Ovum - a view on 3

Mobile broadband: Has 3's time come?

On Wednesday, we met with the CEO of 3 UK, Kevin Russell, to discuss the mobile broadband opportunity. The meeting coincided with the GSM Association (GSMA) recently announcing that there are now 32 million HSPA connections worldwide.

Comment: Firstly it is important to note that 3 defined all types of HSPA as 'mobile broadband', including access to data via mobile handsets, rather than just through laptops via USB or data card modems. Of course, in this broader sense the scale of the 'mobile broadband' opportunity is far greater than purely through the PC.

Nonetheless, Kevin's main message was that even though he has been at 3 since 2001 only now are customers entering 3 stores to ask specifically for data products. Several drivers behind this change were put forward; with Kevin suggesting that 3 and 3G's market opportunity has finally come of age:

Network: HSPA has undoubtedly enabled the user experience initially promised by 3G. In this sense 3 UK's network sharing deal with T-Mobile will be a major benefit, improving the breadth and depth of coverage. Not only does 3's population coverage benefit from T-Mobile's current 3G coverage, but it will also increase network density in highly populated areas (significant given the high proportion of 'mobile' data usage at home both through handsets and dongles). Furthermore, T-Mobile is still upgrading its 2G network, adding further 3G coverage and capacity.

However, the issue of network capacity remains a nagging doubt if data traffic were to explode as promised. Kevin reported a seven-fold increase in data traffic in the four months from October last year to February 2008 and that they are still feeling their way around the impact on the network. He also conceded that 3 Austria and 3 Sweden had experienced some network congestion as a result of data uptake. However, he was confident that there was 'significant capacity' in the UK radio network and that the core network could be easily upgraded to cope with demand. This sounds reasonable to a green field 3G operator like 3, but it does raise the interesting question of how older, more organically evolved networks, belonging to more established operators will fare, particularly at the core.

Devices: The availability of handsets is approaching the tipping point where vendors include HSPA functionality by default. As a result, the GSMA has announced that 467 HSPA handsets are now available. However, it is HSPA dongles that are piquing user interest, with the UK market reporting 55 000 sold in January. The user experience is also crucial to success, with dongles offering a very simple plug and play installation process that even bypasses the need to install software via a CD. Dongle sales will certainly increase throughout the year as the mobile PC broadband proposition gains further momentum.

Pricing: Kevin was keen to stress that simplified pricing was crucial to consumer uptake. However, he did admit that 3 was not yet ready to offer an unlimited data package, as the potential impact on capacity of high traffic applications, such as file sharing, was still unknown. Nonetheless, we feel that 'unmetred' internet access, as in the fixed broadband, world will ultimately be the most common pricing plan. This raises uncomfortable questions regarding the business model for service providers once that point is reached.

Business model: There is little doubt that 3 has an excellent opportunity to reap the customer and financial benefits of interest in mobile data services. However, if price plans ultimately follow those of the fixed broadband world, where next for 3? We posed the question to Kevin and his response was that VoIP, email and instant messaging are the key services where it sees it adding value. The emphasis on content is to be downplayed moving forward. These sound like the words of a fixed broadband ISP (or, dare we say, a 'bitpipe') and not a mobile operator. Scale will be absolutely critical if 3 is to succeed with this approach, but as we noted last week (see EuroView Daily, March 31), 3 has not been successful at increasing this to date. All of 3's hopes must now be pinned on data, but the UK's other mobile operators will not be sitting around allowing it a free run.

Ultimately, Kevin was extremely upbeat on 3's potential to build on its improving financial position with data at the heart of the equation. However, questions remain about its future business model, especially as it will need scale to succeed.