Professors, Ladies and Gentlemen

As a lapsed academic it is nice to be back in a familiar setting. Somehow academic institutions always feel the same, whether in North America, Europe or Asia.

What I want to do this afternoon is to look at the value of mobility, who creates it, who benefits from it and what that tells us about the future of the telecommunications industry.
 

San Francisco

It is hard to pick a starting point, but let me try San Francisco. Not, the Silicon Valley of today, but that of 1945 when the allied powers were setting up the United Nations.

Amongst the delegates were Hector McNeil MP, the British Foreign Minister, and Tom Watson Snr for the US Government. By one of those lucky chances McNeil suggested that his home constituency of Greenock on the River Clyde might make a good place for a post-war factory for Watson's firm. McNeil had good reason to be concerned about employment, since the shipbuilding industry had been in decline for at least half a century.

Thus IBM came to Greenock to make typewriters and very much later the IBM PC. It faced the sort of red tape which the UK has largely eliminated, but which seems to remain in India.

I do not know how far the British can be held responsible for bureaucracy in India. We were only the colonial power here for a couple of centuries so that our impact cannot be so very great. Certainly, India has an unenviable reputation for red tape.

Dundee is a city on the other side of Scotland from Greenock but with strong connections to South Asia. It was the centre for the processing of jute. Like shipbuilding, the jute industry declined during the course of the last century. The city found new "light" industry from National Cash Register (NCR) and Timex. These factories employed many women in the manufacture of domestic or light industrial goods. They began the transformation of the Scottish economy.

Later, something known as "Silicon Glen" appeared or so the marketing people would have us believe. The story of Silicon Glen has been moderately difficult. It was never strictly a glen, it was a scattering of manufacturing facilities over the central belt of Scotland. It was largely firms based in the USA with some from Japan and Korea. For the most part they were branch plants which made it easy for the parent corporation to reduce the workforce, to fail to reinvest and ultimately to close factories. It was mobile industry, but it often proved rootless.

It proved surprisingly easy for other countries to compete with Scotland, notably Ireland. They might not match the whisky and the golf courses, but they could provide labour with the right skills and they could and did offer better tax incentives. It was seldom the price of the labour that mattered, it was more the right mix of skills. It was also about access to markets and currency rates. It was important to have price stability by having a substantial part of the costs in the currencies in which the goods were to be sold.

A combination of the weaknesses of branch plants, consolidation within the sector, the introduction of new industrial processes, the development of new commercial practices and competition from other locations eroded the benefits of Silicon Glen. This required a re-doubling to efforts to attract new industry.

What was especially missing was a generation of entrepreneurs and that has taken years to remedy.

There have been many attempts to match Silicon Valley's combination of:

• image
• venture capital
• intellectual capital

Route 128 around Boston looked be promising for a good number of years. However, that was when mini-computers were in vogue.

There was a spill over from California into Washington and Oregon, but these were short lived.

The notable exception is Microsoft, but that absorbs other economic activity rather than allows it to spin off. MS is the antithesis of Silicon Valley where fission is predominant.

Silicon Fen around Cambridge claims to have both venture capital and intellectual firepower. Yet, it remains marginal.

Singapore has been a formidable player in economic growth for many years. The leadership of Lee Kwan Yew has been remarkable. Recently, he has pointed to the need for a re-invention of Singapore for the knowledge economy.

Taiwan has become a hub of manufacturing both direct and outsourced for leading companies. However, now it is losing out to mainland China.

One of the more unusual locations is Dubai Internet City which tries to combine it limitless supplies of capital with an attractive location and cheap imported labour. I am told that the palm trees there cost US$ 700 per year, for their desalinated water. If true, that is more than the GDP per capita of many countries. DIC lacks the dynamism and enthusiasm of other locations, it looks good, but until the economic pressures really bite, it will remain more show than substance.

Many of the efforts to recreate Silicon Valley evaporated with the end of the dot com craze. Just as these countries had managed to ensure that they had venture capital organise, they realised it had gone berserk. Then there was the collapse, the dot bomb, the dramatic re-evaluation of share prices. Suddenly the incubators and the start-ups ran out of money or rather of other people's money, there was no hope of an IPO in the near future and the game was over.

If there is one thing that we have learned in the last twenty-five years, it is that Silicon Valley is genuinely unique. It has proved impossible to replicate or clone.

The Silicon Valley model remains highly attractive and extremely effective.

New technologies are constantly being generated and brought to market either directly or through services based on them. People leave established firms to create new ones. Some of these succeed and others fail. Sometimes successes are long term, more often they are short-lived.

Of course, success often brings in the big players who are anxious to ensure their own survival and the avoidance of new competitors. A realistic alternative to an IPO has been to be bought up by one of the bigger fish.

The arrival of Microsoft in the mobile telecommunications sector is not a coincidence. There are markedly more mobile phones on the planet than personal computers.

However, we may need a new tone for our phones, to tell us to wait while the person we calling reboots Windows 3G.
 

Mobile telecommunications

One of the most startling successes of the last two decades has been mobile telephony.

I will come back to the extremely serious doubts about the commercial success of mobile data communications, at least those of 2.5G, 3G, 3.5G and 4G.

The numbers speak for themselves. About 1,000 million mobile phones worldwide. Adding some 400,000 per day. It is overtaking the fixed network and still growing, though saturating in a few developed markets. A forecast published today suggests 3,000 millions by 2009.

One of the more peculiar features of mobile telecommunications is that research, development and manufacturing have been in unexpected locations, notably with Nokia in Finland and Ericsson in Sweden. There are long analyses of Nokia and how it moved from the manufacture of rubber boots in a commanding position in the manufacture of GSM systems.

The USA fell into apparently senseless protocol wars and missed the mobile revolution.

The real killer in the USA was the inability of the Federal Communications Commission to move away from Receiving Party Pays (RPP).

Operators serve predominantly the business user and not the consumer market. The US remains, as one Deutsche Telecom manager put it, an emerging market. From the USA, our enthusiasm for mobile telephony is incomprehensible.

Americans do not know about ten-year olds demanding the latest model from Nokia. Then when it is no longer hip, passing it to a parent.

The uniform adoption of GSM in Europe worked both within the European Community and encouraged adoption elsewhere. Only very recently, has CDMA made something of a comeback, largely in Asia. Ironically, at a time when US-based operators are switching to GSM.

It is worth noting that India, for incomprehensible reasons, followed the example of the USA in RPP and seems now to be opening up its own senseless protocol wars between GSM and CDMA-WLL. The operators appear to be fighting amongst themselves for a tiny part of the Indian population.

Growth from GSM, from pre-paid and from SMS looked like the sorts of growth we saw in dot.com ventures. Consequently, some analysts decided that mobile telecommunications was like dot.com and should be evaluated in the same way. This was both good news and later bad news. The operators spoke in rather mystical ways about growth and future revenues from services and m-commerce.

Growth pushed up share prices and allowed some operators to go on buying sprees. This was funded not by real money, but by share certificates in the company, making the acquisition. It all added to the upward spiral.

Growth was king.

The fastest growth came from SMS. This was a wonderful bonus for the operators. It was traffic in the signaling channel so that it cost virtually nothing to handle. The costs were in marketing and billing systems. It showed staggering growth which pushed aside any doubts about the future.

The only challenge was how to get the customers to pay for something that they had been told was free.

It is now dressed up as revenue from data, to conceal the paucity of the data revenues.

We turn now from a string of successes to a string of failures. These concern data communications and mobile access to the Internet.

Wireless Application Protocol (WAP) died a very painful and public death from hype. I had not appreciated how lethal an overdose could be. It was talked up, far beyond the ability of the technology or the operators to deliver.

High Speed Circuit Switched Data (HSCSD) was a service which barely saw the light of day. The operators did not always install it and when they did had little idea of the applications and no ideas about how to price the service or how to market it.

For more than twelve months we have had General Packet Radio System (GPRS) on offer. Yet there is no quality of service and the traffic has a lower priority than voice. The availability is very patchy. International roaming is rarely available and the pricing is punitive. GPRS is not being adopted by businesses.

In the future there might be a market for teenagers who want to swap Britney Spears or J-Lo music files. You will have to forgive my ignorance of their Indian counterparts. However, I doubt they will want to pay much for that privilege.

EDGE can only be built on the success of GPRS. If one fails, so does the other. The exception will be where operators jump directly to it.

The introduction of java-enabled handsets raises a whole host of issues. Especially when linked to an IP network. However, these create problems for the 3GSM operators who want to control the revenues. They may yet see Instant Messaging (IM) challenging our mobile phone number as the ultimate identity to reach an individual. It is vastly more flexible and much cheaper.
 

The third generation

Much has been said about the third generation of mobile telecommunications. The first was analogue and that is almost gone. The second was digital, whether GSM or CDMA and that now reached one sixth of the world's population. However, these were designed in the days when a data rate of 9,600 bits per second was seen as sufficient. That was before the average 19 year old was building his or her own web site in Macromedia Flash.

It remains unclear what the real data transfer rates are on 3G. We have seen a lot of backsliding from the promised 2M bps.

For all that licences have been sold and roll-outs planned, 3G remains a remarkably nebulous concept. The only thing which seems certain is that it will and must generate massive revenues.

I will steer away from Christian texts, but forgive me quoting from the Old Testament,

for I the LORD thy God am a jealous God, visiting the iniquity of the fathers upon the children unto the third and fourth generation of them that hate me; [Exodus XX.5]

• greed
• sloth
• envy
• gluttony
• collusion

Business models

The model for a long time was growth. Just unqualified growth.

The high costs of customer acquisition were ignored. The problems of "churn" were ignored.

Empires were built of paper. The stock market value of leading firms allowed them to buy everything they wanted.

There remains enormous debt in the sector. Many companies which made acquisition in the past have a lot of writing off to do.

With the end of the dot com boom, growth was cast aside. The new measure was Average Revenue Per User (ARPU). Having lost the trust of the financial markets, the operators are monitored month by month. The sharp declines have been arrested in many markets.

It leaves little room for the operators to move. Yet they rely on money from international mobile roaming and call termination which are coming under intense regulatory pressure and will fall considerably over the next two years.
 

Competition law

There are days when I wonder if the people working in sales and marketing for mobile telecommunications operators are utterly ignorant of competition law or whether they enjoy breaking it.

In the USA and in the European Union there are very strong, if somewhat different, sets of competition law. In the European Union it is laid out in the Treaty of Rome, dating back to 1957.

It is not as if competition law is obscure. Anyone who does not know about competition law should go ask Bill Gates.

Everyone talks about the wild success of I-Mode. Yet explaining domestic Japanese successes is never easy. The cultural and economic differences are so great that getting to understand the setting is a real challenge. The adoption rates and the prices of basic telephony and of Internet access make comparisons tough and possibly meaningless.

I-Mode would be completely illegal under most competition law regimes. The standard was not only proprietary to NTT DoCoMo, but unpublished. It came into the public domain only days before agreements were signed to use the technology in Europe. There is a lock on the SIM card and another on the portal. There is selective third party billing, which discriminates against most service providers.

I-Mode is truly a "walled garden" with some rather unpleasant razor wire wrapped around it. As such you cannot expect to replicate it overseas.

Indeed, Japan may be forced to open access under WTO General Agreement on Trade in Services. DoCoMo is a major operator and must provide transparent, non-discriminatory access to foreign service providers.

The European Commission continues to investigate international mobile roaming to determine if the operators are running a cartel.

The deal is very simple, when someone from country A visits country B they use their phone but are charged at prices well above those of a typical customer in country B, then the operator in Country A adds a charge of 25%. This is then reversed. It is a great way to push up revenues.

The new European Union legislative package will define the national wholesale market and require that it be regulated. In the medium term this should drive down the wholesale price.

A further source of money for the mobile operators has been to leveraging their market power in the call termination markets into the markets for call origination. Thus they force fixed operators  to pay grossly higher feed for termination of calls,

The operators have also engages in concerted moves to push up the prices of SMS. This includes domestic, international and roaming charges.
 

Privacy

The position of the operators is little better in their observation of data protection law.

We are told that 3G revenues will come from personalised and localised services. This clearly requires customisation offering each of us slightly different services even if we are all in the same place.

If I am in Delhi, then customisation and localisation requires either that my location be sent back to my GSM operator in Belgium or that my profile be brought here to India. In either case it is going to break the European Union's Data Protection Directive.

With the addition of roaming charges, it will be easier and a good deal cheaper to buy a copy of Fodor or the Rough Guide to India. Alternatively, I could download material onto my laptop or PDA.

Location Based Services remain highly speculative and unproven.

We also have to ask who would pay to know where you are right now? If we put it on eBay, what is it worth?

Perhaps your wife/mistress/girlfriend/boyfriend or children or maybe some colleagues. They would be interested to know both where you were and where you were not. We could easily imagine a service to tell you where your kids are. However, it would just create a new busy of phone minding. Equally, an alert to say "dad is two kilometres away and closing" might be appealing to kids. Apparently in Japan the location of pets, equipped with a 3G phone, will be a new service. DoCoMo plan to put twenty million 3G devices on domestic pets.

Maybe someone who wants to rob your house would like to pay? However, they will find it easier to bribe someone at the operator or hack into the computer.
 

The European lead

I will doubtless be criticised as unpatriotic for questioning the alleged European lead in mobile telephony. However, it seems to me to have long away been lost. It is a loss that is not easily to be reversed.

Until the 3G auctions in the United Kingdom and Germany, Europe was believed to hold the "lead" in mobile telecommunications. It had dominance in GSM and GSM dominated the world. Deutsche Telekom, France Telecom (Orange), Telefonica and Vodafone held substantial foreign assets.

Sometime last summer, China overtook the USA as the largest single market for mobile telephony when it passed the 140 million mark. It has since continued to grow at a remarkable speed with the capacity to continue for many years to come. Some forecasts suggests 500 million phones in a few years time. These are mostly manufactured in China and many are designed there. It has been an enormous economic success. It has also created the world's largest market for mobile services, for m-commerce.

While South Korea cannot match the scale of China it seems to have a workable strategy, namely to develop its technologies and services. It is pushing hard on the sale of CDMA where the unit costs are impressively cheap. On broadband, it is first making a success of fixed broadband and only then will it roll out services to mobile customers. It has had world leadership in fixed broadband for at least eighteen months and is unassailable.

Consequently, it now has the customer base with which to develop an understanding of the ways to create value for customers. Its development of networked games seems to have caused some concern in Japan.

It looks increasingly likely that the markets in which personalised services and location-based services will be developed first be in North-East Asia.
 

India

From time to time we are reminded that we live not in cyberspace, but in the real world with a real geography.

Colonialism brought India many things, of which the English language has proved to have some positive value. Combined with the low levels of wages of skilled labour that has brought a range of labour-intensive business activities to India in the last few years. However, this is threatened by other countries that covet the success of India and are luring businesses to their chosen locations. Experience suggests that maintaining market share in such circumstances is going to be difficult.

Many of the activities themselves are very recent and subject to short term change, whether technological changes or the whims of senior executives. The call centre has sprung up in a short time and will disappear equally rapidly. Outsourcing has been a subject of great debate in business and in business schools over the last decade. There remain very real doubts about the value.

Working in call centres is certainly not a career.

The greatest absence in India is that of a domestic market.

All the IT-enabled Services, such as BPO and call centres, are serving foreign markets. They are little enclaves of America and England that happen to be in Bangalore. Often there is no domestic market of any significance to serve and where there is, it will be long years before anyone addresses them by forms of call centres, consumer-facing e-commerce or m-commerce. That is not the case for some of India's competitors.

That absence of a domestic market will yet prove a critical failure.
 

Conclusions

Mobile voice telephony has proved to be more popular than anyone imagined. More popular by a very long way.

It has also proved almost universally applicable from the extremely high fixed teledensities of Finland and Hong Kong, through Thailand and Lebanon to Zimbabwe and Uganda. Its greatest success has been in the form of the pre-paid card.

Mobile telephony provides an interesting value for people on all but the very lowest incomes.

Mobile telephony has made a marked contribution towards closing the digital divide, something that was relatively unexpected. There remains massive scope for further deployment to those who do not yet have telephones. The business models for this are well established and the manufacturing costs are declining.

To the success of voice telephony we have to add SMS which is growing at an impressive rate. However, in some markets it is saturating.

GSM (and CDMA) plus SMS have created substantial value for personal communications and part of that value has been captured by operators and manufacturers.

There has been substantial work in research laboratories and by manufacturers to duplicate the success of voice in mobile data communications and in m-commerce. However, it has failed to catch the imagination of consumers or of business users. Consequently, the revenues from this remain tiny.

Moreover, the operators now have a track record of a number of significant failures. First and foremost is WAP (Worthless And Pathetic), but rapidly followed by HSCSD (How Success Can Sometimes Disappear) and GPRS (Great Protocol, Rubbish Service) each having its own depressing story. The mobile operators have not had the beginnings of a clue of what these really are or of how to sell them. There is no reason to think 3G will be any different. After all the staff are voice experts.

From a very different source we have Wi-Fi alias IEEE 802.11b making solid progress, including here on your campus. It has some initial successes, despite security problems and confusion with a bunch of similar services on 2.4GHz and 5.8GHz. We may not need or at least not be willing to pay for full personal data mobility. For many businesses, access to high speed bandwidth is needed only the office, the home, the hotel and the airport.

The commercial and community success of wireless data networks remain unknown. Yet this is vitally important, since many of the hundreds of millions of mobile voice subscribers simply do not have a fixed line on which to access the Internet. If they are to do so, then some services must be made to work.

To date, customers see little if any value in the "services" they are being offered and so are willing to pay very little. Until the operators can offer something valuable, mobile data will remain on hold and that applies to 3G as much as 2.5G. The endless search for the killer application may indeed be without end.

I started in San Francisco, amidst the cold, the mists and cable cars. It is a destination which is very attractive to many Indians, though not for the climate. I know some students of IIT go there. There is something in California which makes it attractive, despite its many drawbacks. There have been many challengers, but Silicon Valley remains the model to beat.

Duplicating or cloning its success has been tried over the last quarter century with no enduring successes. Whatever industry has been brought in as Foreign Direct Investment, has proved fickle and volatile. It is itinerant and truly mobile.

Ultimate success comes from a successful market, whether with businesses or individual consumers. What they will pay depends on the value they believe a service has for them. Mobile telephony has had a substantial value.
 

Thank you very much for your attention.
 

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Last updated 5 May 2002.