The future of wireless: mobile multimedia

Using third-generation (3G) high-speed networks, or even narrower-band networks, portable multifunction phones will soon reach data transmission power similar to that of personal computers.

With wireless technology advancing and average consumers becoming more adventurous, mobile telecom carriers and makers of handheld phones are poised to take the great leap beyond the voice market "invented" by Alexander Graham Bell in 1876 and fully develop the market in mobile data communication.

Certainly, all signs indicate that mobile data - the sounds, pictures, video, and text transmitted through wireless networks - constitutes the biggest new business opportunity for the wireless telecom industry since its inception. A burgeoning population of consumers of all ages around the world fancies possessing a single mobile device for communication, organisation, and entertainment.

Also, for many wireless telecom operators worldwide, mobile data service isn't just a new market opportunity, it's a survival kit. Operators are in a difficult spot: the network connection they control is rapidly becoming a commodity, as markets are liberalised globally and in the Middle East, and revenue growth from traditional voice and text services is slowing.

Compound annual growth in spending on voice services from 2002 to 2007 will be just 4 per cent. (See Exhibit 1.) Thus, the mobile operators that spent billions of dollars to build 3G networks are under great pressure to introduce multimedia data services to generate revenues fast, so they can pay off and capitalise on their broadband investments.

According to Karim Sabbagh, UAE-based vice-president, Booz Allen Hamilton: "In the Middle East, most investments are still going into 2G and 2.5G infrastructure, with growth still expected in these services.

"However, the region is in a unique position to start educating mobile phone users about multimedia services using currently deployed infrastructure, prior to investing in future generation networks.

"The phenomenal success of SMS-based services for TV votes and infotainment downloading is a cost-effective way for operators to educate the masses prior to stepping up to the next wave of applications that require higher capabilities than what exists on networks today."

But for mobile operators looking to make the shift from voice to data services, success will come only by substantially changing their business models.

Booz Allen Hamilton believes that a new "integrated services" business model - one that encourages productive partnering and more varied approaches to value creation - is the most promising option for the wireless industry.

Operators won't simply provide a connection to the network; rather, they will position themselves to directly influence and profit from every aspect of the wireless experience: reliable connections, clear reception, attractive and easy-to-use phones, useful and fun applications, good customer service, and more.

To do this effectively, mobile operators will need to interact more closely with handset manufacturers, content owners, software vendors, and application developers.

Beyond connectivity

Although the worldwide growth in the mobile data marketplace has been little short of breathtaking and major European and American mobile telephone operators race to attract new customers with their own multimedia data services, operators continue to apply the same connectivity-only model that the first generation of US and European cable and Internet service providers did in the 1980s and 1990s.

In 2002, spending on mobile data services in Europe, the United States, and Asia reached $32 billion. From 2002 to 2007, mobile data service spending will grow at a compound annual rate of 24 per cent, reaching $92 billion in 2007, according to Booz Allen Hamilton projections.

In the Middle East, mobile data revenues were estimated at $471 million and are expected to grow as revenues from traditional voice services shrink due to increasing competition and market liberalisation.

"Growth will be driven in the Middle East by the increasing deployment of enabling infrastructure. Almost all Gulf and Middle East operators have introduced GPRS and have WAP capabilities. MMS is available in most Gulf countries with a planned introduction in the remaining ones within a couple of years," said Gassan Hasbani, Beirut-based Booz Allen principal.

Even though voice transmission remains by far the largest part of the wireless business, we anticipate that in Europe sending messages, getting news, playing games and lotteries, watching sports, and sharing photos and video clips will be the top revenue growth generators in mobile products and services for the mass market within three years, with the United States following a similar trajectory.

This also is the case for the Middle East, judging by the level of interest that is being shown in such services and the increasing number of portals emerging in the region.

Mobile operators can continue to capture only the basic value from the network connection as they add multimedia services, but their ability to grow revenues and profits will be highly constrained.

The connectivity-only value proposition keeps them embroiled in brutal competition on pricing and network quality. Additionally, with this model, operators will always remain one step removed from the customer experience.

Following extensive research and discussions with scores of executives at leading companies, Booz Allen Hamilton has identified two primary ways mobile operators can change their business models.

The first option is to adopt a low-cost, low-risk, lower-growth connectivity model with the objective of increasing user traffic and the volume of data transmitted over the company's wireless network. The second option is to use the higher-cost, higher-risk, but higher-value-added integrated service model, which aims to capture more value from the different types of content, carried over the network.

Refocusing relationships

The connectivity model may be viable for some small mobile service companies with limited financial resources and high-speed network capacity that can compete on price, rather than on the breadth and quality of their services.

But this approach won't work for the major carriers, especially those that have already made significant 3G investments. To earn the required return on their investments in high-speed networks, these operators can't afford to cede to other players any of the potential revenue streams they can earn from content transmitted through their networks. For the majors, the integrated service model makes more sense.

Under it, mobile operators will get involved in - and extract revenue and profit from - all the critical points in the value chain that affect the user experience. Mobile operators may play multiple roles in packaging, promoting, and selling content, subscriptions, and services offered by third-party content companies. These partnerships are crucial to the mobile operator's ability to expand revenue streams, grow market share, and capture more value from the customer relationship.

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