Only 10% of European mobile users — one-fifth of operators’ expectations — will use UMTS in 2007, which will delay industrywide payback until 2014 at the earliest, according to a new report by Forrester Research B.V. (Nasdaq: FORR).
“Forrester discussed deployment plans with executives at 26 European UMTS license holders and, to our surprise, 87% of interviewees expressed optimism about UMTS, and 31% think it will become a definite success,” said Forrester Analyst Michelle de Lussanet. “All but three expect to have a UMTS test network running by Q1 2003, and 88% plan to launch commercially before 2004. The 21 incumbents in our interview sample think UMTS will bring in 5% of total revenues in the first year and 39% in the fifth year. But in our view, operators are dreaming. Only about 10% of European mobile users will use UMTS in 2007 — one-fifth of operators’ expectations.”
Forrester calculates that even with operators’ unrealistic penetration assumptions they will need to triple 3G user ARPU to break even in year five. More sensible penetration rates and a realistic, flat ARPU over the full license period will push average break-even out to 2014 for most countries, with the worst cases not reaching break-even before licenses run out.
Finland, France, Italy, and Switzerland will hit break-even earliest between 2010 and 2012. France and Italy combine relatively few 3G competitors with large market size, minimizing the ratio of cost to potential revenue. Zero-cost 3G licenses and handset-subsidy prohibition will drive Finland, while Switzerland gains from average €500 ARPU — Europe’s highest. The UK, Germany, Spain, and Portugal won’t see black ink before 2015. In the UK and Germany, this bleak 3G future stems from exorbitant license fees of €764 and €683 per capita, respectively. But all four countries will see an increase in the number of competing operators in the 3G era, requiring higher customer-acquisition spending and greater handset subsidies. Greenfield players like Hutchison 3G won’t hit break-even until 2017. Hutchison’s disadvantage comes from its high up-front infrastructure investment, in addition to fierce UK market conditions.
“The reasons for the excruciatingly slow UMTS take-up are fourfold,” de Lussanet added. “Complex UMTS technology and network planning will yield significant setbacks — from interoperability between different vendors’ network components, handovers between UMTS and GSM networks, and complex UMTS network planning for which operators have no experience. Also, UMTS phones will ship late. Complex 3G phones must switch between GSM and UMTS and support features like video streaming, a camera, Java, and Internet browsing — all in a low-cost, lightweight, low-power unit. This, combined with uncertain user take-up, means that handset vendors will not supply large volumes of 3G phones early. Thirdly, business and operational issues — such as forming partnerships, working out revenue-sharing models, and creating service-level agreements — will stall service creation. And finally, European consumers have historically been slow to adopt new services like i-mode and GPRS.”