Europe's just kidding itself

There is a widespread perception, even in the US, that Europe is racing ahead in wireless communications. Many derive comfort from the belief that Europe's lag in Internet developments will be compensated by a leap forward via the next generation of mobile technology (which is often dubbed "3G").

After the success of the iMode system in Japan, that country is also considered ahead of the US. However, both Europe and Japan are kidding themselves if they think they can use 3G to catch up with the US in terms of Internet access.

Why? Because the perceived European lead in mobile services is based on its recent push ahead of the US in just one area: penetration. And that statistical advantage is no guarantee at all of an imminent "Euro-leap" in Web access.

European countries edged past the US in mobile service uptake at the end of 1999, when statistics showed 33 subscribers per 100 inhabitants for Europe compared to 32 subscribers per 100 inhabitants for the US. There were, of course, parts of Europe with much higher penetration rates - such as Finland with 65 subscribers per 100 inhabitants - but also those with much lower diffusion, such as Germany with 28 per 100.

This variation across European nations is a reminder that one of the frequently quoted explanations for Europe's lead - the adoption of a single mobile standard - is nonsense. The GSM standard may have worked to the advantage of manufacturers with headquarters in Europe, such as Nokia and Ericsson, but has had very little to do with how penetration rates and usage patterns have evolved.

The ability of mobile customers to "roam" across Europe's many national networks - not possible in the US - was useful, but it was not the feature that turned mobile communications into a mass market. In the early days of cellular mobile market development, when it was primarily a business service, America was well ahead of Europe.

Today, the majority of European users do not subscribe to tariff options that include international roaming. This is either because they must pay a premium fee for the privilege of roaming, or because they use prepaid cards, which usually do not provide roaming capabilities.

Moreover, if people buy air time in advance - through, say, pay-as-you-go cards - they generally cannot apply this to international calls or calls made when roaming. Calls made to third countries while roaming incur very steep additional charges (for example, using a Swiss phone to call Stockholm from London). In other words, the technological advantages of a common standard have been negated by a lack of European competition and high tariffs.

The same drawbacks, until recently, were also evident in the US - not so much as the result of competing standards but as the legacy of the old practice of licensing regional duopolies. This created a patchwork of service providers and high roaming charges. But following a series of airwave auctions in the late 1990s, national networks have emerged that enable users to roam across North America without additional charges. As a result, the prices for roaming in North America are now much lower than Europe.

But despite these changes Europe has managed to overtake the US in terms of mobile penetration - and in the short term is likely to sprint ahead.

The discrepancy is all down to the different pricing structures of the two continents. North America predominantly uses "receiving party pays" schemes, whereas "calling party pays" are the dominant policy in Europe. All indications are that the market for prepaid cards has flourished much more in countries where the calling party pays.

Although prepaid cards have many advantages (such as guaranteed cash flow for the telecom operators) they also have one major drawback - they are the most expensive way to make a wireless call, and tend therefore to develop a cost-conscious user base.

At the beginning of 2000, more than half the mobile users in Europe were using prepaid cards, compared to only 6 percent of American users. In some European countries, for example Portugal and Italy, more than 80 percent of usage is prepaid. Accordingly, the penetration rate of postpaid users is actually much higher in the US than Europe.

Those postpaid users are the key to the success of the wireless Net. For one thing, they are much less cost-conscious than people who pay-as-they-talk. This is one reason why usage, as measured by the average minutes per user, is much higher in America than Europe: with lower per-minute costs, US subscribers are more likely to pick up their phones whenever the fancy takes them. For another, postpaid phone users are largely business customers and more receptive to the benefits of a wireless Internet service.

It is certain that both prepaid and postpaid phones will have very high penetration rates on both sides of the pond prior to the arrival of 3G services. But it is not clear that a high penetration rate, based on prepaid phone cards, confers much advantage by way of increasing wireless Internet access.

One of the reasons for the phenomenal success of short messaging services (SMS) in Europe is because text messages are perceived as less expensive than voice. Clearly, wireless Internet access needs to develop pricing that is attractive to users. And in the case of prepaid cards - where call prices start at a much higher threshold than postpaid - this will be a difficult challenge for the mobile operators.

In the US the trend toward new pricing structures for mobile Web access is already evident, inspired by fixed line Internet (most notably, AOL) and not constrained by the outmoded "receiving party pays" system. For example, AT&T offers unmetered wireless Internet access under different plans which range from free to US$14.95 (€16) per month. In that market AT&T has to compete against up to six other operators, depending on the location.

In Europe no operators have yet made such an offer, with wireless Internet access sometimes being priced at a much higher level than fixed-line telephony, and they are unlikely to do so without an increase in the level of competition.

Most of this also applies to Japan, where DoCoMo's iMode service has attracted 17 million users in less than two years. The originality of the system is that it is "always on" (hence there are no connection delays). However, with all the attention paid to it by European media, two points are never discussed: iMode operates at 9.6Kbps, which equals more or less the speed of a fixed network access to the Internet in 1991, and the cost for downloading 1Mb of data is around €25 (DoCoMo charges users based on the quantity of data traffic they generate and the type of services they access, instead of charging them per minute). This compares to a cost of around €0.22 over a cable modem.

Therefore, iMode's pricing scheme is ideal for small text messages, which are charged at around €0.04 (compared to €0.16 in Europe) and for data-light services such as daily horoscopes or ring tones. But the average MP3 song file is around 3Mb. It's obvious that mobile pricing will need to adjust dramatically if the wireless Internet is to become a mass market and be used for things people take for granted on the fixed Net, such as downloading pictures and songs.

Sam Paltridge is an Internet analyst at the Organization for Economic Cooperation and Development in Paris. The views he expresses here are his own and are not necessarily those of the OECD or its member governments

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