Evolution of demand

While the Internet has been hailed as the ultimate tool for business and personal communications, it was in fact military and educational institutions that first made the Internet a reality. Until 1993, Internet demand came mainly from academics and technologically-savvy users. With the introduction of the World Wide Web and of graphical browsers in the early 1990s, the Internet went mainstream and its ensuing growth has been phenomenal.

Certain economies have had more success than others in attracting Internet users. Demand has been strongest in areas with unlimited local calls, such as Australia, Canada, Hong Kong¹, the United Arab Emirates, and the United States. These five economies had an average of 37 per cent more Internet users in 2001 than would be predicted on the basis of their GDP per capita alone (see Figure 3.1, left chart).² Some other countries, particularly those with highly concentrated urban populations such as Korea, have been able to meet demand for Internet access more easily than elsewhere.

The history of mobile communications goes back much further than that of the Internet, but its commercial application is just as recent and it has followed a similar demand pattern. Analogue cellular networks were commercialized in the early 1980s and digital cellular ones in the early 1990s. In 1991, only one per cent of the world’s inhabitants had a mobile phone. Astoundingly, only ten years later at the end of 2001, almost one in every six, or 948 million, of the world’s inhabitants had a mobile phone (see Figure 3.1, right chart).³ 3.1.1 Current trends

Most economies are seeing increases in demand for both Internet and mobile services. However, in some economies, one has been more successful than the other. This is due in part to the fact that many of the factors hindering fixed Internet access actually increase demand for mobile services, and vice versa.

Many economies have struggled to expand Internet access because PC access comes with high fixed costs.

First and foremost, the cost of individual PC ownership has been prohibitive in all but developed economies.

Second, most Internet users in the world still rely on dial-up Internet connections over a fixed phone line.

Many operators are unwilling to build the necessary fixed-line infrastructure for fear of not recovering their costs. This problem is known as the “last-mile” problem, because wiring the last mile (or more accurately, the last few tens of metres) to each individual building is the most expensive and least cost-effective part of infrastructure deployment. As a result, in the absence of a fixed-line phone connection, even those users with access to a PC can find themselves without access to the Internet.

Figure 3.1: Internet and mobile users according to GDP per capita (2001)

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Internet users, per 100, by GDP per capita, 2001

LUX

Mobile users, per 100, by GDP per capita, 2001

TWN

Some of the economies that have been struggling with high fixed Internet costs and the last-mile problem have been prime markets for mobile deployment. Mobile networks effectively eliminate the last-mile problem by using wireless technology rather than using fixed wires to connect people. The demand for mobile networks in many developing countries has been very strong and penetration rates have soared, reflecting a large pent up demand for ICTs prior to the arrival of mobile technology. Africa, for instance, was the first continent where mobile users exceeded fixed-line ones.

By contrast, some economies with strong Internet demand have been slow to expand their mobile markets, primarily due to existing billing structures. In North America, telephone customers usually pay a monthly fee which includes unlimited local calls, a practice which lends itself very well to rapid take-up of Internet access. However, unlimited local calling has significantly stunted early mobile growth. Typically, in such economies, a receiving-party-pays (RPP) system exists, whereby mobile users are charged for both incoming and outgoing calls. In contrast, in Europe and most of the GSM world, a calling-party-pays (CPP) system exists, whereby mobile users do not pay for incoming calls on their home network. Rather, fixed-line users pay a premium to contact mobile users. The result is that, in RPP unlimited call environments, mobile operators do not enjoy the same level of profits as they do not levy above-cost termination charges on fixed-line operators. In addition, mobile users are penalized for receiving calls, resulting in many phones being switched off and calls remaining unanswered. This has recently been improving as operators resort to bundled packages and flat-rate calling for mobile users (in India, for example). Nevertheless, there is an established pattern of economies with sizeable advantages in terms of Internet access suffering slow growth for mobile communications.

This inverse relationship between the Internet and mobile markets is well illustrated by the comparison of Italy and the United States, as shown in Figure 3.2, left chart. Both economies have high per-capita GDP, but each excels in a different market. Italy is one of the world leaders in mobile phone penetration, especially for prepaid use, but has been much slower to adopt the Internet. The United States, by contrast, has high Internet penetration rates but lags in mobile use (with relatively few prepaid users). In fact, Italy has almost twice as many mobile phones per capita than the US, while the US has twice as many Internet connections per capita than Italy. The rise of the mobile Internet is blurring the boundaries between these technologies and thus the current disparity may not last long.

The phenomenal growth of mobile has surpassed even the most optimistic projections and many economies now have more mobile phones than fixed lines (see Figure 3.3). This is true not only in developed economies, such as Austria, Finland, Hong Kong and Italy, but also in developing ones, such as Cambodia, Côte d’Ivoire and Uganda. By the end of 2002, it is predicted that there will be more mobile phones than fixed lines in the entire world.

Figure 3.2: Historical Internet and mobile growth, strengths and weaknesses

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Internet and mobile users per 100 inhabitants, 2001 Mobile and Internet grow th rates, w orld

Source: ITU World Telecommunication Indicators Database.

CHAPTER THREE: MARKET TRENDS 43 Figure 3.3: More mobile than fixed

Countries with more mobile than fixed telephone subscribers, 2001

Note: The map refers to the situation at year-end 2001. Shaded countries have more mobile than fixed.

Source: ITU World Telecommunication Indicators Database.

Another reason mobile penetration has increased so quickly is the advent of prepaid calling cards. Many users in developing countries do not have easy access to credit, which they would need to sign up for a fixed-line telephone. Operators in many countries have done away with the need for credit by adopting prepaid calling plans, thus attracting large numbers of new users. This has been a boon for mobile operators who previously couldn’t provide access to those they considered to present credit risks. This results in a huge increase in the number of mobile users in developing and least developed countries that can now afford to have telephone service.

Developed countries have also been quick to adopt mobile technologies, but with different underlying user incentives. Users in developed countries adopt mobile phones primarily for mobility and convenience, rather than necessity, as most users also have fixed lines at work or home. The latest trend in developed countries is that users are choosing to drop their fixed connection altogether, rather than paying for both a mobile and fixed line.

3.1.2 Take-up of mobile Internet services

For the time being, both mobile and Internet use continues to climb (as shown in Figure 1.1, Chapter one), albeit at a decreasing rate (see Figure 3.2, right chart). As more users get online via a mobile phone, the world is very likely to undergo a transformation in the ways that people utilize the Internet. The Internet experience will shift in part to mobile devices as they become equipped with faster connections, better screens, and compelling content. The mobile Internet will not displace the fixed-line Internet, but will bring content in faster and increasingly convenient ways to the near billion mobile phone users. The beginnings of this shift have already taken place in several countries where mobile Internet services are offered, but they have met with varying degrees of success (see Figure 3.4, left chart). What these first experiences of the mobile Internet have shown, is that much of this success hinges on the business strategy of mobile operators and their collaboration with the many new players entering the market.

Figure 3.4: Mobile Internet around the world Mobile Internet penetration and use in selected countries.

72.3

Mobile Internet users as % of total m obile, 2001

Germany Italy France UK Spain RoE Total W.

Europe Mobile users

WAP users

WAP as a % of mobile users Note: In right chart, RoE stands for Rest of Europe.

Source: MPHPT (left chart); Dr Carl H. Marcussen (Centre for Regional Tourism and Research, Denmark, at http://www.crt.dk/), ITU World Telecommunication Indicators Database (right chart).

There are a number of different applications currently available on mobile handsets, some of them already widely used, while others are still developing their full potential. The success of mobile messaging has been phenomenal and a surprise to both operators and users (see Chapter two). Clearly the most widely used mobile messaging service is SMS, which allows users to send messages up to 160 characters long via their mobile phone. In May 2002 alone, SMS users worldwide sent a total of 24 billion messages⁴ (see Figure 3.5).

The tremendous success of the service can be attributed to two main reasons. First, for brief communications, SMS is less expensive than mobile voice calls. Second, SMS is a less intrusive form of communication than real-time voice and lends itself better to many situations where voice calls would be inappropriate—an SMS user can send a message during a meeting, on the bus, or anywhere else simply by typing on the keypad of the phone. The demand for SMS has been particularly strong among younger people, especially those with a limited budget for voice calls. It has also had great success in developing countries, such as the Philippines (see Chapter five).

Not only have operators been able to profit from person-to-person SMS, but they have also found ways to charge for information broadcasted to a large number of users via SMS. During the 2002 football World Cup

Figure 3.5: Worldwide SMS growth

0 SMS Messages (billions, m onthly, w orld)

SMS Messages (billions, yearly, w orld)

0

CHAPTER THREE: MARKET TRENDS 45 for example, many sites offered SMS updates for every goal or final score. This enabled people at work or away from televisions or PCs to keep up to date on the scores. Users were even willing to pay upwards of 50 US cents for every broadcast SMS received. Germany’s eight goals against Saudi Arabia proved profitable for those countries’ mobile operators.

As mentioned in Chapter two, several countries have already introduced multimedia messaging (MMS) -type services, the successor to SMS. In June 2002, Japan’s J-Phone had 5 million camera-equipped “sha-mail”

handsets in use on its network.⁵ Another first mover in the field of MMS is Korea, which launched its mobile picture and video messaging services in April 2002. Korea’s largest mobile operator, SK Telecom, doubled the number of its users whose phones have high-speed Internet access from 6.96 million in 2001 to 12.97 million in 2002.⁶

E-mail was the most popular Internet application until the arrival of the World Wide Web, and it continues to be popular, with one forecast putting the total number of users with e-mail mailboxes at 1.2 billion by the year 2005.⁷ As mobile services become more sophisticated, more e-mail services will be made available on mobile phones. It is interesting to note that even though the estimates for the number of e-mail boxes are quite high, there will probably still be more mobile phones than PCs. This highlights the significant impact of making e-mail available on standard mobile phones. Research in Motion (RIM) developed a stand-alone mobile device that lets users send and read e-mail. RIM’s “Blackberry” was originally meant only for e-mail but has now been enhanced with voice capabilities, making it a mobile phone and e-mail client in-one. New 2.5G and 3G phones have much of the same functionality, but have evolved in the opposite order. Mobile phones started with voice services but are incorporating e-mail clients, or programmes, into their devices for use on data networks, allowing users to download and send mail messages from standard accounts via their phone. If the past is a good indicator of future development, mobile e-mail may well become one of the most popular data services on offer—a trend that has been confirmed by a number of user surveys.

SMS already illustrates how simple data transfers function well over mobile connections. However, when the data becomes more complex, such as Web pages, the results have been mixed. The two most popular methods for browsing Web pages on the Internet using a mobile device, WAP and i-mode, differ fundamentally, but aim to deliver the same type of Web-browsing experience.

As mentioned in Chapter two, WAP had difficulty catching on with consumers because users expected a PC-type browsing experience, only to be disappointed by the lack of content available, slow download speeds, and expensive tariffs. Even when they are equipped with WAP-enabled handsets therefore, some users are choosing not to use the services offered, particularly because of the high cost (see Figure 3.4, right chart).

The same phenomenon is being seen with GPRS handsets. Despite the lack of initial enthusiasm however, the number of WAP users is slowly increasing (there were 284 million users in Western Europe in 2001), as is the available content.

While WAP portals have had a difficult time attracting users, in Japan, DoCoMo’s i-mode and similar services offered by KDDI and J-Phone have had phenomenal success (see Figure 3.6, left chart). Since its inception in February 1999, DoCoMo has built a subscription base of over 33 million users, bringing the total number of mobile Internet users in Japan to over 54 million. In addition, i-mode is no longer limited to the Japanese market. KPN has 50’000 subscribers on their new i-mode network, including 10’000 in the Netherlands⁸ and 40’000 in Germany.⁹ Other economies, such as Taiwan, China, are also developing services and hope to meet with similar success.

Although the digital content market for mobile has had some success, it has been much harder for the mobile world to work out a viable plan for m-commerce (mobile commerce). The Internet version, e-commerce (electronic commerce), has had mixed reviews, but overall transactions are on the rise. On the mobile side, the European Information Technology Observatory estimates that Europeans alone had m-commerce transac-tions totaling €247 million (US$ 223 million) in 2001, with a predicted €488 million (US$ 440 million) for 2002.¹⁰ The Japanese MPHPT foresees dramatic growth in m-commerce, which is set to reach an estimated US$ 14.8 billion, representing 21.6 per cent of total e- and m-commerce transactions, by 2005.¹¹

Handsets

The advent of the mobile Internet could serve to revitalize the mobile handset market. Handset manufac-turers enjoyed a period of strong growth up until 2001 when, for the first time, mobile handset sales actually fell from one year to the next. This followed a 60 per cent compound annual growth rate from 1996 to 2000.¹² The drop in sales is certainly not due to lack of demand for mobile communications: on the contrary, people are using mobile services more than ever. Rather, the problem for handset manufacturers lies in the fact that certain markets, namely Western Europe and parts of Asia, are nearing saturation levels. This leaves manufacturers and operators with the conundrum of how to stimulate demand for new handsets when most users already have a mobile phone. The answer is two-fold. First, they must find ways to increase revenues from existing users. Second, they need to offer new services that require phones with enhanced functionality and colour screens.

While the solution may sound simple, it has been much more difficult to implement in practice. Operators have been able to raise revenues by offering newer services such as SMS to existing users. However, equipment manufacturers have found it a difficult task to convince users to upgrade to newer phones with additional features. Even with the promise of Internet services over GPRS networks in Europe, manufacturers have not been able to produce large numbers of phones to capture the initial demand. In addition, as with PCs, many users wait until the very last moment to purchase handsets in order to obtain the most features and value for their money.

Handset manufacturers are also feeling pressure from personal digital assistant (PDA) manufacturers that have built wireless connections into their devices. While the PDAs are not yet in wide circulation, they may serve to stimulate take-up of high-speed services such as GPRS and 3G, because their larger colour screens are better suited for multimedia viewing and delivery. Also, in the mobile market as a whole, enhanced data services are fast becoming a lucrative source of revenue. Furthermore, mobile phones have the potential to provide wider access to the big Internet portals, due to their high penetration levels.

3.1.3 User adoption of high-speed mobile services

While simple data services have been the most successful aspect of the mobile Internet thus far, the intro-duction of 2.5G and 3G¹³ mobile services could significantly increase the demand for mobile content. With a larger “pipe” through which to send and receive data, mobile users will be able to take advantage of MMS, use streaming audio and video, engage in interactive gaming, and have an always-on mobile connection at their disposal. While it may be tempting to compare 2.5G and 3G connections with the wired world’s

“broadband” connections, the two serve different purposes. The physical limitations of small, mobile devices and the slower overall speeds make 2.5G and 3G connections particularly suited to more targeted uses.

In 2001 and 2002, GPRS (2.5G) networks were launched in 49 economies, but their growth has been slower than expected by many operators. As of July 2002, 121 GPRS networks had been commercially deployed and a further 60 networks were in testing and implementation phases.¹⁴ In the United States, GPRS has been launched by AT&T wireless and Cingular Wireless, which began providing the service in Seattle and are planning to extend it to other cities later in 2002.¹⁵ In Western Europe, it is estimated that about 1.2 per cent of cellular users have a GPRS-enabled handset, but that only 30-35 per cent of those users make actual use of GPRS services (see Figure 3.6, right chart). The result is that the total number of GPRS users at the end of 2001 barely reached 1 million. This rather disappointing start is probably due to several factors, including the lack of handset availability, the high price of services and the lack of content and attractive applications.¹⁶ The other 2.5G standard in operation, cdmaOne IS-95B, has been successfully launched in Hong Kong, Israel, Japan, Korea and Peru. At the end of the first quarter of 2002, there were 43.2 million cdmaOne subscribers worldwide.¹⁷

3G CDMA2000 1x networks have been deployed in a number of countries, with Korea being the first to launch services. In Korea, the total number of CDMA2000 1x handsets sold has been growing at an

3G CDMA2000 1x networks have been deployed in a number of countries, with Korea being the first to launch services. In Korea, the total number of CDMA2000 1x handsets sold has been growing at an