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Wireless Data Report - Executive Summary

What will the wireless data world look like in the coming years? How large will the key markets be? And what are the likely services and products in the new mobile world? This summary of a JP Morgan/Andersen report has some of the answers.

EXECUTIVE SUMMARY

Wireless data looks as though it is going to be a huge business: on our estimates, the European market for wireless data will be worth some $82.4 billion by 2010, with wireless data revenues in 2006 larger than the existing voice market (by revenues) in 1999. The convergence of two of the fastest-growing sectors in the economy today—the internet and mobile communications businesses — is set to create an extremely rapidly growing market amid a 'gold rush' atmosphere, with players looking to secure an important role at all costs. We believe that the risk in this environment might be paying over the odds for scarce resources: people and ideas, but not necessarily assets, financed largely (given the current balance sheet constraints of the operators) with equity. This situation will exacerbate the risks for investors in wireless assets.

With mobile penetration rates high compared with the rest of the world and regulations in place to build on the GSM standard and implement a global 3G network, we believe that Europe is set to be at the forefront of the wireless data industry. Already more than one million people in the United Kingdom have replaced fixed-line phones with mobiles. Importantly this should reinforce European operators' optimism that they can contribute to the development of wireless data in other large markets. We expect European operators to acquire more assets outside Europe, or build on existing investments.

In this study we have defined wireless data as any value-added transaction or service carried out over a wireless network excluding simple person-to-person voice communications. This wide-ranging definition suggests that the market for wireless data will expand far beyond traditional e-commerce or mobile applications. A key new application is machine-to-machine communication (M2M), which is set to create a fully networked economy, extending the internet away from the desktop and into all aspects of daily life. We believe that wireless data will add most value in those areas where it emphasises the core intrinsic values of mobile devices — convenience and portability. Already, for many users, the mobile has graduated into the 'always with you' group of consumer devices. With the advent of wireless data, the mobile will bring the internet into one's 'back pocket', providing users with instant web access whenever they want and wherever they are. The mobile device may also replace many of the 'back pocket' consumer items such as wallets and security passes through the introduction of applications such as e-cash.

The value in wireless data will lie in knowing the customer and using this knowledge to create revenue streams. The mobile phone is a personal device, specific to one user. Mobile service offerings can therefore be tailored to specific end-user requirements. Unlike e-commerce, the consumer will expect (and possibly demand) a greater level of customisation. Mobile phones already offer the ability to give approximate location through cell-of-origin technology. In the future, mobile devices equipped with Global Positioning Systems (GPS) will give exact location details. This opens up the market for a range of new applications requiring location specific knowledge, enabling retailers to target customers in a way unimaginable today.

 The early adopters are, in our view, most likely to be business users, reflecting the premium to be paid for bandwidth-intensive access and applications. An increasing number of applications are being developed for business users. We believe wireless network operators with a greater proportion of business customers will, correspondingly, enjoy first-user advantage. However, research suggests that there is a substantial market for wireless data in the under-25 age group, indicating that capturing the users of tomorrow will require strong, powerful, youth-orientated brands. This situation might create opportunities for powerful brands entering the 3G market as Mobile Virtual Network Operators (MVNOs).

Mobile phones will provide another means of access to the web rather than the only means. In the coming years we believe that no one device will offer all services. As a strategy to build on this market evolution, operators will most likely need to offer open services rather than closed proprietary services. A successful approach may be to offer a 'walled garden' with a small access gate on to the rest of the internet

The cost of transmitting data over a wireless network is set to fall dramatically as packet-switching technologies are introduced and capacity increases. Coupled with the 'always on' characteristic of General Packet Radio Service (GPRS), consumers are able to send and receive information instantly and at a very low cost. Moreover, network operators will be able to prioritise communications by type to improve efficiency over networks. GPRS, which is due to be implemented by many operators in early 2001, will offer a substantial increase in bandwidth for all users. Evolved Data for GSM Evolution (EDGE) will offer increased bandwidth through still more efficient use of the 2G network. The Universal Mobile Telecommunications System (UMTS), or 3G, which should be operational by 2003 in Europe, will offer speeds of up to 2 Mbps. However, this will be available only indoors and with a network upgrade. The applications will also vary in value for the operator.

Almost all applications at present envisaged (even video applications on Personal Digital Assistant-sized screens) do not require higher bandwidths than those that will be available with technologies such as EDGE. This technology is far less expensive than 3G, since it requires only an upgrade of the existing GSM network rather than the deployment of a new one.Yet mobile operators have invested billions of dollars to obtain licences and to deploy 3G networks because mobile operators require more spectrum, for two major reasons. First, they want to set up operations in countries where they are not yet present. This strategy requires a licence unless network operators wish to become virtual mobile operators. Second, many mobile operators will face saturation problems on their networks and therefore need additional spectrum in their own country. The debate over the bandwidth possibilities offered by 3G is actually a debate on the number of users rather than the bandwidth requirement per user.

As this is a new marketplace, no one company has all the experience and skills necessary to provide a complete end-to-end solution. The need to acquire new skills in order to compete in wireless data means that the strategy of a traditional operator will have to change. The value chain for wireless data is new, a combination of the old mobile communications and the existing internet value chain. Value will reside in ownership of the customer relationship and in content and service provision. All operators will thus look either to establish a portal or to form partnerships with portals in order to secure a relationship with the end-user. The result of this is likely to be horizontal consolidation through partnerships and acquisitions. Many operators are already looking to secure relationships with application
service providers and developers. 
 
Currently the telecommunications industry accounts for around 2% of GDP; through wireless data, mobile operators are capable of targeting a margin on the remaining 98% of goods and services. In our opinion operators have the opportunity to derive revenues from service fees, airtime, advertising and customer knowledge, commissions and content management. We see revenue streams in mobile expanding from today's base of airtime and call revenues to include commission on transactions, advertising and other value propositions. The wireless data business model will move towards the internet business model and away from the traditional mobile voice model.

With the cost of obtaining a 3G licence varying by country, the cost of setting up a 3G network will vary dramatically. This has important implications for the strategies of mobile operators. In countries such as the United Kingdom, Germany, Italy and France, which have high licence fees, operators will probably look to form partnerships with other content and portal providers, possibly in exchange for equity. Operators will also look to exploit any relationships they have with operators in other cheaper markets.

Based on the work carried out in this report, we estimate that by 2010, the European wireless data market is projected to be worth in excess of $82 billion. Transactions account for the single largest revenue element in the total revenue pie, although voice revenues continue to be the single largest element of total ARPUs. Significantly, SMS revenues, at present an important driver of revenues, become a small percentage of total ARPU in future. However, while it can be seen that voice revenues increase initially due to growing subscriber numbers and greater usage as the price per unit falls, total voice revenues are expected to begin to decline from about 2002 onwards. This decrease is offset by growth in revenues from data services, with transaction commissioning, multimedia and info services/surfing taking the lion's share of data revenues by 2010.

The most advanced markets in Europe for wireless data services will continue to be the Nordic markets, reflecting the advanced levels of wireless penetration, internet penetration, and the income distribution within these markets. The UK market also offers substantial upside potential too, with business data applications generating a relatively high proportion of total revenues. The United Kingdom currently has the highest proportion of B2B-enabled firms in Europe and hence has the potential, within our model, to become a major wireless data market. Germany remains the single most important market in Europe based on the projected revenue opportunity, with France and the United Kingdom the next most important of the European markets, according to the model.

JP Morgan is a leading global financial firm that serves business, government and individual clients through a range of sophisticated advisory, financing, trading and investment capabilities. Morgan also commits its own capital and resources to promising enterprises. For more information, visit www.JPMorgan.com

Andersen (formerly Arthur Andersen) offers a broad range of professional services in consulting, assurance, tax, corporate finance and, in certain countries, legal services. For more information, visit www.Andersen.com

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