Tuesday, August 10, 2004

Commentary: Why Hutchison's 3 will succeed

James Pearce: ZDNet Australia: News: Communications
May 28, 2003
URL: http://www.zdnet.com.au/news/communications/0,2000061791,20273760,00.htm

COMMENTARY--The hype over third-generation (3G) mobile services in Australia has been going on for years now, and many consumers are probably relieved the "when it comes" promises have been replaced by the "here it is" cold hard facts.

Contrary to public perception, the launch of 3G networks is on schedule. Hutchison forecast a 2003 launch of its service back in July 2001 and finally did so yesterday. Vodafone said it was aiming for 2004 when the 3G spectrum was auctioned in March 2001.

The battle for public 3G mindshare has been vicious and dirty, as evidenced by varying tactics by existing telcos to weaken Hutchison's entry. Most of the attacks derided the usefulness of 3G bandwidth, such as Optus announcing the ability to send streaming video over GPRS. Telstra used a fairly liberal definition of the high capacity network when it launched its Mobile Loop service, which at 144 Kbps is at the bottom of the most generous standard definition being used.

What's different about Hutchison's 3G network, dubbed "3", is its live video calls--perfectionists will denounce the service because of a slight delay in transmission, similar to the effect seen when foreign correspondents deliver their broadcasts, but the service is still impressive enough that most people won't mind.

Telstra has claimed that live video calls make up only about 2-5 percent of consumer demand. Add this to the fact that Hutchison is starting from scratch in Australia--apart from a small customer base using its Orange mobile services--and the new entrant could be seen to be on shaky ground.

But one must take a closer look at 3 to make that assumption since it has clinched a few solid and unexpected hits at the competition.

The video calls were expected, but many people--myself included--expected Hutchison to leverage the uniqueness of this feature to charge premium rates. Instead, the company announced rates for voice and SMS that beat Telstra and Optus hands down, and works out to be cheaper than Vodafone and Virgin Mobile if the call is long enough to compensate for the flagfall.

At AU$0.15 per SMS, Hutchison also cuts the knees off the market rate of AU$0.25, while the only serious competitor, Virgin Mobile, charges AU$0.10 for every SMS within its network.

Hutchison's 3G handsets are also priced in the mid- to high range, rather than the extremely high levels as earlier predicted, making 3 one of the best plans around.

It remains to be seen whether the low prices are part of a strategy to sell services cheaply to gain marketshare before increasing prices, or if the rates were set at a profitable level. But for now, the other mobile companies can't risk leaving Hutchison with such a significant price advantage.

The one thing that all the telcos agree on is that it will be the services offered on mobile phones that will grab customers rather than the technology being used. In fact, the constant cries of "We're not selling a technology, we're selling a service/experience/solution!" at press conferences these days are becoming tedious.

In terms of what can be offered on a mobile service, Telstra has to be viewed as the underdog, much as most Australians prefer to view it as a staggering behemoth. Hutchison's parent company, Hutchison Whampoa, is one of the most profitable companies in the world and has AU$28 billion to see it through any competitive challenges at hand.

Vodafone--normally viewed by Australians as the "runt" amongst the serious mobile contenders in this country--is one of the largest mobile companies in the world with 112.5 million customers spread over 35 countries. It is leveraging on this to provide a serious amount of content through its 2.5G Vodafone Live service, which is specifically designed to be easy to navigate on a handset and already has one million customers worldwide.

Optus, through its parent company Singapore Telecommunications, is a very significant player in the Asia-Pacific region. In contrast to these companies, Telstra is primarily a domestic player. Despite its overwhelming dominance in the local market, attempts to move overseas have met with dubious success. [Ed- Telstra tried to enter the Hong Kong market with little success]

In Australia, the mobile phone market is highly competitive and relatively large--there are now more mobiles in the country than landlines. An equilibrium in the market was reached recently, with instability in price caused by new entrants and the introduction of mobile number portability settling down into a stable balance. Most companies appeared to be viewing the next generation of mobile services as the primary place for competition.

The launch of 3 changed all that. Hutchison severely undercut the market for traditional mobile services, and whether or not it can maintain those low prices, it reminded everyone that despite all the hype surrounding the "next generation" of mobile phones, the main areas of profitability for companies remain in voice and SMS.

Ed- Those familiar with the various telco mobile plans will note that Vodafone then Telstra have followed 3's lead at introducing call caps. Vodafone $79 call cap with $500 worth of calls, PXT and TXT beats 3's $99 voice call cap hands down. But 3 offers a wide variety of new multimedia material that is not available on Vodafone Live, although it isn't very good at the moment.

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