InterDigital Inc (IDCC)

[sophist]

INCREASED VOICE CAPACITY - A KEY DRIVER FOR UMTS

The question isn't whether UMTS will be deployed but rather how quickly.

Four factors are driving UMTS adoption. These are: (1) regulatory mandates, (2) greater network capacity, (3) reduced capital and operating costs, and, for end-users, (4) the availability of well-functioning, numerous, and low-priced handset models.

Most important, and least recognized, is the value of UMTS for providing low-cost voice capacity.

The UMTS air-interface is more efficient than are the GSM-GPRS and EDGE interfaces, in particular, for mixed voice and data. This translates into greater traffic capacity per MHz of spectrum and, correspondingly lower operating costs. These lower costs become more pronounced as traffic increases.

Yet, the industry has seemingly ignored the capacity gains and cost savings that UMTS allows and, instead, focused on the data services that it enables. Abstractly, the industry recognizes the capacity and cost advantages for voice that UMTS provides. Yet few are talking of those advantages - and, by inference, paying full attention to them. When placed in the perspective of industry revenues, this lack of attention is remarkable. Voice generates most revenue.

Because UMTS increases capacity, it will become increasingly important, indeed essential, for facilitating expanded data services. However, into the near- to mid-terms, if not beyond, voice will continue to produce most revenues.

On this account, the strategic advantage of UMTS may lie as much in the low-cost voice capacity that it provides as in the high-speed data services that it enables. Network costs are high during the early years of UMTS, thus explaining the reluctance of many operators to invest in it.

Beyond 2006-2008, the situation reverses. Both increasing traffic and a greater proportion of data will inexorably raise the per-minute costs of EDGE and, especially, those of GSM-GPRS. At the same time, the costs of UMTS will continue to decline. Once the cost curves cross, the operators that have deployed UMTS will enjoy an increasing cost advantage over those
who have not.

The crossing of the cost curves would explain Hutchison's market entry as a "pure" UMTS operator and its seemingly untenable tariff reductions in the U.K.

In March 2003, Hutchison launched Europe's first commercial UMTS networks in the U.K. and Italy. On June 5, Hutchison-U.K. slashed voice tariffs to 5p per minute or less. This represented as much as a 50 to 70 percent discount on the average price for mobile calls.

It appears that Hutchison has reached similar conclusions to ours - that UMTS will prove profitable based on its lower costs for voice alone. From this perspective, Hutchison's pricing makes competitive sense - assuming its continuing commitment to UMTS -- and could build a meaningful subscriber base before its competitors respond.

Hutchison's UMTS handset subsidies would support this thesis. Network operators will subsidize UMTS handsets to $100 or less. This is being driven by Hutchison-U.K., which is already selling handsets for as little £49 ($80).

Some will argue that such subsidies will lead Hutchison to bankruptcy. However, over the mid- to long-terms, UMTS will enable it to provide lower-cost voice service. As such, it believes that it can offer voice to heavy users at as much as 50 to 70 percent below current rates and still prosper. If it attracts enough such users from other operators, the handset subsidies - in the abstract - make sense.

Whether or not Hutchison has the financing to reach breakeven is another matter. Nonetheless, by subsidizing to less than $100, the price of handsets as a barrier to adoption of UMTS, at least for heavy users, will no longer be an issue.

The competition from Hutchison aside, established operators may find that subsidizing UMTS handsets for their heaviest users will be a less expensive way to relieve capacity on their GSM-GPRS networks than by adding GSM-GPRS infrastructure.

This analysis is from The Shosteck Group's newly published white paper, entitled UMTS -- WHY AND WHEN IT WILL HAPPEN:
TIMETABLES AND FORECASTS. (See below.)

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NEW SHOSTECK GROUP WHITE PAPER -- UMTS -- WHY AND WHEN IT
WILL HAPPEN: TIMETABLES AND FORECASTS

This new paper compiles, expands and updates the views that The Shosteck Group has presented in its strategic seminars and studies since 1999.

It delves into:

FACTORS DRIVING UMTS ADOPTION
Regulatory Mandates
The Greater Capacity and Lower Costs of UMTS
Refocusing on Voice
The Cost of Voice over GSM-GPRS and EDGE
The Cost of Voice over UMTS
Adducing the Hutchison Strategy

THE INFLUENCE OF EDGE
The Impact of EDGE on UMTS Deployment
The Impact of EDGE on UMTS Investment

HANDSETS AND THEIR IMPACT
Handset Performance
The Number and Variety of Handset Models
Handset Prices

FORECASTING THE ADOPTION OF UMTS
Forecasting UMTS Subscribers
Forecasting UMTS Handset Sales

Full Table of Contents and information on this study are available on our website. For questions, please email Jane Zweig, [e-mail] or call 1 301 589 2259.

THE WHITE PAPER IS AVAILABLE FREE OF CHARGE BY REQUESTING
IT ON THE SHOSTECK GROUP WEBSITE, www.shosteck.com

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