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European Operator Unveils Third-Generation Mobile-Phone


Feb 02, 2003 (Sunday Business - Knight Ridder/Tribune Business News via COMTEX)
-- It is 10 centimetres long, weighs 150 grams, is silver and dark blue, and
takes up less pocket space than a cigarette packet. Yet a product unveiled last
week could mean life or death for some of the world's biggest companies, which
have spent tens of billions of pounds on its development.

Last week the world had its first glimpse of a genuine third-generation mobile
phone. It was launched by Hutchison 3G, one of the European mobile operators
which together spent $100 billion (UKpound 61 billion, E92 billion) on licences
at the top of the internet/telecoms boom in 2000. It will enable customers to
make mobile video calls, send and receive video clips and surf the internet. It
will be available to Hutchison customers before the end of March -- long before
a similar product is available from rivals Vodafone, MmO2, Orange and T-Mobile.

The technology is undoubtedly impressive. But the question remains: will the
public pay the UKpound 1.6 billion a year needed to turn into profit the $11
billion Hutchison is so far estimated to have sunk into its new service, dubbed
"3"? As yet, the signals are unclear; Hutchison is taking a huge risk.

With its translucent white plastic panelling and designer lighting, 3's new
flagship store in London's Oxford Street looks more like the surgery of a
Hollywood cosmetic surgeon than a high street phone shop. Behind a gleaming
glass case are displayed the mobiles the industry has been waiting anxiously to
see.

At first touch, the new phones feel no different from the lightweight
flip-screen phones already on the market -- apart from the price tag, which at
UKpound 399 feels distinctly heavy.

But take the phone on to the street to make a video call and you begin to
understand where the $11 billion investment has gone. A hands-free earpiece
allows you talk while looking at a live video of the person you are talking to.
A smaller picture of yourself and the way you look on their handset also appears
on your screen but can be dismissed at the touch of a button. As well as seeing
the person you are talking to, you can send them live footage of your
surroundings.

The phones also offer a variety of services in addition to making video calls.
Watching replays of sporting moments, particularly soccer, has been identified
as a key application and 3 has an exclusive agreement with England's Football
Association Premier League for the provision of video clips of goals and other
events to mobiles.

The cost of the deal has been estimated at UKpound 35 million for three years,
al-though 3 could end up paying substantially more if the service proves a
success. Users will have to await anywhere from a few minutes to an hour to
download a video; having done so, they can store it on the phone to show it to
friends.

Last week, 3 announced it had done a deal with Reuters, the global information
and news group, for content. Under the agreement, 3 users will have access to
breaking news, archive stories, company reports, market news and investor data.
This is available direct from the 3G phone's homepage screen and is updated in
real-time via a feed from Reuters.

The Business understands another deal with film entertainment provider My Movies
is also on the table, which will provide users with video clips of movies
currently playing at the cinema. When used in conjunction with the new phone's
location-based software, this allows the user see what is showing.

By the end of the year, all of 3's phones will have what the industry calls
assisted global position service, the satellite location services that precisely
pinpoints a cellphone's location. Although only handsets made by Motorola will
have this precise location service, 3 believes it can still offer customers an
acceptable location service based on a network identification technology called
cell ID that can locate a phone within a couple of streets.

Unlike NTT DoCoMo's 3G phones in Japan, 3 users can also roam on to MmO2's
global voice network using their 3G handset to make ordinary mobile calls.
Japanese users wanting to do this have been forced to carry two phones.

But all this innovation has come at a high price for Hutchison 3G and its three
shareholders: Hutchison Whampoa (65 percent), NTT DoCoMo (20 percent) and KPN
(15 percent). The UK 3G licence alone cost Hutchison UKpound 4.4 billion and the
company is currently working through a UKpound 3.2 billion loan from 16 banks
plus another UKpound 700 million of vendor financing.

Nomura calculates that by November of 2002, Hutchison had already invested more
than $11 billion in European 3G licences and capital expenditure before signing
up a single commercial customer. The $11 billion question facing 3 is whether
customers will sign up in sufficient numbers to justify this investment. Having
conducted 16,000 customer interviews, 3 says it is confident there is a strong
enough demand for 3G. But the privately-owned company remains secretive about
its strategy.

Canning Fok, managing director of Hutchison's lead investor Hutchison Whampoa,
has previously indicated that the 3 network should attract about 1 million users
in the UK and Italy by the end of 2003.

Every UK user will pay either UKpound 59.99 a month for a package for all
services including voice, with heavy users being offered a basic package for
UKpound 99.99 that 3 believes will be sufficient for nearly everyone. But even
if 3 achieved the predicted 1 million users by the end of the year and even if
they all opted for the heavy user tariff, Hutchison would still be a long way
from recovering its costs.

Nomura telecoms analyst Chris Alliott says: "Hutchison 3G is going to have to go
some in terms of market share to make any money." He says 3 will have to capture
a 13 percent market share by 2010, generating average monthly revenues of over
UKpound 25 per subscriber, representing UKpound 1.6 billion a year, before it
can begin to break even.

The first 20,000 subscribers to the new service will be offered significant
reductions on the price of mobile phone handsets. After that, 3 intends to rely
on clever marketing and the must-have appeal of video phones to attract big
customer numbers.

If the targets look ambitious, there are still technological hurdles to
overcome. The industry is waiting to see if 3 can solve those problems when the
network launches commercially in March. There are concerns that the 3G network
could experience temporary loss of service as it begins attract significant
numbers of users in addition to the 1,000 trial users. The 3G networks are known
to work well in test conditions with a small group of users but tend to fall
down when accessed by larger numbers.

Nomura's Alliott says: "The whole user experience will have to work well. People
now take reliability of service for granted when making voice calls and they
will expect the same from 3G."

Previous technical delays in the launch of 3G may work against 3, as it has to
compete with other technologies. The kind of picture messaging offered by
operators such as Vodafone Live are already nicknamed "2.5G" because of their
ability to provide many of 3G services over existing networks.

But there is a bigger threat, one you do not have to walk far from Hutchison's
glitzy shop to find. Anyone sitting in the Costa Coffee shop near 3's Oxford
Street store can access the internet faster and cheaper. A rival wireless
technology called Wi-fi, currently being billed by its main UK promoter BT as
"fast secure broadband internet access for people on the pause", is being rolled
out in 4,000 hotspots by 2005.

Wi-fi hotspots can usually only be accessed within a 100-metre radius of a base
station but the low cost (around $100) of stations means that BT and its
partners such as Hilton Hotels, BAA and Costa Coffee, can install them wherever
they think business travellers may need them. Wi-fi has the potential to siphon
off the kind of high-spending business customer that 3 will need to underpin the
revenues needed to pay back its massive early investment.

BT's official line has always been that Wi-fi and 3G are "complimentary"; but
significantly the operator chose the week of 3's product unveiling to take the
gloves off and give 3G a body blow.

David Hughes, BT Retail's director of mobility and the man in charge of BT's
Wi-fi rollout, announced a price comparison that showed Wi-fi internet access to
be one-tenth the price and four times the speed of 3G. He added that there were
already 20 million devices such as laptop and handheld computers shipped
worldwide that were Wi-fi enabled -- far in excess of the number of 3G phones.

So far, BT has 80 live Wi-fi hotspots and deals announced with BAA, Welcome
Break and Hilton Hotels take BT's Wi-fi network national with hotspots now
beginning to appear in 27 Welcome Break Service Stations, 36 Hilton Hotels in
England, Scotland and Wales and in key regional transport hubs such as Aberdeen
airport.

A total of 45 companies have signed up for trials of BT's Wi-fi network. These
include the BBC, Carlton Communications, Toshiba. Scottish Enterprise, Royal and
Sun Alliance, John Lewis, Microsoft and GE Capital. These companies can now also
use any of TeliaSonera's network of 500 Wi-fi hotspots in Sweden, France, Italy,
Denmark and the United States.

More worrying for 3, Hughes also chose last week to reveal BT's new global Wi-fi
roaming strategy. In addition to the 400 sites that BT intends to make
operational by the summer of this year, BT intends to provide users of its Wi-fi
service BT Openzone, with international roaming via a network of partnership
agreements. In addition roaming agreement in place with Scandinavian operator
TeliaSonera, BT told The Business it is in talks with 12 operators worldwide
with which it hopes to close roaming deals by the end of this year.

Roaming is crucial for any mobile network hoping to attract the high-spending
early-adopter professional market. Worldwide roaming by 2004 could give BT
Openzone a big edge over 3. Business travellers and holiday makers are more
likely to want to make video calls to family and friends when abroad; 3's
service will initially be limited in this area.

While 50 percent of the UK population will be included within the 3G network at
its launch, when abroad 3 customers will initially only be able to make video
calls in Italy. This will be extended to Hong Kong, Australia and Sweden, but 3
can give no indication as to when anything like full international roaming will
become available.

When 3 opens the doors of its Oxford Street store to the public in March far
more than Hutchison 3G's $11 billion investment will be at stake. Between them,
Europe's mobile operators have invested over $100 billion in 3G operating
licences and have to invest as much again to build the networks to operate 3G.
In the UK, operators like Vodafone and MmO2 have delayed full commercial launch
of their 3G networks until 2004.

Hutchison's early launch of 3G has in effect put them in a no-win situation.
Although they seem happy to watch Hutchison trailblaze 3G, the other main mobile
operators are likely to lose out and see dramatic share price falls if
Hutchison's 3G succeeds or it if fails.

It is impossible to overstate the size of the gamble. If 3 proves popular and
the network starts to grab the kind of market share it needs, the other mobile
operators will face a choice between annihilation or consolidation in market
that will be unable to support five high-spending mobile network operators.

If, on the other hand, 3 gets off to a slow start, other operators will face
strong shareholder pressure to write off the billions already spent on 3G
licences and make substantial downward reductions on their revenue predictions.

If the general public were to give 3G the cold shoulder, Hutchison would have
had the distinction of giving birth to technology's biggest and most expensive
white elephant ever.


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(c) 2003, Sunday Business, London. Distributed by Knight Ridder/Tribune Business
News.

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