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Slow tortoise is favoured winner

Krishnan Thiagarajan

FOR once, being late in launching third generation mobile systems (also called 3G) may prove to be a decisive and enduring advantage for mobile players in the Asia-Pacific markets.

Although players in the Asia-Pacific will be playing second fiddle to the European mobile majors in the field of 3G, it will offer them a good chance of learning the crucial lessons from the European 3G experiment and employing them constructively to lea pfrog their European counterparts in the long run.

Clearly, the following lessons are highly instructive from a medium-to-long term perspective:

The licensing methods: As early entrants into the 3G era, the European mobile majors had no benchmarks for judging both the method of licensing and the licence costs associated with such investments. As far as the method of licensing was concerned, the E uropean majors had two options -- auction or beauty contest. The European regulators chose the ``3G spectrum auction'' method because this method helps the government to mobilise substantial financial resources for its other telecommunication projects.

But the downside of this exercise was evident from the 3G auctions held in West Germany, the Netherlands and Great Britain. Given the overall bullish sentiment in the telecom industry and the hype surrounding the extraordinary potential for 3G in mid-200 0, players in the UK, Germany and the Netherlands bid extraordinary amounts (of close to $100 billion) as auction fees. Such extraordinary high licence costs have contributed not only to a longer payback period on 3G investments of almost 15 years, they also have led to growing pressure on network operators in Europe to accelerate the network rollout of 3G. It is likely that the network rollout will take place in Europe irrespective of concrete indications of market acceptance and growth of 3G.

For the regulators in the Asia-Pacific region who have been late in joining the 3G revolution, this massive overbidding for 3G spectrum in Europe has highlighted the downside of the auction process. Based on this experience, the regulators in the Asia-Pa cific have employed/are aiming to employ three different licensing methods in the region.

Despite adverse publicity surrounding the auction process in Europe, Australia recently completed the 3G spectrum allocation using this licensing method. But, Australian regulators were in a better position to conduct the 3G licensing, because they were fully aware of the pitfalls in the exercise.

Having learnt the lessons from the European experience, most of the other regulators in Asia such as South Korea or Malaysia have structured/are examining the alternate method of licensing namely, the ``beauty contests'' for 3G spectrum allocation. In th e so-called beauty contest method, the selection process is dictated by a combination of technical and financial bids, scrutinised and shortlisted by the government (based on guidelines evolved by the regulators). Even though this method does not generat e much of financial resources for the government, it is equitable as it elicits much more conservative and realistic bids. However, the downside is that it offers tremendous scope for the government to favour domestic companies and for the existing mobil e operators to exercise undue influence on the licensing process.

Finally, the regulators in Hong Kong are contemplating a hybrid method of licensing for the region, which incorporates the features of both auction and beauty contests in the licensing process. Given these divergent trends, it is hard to say which is the best method of licensing, but one can say with conviction that some of the lessons from the European experience have been learnt by regulators in the Asia-Pacific region.

Viable financial models: There is a growing consensus among telecom analysts at different investment banks that the payback on 3G investments by European network operators will be in the range of seven years for incumbent operators where licences were pr ovided for free and 15 years where the licences were auctioned. As the licence fees for Asian players is likely to be considerably lower than their European counterparts, they are likely to start off on a better footing on the project payback front. Obvi ously, this will offer them the flexibility to stagger their investment in development of products and applications in line with market requirements and acquire content and invest in customer acquisition in a phased manner. Obviously this flexibility wil l help players in the Asia-Pacific to avoid the ``WAP backlash'' in Europe in the latter half of 2000.

Phased network deployment: Most of the players in the Asian region have been following a very conservative approach to 3G network deployment. Considering the huge WAP backlash and the slow uptake in Internet-ready mobile phones in Europe, players in Mala ysia, South Korea, Hong Kong and other Asian regions are aiming to first commercially deploy 2.5G (based on the General Packet Radio Service -- the GPRS platform) mobile systems and then gradually make a transition to 3G. This phased transition is meanin gful because it allows the network operators to experiment with a ``packet switched service'' which is ideally suited for data traffic at considerably lower investments. Apart from providing the users with an ``always on'' Internet connection, the GPRS p latform is also helpful in taking the users gradually up the 3G value chain, through better speeds of access (from 9.6 kilobits per second (kbps) to 40-50 kbps-almost like the existing modems in a computer), higher user friendliness and newer models of p ayment in the form of volume of data transfer as against pay per time in a traditional network.

Although some of the players in Europe are also planning to take this path to 3G, network operators in Germany, Great Britain and the Netherlands do not enjoy this luxury as there is pressure on them to accelerate the 3G rollout and make their licence fe es bids translate into revenues as early as possible.

Harder look at business models: It has been forecast that the Asia-Pacific region may have the largest number of mobile users in the globe over the next decade. The growth rate in mobile subscriber base in the Asia-Pacific region has been phenomenal. At the beginning of the 1990s, there were fewer than one million mobile users within the region. At the start of 2000, there were around 170 million users and by 2010, it is forecast that the Asia-Pacific could account for half the world market.

If such staggering growth in subscribers were to materialise, the onus will be on network operators and infrastructure vendors in the Asia-Pacific region to examine their business models far more carefully than even players in Europe. In tracking the Eur opean counterparts, the Asian players will have the advantage of learning from business models employed by them, longer period to develop customised content for the region and a longer time frame to identify ``killer applications'' in each of the Asian p ockets.

Since the success of 3G hinges upon the strategic alliances/partnerships which are being forged by different European players in the content and application arena, the phased deployment of 3G will also help Asian players learn the pros and cons of this s trategy. Ultimately, in a highly turbulent market, being late in catching on to the 3G revolution may turn out to be a blessing in disguise for players in the Asia-Pacific region.

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