.

If ETFs are eliminated, then mobile operators in the US will probably reduce handset subsidization but continue to sign postpay customers to contracts. However, when a customer breaks such a contract, rather than making that person pay a $200 ETF, the operator would have to go after him or her for the value of the full remaining term of the contract. Let’s say Jane Doe decides to end her $50-per-month mobile service one year before her contract is up. That’s 12 times $50, or $600, that she owes the operator for the term of service. Hmmm…maybe a $200 ETF–or better yet, an even smaller prorated ETF–doesn’t look so bad after all.

Maybe it’s just me, but as a consumer, I’d rather pay $50 for a $400 handset and risk being charged a $200 ETF if I break my service contract than pay $400 for the same phone and then be hit with an even larger bill for the full term of my contract if I cancel it early.

 
 
 
 
With mobile TV services in the flagship market of South Korea floundering and with few signs that operators anywhere else have found a successful formula for launching such services, most operator and vendor delegates at the recent CommunicAsia Summit in Singapore struggled to find enthusiasm for the fledgling industry.

The key question is which business model will work best for commercial mobile TV services, and the industry does not seem anywhere close to coalescing around an agreed model.

Some operators and vendors say that mobile TV should be subscription-based, to offer a reliable revenue stream; others say an ad-supported model is the most viable option; and still others argue that a combined pay/advertising approach is the way forward.

Figures from South Korea seem to suggest that both pay-based and ad-supported models have critical weaknesses, which would also apply in other markets in the region. A lot more experimentation and creativity from operators might be required to find the right model.

Those promoting the idea of a pay-based service say that only by charging for content can a business model work. They say operators must team up with content firms to acquire premium content - most particularly sports - that people will be willing to pay a monthly fee to view or even pay for on a per-view basis.

But this line of thinking seems flawed, given that there is a limited amount of blue-chip content for which people will be prepared to pay, most notably live sports events - such as English Premier League soccer games - or highlights of them.

The problem is, of course, that content-rights holders have become adept at exacting a premium price for key sports rights, meaning that mobile TV operators would have to recoup their heavy capital investment by charging high subscription fees.

This is a problem, since the high churn rate experienced by TU Media in South Korea seems to suggest that mobile TV subscribers are extremely price-sensitive.

TU Media subscribers pay just KRW13,000 ($12.60) a month for the service but have been leaving in droves after their initial one-year contracts finish, forcing the firm to offer significantly reduced subscription rates to keep subscribers from deserting the service.

TU Media’s experience suggests that mobile TV subscribers will be willing to pay only so much for services and that although blue-chip sports content has a crucial role to play, operators must find a way to acquire the content without paying excessive prices.

On the advertising side of the debate, many delegates at CommunicAsia argued that an ad-based strategy would work best for mobile TV platforms but that operators would have to be extremely creative in their approach.

Delegates uniformly agreed that the idea of transporting the traditional TV-advertising model to mobile was deeply flawed and that mobile TV operators would not be able to sell regular 30-second ad spots on mobile TV services, given the different nature of the platform.

One senior mobile operator executive said that he was skeptical of the ad-supported model, because mobile TV users tend to watch only 10-15 minutes at a time and it would be hard for operators to interrupt that short window with advertising without disrupting the user’s experience.

But other delegates, including those from both operators and vendors, were more hopeful that a successful advertising model could be built, though the consensus was that ads would have to be shortened to suit the mobile TV viewing experience and that they would have to be carefully targeted at specific user groups.

These are both valid points, but the elephant in the room is the fact that many mainstream advertisers are skeptical of mobile TV as an advertising model - and some might not be aware of its existence at all - meaning that mobile TV operators will need to work closely with media buyers and ad agencies to craft their message.

This might mean offering heavy price cuts in the short term to persuade advertisers to seize the unique opportunity to reach users that mobile TV advertising offers and then trying to turn these advertisers into long-term customers.

There is no magic bullet that will provide a successful business model, but there seems to be a reasonable possibility that an attractive model can be built if operators can match the largely young and technology-friendly subscribers viewing mobile TV on their handsets with advertisers desperate to reach such a market.

Intriguingly, conference delegates also discussed the possibility that broadcast-type mobile TV services might never fully take off in the region and that Multimedia Broadcast Multicast Service video streaming over high-speed HSPA and future LTE networks would dominate the market.

The debate has strong proponents on both sides. Many vendors back an MBMS approach, saying that experience shows that broadcast-style services are not what users are demanding and that the more-narrowly targeted VOD-style content being offered on HSPA networks is already proving hugely popular.

The pro-MBMS argument also runs that with HSPA/LTE networks already in place and offering voice, data and video services, why go to the expense of deploying a terrestrial or satellite-based mobile TV network, especially with the expense involved in creating high-quality in-building reception?

Although this is a persuasive argument, it has shortfalls, most notably the fact that even LTE networks will still be point-to-point networks and will be unequipped to operate as point-to-multipoint services, which a full broadcast mobile TV service would require.

The broadcast-mobile-TV lobby argues strongly that the core strengths of broadcast-based networks cannot be replicated by even high-speed mobile networks, which would not be able to support the huge demand that’s sure to arise for broadcasts of live sports and important news events.

In reality, the MBMS-vs.-broadcast-mobile-TV debate is spurious, given that both technologies are going to be on the market, and it will be users who determine which is the more successful.

At this early stage, it looks likely that subscribers and operators will use high-speed, quality video streaming for VOD-based “snacking” on content and that full broadcast mobile TV will be used for some live events, for which only a broadcast-style service can supply the quality of service required.

 
 
 
 
PCCW Chairman Richard Li must have been out of the business pages for at least six months, so it was only a matter of time before he came back to dominate the headlines once again.

Already well known in the region for being the son of billionaire Li Ka-shing, head of the Hutchison Whampoa investment group, Li has become one of the highest-profile investors in the region since his Pacific Century CyberWorks (PCCW) outfit paid $28 billion to Cable & Wireless to assume control of Hong Kong Telecom in 2000.

After a period of relative quiet, Li is back in the news, with a grand plan to consolidate the media and telecoms assets of PCCW into one firm, HKT Group Holdings, of which he would sell 45 per cent to new investors and possibly move toward an IPO in a couple of years.

PCCW is inviting proposals from investors interested in the 45 per cent stake, with local reports saying the deal has already drawn interest from international players, including several mainland companies, though private-equity players are reportedly shying away from the deal because it does not given them a controlling stake.

The proposed deal has already created a storm of publicity, given that Li’s previous attempt to sell a stake in PCCW two years ago created a furor and ended in abject failure.

In 2006, Li tried to sell PCCW to private-equity firms TPG-Newbridge and Macquarie Bank, only to have the deal blocked by China Netcom, which owns 20 per cent of PCCW. Netcom nixed the deal after its mainland-government backers refused to countenance the sale of PCCW to foreign owners, and Netcom was upset that Li had invited bids for PCCW without obtaining its consent.

The bad blood has almost certainly cost Li the chance to get a slice of any media or telecoms opportunities that emerge in the mainland any time soon, though PCCW says the latest deal has received the approval of Netcom’s directors.

The misery of the TPG-Newbridge/Macquarie Bank deal’s failure was compounded by the rejection by shareholders of an alternative deal, in which Li would have sold his 23 per cent stake in PCCW to long-time family associate Francis Leung for $1.17 billion.

The new deal on the table does not involve the dilution of Li’s stake in PCCW, and he has already told local press that he has “no intention” of reducing his stake in the firm.

The thinking behind the newly proposed deal seems to be that selling the stake in HKT would “unlock the value” of the firm’s assets and generate a cash pile with which PCCW could compete for any telecoms assets that became available in the international market, most notably in Asia Pacific and the Middle East.

Li has already said that the global credit crunch has reduced the prices being asked for global telecoms assets, making M&A activity more feasible for the firm.

But despite Li’s optimism, it looks like PCCW might be trying to hunt big game armed with only a pistol if it tries to take on the big boys in the cutthroat international M&A market, given that most analysts say that the 45 per cent stake in HKT would raise only about $3.7 billion.

Considering that Indian operator Reliance is having to stump up about $45 billion for South African firm MTN Group, PCCW will have to shop in the cut-price stores, not the high-class boutiques, if it wants to play the M&A game.

To be fair, PCCW does bring a lot more to the M&A table than some of the pure private-equity investors, whose cold, hard cash has limited appeal to some regional telcos on the block, which crave the expertise and brand power that an alliance with Vodafone or Hutchison could bring.

PCCW has one of the best quadruple-play offerings on the planet, with 2.6 million fixed-line telephony subs, 1.23 million broadband subs, 1.07 million mobile subs and 882,000 customers signed up to its world-class IPTV service.

The firm has built a magnificent network platform and is expert at getting the most out of converging communications networks - traits that other operators around the region would be eager to get their hands on.

However, although PCCW does have a great story to tell, it does not bring to the table the kind of market scale that other telcos, such as Vodafone, Hutchison and SingTel, can. That is where PCCW’s lack of focus on developing any kind of serious regional M&A strategy in the years just after the 2000 acquisition of HKT has really come to haunt the company.

The $28 billion megainvestment in HKT, followed by the dotcom crash and 90 per cent drop in PCCW’s share price, took the financial wind out of the company and rendered it a mere spectator as regional rivals SingTel, Telekom Malaysia and Indian operator Bharti Airtel were busy getting in on the ground floor of the regional mobile market.

PCCW has created a truly impressive product in its home country, but the limited Hong Kong market can never give the firm the kind of growth it needs to be a serious player, especially since the golden doors to mainland China treasures have remained firmly closed.

As a result, PCCW is going to have to be extremely creative if it wants to be a serious M&A player, and it might have to team up with a bigger force in the market if it wants to share some of the few spoils that are left globally.

 
 
 
 
At a recent industry event, a number of executives trotted out the latest variation on that old maxim of the telecoms industry: “Customers don’t really care about technical details; they just care about what technology can do.” In this instance, it was applied to broadband speeds: “Customers don’t really care that our network can’t deliver 8Mbps speeds, they just care that it allows them to access YouTube, Facebook, etc.”

Unfortunately, history has shown time and again that customers really do care about the technical details, particularly when they have been mis-sold. Anyone remember the satisfaction of surfing the BT Cellnet? Were you pleasantly surprised by the first generation of 3G phones?

Yet, several years on, few operators can resist overhyping their services. As outrage over “up to 8Mbps” DSL reached its peak in the UK, several mobile operators began marketing mobile broadband services promising speeds of “up to 3.6Mbps”. Vodafone even marketed a service offering “up to 7.2Mbps”, until it was forced by the Advertising Standards Authority to drop the claim after rival operator 3 complained that the actual download speed experienced by customers was 6.6Mbps.

Even so, it seems unlikely that many customers will even be able to experience that speed. I’ve been trialling an “up to 3.6Mbps” mobile broadband service from 3 for some weeks now and have never seen speeds pass 1.4Mbps. Most of the time they linger around 600Kbps, occasionally dropping down to dial-up rates.

On one level, it is understandable that operators have a history of being slightly vague about the technical details. Long before their products reach the market, vendors are busy hyping the capabilities of the technologies the services will rely on. Perhaps after years of disappointment, the operators cannot bear to print what their services can actually deliver on their marketing material.

This is a shame, because focusing on the technical details is one area where operators can truly excel. After years of failed attempts to become content players, fixed and mobile operators should realise that their true calling is to provide quality connectivity.

That is not to say that DSL operators should radically redesign their networks or that mobile operators should build new cell sites on every corner in order to deliver the headline speeds they promised in the first place. Rather, they should be transparent and manage consumers’ expectations, because, frankly, they have set the bar far too high.

Some positive steps have already been made in this direction. I know, for example, what speeds the 3 mobile broadband service I have been trialling has delivered because it features a software client that logs them for you. The client also keeps track of how much data has been transferred over the connection, which helps users to avoid exceeding their monthly download caps.

On the fixed-line side of the market, UK ISP PlusNet enables subscribers to access an even more detailed breakdown of their usage via an online tool. The BT-owned ISP also offers all comers an insight into traffic on its network and how it is managed on its customer-support pages.

What’s more, PlusNet provides a glimpse into how more mainstream ISPs might use the concept of quality connectivity to increase ARPU and reduce churn. The ISP markets a quality-assured service aimed at online gamers, which, at £19.99 (US$39), costs twice as much as its entry-level broadband package. It is not fanciful to imagine consumers may be willing to pay more for services that bring the same level of quality assurance to online video, particularly as the resolution and frame rate of services grow.

Regardless of the future opportunities, UK ISPs have a number of pressing reasons to start thinking about how to offer quality connectivity.

First, most have signed up to a code of conduct to inform customers of the true broadband speeds they are likely to get. Second, a wide variety of groups, from hobbyists to consumer media to Ofcom, are performing their own research on speeds, using a variety of means.

Third, even BT’s own lab tests seem to suggest that services on their next-generation ADSL2+ network will disappoint, with only half of homes covered able to access the 8Mbps speeds promised by the first generation. Given that the unbundled networks of BT’s rivals use the same copper infrastructure, its seems likely we will see similarly disappointing rates from their services.

ISPs should use this period of transition to think carefully about how they can set more realistic expectations about headline speeds, while working out ways to go above and beyond the letter of Ofcom’s code of conduct. From now on, their motto should be: “Customers really do care about the technical details, because it lets them know what they can do.”

A meeting of minds between the Middle East’s media and telecoms industries is still some way off, it emerged at the Arab Advisors Group’s Media and Telecoms Convergence conference in Jordan’s capital, Amman, last week.

Some operators have major doubts about the prospects for delivering media content over telecoms networks in the region. “Content seems very exciting, but how do you make money out of it?” said Peter Kaliaropoulos, CEO of Batelco. “We need to work that bit out. The question should be how to create a market for content that currently doesn’t exist in the Middle East.”

For telcos in the region, the amount of revenue that will come from content is likely to be small, and the scarcity of revenues will make it difficult to justify the expense of content development and acquisition to investors, according to Kaliaropoulos.

Some other operators see the convergence between media and telecoms as inevitable. “The trend is for everything to move to mobile: the Internet, TV,” said Mickael Ghossein, CEO of Orange Jordan.

Change is under way regardless, according to Du CEO Osman Sultan. “There has been a shift from the promise of ‘mobility for everyone’ to a promise of ‘everything everywhere,’” he said. “We are saying to customers, ‘You can carry your whole life [on your mobile device].’”

Even the skeptics seem to acknowledge the risks of staying on the sidelines: Despite its doubts about convergence, Batelco plans to set up a division to acquire or develop content for its various operating businesses.

But the convergence of media and telecoms brings together two completely different sets of players, each of which is moving from a position of “unshared certainties” to one of “shared uncertainties,” Sultan said.

If telcos are to offer content, they need the expertise of the media companies, according to Sultan. “We don’t know anything about content,” he said. “Those people [media companies] have spent 100 years learning how to deal with artists and singers.”

But, Sultan said, it is evident that people will not watch full movies and soccer matches on a mobile screen, because it is too small. Simplicity is vital too, he said, because 85 per cent of people who have tried mobile TV stopped after the first attempt because it was too complicated.

Sam Barnet, COO of MBC, the largest broadcaster in the Middle East, with 82 million viewers a day, made similar points. People are generally put off by difficult technology, so telcos need to make it easy for users, he said. A DVB-H system the user can turn on and watch immediately might be better than a 3G system that takes time to load.

In addition, the mobile platform requires different types of content compared with conventional TV. “Delivering the same TV content that you watch on a TV set probably isn’t the way to do it,” Barnet said. So MBC has asked Al Arabiya to make five-minute news programs for mobile, while MBC itself is creating five-minute versions of its popular 30-minute TV comedy show Tash Ma Tash. MBC also recently bought a Riyadh-based company that produces content specifically for the web and mobile.

Telcos developing mobile TV offerings should bear in mind the fact that Middle East audiences are reluctant to pay for TV. Despite the proliferation of satellite channels, the region has only three pay-to-view broadcasters - Showtime, ART and Orbit - and they account for only a small part of the overall TV market. “The Middle East broadcast market is predominantly free-to-air,” Barnet said. “Pay-to-view is very small. So telcos are going to find it very difficult to charge for TV services.” And the TV advertising market in the Middle East is also small, so if telcos are hoping for a share of the advertising market, they might be disappointed.

Also, Middle Easterners typically do not commute to work via public transportation to the extent that their counterparts in Europe and East Asia do, which removes one key opportunity for engaging with mobile content.

Telcos will find it difficult to go it alone in TV, according to Barnet. “Should telcos create their own TV brands and bring them to market?” he said. “I don’t think they should.” Telcos that have tried to do so in other parts of the world have struggled, he said.

But there might be scope for MBC to extend its brand into the telcoms sector. Asked whether MBC might launch an MVNO, Barnet said: “MBC has strong brands that are suitable to those of large cellcos. That’s all I’m saying.”

 
 
 
 
The meaning of “open” is in the eye of the beholder. Clearly the mobile communications industry is opening up to new ideas, business models, device concepts and the like, but is it becoming truly open? With so many competing commercial interests, not to mention legal and regulatory issues, efforts to really change the business face numerous hurdles.

At Qualcomm’s BREW 2008 conference last month in San Diego, Qualcomm announced efforts to further open its highly successful BREW mobile platform. Openness appeared to be executives’ mantra as they discussed the integration of Adobe Flash into the BREW Mobile Platform and the introductions of Plaza - Qualcomm’s new platform-agnostic widget framework, based on open standards that use the BREW service-delivery ecosystem - and the year-old BrandXtend platform for off-deck content. “Opening up BREW helps us and you in the delivery of new services,” Andrew Gilbert, executive vice president and president of Qualcomm Internet Services, MediaFLO Technologies and Qualcomm Europe, told BREW developers.

But amid this spirit of openness were murmurs of discontent regarding the high level of scrutiny applied by Qualcomm to the demonstration devices, speaker presentations and marketing materials at BREW 2008. Qualcomm reportedly told BREW participants that the company had to be extra careful, because of the cease-and-desist order imposed by the US International Trade Commission on the marketing of devices that include Qualcomm chipsets deemed to infringe a Broadcom patent.

But some exhibitors told me that some handsets that had recently been shipped to the US and were being sold there - meaning the devices had ostensibly been allowed into the US because they did not conflict with any legal rulings - were not allowed to be used in demonstrations. They also said that every speaker’s presentation had to be approved, and sometimes edited, by Qualcomm before the event. Qualcomm even insisted on inspecting, and potentially rejecting, every piece of marketing material destined for booths on the show floor, the exhibitors said.

Such actions make one question Qualcomm’s interpretation of the word “open” as it relates to the free flow of ideas, particularly when exhibitors and speakers were whispering about the “Qualcomm police” and “censorship that was truly stunning.”

Qualcomm apparently felt that it had to make these moves to protect its interests, which is something every company in a free-market society must do to survive and compete. And Qualcomm’s not the only company that’s touting an open approach but leaving some to wonder just what the term is supposed to mean.

Take Google. Its Linux-based Android operating system and the company’s backing of the Open Handset Alliance to help push Android and its own vision of mobile industry openness have been part of a full-scale campaign to turn Google into the poster child for all things open, including open-source platforms and open access.

But is Google really interested in altruistically opening the industry to all, or is it merely staking out its own beachhead?

Arun Sarin, former chairman of Vodafone, has said that the Android OS is “open for Google” only. He has also expressed concerns regarding plans Google might have for the user data that it could amass via Android-powered handsets.

At the BREW show, an executive with a white-label-search-engine company told me that Sarin has been trying to warn the industry after learning from his mistake in choosing Google as the search engine for Vodafone Live users with 3G handsets. When the deal was announced in February 2006, Vodafone basically gave away its brand and valuable handset-screen real estate to the largest Internet search engine, a mistake guaranteed to haunt Vodafone’s branding efforts for years to come and help Google continue to build a mobile user base that it can profit from.

And Google is still signing favored-partner deals with mobile operators, which is hardly an open approach to business. For a US$500 million investment, Google earned the opportunity to become the official search provider and a preferred provider of other apps for the new Clearwire - the WiMAX joint venture of Sprint Nextel and Clearwire - which will also support Android in its retail voice and data products. Google has also been named the default provider of web- and local-search services for Sprint’s CDMA network.

Obviously, most companies want an “open” environment that suits their needs but not necessarily other firms’. In addition, there are numerous challenges - technical, legal and political - in creating a fully open mobile communications environment. Many are talking the talk, but we have yet to see whether any will walk the walk when it comes to throwing open the doors to their end of the mobile business.

 
 
 
 
China’s government has finally announced details of its restructuring of the local telecoms market, bringing to an end years of speculation, rumors and theorizing about its content.

Ironically, the announcement was somewhat of an anticlimax, because the details of the exercise matched those that had been steadily leaked by the government since the beginning of the year.

Nonetheless, the restructuring remains one of the biggest stories of the year, because it is unlikely that any other government would so brazenly move its major telecoms players around like pawns on a chess board.

Under the broad terms of the plan, mobile market giant China Mobile will acquire small fixed-line player China Tietong (formerly known as China Railcom), and leading fixed-line player China Telecom will buy the CDMA-network operations of second-ranked mobile operator China Unicom. China Unicom will maintain its GSM operations but merge with second-ranked fixed-line operator China Netcom.

On announcing the restructuring, the Ministry of Industry and Information (MII), the Ministry of Finance and the powerful National Development and Reform Commission (NDRC) said it was designed to address the unbalanced competition in the telecoms market, in which China Mobile and China Telecom dominate their respective sectors against much weaker rivals.

The three bodies also said they hoped the restructuring process would create three strong, integrated operators that would all be allocated 3G licenses.

But the sting in the tail came via a comment in the bodies’ joint statement: that they wanted the restructuring process to “focus on self-developed technologies and their application, so as to improve the nation’s innovation capabilities.”

Peeling back the bureaucrat-speak, this means that the three groups want homegrown 3G technology TD-SCDMA to be as widely adopted as possible, and this is the most crucial part of the entire restructuring imbroglio.

China Mobile would still be the most powerful operator by far in the market after the restructuring exercise, and might be even more powerful, in light of its acquisition of China Tietong’s fixed-line assets.

By contrast, the prospects for China Telecom as a CDMA operator remain sketchy: The firm has little experience in the wireless space and cannot be expected to develop overnight into a fearsome competitor to market giant China Mobile.

The China Netcom/China Unicom merger is similarly fraught with potential difficulties, given the complexity of integrating two huge companies with thousands of employees and billions of dollars of assets.

The creation of a three-player market will not on its own be enough to bring parity to the telecoms market and slow down China Mobile’s domination, especially since the government’s proposed “asymmetric” regulatory policies look far less interventionist than those implemented in other markets, South Korea in particular.

The real threat to China Mobile comes from not knowing how far the government will go in using the company to push TD-SCDMA into the market.

Most analysts agree that China Netcom/China Unicom will be granted the much-prized WCDMA license, while China Telecom will receive a 1xEV-DO license for its CDMA network. And as the strongest player in the market, China Mobile will receive a TD-SCDMA license, analysts say.

Some analysts suggest that because of TD-SCDMA’s less-than-stellar performance in trials, the government will accede to China Mobile’s wishes and grant it a WCDMA license alongside its TD-SCDMA one.

China Mobile would then be able to roll out a nationwide WCDMA network followed by a much smaller TD-SCDMA network, based mainly around the largest cities. This would create huge capex savings by removing the need for two nationwide networks.

Sounds like an ideal solution, right? Not so fast.

The mainland government is certainly not naive enough to have deployed vast financial and political resources to develop TD-SCDMA, only to allow China Mobile to shuffle the technology toward the back door by granting it a WCDMA license.

TD-SCDMA is not necessarily the government’s last chance to push a homegrown mobile standard: Domestically developed LTE TDD-based technologies are a possibility, but not for a while.

China is about five years behind the rest of the region in deploying 3G services. It is clear that any move toward LTE is still a long way off and that the government would be reluctant to allow foreign technologies, such as WCDMA/HSDPA and EV-DO, to have the market completely to themselves, even in the medium term.

The government clearly sees the restructuring as a watershed in the telecoms market and might well choose this moment to make a powerful stand on TD-SCDMA by forcing China Mobile to go it alone with the technology, at least for an initial period, to give TD-SCDMA the best chance of mass adoption.

What’s important to remember is that although China is far behind in TD-SCDMA development, senior members of the government - well above the level of those calling the shots at the MII or NDRC - are pushing hard for locally developed technologies to be advanced at the expense of foreign rivals’.

The MII and NDRC would be loath to open themselves to embarrassment in front of their political bosses by allowing TD-SCDMA to be sidelined by China Mobile. They see it as a political obligation to give the technology the best possible chance of success.

That does not, of course, mean the government is willing to risk destroying China Mobile’s intrinsic value by subjecting the firm to onerous obligations with respect to TD-SCDMA.

But it does mean the government will expect the operator to do its part to make TD-SCDMA a success, given that it has enjoyed such a favorable regulatory ride in the past decade, which is what helped turn it into such a giant in the first place.

 
 
 
 
The recent announcement by France Telecom’s Orange that it has reduced its data-roaming tariffs demonstrates that the industry has a lot to do when it comes to addressing the perceived problem of high data-roaming costs.

Orange’s move is evidence that operators are concerned about the European Commission’s decision to continue looking closely at roaming prices. In the absence of major reductions to data-roaming tariffs, the EC is poised to mandate a reduction to them in July.

But although Orange’s cut in data-roaming costs is welcome, in that it will make such services cheaper for some Orange roamers, it fails to reduce them enough.

To head off regulation on data-roaming tariffs, operators are taking the initiative in cutting them, just as they did with voice-roaming rates before the European Commission introduced the mandated Eurotariff. The Eurotariff, which came into effect June 30, capped roaming prices at ?0.49 ($0.77) a minute for calls made within the EU by subscribers of European mobile operators.

At the same time, perhaps sensing that regulation of data- and SMS-roaming rates is inevitable, Boris Nemsic, CEO of Telekom Austria Group, said last week that “it is worrying that at a time when the long-awaited benefits of mobile data are beginning to be felt in the European marketplace, the Commission is considering more price regulation.”

Nemsic said that Austria’s market and others are functioning well without additional regulation, because when volumes go up, prices come down. In less than a year, data-roaming prices have been cut in half, Nemsic said. He said that one megabyte of data use while roaming costs ?0.42 with Mobilkom’s daily and monthly roaming packages and ?2.40 without a specific data-roaming tariff.

“Take a look at Austria today, and you’ll see the European price levels of tomorrow,” he said. “Extrapolate this price development over the next two to three years, and sending e-mails, receiving MMS or using specific data services, such as telematics or mobile navigation, when abroad will cost close to nothing.”

Operators have made some moves in the right direction and look set to reduce data roaming tariffs, but such measures will probably fall short of the scope of reductions that the EC says it wants to see. It was a similar situation that led to the introduction of the Eurotariff.

The EC reportedly wants interoperator wholesale prices for data roaming services set at ?0.35 per megabyte. They currently stand at about ?1. And it wants SMSes sent while traveling in the EU to cost ?0.12. The average in Europe is about ?0.29.

At the Mobile World Congress (MWC) in February, Viviane Reding, the EC’s telecoms commissioner, said that the EC would “take stock” of data-roaming prices July 1. “We’ll put the current SMS-roaming prices on a web site” and then “go to the European Parliament and Council of Ministers and give them an answer on what has to be done with data,” she said.

The EC “won’t be satisfied with only a few large operators [making reductions],” she added. “July 1 will be the moment of truth. Operators know perfectly well that if the movement isn’t right, the EC will be ready to regulate.”

Although the EC is most likely to regulate only SMS roaming rates in the near term, it might also address data roaming July 1, and if not, it will do so soon. So how will the EC react to the latest roaming-rate cuts from Orange and others?

Orange announced a fixed-price data-roaming tariff May 19, Travel Data Daily, under which users pay a fixed price for data roaming. The service costs Eur12-15 for 50MB of daily Internet access within the EU.

Orange is not the only operator to make reductions in data-roaming rates under close scrutiny by the EC.

Mobilkom owner Telekom Austria, which owns mobile operators in southeastern Europe, last week reduced its SMS-roaming rates another 20% in Austria, to Eur0.20 per SMS, and almost 40% at Mobiltel in Bulgaria.

On the subject of SMS roaming, Nemsic said that “when it comes to standard tariffs, we already have very competitive SMS levels today compared to national tariffs.”

Many cuts have already been made this year. For instance, at the MWC, T-Mobile unveiled a Pan-European flat-rate data offering of Eur15 a day for a laptop using any network in any EU country. Usage is capped at 50MB a day, resulting in a cost per megabyte of Eur0.30. The company says it will also launch a tariff of Eur2 per megabyte in all markets later this year.

Vodafone, meanwhile, announced a price reduction of up to 45% on its monthly data-roaming tariff, but only for European business travelers. In June, it is planning to lower the maximum charge for its monthly data-roaming bundle from Eur75 to Eur60 a month.

But these efforts, and others like them, important as they are, are unlikely to stop the EC from intervening to force operators to lower data-roaming prices.

Operators seem set on keeping data-roaming rates higher than the EC wants them, preferring instead to reap the benefits of higher prices until forced to cut them.

Meanwhile, it is only a matter of time before European regulators start to question operators about why roaming calls to and from countries outside the EU are so expensive. The European Regulator Group, which represents the regulators of both EU and non-EU European countries, says it is “monitoring the situation.” It is surely only a matter of time before the price of data roaming in the EU and roaming calls made and received outside the EU are set by the European Commission.

 
 
 
 
Mobile operators are starting to uncover new business models that help to address the problems posed by saturated mobile markets and high handset subsidies.

European operator Telefonica O2 announced last week that its SIM-only service, Simplicity, has almost half a million customers and accounts for one-third of its online sales. The SIM-only concept was pioneered by discount MVNOs in northern Europe and is now being embraced enthusiastically by mobile operators.

It holds two key attractions for operators, according to research from Informa Telecoms & Media. First, it enables them to accelerate the migration from prepaid to postpaid price plans. And second, it significantly reduces subscriber-acquisition and -retention costs. SIM-only customers keep their existing phones, so operators do not need to resort to costly device subsidies.

With the impending credit crunch in many developed markets, SIM-only services are extremely attractive to users who are prepared to keep their old phone in return for lower subscription and usage fees.

Some operators have started handing out “free” SIM cards as part of a special promotion. Even though the vast majority of these cards remain unused, it is a relatively low-cost and effective way for an operator to market its service and can generate a good return on investment with even an extremely modest take-up.

The UK’s O2 is an example of an operator that has successfully used this approach. In countries where there is a strong incumbent, a “challenger” might believe that it has a better chance, in the short term, of persuading target customers to take out an additional subscription to use for specific services rather than attempting to make them completely drop their existing subscription.

For example, in Italy, Wind’s Noi family tariff is particularly convenient for on-net calling, and the operator has become the secondary supplier for millions of Italian mobile users. Typically, the operator offers a package of two to four SIM cards, and calls between the cards are virtually free. The latest examples of such promotions are the Noi Wind Pack and Noi Wind Pack SMS, both launched in 2Q07: The Noi Wind Pack SMS offers 4,000 text messages to Wind numbers for a monthly fee of Eur2 (US$2.70), and the Noi Wind Pack offers 200 on-net voice minutes for up to three SIM cards for a monthly fee of Eur6.

The SIM-only business model highlights how operators in developed markets are undertaking a thorough review of their businesses and strategies in a bid to retain their levels of profitability amid the onslaught from lean, fast-moving Internet companies and business cultures.

While SIM-only services are an effective tool to win market share, reduce subscriber-acquisition costs and spend on customer retention, mobile broadband is a brand new revenue stream for mobile operators.

Measuring the sales of HSDPA modems and data cards is difficult, because most operators report only a total subscription number that also includes HSDPA-enabled phones. However, Informa data and other financial reports - for example, sales data produced by European retailer the Carphone Warehouse - indicate that in many markets, sales of dongles in 2H07 compared favorably with those of new mobile phones.

HSDPA dongles are now among the top-selling devices for mobile operators in a number of European countries and made up more than half of the global total of 30 million HSDPA subscriptions at end-2007, according to Informa research. The number of 3.5G-connected laptops will rise to 184 million by 2012, Informa says.

In some countries, operators, retailers and service providers are experimenting with the bundling of laptop computers with mobile broadband subscriptions and dongles. In Sweden, Tele2 is partnering with mobile retailer Carphone Warehouse to offer a ?10-a-month mobile broadband subscription and a ?30-a-month subscription that includes a free laptop.

Carphone Warehouse says it can significantly expand the market for laptop PCs by subsidizing devices in this way. Its own research has indicated that children age 15 and under would rather have their own laptop than a mobile phone.

Mobile operators have the opportunity to play an even more active role in the computing market as manufacturers start to embed SIM cards in their laptops.

In August, TeliaSonera partnered with Dell to provide mobile broadband using SIM cards, using the Telia Connect Card in Sweden, Denmark, Norway and Finland. In October, T-Mobile and Sony Vaio expanded their partnership, offering four new Vaio notebook models featuring Web’n'Walk HSDPA/HSUPA data modules.

Given the importance of the SIM card in the relationship between the operator and the handset, and in the delivery of new services, the embedding of SIM cards in laptops gives mobile operators huge potential for rolling out new functionality and applications across multiple platforms and applications.

 
 
 
 
A large ecosystem and economies of scale alone create and sustain successful mass-market technologies. The heavy-hitters in the US technology and media industries that recently rallied behind WiMAX will be hoping they have done enough to ensure that they are on the winning side of this adage. And in Europe, Intel’s winning of a license to offer WiMAX services at 2.6GHz in Sweden, along with upcoming 2.6GHz auctions across Europe this year, should make incumbent mobile operators alert to the potential threat from new business models.

The prospects for WiMAX looked decidedly bleak at the CTIA event in March, where a convincing range of devices was noticeably absent amid funding and rollout woes for Sprint Nextel.

But the technology has since received several lifelines. Sprint Nextel announced last week that mobile WiMAX had met its criteria for commercial acceptance. And after months of on-off negotiations, Sprint Nextel and wireless ISP Clearwire recently to form a new joint venture that will combine the companies’ WiMAX assets in the US to create a nationwide network. Additional investment will be provided by three leading US cable companies - Comcast, Time Warner and Bright House - and by Intel and Google.

Having the cable operators as partners could help increase WiMAX adoption and economies of scale as the joint venture tries to exploit a small time-to-market advantage over LTE. In a conference call, Sprint CEO Dan Hesse said the rollout of WiMAX would place it “two years ahead of the competition,” meaning operators rolling out LTE.

The joint venture expects its 2.5GHz mobile WiMAX network to cover an area of the US with a population of 120-140 million by end-2010, which would enable it to serve many of the top 200 US markets.

However, Hesse also said the JV agreement doesn’t bar Sprint from investigating “other 4G options,” which could be taken to mean that Sprint might yet consider LTE as a 4G option for its CDMA network.

Sprint and Clearwire created their new WiMAX company in a bid to create a nationwide WiMAX ecosystem. The deal is valued at US$14.5 billion, based on an investment price of US$20 per share.

Sprint will pool all of its 2.5GHz spectrum and all WiMAX assets into a subsidiary of the new company, called Clearwire, of which Sprint will own 51%. Existing Clearwire shareholders will own 27% of the new company, to which Clearwire will contribute all of its 2.5GHz-spectrum assets.

Comcast will invest US$1.05 billion in the deal; Intel Capital will invest US$1 billion, in addition to its previous investments made in Clearwire; Time Warner Cable will invest US$550 million; Google will invest US$500 million; and Bright House Networks will invest US$100 million, for an aggregate total of US$3.2 billion.

The deal also sees the creation of major new wireless companies.

The new Clearwire will enter into 3G-wholesale agreements with Sprint, becoming a bundled provider of Sprint’s wireless voice and data services. Comcast, Time Warner Cable and Bright House Networks will also enter into wholesale agreements with the new Clearwire, becoming 4G providers of the new Clearwire’s mobile WiMAX service.

Sprint and Clearwire also announced commercial agreements with the strategic investors. Intel will embed WiMAX chips into its Intel Centrino 2 processor and will market the Clearwire WiMAX service with its performance notebook PCs.

Google will partner with the new Clearwire to develop Internet services, advertising services and applications for mobile WiMAX devices. In addition, Google will be the search provider and a preferred provider of other applications for the new Clearwire’s retail products.

Google will also partner with the new Clearwire on an open-Internet business protocol for mobile broadband devices. The future voice and data devices that the new Clearwire provides to its retail customers will be compatible with Google’s Android operating-system software.

Google and Intel each have options to enter into 3G and 4G wholesale agreements with Clearwire and Sprint, respectively, but have no current plans to do so.

Earlier this year, Sprint postponed the launch of its Xohm WiMAX service from April until later in the year. It is now expected to wait until the summer to launch the service, in what is being seen as another blow to the beleaguered operator’s plans to offer WiMAX services.

Sprint says that soft launches in Chicago and the Washington, DC/Baltimore area are progressing well.

For its US$500 million investment, Google earns the opportunity to help the new Clearwire develop Internet services, advertising services and applications for mobile WiMAX devices, and Google will be the operator’s search provider and a preferred provider of other applications. Google and Clearwire pledge to work on an open-Internet business protocol for mobile broadband devices, and the operator will support Google’s Android operating system in its retail voice and data products.

In a separate pact, Google will become the default provider of web- and local-search services for Sprint’s CDMA network. Sprint also intends to load several Google services, such as Google Maps for mobile, Gmail and YouTube, on some handsets and provide more-direct access to other Google services.

It’s reasonable to expect that the long-awaited “Google phone” will finally be launched as a WiMAX device, potentially with cellular chipsets included.

Mobile operators should be braced for new entrants in the wireless-broadband space that are already major brands. They will be offering a whole new business model that will bundle content with fixed-line broadband and telephony - each areas in which cellcos are traditionally weak. Cellcos’ traditional voice offerings could be left looking rather thin by comparison.

As such, the coming together of major players in the US media and telecoms sectors will, for the first time, create an alternative to the cellcos’ traditional way of doing business: tying customers in for long periods of time in return for access to a mobile voice and data network via a single device.

As far as voice is concerned, this model has been an abiding one and will prove to be difficult to dislodge, because it is simple to understand and offers a compellingly simple proposition.

But for data, the prospect might prove to be very different. Operators are only beginning to sell large amounts of data via USB dongles and embedded chipsets, each via the voice subscription model. There is a chance for Intel and other consumer-electronics companies to introduce different pricing models and severely disrupt mobile operators’ data-growth plans.

Recent events in the US and the 2.6GHz auctions in Europe this year should put incumbent cellcos on their guard to defend against the incoming wave of WiMAX-based services and business models.