Does 3G have a Viable Business case for Emerging Markets?

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Martin Varsavsky, CEO FON (largest Wi-Fi network operator) once said “We are sorry for telecom operators who made the mistake of 3G but it’s not our fault”. Another top executive at one of the European operators had once remarked that “For operators, 3G is essentially a waste of money”. There is a lot of media hype in the emerging countries like India and China on 3G roll-out but the business case for 3G is still far from being viable. The expectations of high consumer adoption leading to increase in ARPU are yet to be realized.

In the emerging countries, either the 3G services are yet to be launched or the 3G subscribers are below 10% of the total subscriber base. Only South Africa and Malaysia have higher then 10% subscriber base with 3G subscribers at 10.7% and 18.3% respectively. It is not surprising that these are the only two countries that have high 3G base as the ARPU in both these countries is higher than that in rest of the emerging nations and data ARPU is also higher. I have a theory that either the total ARPU should be over $10 per month or the data ARPU should be over 15% of total ARPU for the 3G services to gain traction. Any country that does not fulfill any of the above two criteria will find it difficult to have a viable 3G proposition. The reason for taking these two as criteria is that if the ARPU is low, it would take a long time to breakeven and it is very difficult to increase the ARPU in any market unless there is a genuine appetite for value added services which is reflected in the greater than 15% data ARPU criteria. In the chart below (click the chart to enlarge), the countries that fall in the lower part of the graph are likely to be less successful in the 3G space while the countries in the blue area are more likely to be successful. China, Indonesia and Philippines are the other three countries apart from Malaysia and South Africa that are likely to succeed in making the 3G a viable proposition. Sri Lanka is a borderline case but given the low ARPU of this market, I am more inclined to say that it would find it extremely difficult to be successful.

3G framework

The consumers in the emerging nations are highly price sensitive and hence it is not surprising that most of the tariff related innovations have come from such countries. The fall in 2G tariffs led to increase in penetration but the falling tariffs could not compensate by the increase in usage (MoU) leading to sharp fall in ARPUs. Given the income levels in emerging nations, the average amount spent on communication services as percentage of total income is very high and hence I do not see the ARPU levels going up even if the quality of service improves. The consumers are well aware that for the price they pay, they would need to compromise on the quality of services and hence so do mind if the services are not at the same levels as some of the more developed countries. Hence, the consumers are not going to shift to 3G unless there is a killer application that would make them sit up and take note. Unfortunately, there is no killer application on 3G. Most of the current applications like email, chat, social networking, internet radio, etc. work well on the current 2G and 2.5G networks. It is only the experience that is better on 3G due to higher data speeds but there is no 3G only application that has a mass appeal. People initially were gung-ho about the video telephony but now it appears that not too many consumers are enthusiastic about it.

Another common myth is that 3G is more efficient than 2G in terms of operating expenses (OPEX) and hence it would result in higher operating margins for the operators. I do not deny that 3G is much more efficient than 2G but at capacity. 3G has three times more capacity than 2G but since most of the networks across the world are on 2100 MHz, the number of sites required to provide coverage are 2.5 times more than that for 2G on 900 MHz. This means to provide coverage, 3G would be more expensive as it needs more sites but the requirement for capacity sites would be smaller due to higher capacity of 3G. Hence, only if the network utilization were to cross a particular threshold, 3G would be beneficial.

Any operator while launching 3G services would go through the following three phases:

  1. Roll-out for Retention: This is the first stage of 3G network roll-out. In this phase, the carriers are not too sure about the 3G potential and would launch the 3G services in the areas where the high ARPU consumers reside or work. This is essentially a step to retain their high ARPU base and the cost involved in launching full scale 3G services is very high.
  2. Roll-out for Capacity: As the 3G usage increases and more consumers start to adopt 3G services, the carriers need to increase capacity and the coverage area. The business case starts to look better but this phase is the most capital intensive one as well.
  3. Rollout for Cost Efficiency: This is the stage in which the real benefits of 3G services start to appear. The focus of the operators in this phase is to have an optimum mix of 2G and 3G subscribers and looks to switchover to 3G completely as the capacity benefits of 3G come into play. This stage has so far been crossed only in Japan and Korea. In Japan, the carriers stopped offering 2G services around two years back to reduce OPEX and complexity in managing multiple networks.

It is a mistake to assume that 3G services are more cost efficient as the cost efficiency roll-out is the last stage and it can only happen when the first two stages have been crossed. The high population density in developing countries does not mean that the first two stages can be crossed quickly.

I have my doubts on the business case for 3G services in developing countries and unless it can provide a compelling reason for its adoption, the 3G services would continue to pull the EBIDTA down for the carriers.

Also Read: Mobile Broadband-Drivers and Inhibitors

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18 Comments on "Does 3G have a Viable Business case for Emerging Markets?"

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Neeraj Gupta
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Neeraj Gupta
6 years 11 months ago

I agreed with you…even after BSNL / MTNL launch, we have 9000 subscribers.
Moreover China Market have launched 3G nearly 6 months back….they have penetration of ~4% per month only.
Need to get killer apps and low price handset to drive this.
WHo is going to invest where one need to invest $1Bn for Spectrum and another 1Bn for radio nw overlay (minimum coverage)?

Regards
Neeraj

vijay deep verma
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vijay deep verma
6 years 11 months ago
South Africa & Malaysia are expected to make a success out of 3 G based on Total ARPU & Data ARPU. South Africa having population of about 50 Mil and subscriber base growing @ 40% and Malaysia with population of about 25 mil and Mo. Penetration of 98 % are but miniscule markets compared to India & China having a subscriber base of above 400 & 700 mil respectively (Population of India & China above 1.2 billion each) with the Indian mkt growing @ 30% YoY. This gives rise to a few questions: a. How many markets of the size… Read more »
Anthony
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Anthony
6 years 11 months ago
One thing 3G operators had going for them in South Africa was an over-regulated fixed line sector. Until quite recently, there was only a single fixed line broadband provider, and the mobile operators provided the necessary competition to drive down prices and expand demand. Having said that, I don’t think you can look at larger emerging markets as homogenous. A 3G network covering the whole of India might not fly, but I would imagine that, if you analysed ARPU in Mumbai and some of the other large cities, you would have a viable market for it. That is how mobile… Read more »
D.P.Singh
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D.P.Singh
6 years 11 months ago
Mobile operators have already begun the process of deploying HSPA data services across their UMTS networks. The lure of high-value and compelling services such as mobile-TV and truly mobile broadband Internet access, is rapidly driving investment in this new technology. HSPA represents a significant improvement in data rates over the initial 3G specification and for the mobile operators it also represents a significant challenge in engineering their networks. With downstream data rates capable of delivering a theoretical 21 Mbit/s, the demand for bandwidth in the radio access network (RAN) is increasing by an order of magnitude from where it is… Read more »
Harish Gandhi
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Harish Gandhi
6 years 11 months ago

IN my view …

3G will not cause EBITDA dilution since the incremental OPEX for 3G will be small for operators that have a 2G/2.5G network. Capex recovery will be much harder.
For greenfield 3G operators – both OPEX and CAPEX recovery will be a challenge.

3G consumer adoption will be slow, will be initially restricted to the metros (since this is where the network rollout will happen first). WIll take a few years before you see a significant impact. However the operator marketing machinery will kick in and there will be substantial buzz around new applications/uses of phones.

Harish

Vishnu Chanduka
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Vishnu Chanduka
6 years 11 months ago
Hi, Martin Varsavsky, CEO FON said that why operator opted for 3G ,in his perception it is a blunder . It is a matter of which technology has a bigger ecosystem to support. It is just like the war between toshiba and sony for VCR and ???. Today 3G has bigger ecosystem supported by bigger companies like ericsson and NSN etc .Which big company is supporting WiMAX ???. What operators are looking for is not just which technology but actually looking for relabile vendor who stand the pressure of market in long run and can keep the supply and innovation.… Read more »
Tokunbo Omiyale
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6 years 11 months ago
Hi Mohit! Very happy you raised this issues.It seems sometimes telecoms infrastructure/operators marketeers seemto chase shadows without looking at the kind of figures and scenarios you presented, My worry is regarding the market penetration and ARPU derived from these new technologies( 3/4G) will ever meet expectations.Having stayed in the west to return to Nigeria 2.5 years ago l’m not still that convinced that triple-play functionality hads achieved its anticipated market uptake and whether it would l don’t know. I hope we are not over-hyping the potentialities of these new technologies in terms customer uptake and capability of manufacturers/operators to break-even… Read more »
Fred Stein
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6 years 11 months ago
Great question: Great challenge. And great analysis. Looking at the superb graphic we see that of the two largest emerging markets, China is clearly in the ‘blue’ and India in the ‘white’. Yet 3G subscriber uptake in China is still well below plan. Now let’s consider the future. I predict that 3G uptake will steadily increase in China. The driver will be lower cost 3G enabled devices, Smart Phones, Tablets, Netbooks, etc. combined with Internet-based services. This will create a ‘virtuous circle’ driving down costs, while proliferating devices and services. The ROI will be good. In India, WiMAX may provide… Read more »
Praveen Gupta
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6 years 11 months ago
My interpretation from this post is that India does NOT meet the criteria. If I reflect on start of 2G service in India 10+ years ago. We had similar questions on success of 2G in India with all kind of ARPU questions. We had similar questions on business case of 2G success. AirTel struggled to survive. Considering where India & AirTel is today, it was an investment well worth it. We will go through same business curve for 3G. However, early players will eventually win a bigger market share (as happened in 2G). So, waiting for business momentum is NOT… Read more »
Yixin ZHANG
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Yixin ZHANG
6 years 11 months ago

As mentioned on LinkedIn, effective demand is a problem in emerging markets– it’s not only about how much consumers can afford on telecommunication, but also whether the services and applications can create enough perceived value to attract enough usage. Before the operators recover their past investments in 3G or 3.5G, 4G will have to wait. 4G may take off soon in North America or Western Europe, but it may take another 3 years or so for China. That’s my guess.

Arthur PInto
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Arthur PInto
6 years 11 months ago
Love it! Mohit, you have hit the spot… Of all these comments one thing is clear: “Disruptive Technologies” need a “Think Different” attitude. It is difficult for distinct cultures to come together in a world of convergence, with several different business models. An important think-different-attitude need to be adopted by the telecomm operators. IP communications is all about IT, and efficient packet transfers. And no network design can serve all types of applications. So the telecomm operators, and their networks, can neither carry all the traffic, nor play gate keepers to all communications. Think Internet. Think UC, and client owned… Read more »
Arthur Pinto
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Arthur Pinto
6 years 11 months ago
Love it! Mohit, you have hit the spot… Of all these comments one thing is clear: “Disruptive Technologies” need a “Think Different” attitude. It is difficult for distinct cultures to come together in a world of convergence, with several different business models. An important think-different-attitude need to be adopted by the telecomm operators. IP communications is all about IT, and efficient packet transfers. And no network design can serve all types of applications. So the telecomm operators, and their networks, can neither carry all the traffic, nor play gate keepers to all communications. Think Internet. Think UC, and client owned… Read more »
Anonymous
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Anonymous
6 years 11 months ago
Success of 3G in India will purely depend on the spending patterns, provided 3G operators are able to meet promised standards and market their offerings well. Basically, 3G is a luxury and India has potential to absorb huge quantities of luxury items. The demographic and geographic spending patterns of high end mobile handsets could be an indicator for the markets of 3G. I don’t think 3G will become a mass consumption item. So roll-out in metropolitan cities seems quite logical. Indians are highly price concious and are not quite willing to leave old habits. We did not accept the worldspace… Read more »
Anmol Singh
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Anmol Singh
6 years 11 months ago
Success of 3G in India will purely depend on the spending patterns, provided 3G operators are able to meet promised standards and market their offerings well. Basically, 3G is a luxury and India has potential to absorb huge quantities of luxury items. The demographic and geographic spending patterns of high end mobile handsets could be an indicator for the markets of 3G. I don’t think 3G will become a mass consumption item. So roll-out in metropolitan cities seems quite logical. Indians are highly price concious and are not quite willing to leave old habits. We did not accept the worldspace… Read more »
Somdip
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Somdip
6 years 11 months ago
Hi Mohit, Good point raised by you,In country like india where teledencity is below 30% and large section of Rural market is still unpenetrated 3 G seems a Hullaboo.Although product offering and delevery gets much customer centric but there sholud be a sense while offering the services to the customer base in Devloping countries.Why we are running for 3G when 2 G or 2.5 G is not fully utilised here.I agree this will be a shift to better customer experince but what will be the cost justification and how much pocket do we have. There will always be a gap… Read more »
Kumar rajul
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Kumar rajul
6 years 10 months ago
Though Mohits Data ARPU / ARPU matrix looks interesting, I have a slightly different view. 3G success (if we define financial criteria) as success will largely depend on two parameters 1. Which circle the operator is in. 2. Quality of subscribers in operators network If an operator is leader in say delhi circle, there is high likely hood that the 3G business case is positive for this operator, while in the same circle another operator with lower quality of subs will struggle to make 3G business case Thsi is because most of the 3G subs are from operators 2G base.… Read more »
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