CandidCapital

New compression and multiplexing technologies mean that true broadband can now be delivered over mobile - so why are mobile network operators apparently so reluctant to let their subscribers benefit from new broadband services?

I went to the Mobile World Congress - the world's leading trade fair for the mobile industry - in Barcelona last week. The battalions of northern Europeans and Americans were denied their usual week of balmy outdoor partying and networking - with an average daytime temperature of 4°C, the outdoor heaters were working overtime.

Nonetheless, the mood of the fair was upbeat: by most measures the global mobile industry is doing well: nearly 4 billion total connections worldwide, growing at 1.2m connections per day. Much of the growth is coming from developing markets such as China, India and even Africa, where mobile presents an opportunity to roll-out a gamut of telecoms services to new users in locations that were uneconomic to connect with fixed-line networks. What's interesting is that it's not just voice services that are being brought to remote villages in India. Network operators are also looking to offer music download, data services and even IPTV (internet protocol television) from the outset.

It's the economics of telecoms, rather than any benign social objective, that is driving this rush to rich services. Fixed-line telephony has become a cheap commodity service which faces the additional challenge of "free" voice calls when subscribers, using their increasingly fast and robust DSL connections, make use of VoIP (voice over internet protocol) services such as Skype. The knock-on effect of this has been pressure on mobile operators to lower their call charges as they come to look ever more expensive compared with fixed-line telephony.

The glory days of the mobile phone industry (and I use the word "phone" deliberately) were the late 1990s when growth rates were high (and call charges exorbitant) in the rich, developed economies and the development of 3G (third generation mobile telephony) technology offered the prospects of new and profitable services. I remember using my mobile as a modem to retrieve e-mails on a trip to Prague in 1999, which was both expensive and painfully slow. At the time the cost of data over GSM (this was prior to GPRS - the first packet switched mobile technology) was the cost of the call charged at as much as £2 per minute for international calls (with a data rate of 9.6kbps - slow compared even to fixed-line dial up at 56kbps). This charging structure meant an effective data transfer cost of £2 per 500kb of data (62.5kBytes) - no wonder the operators looked forward to exploiting the brave new world of 3G.

It started to go sour, however, when someone in the UK Treasury hit on the bright idea of auctioning spectrum as fair and efficient way of allocating it. I still don't understand why any government has the right to tax spectrum - which is a public asset that should be utilised for the direct benefit of those who can make effective economic (or even social) use of it. Taxation should always be felt by the taxpayer at the time of levying it, otherwise it loses its connection to democratic accountability. Gordon Brown, then UK Finance Minister, was a past master at levying unfelt so-called "stealth" taxes, not just on radio spectrum but, even more disastrously, on pensions as well.

In the event, the network operators, terrified of losing out on the 3G revolution, were panicked into paying £22.5bn in the UK auction, £30bn in the German one and lesser, but still significant, amounts in other European countries. No wonder that the roll-out of mobile web and other services dependent on 3G has been so protracted, since the operators have been cash constrained for infrastructure investment as well as needing to ensure that new services generate the strongest revenues possible in order to recoup the costs of the spectrum licences. This handicapping of the benefits of 3G was foreseen in a Guardian comment column in early 2000, which argued for using the windfall to reduce the digital divide and promote the adoption of mobile technology:

"The most symmetrical solution would be for the proceeds of this digital auction to be used to provide as many people as possible with an incentive to get speedy and affordable access to the internet by subsidising the take-up of digital television and the next generation of mobile phones. This would have big knock-on effects on the rest of the economy. It would improve education and accelerate the use of the new technologies thereby enabling Britain to take a lead in the burgeoning area of mobile commerce in the same way that the US did with e-commerce.

"At the very least, this would avoid the worst scenario likely to emerge from the current orgy of bidding for mobile phone licences - that by making high speed access to the internet too expensive for ordinary people it will widen, not narrow, the digital divide that Tony Blair is so concerned about."

Now the network operators are much more canny and even the prospect of new slices of spectrum - a commodity that is intrinsically limited in supply - evinces a cautious response. Instead they emphasise the work of the LTE (long term evolution) project that sets out to build on UMTS (the dominant 3G technology) by improving data rates through improved modulation and other techniques for making better use of currently available spectrum.

Yet, worried as they may be about governments' attempts to levy another windfall tax on spectrum, the real threat perceived by the mobile operators is what they see happening in the fixed-line internet (principally DSL and Cable). There both ISPs and telcos (notwithstanding the steady acquisition of the former by the latter) have so far failed to benefit significantly from new services made possible by broadband internet and have become, in effect, dumb pipes. New operators, such as Carphone Warehouse, have gambled on using the carrot of ‘free’, unmetered (subject to a ‘fair use’ limit of 40Gb of transfers per month) broadband internet access as part of a telecoms package where additional voice calls will be the main revenue driver. BT has gone even further, effectively offering to cannibalise its circuit switched telephony services, by encouraging VoIP usage among its broadband customers – relying on the widespread adoption of premium IPTV by subscribers as the ultimate revenue generator.

In the developed world, the landscape is further complicated by internet services based on other technologies including Wi-Fi and, pushed by a consortium led by Intel, WiMAX. It’s increasingly hard to see what the key differentiators are that drive customers to one technology or service over another.

In the developing world, in contrast, mobile operators have become the dominant suppliers of telephony, data and, often, TV services. Nor is this confined to rural areas where it’s uneconomic to install fixed-line infrastructure: many developing countries have ageing and inadequate telephony infrastructure that can’t cope with rapidly expanding demand in urban areas as well. Airtel, one of India’s largest mobile network operators, has ambitious plans to bring telephony, the internet and television to millions of rural Indians who have ”never heard a dial tone nor seen a television image”. Moreover, UMTS, with the enhancements of HSPA derivatives in the short-term and the fruits of the LTE project in the longer-term, is the only credible technology for doing this.

None of which convincingly addresses the dilemma facing Airtel’s equivalents in the developed world – just how do you continue to make strong profits out of building and operating a service that is, in the end, a pipe for exchanging or delivering other peoples content?

18 February 2008