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Last Updated: Thursday, 11 November, 2004, 08:17 GMT
Dreaming of a 3G Christmas
Analysis
By Tim Weber
Business Editor, BBC News website

Are you a YAF - "young active fun"? Read on, this might change your life (and your bank balance).

Are you outside the bracket of the well-earning 18-to-34 year olds? Read on, this might affect the health of your pension fund.

There is a lot riding on the fortunes of third generation mobile phone services (3G).

For those at the cutting edge of mobile communications, they promise a "leap" to a whole new lifestyle.

For the rest of us, the success or failure of the heavy 3G investments will determine telecoms share prices, and most pension funds will have at least some exposure to that.

Payback time

Vodafone boss Arun Sarin (c) and colleagues holding a 3G phone
Vodafone boss Arun Sarin says 3G drives shareholder value

It has been a slow start. Most 3G licences were awarded four years ago, for lots of money.

Vodafone spent some 14.7bn ($27.3bn) around the world for these licences, 6bn of that in the UK alone.

Then billions more to set up the network and overcome technical problems.

Now it is payback time, and that's where the YAFs come in.

3G phones give users more bandwidth and higher connection speeds.

In real life this translates into phones that allow you to make video calls, download songs and films, watch football highlights on Saturday afternoon in the park or play sophisticated computer games on the move.

And the people happy to pay for such premium services are Vodafone's YAFs, the same demographic that has already signed up to the company's Vodafone Live! service - currently about 10 million worldwide (out of a total of 140m).

The service combines snazzy phones with rich content and traces its success to the "Beckham phone", hawked in a series of adverts with the English football captain (who returns to Vodafone adverts for the 3G launch).

'Evolution, not revolution'

Peter Bamford, chief marketing officer of Vodafone, gives this real-life example of a 3G test user: The man and his girl friend did not know what to do with the evening, they checked out a few film clips on their 3G phone, settled on a movie, checked which cinema showed the film, booked two tickets and downloaded a map on how to get to the cinema.

Old hat if you are online, but fairly cutting edge if you sit on the commuter train from work to home.

Vodafone 3G phone by Sony Ericsson
Pay-to-view: In the UK football is a great revenue driver

The new "Vodafone Live with 3G" offering takes this concept further and combines speed with hefty mobile computing power and high-spec video phones (one model boasts a 2 Megapixel camera).

Those used to the bulkiness of early 3G models will be pleasantly surprised. Just a smidgen larger than today's GSM phones they don't weigh much more, but sport crisp colour screens.

And while the typical "Live" subscriber delivers 7% more revenue than other Vodafone users, 3G bundles are supposed to boost shareholder value even further.

Wherever you click around the service, chances are you encounter a little buy icon. 25 pence here, 2.50 there - it all can add up to a hefty lifestyle phone bill.

Throw in music downloads and a bit of pornography - its explicitness tailored to the local market and the access controlled to keep it out of the reach of children - and you have a revenue model.

"This is an opportunity to increase revenue growth, profit growth and cash flow growth," says Vodafone boss Arun Sarin.

With Vodafone putting a price tag of 200 and more on phones that come with its 3G pre-pay services, and some 3G contracts running up to 18 months and costing up to 60 a month, the spring in Mr Sarin's step at the 3G launch seems reasonable.

But ultimately, as Mr Sarin himself acknowledges, the new 3G phones are just an "evolution, not a revolution".

Is that good enough to attract the punters?

Keeping it cheap and simple?

And there are more question marks.

Are there enough YAFs to justify the huge 3G investment?

Britney Spears on an LG phone by 3
Will customers happily pay up to see Britney's latest video?

Vodafone hopes to have 10 million "Vodafone Live with 3G" customers by March 2006, with about half of them "upgrades" for existing customers.

Rival 3 has been working markets in the UK, Australia, Hong Kong, Sweden, Denmark, Austria and Italy for 18 months now, and subscriber numbers have been well below expectations.

Company insiders hint that uptake has greatly accelerated during the past three months, with subscriber numbers up by about 50% to nearly two million.

But this is probably the result of recent aggressive discounting and the launch of new smaller, heavily subsidised handsets.

With Orange and T-Mobile expected to launch their competing 3G services in December, can prices be kept at premium levels? 3's chief operating officer Gareth Jones claims that he is already undercutting Vodafone's price plans.

And what about the vast majority of mobile phone users that are not YAFs and have little need for streaming video or advanced computer games?

In Sweden a start-up mobile phone company managed to grab more than a third of the market by offering a stripped down service with feature-poor mobile phones but cheap and easy-to-understand pricing plans.

Dump your iPod, ditch your digicam?

So with just 16 years to run on Vodafone's UK licence, can 3G generate enough revenue to justify the huge investment?

Well, the secret hope of all 3G operators is called convergence.

"If you ask people to take everything out of their pockets but three things, they will keep their keys, their wallet and their mobile phone," says Vodafone's content expert, Guy Lawrence.

Tough luck for the iPod, because in a year's time, give or take three months, 3G phones will contain hard disks as large as today's iPod digital music players, he claims.

And why take a digital camera when 3G cameras are racking up the mega pixels?

With prices plummeting and juicy contracts allowing network operators to subsidise handsets, 3G phones could find their way even into Granny's handbag - just like today's camera phones.

With nifty market segmentation - tailoring the phone and the price plan to target ever smaller niche markets - and three or four years down the line the profits could be rolling in.

This year won't see a 3G Christmas. But for shareholders, the 3G Christmas is one that can't come too early.




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