It cost £22.5bn to deliver, and all we want is a Crazy Frog

The latest 'multimedia' mobile handsets are bringing free downloads to the masses - which isn't music to the ears of the 3G operators
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When executives at Nokia talk about the future, the heads of mobile phone networks such as Vodafone and Orange would do well to pay attention. But what they are hearing from the market-leading handset maker might not make for comfortable listening.

Nokia unveiled three new 3G handsets or, as the company prefers to call them, "multi-media computers", in Berlin last week. These devices are packed full of features that will make them must-have gadgets: new cameras with high-quality lenses, DVD-quality video and the ability to store hundreds of music tracks.

But, along with rival devices from companies such as SonyEricsson and Samsung, the handsets could prevent the operators ever seeing a return on the £22.5bn they spent on their 3G licences six years ago.

For executives such as Anssi Vanjoki, the head of Nokia's multi-media division, the latest phones are about putting the consumer, not the operator, in the driving seat. Some features, such as the wireless networking (WiFi) built in to almost all of Nokia's multimedia range, will erode the network operators' income. Owners of the phones can use a free WiFi connection at home, in the office or in a hotspot to share their video clips and photos, rather than paying to send them via 3G.

In a saturated market, the way the phone manufacturers make money is by persuading consumers to upgrade to new gadgets with great features, even if these could cut the network operators' profits.

It is not just Nokia executives who think this way. Samsung unveiled a handset with a 10-megapixel digital camera at the CeBIT show in Germany last month, and SonyEricsson has adopted both the Walkman and Cybershot brands for its music and photography optimised phones.

"There is a battle out there," says Paolo Pescatore, the research manager at industry analysts IDC. "Nokia has the presence and the power to drive its story in the marketplace. But what operators want is a completely different story. They are struggling right now to get users to migrate to the new data services."

The numbers support this view. Vodafone's chief executive, Arun Sarin, recently conceded that just 7 per cent of his company's revenues come from 3G services, despite its having reached the milestone of 10 million 3G users.

All the main operators face similar problems: the latest per-subscriber revenue figures showed falls for both Orange and Vodafone. Competition is driving down the cost of voice calls. Data and premium content services have yet to take up the slack.

A look at how subscribers are actually using 3G makes for grim reading. Some of the 3G services that have been a success, such as laptop data cards for business users, are generic and face competition from other networks, such as WiFi and WiMax.

Other services have a similarly limited appeal. At the World Telemedia conference in Berlin last week, M:Metrics, a market research company specialising in the mobile industry, revealed that just one in 10 mobile phone users in the UK and Germany have downloaded content of any sort - paid for or free - to their handsets.

According to Hervé Le Jouan, the managing director of M:Metrics, much of that traffic consists of ring tones. Some 6.8 per cent of UK mobile phone users have downloaded a ringtone, and just 2.4 per cent have downloaded a game. Such figures may have been enough to propel the Crazy Frog ringtone to the top of the pop charts, but they are unlikely to please the mobile operators' shareholders.

Now the networks' failure so far to persuade consumers to buy premium content is being compounded by the handset makers' latest devices. Phones such as those unveiled by Nokia last week make it easier for consumers to generate and share their own content, as well as to transfer music from a PC to a phone.

Significantly, Nokia is also pushing compatibility with existing PC-based music software and forming partnerships with established, web-based services rather than emphasising (paid-for) services on the mobile operators' portals. For example, it announced an alliance with Flickr, the online photo service owned by Yahoo!.

At Nokia, Mr Vanjoki maintains that these features are what consumers want. "This is being driven by genuine consumer demand. It is not being determined in the operators' purchasing offices," he says.

But he does offer some solace to operators, suggesting that the new generation of handsets will bring in more revenues in time. "When operators look at their user base, they start to understand that some subscribers stay on the network for two or three years with the same type of device. You can bring down churn when you have really sticky applications."

Consumer-driven content is the ultimate "sticky" application, he suggests, and it can create a virtuous circle of usage as subscribers upload pictures, send messages, email their friends and call to discuss what they have shared.

And some operators are starting to agree with this point of view. According to Huw Griffiths, the head of data and content services at O 2, it simply takes time for new services to become established among users.

Text messaging was launched 12 years ago but has only been mainstream for five and still has room to grow, he points out. WAP mobile websites have been around for five years, and O 2 now has 150,000 users with personal WAP sites, a precursor for mobile blogs.

"It takes three years for a service to reach a reasonable level of penetration and for devices to become mass market, and then it is a question of driving user adoption," Mr Griffiths says.

But for the mobile phone networks, with voice revenues in decline and new competitors waiting in the wings, the outlook could get worse before it gets better. The operators will need strong nerves to persuade the markets that their investment in 3G, and especially in rich media services, will pay off.