From 2G to 3G

From 2G to 3G

Bjørn Erik ReinsethCEO

19 March 2002

Bjørn Erik Reinseth, March 2002 Page 2

Agenda

Operator options

Business models

Players

Services

Culture

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2G characteristica

•No value chain – operators in full vertical control

•Limited service development – services specified by ETSI

•Low financial risk

•Creativity focused around network roll-out

•Extended lifetime – likely throughout 2012 => cash cow!

•Traffic generated by customer produced content (voice)

•Growth assured by increasing subscriber penetration

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3G characteristica

•Operator control limited to customer administration & screening, billing and basic (carrier) services

•Traffic generated by third party content services as well as person-to-person communication

•Larger financial risks, especially with high licence fees

•No ”proof” yet of a working business model

•Growth must come from increased usage, which will be revenue streams from other business areas

•Increased ARPU, but reduced margins

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The operator options

Network competition alone will not develop the mobile market according the stated objectives

Most consumer experienced development are results of service developments rather than network developments

A broad range of operator categories (SP, MVNO, MNO) is the only way of creating the wanted dynamic market

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ESP

SP SP

MVNO

ESP

MVNO

MNO

Time

Investments

Margin

The operator options

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Vertical options from 2G to 3GNO

SP

GSMUMTS

A

B

UMTSNO

GSMSP

CUMTS

SP

UMTSMVNO

D

GSM 1800 +roaming + VAS

GSMSP or MVNO

& VAS

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Service ProviderInternational calls

Calls to other operators

Sense Billing and Customer Administration

Voice Mail

SMS-C

International calls

Calls to other operators

Sense core network

Telenor/NetCom Voice Mail, SMS-C,...

Telenor/NetCom radio network

Telenor/ NetCom

core network

or MVNO

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MVNO vs Service Provider

MVNO Service Provider

Own operator code w/own SIM cards

YES NO

Swap customers between networks

Technically easy New SIMs required

International roaming Own agreements MNO agreements

Radio network (basestations) NO NO

Core Network (switches etc.) YES Not required

VAS platforms Own MNOs (today)

Complete call control YES NO

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A business for (fixed) content?•Fixed line internet provides no business model for

content services (charging for traffic only)

•Content providers are (desperately, but in vain) seeking to get shares of traffic revenues

•Fixed internet users are spoilt with free of charge content services

•Paper media with decreasing popularity cannot in the long run finance internet services albeit increasing popularity

•Two main challenges:• Willingness from media players to limit distribution• Simple and working debiting principles

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What happened to e-business?•Internet as a channel was no more than advanced mail

order

•Type of business was secondary to channel of distribution

•Focus was on atoms and not bits• Bits: Pictures, video clips, music, tickets, etc.• Atoms:Physical items

•No business model for trading of bits (credit cards most suitable for atoms)

Sense will focus on trading bits!

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What about mobile content?•There is a willingness to pay for mobile content

(ref. premium rate SMS)

•There is limted content avable for free (WAP only), hence users are not too spoilt with free content.

•There is a business model for mobile content services (ref. premium rate SMS)

•SMS is slowly becoming a general currency despite shortcommings like:• Expensive for credited part• Hesitance by operators to boost phone bill

excessively

•A model similar to premium rate SMS must be the governing business model for 3G mobile content services

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Mobile content servicesTwo regimes so far:

• Premium rate SMS• WAP (circuit switched)

Why was WAP (to date) a flop and premium rate SMS a success?

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WAP vs Premium rate SMS WAP Premium rate

SMS Attention High, but plunging Low, but soaring

Bandwidth Medium Very narrow

Terminal availability Limited All

Charging principle Traffic only Content + traffic

Revenues to CP NO YES

Charge per piece of information

NO YES

Users pay for reading time YES* NO

* will be overcome with WAP over GPRS

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Players in the 3G value chain

Mobile operator (SP, MVNO or MNO; delivers and charges for mobile content services)

Content Provider:1. Content Facilitators (prepares chargeable

content for mobile devices and performs IPR management)

2. Content Producers (e.g. Disney, CNN, NRK, Scanpix, National Library)

3. Media Partners (e.g. magazines, newspapers, tv-channels, radio-stations)

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Revenue breakdown (seen from MNOs)

”Gross”Margin

NetworkCost

Inter-connect

Cost

2G (voice)

Inter-connect

Cost

NetworkCost

”Gross” Margin

ContentCost Media

Partner

ContentProduction

ContentFacilitator

3G (SMS, GPRS, UMTS)

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Mobile content services (SMS, GPRS, 3G)

Sensecontent

&servicesstation

Contentprovider

Contentprovider

Contentprovider

Networkoperator

2G, 2.5Gor 3G

networks

@(www)

Sensewill provide flexible

billing solutions for content

Content providerscontrol own pricing

and branding

Standardisedinterface; technically

and comercially

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MNO – Content Provider relationshipThe conseption of MNO purchased or controlled content

will never be accepted by Content Providers

Content Providers will never accept a limited distribution of their content (i.e. through selected operators only). Exclusive content deals will be time limited only.

The operator must accept Content Providers right to own:• Branding• Pricing• Editorial freedom

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3G servicesThe mobile business will never re-experience a killer

application like mobile voice

There is no 3G killer application, so stop looking!

Three main driving 3G services (other than voice):• Internet surfing• MMS (third party content)• MMS (point-to-point)

”2G is a self playing piano.In 3G you must compose the music and play it yourself”

Unknown wise guy

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Market development - voice/non-voice (2G/3G)

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Voice ARPU VAS ARPU

Month

ly A

RPU

/mobile

penetr

ati

on (

%)

Mobile penetration

Voiceneverdies

Source: Lehman Brothers Research, 2000

soaringARPU,

plungingmargins

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3G pricing structures

Two main changes:• Towards fixed monthly

price for (non-voice) traffic

• Content charged per attributes, i.e. not for size or time

Traffic will be; voice, MMS, internet surfing, content download

Subscription/availability

Traffic

3rd partycontent

(charged byoperator)

Operator produced VAS

3rd partycontentchargedthrough

credit cards, accounts etc.

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Cultural changes

Operators’ 2G experience and success is a big threat to the 3G development.

Looking for a 3G business model with a 2G business model in mind will fail

Organisations require different mindset, skills and attitude in a 3G world. This transitions will be an enormous challenge to organisations which have always experienced growth

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Cultural changes

The engineers’ dominance in the mobile business must cease.

Must threat mobiles more like FMCG, but remember• get to know every customer,

not only the sum of customers

Mobile content is definitely like FMCG

2G is about doing things right, whereas3G is about doing the right things!

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Summary – transition from 2G to 3GDesperate need of a sustainable business model

Large changes in organisational culture required

Operators will play a less significant role

Growth must come from increased usage