Time To Reap

While the core business of mobile operators remains the provision of a high

quality 2-minute phone call, as voice ARPUs steadily decline mobile data is key

to the growth aspirations of many mobile operators. In Western Europe, mobile

data currently accounts for about 17% of total service revenue and is expected

to grow to 30% by 2009.

Messaging has been the only significant revenue generator in the mobile data

space over the past 5 years, currently contributing about 84% of data revenues.

Within messaging, SMS accounts for the bulk of revenues-over 90%-and is

expected to remain the single biggest contributor to data revenues in the near

term. However, SMS is under substantial pricing pressure, with prices having

declined 65% between 2001 and 2004 and widely forecasted to continue to fall.

The challenge, therefore, for operators is to create viable new data revenue

streams beyond messaging.

Infotainment-the convergence of information and entertainment

services-will become the main driver of growth, growing at 48% CAGR from 6% of

data revenues today to 23% (~ 10 bn by our estimates) by 2009.

Mobile Music Will Remain a Niche Service



Mobile music has been instrumental in helping mobile operators create an

exciting 3G story. However, despite the hype, mobile music is expected to

account for only 2% of total data revenues by 2009. To succeed with music,

mobile operators have to significantly cut prices to come close to parity with

substitute offerings like iTunes. The future for mobile music is further

threatened by handset manufacturer moves to develop iPod-like phones and form

alliances with online music stores to potentially bypass the mobile operator's

network. Nokia, for example, has developed the N91 has an integrated 4GB hard

disk capable of storing up to 3,000 songs in a variety of digital music formats.

Users can synchronise the device with their computers via USB 2.0 and create and

manage play lists that, in turn, can be shared with others via Bluetooth. So

whilst music on a mobile handset may carry a strong appeal, the demand for

premium-priced music downloads over the air is far less obvious.

Mobile music extracts such as ringtones and ringback tones, however, will

continue to attract interest due to its ability to personalise the mobile phone

user.

Mobile Gaming: A Challenging Path



Mobile games are projected to be a big revenue generator in the mobile

infotainment segment, but their long-term growth potential is limited. The

limitation is imposed by the niche segment appeal of the service and the growing

complexity and escalating costs associated with game development, which makes it

difficult to establish a clear RoI. For example, Gameloft currently targets 250

different models and translates each game into 5 to 8 languages. This means that

there can sometimes be more than 700 versions of the same game.

With respect to customer uptake, in 2004, while a third of the European

mobile users were playing games pre-installed on their handsets, only 5% were

downloading games. Moreover, an average mobile gamer is different from the one

playing games on a console or over the PC. The relatively poor experience on

mobile handsets, due to screen size and button placement, keeps the hardcore

console/online gamers away. Surveys show that the majority of people interested

in playing games on their handsets are casual gamers who play games to kill

time. Therefore, it's the easy-to-play games with low learning curves that

have attracted a user base. Another interesting development is that females make

up about 50% of the mobile gamers but this segment remains under-targeted by the

operators with most of the games being male focused.

Mobile games are projected to be a big revenue generator in the mobile infotainment segment, but their long-term growth potential is limited

Operators, hence, have to cater to widely diverse preferences and are

offering an increasingly vast array of games to cater to this diversity. O2

offered just ten games on two devices in 2003 but now offers 300 games on sixty

devices. With the amount of operator effort going in for the gaming segment, it

is imperative that operator's fine tune their strategies to realise the

projected potential. Choosing the right content, widening the marketing channels

and moving into new target segments, will be key to making a success out of the

gaming category.

Mobile TV Could be the Star Performer



Mobile TV is emerging as a key service driven by its mass-market appeal and

intuitive usage. Surveys have found 40—60% of European mobile phone users to

be interested in receiving TV on their mobile phone. More importantly, users are

willing to pay 8—12 per month for it (according to a survey conducted as part

of the BMCO project in Germany).

Operators are already finding the mobile TV service to be a compelling

mechanism for communicating the 3G value proposition to consumers. Orange France

is offering live TV services with over 42 channels on 3G and EDGE. Six months

after launch, 50% of Orange's 3G users are watching TV on their mobile, with

the average user logging in 25-30 minutes of usage in 10-14 sessions per month.

Similarly, TV represents 50% of 3G data traffic for SFR.

However, given bandwidth limitations, 3G is not the preferred medium for

mobile TV delivery in the long term. Instead, broadcast technologies like DVB-H

or DMB for mobile TV offer a better solution. So concurrently with launching a

3G-based service, operators also need to start formulating their plans for DVB-H.

We see TV heralding considerable revenue opportunities in the mobile space,

necessitating concerted efforts from mobile operators to quickly get their

mobile TV strategy defined in terms of the customer proposition, handset

management, content and partnership models.

Implications for Mobile Operators



Taking a position on the market's evolution and defining a corresponding

infotainment strategy is therefore crucial for operators. We believe that mobile

operators should take the following steps:

• Ensure their strategies emphasise mass-market appeal: Central to strategy
  
  design should be a clear emphasis on mass-market appeal, focusing on and
  
  embracing the commonalities across segments, rather than continuing to
  
  finely slice the market and developing services to address those niches
• Plan for Mobile TV: The business case for mobile TV is fuelled by its
  
  mass-market appeal and proven consumer willingness to pay for the service. A
  
  key first next step for operators is to develop a detailed business case to
  
  serve as a basis for approaching potential partners. Time-to-market is key
  
  for this service, so the process of forging partnerships with broadcasters
  
  and content owners needs to be set in motion quickly. On the customer front,
  
  the key next step is the design and testing of the value propositions to
  
  ascertain consumer interest and propensity to pay for the service.
• Be realistic about the nature of the opportunity in mobile music: Mobile
  
  music on the other hand will remain a niche service despite the hype, as the
  
  consumer propensity to spend and current operator pricing are currently
  
  disjointed. There could be an upside for music on the mobile if prices
  
  approach parity with fixed-line alternatives, but that is unlikely given the
  
  already thin margins and the inherently higher cost associated with mobile
  
  bandwidth.

Priya Mehra, manager, TME

Strategy Lab, Capgemini



Dinesh Jindal, sr consultant, TME
Strategy Lab, Capgemini



vadmail@cybermedia.co.in