3G Improves Data Profitability - Report

UMTS increases data profitability, according to a new white paper published by The Shosteck Group. This analysis is a follow-on to an earlier white paper, in which the firm showed how UMTS will provide increased network capacity and as a consequence, lower operator costs, particularly in terms of voice.

The new report quantifies the extent to which UMTS will lower operator costs, how far operators might reduce tariffs, and the extent to which such reductions will increase data traffic, revenues, and profits. It concludes that by expanding traffic exponentially, UMTS will reduce the full costs per byte by 3.5 to 5.2x below those of GSM-GPRS.

It then examines how UMTS operators can accelerate data traffic and generate additional revenue -- and profit -- from data services.

Central to this is the "sweet spot" analysis that characterizes which applications and services will prove most profitable. UMTS increases the sweet spot in two ways. First, UMTS lowers the cost of delivery, enabling operators to charge less. Second, UMTS enables improved services - higher image resolution, faster delivery, larger and more functional applications, and better Quality of Service -- critical to the success of data offerings. If services under-perform (poor quality), users will not adopt them. Improved services at lower charges mean that more people will use them and do so more often.

In the center of the sweet spot are services which: (1) have high value to end-users, (2) perform well, (3) are inexpensive to provide, and (4) can be delivered in large quantities. These will be the most profitable.

Video-telephony is highly hyped. It is the flagship service of Hutchison 3G. It is also offered by NTT DoCoMo. But it's unlikely to prove profitable for operators over the near term. Three factors devalue it -- technology immaturity, limited network coverage, and potentially high pricing. Given the above, video-telephony, at present, fails the sweet spot test.

However, with time and continued network build-out, maturity issues will be resolved. UMTS will be fully mature by late 2006. By then, video-telephony may be built into a majority of phones, much like camera phones in Korea today.

Rather than video-telephony, The Shosteck Group points to multimedia services -- in particular video-streaming -- as a far more attractive proposition that costs less to deliver and provides the potential for greater margins. Over the near term, operators that focus on simpler and less expensive UMTS services are most likely to profit. Nonetheless, with time, handsets will become more sophisticated. Networks will mature. These will enable operators to deliver more complex services than are feasible at present, and to profit from them.

The value of services will increase. This will enable operators to support specific market segments with highly focused offerings.

But with increased network capacity, lower costs, and all-IP networks (with Release 5 and beyond), UMTS operators will be better positioned to serve them. Lower rates will attract customers beyond the classic "road warrior." This will increase revenue and profit for all UMTS operators.

The report can be downloaded for free from http://www.shosteck.com/news/umts2.htm"

Posted to the site on 11th February 2004