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=DJ FOCUS: Mobile-Only Operators Fear VoIP Value Destruction

By Nic Fildes
Of DOW JONES NEWSWIRES

BARCELONA (Dow Jones)--Mobile operators can usually be found talking up prospects at their annual conference but this year the spotlight's been as much on threats as opportunities.
The emerging Voice over Internet Protocol, or VoIP, software, which routes voice calls over the Internet, has been the main talking point at 2006's 3GSM mobile telecommunications conference in Barcelona as handsets and services that provide mobile phone users with access to Internet-based voice calls emerge.
For mobile companies that charge premium rates for voice calls, VoIP is a major threat as it offers consumers free calls over the Internet. With tariffs for voice products, both fixed and mobile, already falling fast through competition, regulatory pressure and new technology, VoIP could exacerbate the situation by potentially cutting tariffs altogether.
"Internet voice is going mobile," Jorma Ollila, Nokia chief executive said at the conference.
"Expect a mobile VOIP downgrade very soon," said Westhall Capital analyst Cyrus Mewawalla in a note entitled 'Nokia Opens The Floodgates to Mobile VoIP.' The investment implication? Stay away from companies who rely too heavily on voice revenues (especially wireless voice, where prices are up to 100 times higher than Internet prices)."
He subsequently recommended selling Vodafone (VOD), Telecom Italia (TI), China Mobile Ltd. (CHL) and Taiwan Mobile Ltd. (3045.TW).
Mewawalla continued: "The premium for wireless voice, without mobility, will disappear as wi-fi networks spread. By our estimates, that puts 75% of the market for mobile voice revenues at risk of a substantial price downgrade (in the order of 50%-80%). For some international calls, prices could fall by 90% or more."
Kai Oistamo, Executive Vice President, General Manager, Mobile Phones at Nokia, told Dow Jones Newswires in an interview that the manufacturer is committed to supporting all emerging VoIP technologies. He also said that with Internet brands entering the wireless space "it is very important to work with these guys."
The major Internet brands like eBay, Yahoo! Inc. (YHOO) and Google Inc. (GOOG), are all investing in developing VoIP services targeted at mobile phones.
Companies like BT Group PLC (BT) have reduced voice revenue exposure over the past few years and have started viewing VoIP as a potential lure for more customers to subscribe to broadband and other digital services. VoIP is even seen as bait to tempt customers away from mobile operators and back on to fixed networks.
France Telecom SA (FTE) and Telecom Italia SpA (TI), are also starting to offer services which utilize both fixed and mobile networks, meaning mobile-only companies like Vodafone Group PLC (VOD) may have the most to lose.
Smaller mobile-only companies like Hutchison Whampoa Ltd.'s (0013.HK) 3-branded operating unit and KPN NV's (KPN) German E-Plus unit have also embraced VoIP, teaming up with Skype, which is part of eBay, to offer unlimited voice calls over the Internet later this year to take market share from larger mobile players.
This leaves Vodafone, the largest operator in the world by sales, with a significant challenge. Although it has been steadily migrating its customers to third-generation, or 3G, networks which enable its customers to use increasingly sophisticated services, the potential threat of VoIP could endanger the bulk of its revenue base.
Vodafone still derives 81% of its revenue from basic voice services while the majority of its data revenue is still collected from customers sending basic text messages.
Yet despite all the talk, it may take a few years before mobile VoIP enters the mass market due to handset availability and call quality.
Vodafone doesn't expect VoIP to become a mass market proposition for two to three years. Chief Executive Arun Sarin unveiled an agreement at 3GSM to offer access to Google's search engine via its Vodafone Live! portal and said in the future, Vodafone will offer large bundles of wireless data which can be used for VoIP, Internet access or instant messaging.
"As an industry we will morph into this space (VoIP) over time," he said.
Sarin said that while VoIP services offer free calls to consumers, the user still has to pay a broadband subscription so the same principle could apply over mobile networks. He said that Vodafone won't offer the service over the next year but in two to three years time.
Sarin instead pointed to the increased capacity of mobile networks which will allow wireless broadband access, although at a lower rate than wi-fi. This will enable mobile companies to create value by offering more sophisticated entertainment services like mobile television, mobile Internet surfing and gaming.
Other mobile operators agree there is still huge potential for mobile networks to create value.
Rene Obermann, chief executive of T-Mobile International AG (TMO.YY), the mobile arm of Deutsche Telekom said: "Voice alone created a multi-billion dollar industry." He pointed to open Internet access, instant messaging and micro payments using mobile devices as key revenue drivers for mobile companies over the coming years.
Mobile television, and advertising around entertainment services, also emerged as topical points at 3GSM.
MTV's Chief Digital Officer Jason Hirshhorn said that the emerging mobile video download market and advertising around these services, opens up a significant new revenue stream for mobile companies and content providers if an appropriate business model can be formed.
"It will be a huge market," he said.
But new services will also take time to develop into meaningful revenue streams, meaning mobile VoIP remains a very real threat for premium voice services.
News at the 3GSM conference that Finnish manufacturer Nokia Corp. (NOK) and Motorola Inc. (MOT) have launched handsets that can roam seamlessly between fixed-wireless broadband - or wi-fi - networks and mobile networks also piled on the pressure for those telecoms companies with large voice exposure.
BT, which doesn't own a mobile network, will offer its customers in the U.K. the Motorola handset in the summer, meaning those users which take up the BT Fusion service can use wi-fi networks when within the range of a wi-fi hotspot to access VoIP. This means they only pay normal mobile rates when on the move and out of range of a hotspot, with, ironically, Vodafone providing the capacity.
T-Mobile will offer a similar service to its U.S. customers via the Nokia handset while Orange CEO Sanjiv Ahuja said its parent France Telecom will also look to offer a converged handset in 2006 as it ramps up its convergence offering.
Steve Andrews, BT head of mobility, told Dow Jones Newswires at the sidelines of the conference that wi-fi "brings the power of broadband to the handset." He said that at least combined 20 wi-fi/GSM handsets are becoming available over the coming months.
BT has around 14,000 Fusion customers using handsets which switch between the short-range Bluetooth technology and GSM and is adding over 2,000 users a week. BT is building wi-fi networks in 12 U.K. cities this year with the network already live in Cardiff and the London borough of Westminster.
With the greater capacity and wi-fi handsets available in the summer, VoIP over mobile looms large as a threat to traditional mobile phone revenues. If consumers can get free calls over VoIP, they are unlikely to pay a premium just for mobile voice.
Company Web site: http://www.vodafone.com
-By Nic Fildes, Dow Jones Newswires; 44-20-7842-9264; [e-mail]

(END) Dow Jones Newswires
02-17-06 1326ET
Copyright (c) 2006 Dow Jones & Company, Inc.