More woe for 3G, says research

Was spending so much money on those licences very wise after all?

European mobile phone network operators will fail to generate sufficient revenue from third-generation (3G) networks and face a steep decline in earnings by 2005, according to research released Friday.

Forrester Research claims that by 2005 mobile operators will have their earnings slashed by 15 percent per customer, equivalent to around 490 euros (£266) per year compared to 419 euros per customer today. Forrester estimates that revenues generated by 3G will fail to offset a marked decline in the amount of money received from traditional income streams, such as voice, SMS and data.

Forrester warns that network providers will make an operating loss between 2007 and 2013 -- forcing businesses to merge or go bust.

By 2005, the amount earned by network operators from these established services will be down 36 percent as newcomers to the sector, such as supermarkets, compete to offer cheap voice services as a way of attracting mobile Internet users.

Mobile operators accept there will be a decline in their traditional revenue streams, but claim new Internet services such as video conferencing and location-based services will generate large sums of money. It was this expectation that drove the bidding in 3G licence auctions in 2000 to unexpectedly high amounts, with the UK auction alone yielding £22bn.

Forrester disagrees and predicts that 3G revenues will fall below expectations. It does not believe 3G will make up for the agreed shortfall in traditional revenue.

Lars Godell, telecoms analyst at Forrester, believes operators will be forced to merge, diversify or collapse. "European mobile operators will consolidate or disappear, and UMTS will be remembered as the trigger that imploded Europe's mobile industry," he said. "We expect that consolidation will leave only five groups serving all mobile users in Europe by 2008."

Those five proposed survivors include Vodafone, T-Mobil, France Telecom (owner of Orange) and BT Cellnet, along with one from either KPN, Telefonica, Telecom Italia or NTT DoCoMo. Other operators will have to merge with these winners, according to Godell. "Dominant players in smaller markets like Norway and Sweden will have to affiliate with these larger groups by 2008 -- leaving no truly independent operators at all."

In compiling the report, Forrester spoke with 26 European operators, and claims to have used "conservative" cost and revenue estimates in its forecasting.

If Forrester is right, there are implications for the wider financial world. Mobile operators borrowed heavily to fund their acquisition of 3G licences, and the Bank of England has already expressed concern that the rapid speed of change in the telecom sector makes it hard for lenders to accurately assess risk.

Analyst firm Bear Stearns warned last November that over-investment in 3G threatens to stifle the development of next-generation wireless innovations and even stall the economy.

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