TCS Daily

3-G Vision

By Frank Sensenbrenner - April 24, 2003 12:00 AM

Recently, France Telecom absorbed a record 20 billion euro charge on earnings for the past year, primarily due to its write-off of overvalued licenses. Even with the incestuous relationship between many large European utilities and governments (who often hold a controlling, if not majority stake in many partially-privatized firms), these losses are staggering, similar to those that finally toppled Deutsche Telekom's chief executive, Ron Sommer.

The history of this shortfall is well known: most of the losses originate from bets on the economy of dreams, and are composed of both acquisitions of overvalued internet portals and infrastructure firms, and ruinously expensive bids for third-generation (3G) mobile phone licenses. The compelling logic behind the hype of 3G was both 'm-commerce', an ability to electronically conduct transactions using mobile phones, and the ability to provide specialized internet-style content, providing a new revenue stream for firms suffering from falling prices of basic communications. The scale of the bidding for 3G licenses was so exaggerated that firms are now petitioning regulators to allow them to jointly develop networks with partners. However, the basic economics behind this can be questioned.

Even accepting m-commerce and 3G, telecoms firms believed their own hype about future profits. While m-commerce has been a success in Japan and in parts of Scandinavia, studies of electronic payments systems like Mondex and other smart-cards have shown that they are only economically efficient when used by roughly five million users, due to extensive back-office facilities needed to process payments. Who was to bear the cost of new equipment? Vendors, telecoms, or consumers? How could the telecoms ensure widespread availability of m-commerce payments?

3G is even more questionable. While Nokia's SMS text-messaging service surged from anonymity to become a cash cow, Internet firms have struggled to charge customers for content, and often use it now chiefly to increase exposure to advertising. In an industry characterized by heavy regulation, any bumper profits tend to be regulated out of existence. In a way, the European telecoms approach is similar to that adopted for pharmaceuticals, in which firms must invest extensively before they can ascertain the business prospects of their new ideas. And what price for pioneering it? Many futurists, such as George Gilder, envision the proliferation of communications bandwidth as the comparative cost of investment plummets. As a commodity, therefore, the cost of using the base service will fall, and companies must compete on specialized features to earn any excess profit. So why lead the revolution, knowing any extraordinary success will be regulated away, and any losses are yours to absorb?

Where to go from here? A possible approach is to rely on the strength of brands in providing content and service. MTV, for example, is launching a wireless brand with Virgin Mobile in the US, targeted at providing musical content (such as ring tones) and customized news. Such an approach uses the customer base of a mobile provider as an effective portal, targeting content at specific customers while relying on a well-known brand. The possibility of alliances between telecoms firms, producing a homogenous commodity, and specialized brands offers gains for both parties, matching a strong customer base that can be tapped for offerings of unique content from trusted parties. If phone companies wish to follow the Internet for growth streams, they should learn its lesson: trusted brands trump unknowns, and partnerships are crucial.

TCS Daily Archives