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