Cashing In on Mobile Madness
New technologies will lead cell phone users to the nearest cash machine — and generate profits
By JENNIFER L. SCHENKER
Photo-Illustration by Nick Koudis
Here's a contrarian business model for you — take on the world's leading cell-phone maker in its own backyard. And while you're at it, stick with an outdated technology, and relegate yourself to fringe markets. That in a nutshell has been the approach of Jorma Nieminen, who some 14 years ago decided to go after Nokia. He did not try a frontal assault. His firm, Benefon, stuck to analog phones long after gsm digital handsets took off in Europe, limiting its market to central and eastern Europe, the Middle East and a few Asian countries.
But Benefon, known in Finland as the other Nokia, survived. Now Nieminen may have stolen a march on Nokia and the other cell phone manufacturers like Ericsson and Motorola. While they focused on gsm and third-generation wireless technologies, Nieminen spotted early on the potential of wireless location services — those based on a cell phone knowing where a caller is at a particular point in time. The market for these services could generate as much as $30 billion in revenues for European carriers and vendors by 2005, according to the London office of U.S. technology consultancy The Strategis Group. Benefon is one of the first manufacturers to incorporate Global Positioning System (gps) chips in its phones.
And Nieminen's firm is also experimenting with adding software to phones to better pinpoint a user's whereabouts even without using gps chips. "We are seeing a very fast ramp- up of business due to this new product range," says Nieminen, who plans to make location-sensitive phones aimed at business and mass-market consumers and sell them globally. Benefon, which had net sales of $26.7 million for the first half of 2000 — a 60% incease over sales in the same period last year — is just one of hundreds of companies in Europe concentrating on niche products for the booming mobile market. Many hope to one day reach the size of Nokia. A few just might do it.
But European firms face fierce competition from U.S. and Asian firms as well as the uncomfortable fact that optimistic revenue projections for wireless Internet in Europe have collided with slow acceptance of wireless application protocol (WAP) phones, the first handsets to allow access to Web content. Equipment-makers also worry that the mobile phone operators who have been shelling out billions of dollars for third-generation mobile licenses across Europe will try to stick them with part of that tab. The prospect of the erosion of manufacturers' profit margins has sent their share prices plummeting.
It is true that in the short term the market for mobile data services could fail to meet expectations. But it's also true that mobile Internet will be a big business for both established companies and new players alike. And Europe will be at the center of the action, says Falk Müller-Veerse, head of European research activities at Durlacher, a research and investment group. "No doubt, the global center of mobile technologies and applications is Europe," he says.
While Japan will be the first to roll out third-generation networks, Europe is a key testing ground for mobile Internet services, and U.S. and Asian companies are anxious to win market share here. For example, California-based Airflash, which sells the platforms mobile operators need to offer location-sensitive services and mobile commerce, estimates that as much as 70% of its business will come from the European market over the next few years. U.S. companies will be competing with European firms such as Finland's Wapit and Germany's Materna which provide operators with mobile application platforms and companies that make platforms to handle billing for transactions over mobile phones, such as Finland's More Magic or Ireland's Sepro.
On the mobile security front, Germany's Brokat, Ireland's Baltimore Technologies and Finland's F-Secure are separately working to develop the best way to protect transactions made over mobile phones. They will try to sell that technology to the wireless operators, several of which have joined the ranks of firms like Microsoft and GE at the top of rankings of global corporations with the highest stock market capitalization. The U.K.'s Vodafone AirTouch and Japan's NTT DoCoMo rank fourth and fifth respectively.
And the big are getting bigger. After its $50 billion acquisition of U.K. mobile operator Orange, France Télécom is now the second-largest wireless operator in Europe after Vodafone and the third-largest globally after Vodafone and DoCoMo. Spanish phone company Telefónica, meanwhile, has built strong regional holdings in Latin America. And it recently shored up its presence across the spectrum of the wireless Web market in Europe by teaming with Finland's Sonera to win a third-generation mobile license in Germany and through its July purchase of Iobox, a pan-European mobile Internet portal. Germany's Deutsche Telekom has rounded out its regional positions in Europe and Asia with its planned purchase of VoiceStream, a U.S. wireless operator with national coverage.
Size increasingly matters. The global wireless market will probably be dominated by four to six major multinational groups within the next few years, and the exorbitant prices operators have shelled out for third-generation wireless licenses in Europe have helped speed up the consolidation. One example is the teaming of NTT DoCoMo with Dutch phone company KPN and Hong Kong's Hutchison Whampoa to bid for mobile licenses in Europe. The price tag for a third-generation mobile license in Germany — which netted the government almost $50 billion — proved too much for Hutchison and the company pulled out after winning a license, transferring its stake to KPN Mobile. But Hutchison, KPN Mobile and NTT DoCoMo may still make a joint bid for third-generation mobile licenses in France and Belgium.
Estimates vary widely on how long it will take operators to recoup their investments in the third generation of mobile services. Already they have spent about $86 billion just for licenses in three European countries and will need to plunk down another $80 billion or more worldwide between 2001 and 2003 on infrastructure upgrades. Whatever the total tab, mobile data services will play an important part in paying it off. Such services could generate revenues of $40 billion a year by 2003. Dutch bank ABN Amro predicts that data products could account for 30% to 50% of mobile service revenues by 2007.
An early example of the revenue potential of data services is something called SMS — Short Messaging Services. Mobile phone industry players joke that the acronymn really stands for "Significant Money Streams." sms allows users to send basic messages (comprising a maximum of 160 characters) to each other over regular gsm phones. Popular with the younger generation because sending messages is often cheaper than making a voice call, sms now accounts for between 3% and 10% of European mobile operators' revenues. "We see sms as a big money spinner for companies in our business and for mobile operators for many years to come," says Stewart Haugen, European general manager of Indiqu, a maker of mobile games and other entertainment services. "wap will not displace but add on to it."
Beyond messaging, the killer applications are likely to include entertainment and location-based services. The global entertainment business is expected to grow by 40% from $165 billion today to $236 billion in 2005, and the wireless segment, by some estimates, could account for a third of the market. NTT DoCoMo's i-mode services give a glimpse of the potential: wireless entertainment services such as games reportedly account for 40% of the revenues NTT DoCoMo receives from its 10 million subscribers. Location services which will combine advanced data-processing techniques with information about a customer's whereabouts will allow operators to offer a range of new services which should also generate important new sources of revenue (See box). Cell phones work by connecting with base stations located at various intervals in cities and along roads, so operators have always been able to identify — from a distance within several hundred meters inside cities and several kilometers in open spaces — where a customer is when he is using a cell phone. But advances in technology mean that operators will soon be able to calculate a cell phone user's location down to as little as 10 meters.
There are several ways of pinpointing location. One is through satellite based systems like gps, which have two major weaknesses: they consume a lot of battery power and they don't work inside buildings. The other method is through land-based systems using existing mobile telephony networks. Location information from current gsm systems "can be off by several kilometers and this is simply not acceptable," says Mikko J. Salminen, vice president of technology at Finnish mobile operator Radiolinja. His firm is trying out a system in which the distances to seven different cells are measured by software inside gsm phones manufactured by Benefon. This approach has an accuracy rate of about 67% and can pinpoint a destination down to 200 m in big cities, within 400-500 m in the suburbs and within 1.2 km on the open road. Salminen says that is good enough: "A distance of 1.2 km translates into driving time of no more than two minutes — it takes my family more than that to decide on a restaurant."
Other mobile operators in Europe are leaning toward solutions for location-based services which either require changes in the Subscriber Identification Modules (SIM) cards inside customers' mobile phones or changes to the networks. Two European companies — Cellpoint and Cambridge Positioning Systems — offer these types of solutions. Salminen says he believes that operators will end up choosing incompatible systems. That will make roaming difficult initially, which is ironic given that location services are most needed when you are outside your home area, he says. But by 2005 there will probably be only about five mobile operators left in Europe, all operating on a pan-European level, so the problem is likely to take care of itself.
After technology questions are settled operators can start tracking consumers's preferences and offer tailored services. Analysts are divided about whether consumers will be willing to pay extra to gain access to these services. Operators will make money, though, by charging content providers for prime placement on their portals, says Matthew Nordan, European research strategy director at technology consultancy Forrester Research, in Amsterdam. Mobile operators are likely to control the flow of location data initially, limiting the scope for alternative service providers to profitably establish a presence within the market area. They also want to control revenue from content on the portals.
As wireless data services become more popular cellular operators will want to become content providers in their own right, says independent telecoms analyst Audrey Mandela. Rather than passing on service fees to content companies, the operators would like to keep some of those fees themselves. They'd also like to create portal services that have the potential to generate advertising revenue. Existing content providers, such as AOL and Yahoo, however, expect to retain this role, simply exporting their current service offering to new platforms.
The cellular operators are trying to emulate AOL's Internet service provider model: creating a so-called walled garden of selected content for its customer base and selling advertising. Trouble is, some cellular operators have taken that model one step further: rather than allowing their customers to move between their portal home page and the rest of the Web, as AOL does, they've blocked access to wap sites that are competitive or that they haven't approved. In May, the commercial court in Paris ordered France Télécom, which runs the nation's largest cellular service, to stop restricting its customers' access to other wap-based Internet services. In the U.K, competitors have asked watchdog Oftel to probe BT's pre-paid Trium wap phone service, which required users to obtain a four-digit code to switch to another portal.
Analysts say Europe's mobile operators are being shortsighted and should follow the lead of DoCoMo, which launched in Japan in February 1999 and now has more than 10 million active subscribers. Having an open policy toward content providers has encouraged thousands of application providers to join its i-mode network, spurring usage. The benefits to DoCoMo include new data fees, billing and collection commissions, additional voice minutes and lower customer turnover.
DoCoMo is expected to put its business model and expertise in mobile data applications to good use in Europe through its new alliance with KPN. And U.S. companies are rapidly developing mobile data applications and are testing them out first in Europe. For example, U.S. software-maker Microsoft, long considered a latecomer in the wireless mobile sector, earlier this month announced that it will collaborate with Vodafone on a European trial of corporate mobile data services. Europe's mobile operators and application providers — like its major phone manufacturers — would do well to be wary about who sets up shop in their backyard. As Finland's Jorma Nieminen still hopes to prove with Benefon, yesterday's dominant position in mobile communications can quickly disappear.
TIME Digital table of contents
TIME Europe home
More stories from TIME Europe and related links
E-mail us at mail@timeatlantic.com
|
|
|
