Mobile Operators Search for New Biz Model

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When it comes to mobile content and applications, operators are offering users only a narrow choice of services, says Marshall. "It's like the difference between a Walmart and a specialty shop," he says.

"The success of 3G and mobilizing the Net is predicated on Internet model and mobile service providers and mobile services are far from that model."

The solution?

The success of cellular helped create the market-saturated hole the industry has got itself into. How can it dig itself out?

Nordstrom believes it's inevitable cellular will evolve toward the Internet model of open access.

"All they know is it's something with a bit pipe, which they are very worried about. I think it's the fear of, 'you know what you have, you don't know what you get'."

Yankee Group's Marshall agrees, and sees clear signs of operators evolving toward more open models, such as Hutchison 3's new X-Series offering. For a near-flat plan, 3 UK and Hong Kong are offering free Skype-to-Skype calls and IM, Internet browsing and access to Slingbox and Orb.

US carrier Sprint is heading in the same direction, trialing a package that offers unlimited voice, text and data for $120. The price is competitive with unbundled prices for those services, and is nearly a value buy for customers who've abandoned their landlines.

"It's a dramatic shift in business model, in the go-to-market strategy and partnerships, even the way in which they structure the organization," Marshall told Telecom Asia. "I think they recognize the opportunity and they are trying to figure out how to execute on it without significantly cannibalizing their traditional business."

However, John Delaney, an Ovum principal analyst, says operators have "good reason to be worried about the Internet model.

Access is not their business model. They want to drive people onto their network and charge for the traffic."

He agrees that the X-Series is another step toward the Internet business model, but says operators should not assume that "consumers won't pay for traffic".

"If you look at multimedia services, especially video streaming and so forth, that seems to be the case. You have the precedent of SMS for which traffic was charged, and it has been enormously successful."

What's missing is the main revenue driver for the Internet content business, he believes - advertising.

Will advertising save mobile?

Certainly, the industry is starting to pay attention, with a number of operators - in the US in particular - offering free text messages in return for ads.

Vodafone is experimenting with B2B advertising services in the Netherlands, targeting insurance salespeople and pharmacists, with advertiser-supported links to preferred content.

"Operators want to make advertising work," says Delaney. "They're worried about doing damage by doing advertising in an inappropriate way, quite rightly so."

But it's accepted online, he says because of the tacit understanding between users and Web sites.

"They know that the reason most of the content is free is because of the ads. In principle, I think there is no reason why users should be any more offended about these services than they are on the PC."

But advertising is not an opportunity for mobile operators alone. Nokia has just launched two mobile advertising initiatives - one a managed service for advertisers, and the other an aggregated content platform to sell access to mobile audiences.

However, cellular operators' unique strength is the huge body of data they have about individual users. Operators can leverage the information on devices and services that are being used, the profile of subscribers who are using it, their monthly spending, and where they use their phone.

Unlike broadband, you are delivering to an individual, Marshall says.

"Obviously, it increases your ability to segment that market. There's an enormous amount of upside there for service providers that can harvest the value that they have in the network."

The problem with breaking out of the current impasse is that financial markets are cool toward the mobile Internet story, and much prefer the emerging market story.

"It doesn't look like investors like operators to be brave," says Nordstrom. "They always prefer to take an increase in dividend."

He thinks it's inevitable mobile will leap to an Internet-style business model, but most likely by an operator controlled by a private equity firm.

Nordstrom says he's aware of "several" operators under close scrutiny by private funds. Private equity players "can operate more easily, they don't have monitoring from the market, and they are more rational" in management decisions, he said.

"I think the mobile ISP model will be the model that will deliver growth to the mobile industry.

That kind of change is most likely to come from private equity."

THE INDUSTRY DIVIDE
The mobile business in developed economies is in stasis, while emerging markets flourish, as these results (below) show.

No wonder Vodafone's acquisition of 67% of Indian operator Essar was so warmly received by the market. And why HTIL, which sold the stake for $11.1 billion, was subsequently marked down.

Vodafone, took a 2.95 billion-pound ($5.7 billion) loss in its interim result last year (the latest available). Leaving aside Essar, it expects just 5-6.5% organic growth this year. HTIL made a pre-tax gain of $9.6 billion on Essar, and declared a special dividend. Its stock price slumped afterward because Essar was its sole source of growth, providing 6.1 million of the 9.5 million new subs and 45.2% of Ebitda for the period (HTIL doesn't break out financial performance for individual markets). HTIL CEO Dennis Lui couldn't convince the market that he has a new growth strategy.

Hong Kong operator SmarTone improved revenue and Ebitda, but its operating profit fell 20% because to higher handset subsidies. Thanks to higher holdings of bank deposits and debt securities, it actually saw a 17% lift to its net.

By contrast, Indian carrier Bharti Airtel is in the sweet spot. Customer numbers nearly doubled, revenue and Ebitda soared 59% and 69% respectively. Its net for the period represented a margin of 22.1%.

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