After years of sliding prices for wireless service in Europe, Vodafone Group Plc (VOD), Telefonica SA (TEF) and Deutsche Telekom AG (DTE) now have a shot at halting that trend by getting customers hooked on faster mobile technology.
As handset manufacturers such as ZTE Corp. (000063) and Nokia Oyj (NOK1V) prepare to use the Mobile World Congress in Barcelona next week to show devices capable of handling data downloads using the long-term evolution technology rolled out in the U.S. about a year ago, operators are seeking to capitalize on the appeal of faster mobile transmission, starting with Germany, Europe’s biggest wireless market.
Phone companies need to bolster strained networks as more customers use increasingly high-quality video, sound and games. While U.S. carriers like Verizon Wireless (VZ) are pushing LTE as a means to move traffic off congested airwaves and have largely avoided price increases, European operators may have a chance to lift revenue with customers willing to pay more for the service.
“When you have a faster connection like that, it saves you a lot of time,” said Roque da Silva, a 27-year-old Capoeira teacher from Brazil, while looking for new wireless plans at Vodafone’s store on Frankfurt’s main shopping street. Da Silva would readily pay a premium for faster access to videos and sites like Facebook Inc (FB).’s social network. “Downloads just take too long right now,” he said.
LTE offers higher up- and download speeds and latency, or response time, that’s three times quicker on average than previous technology. Vodafone, which will be first to the German market on March 1 with HTC Corp.’s (2489) Velocity LTE smartphone, plans to add 10 euros ($13) and extra data volume to its top two tariffs. German customers’ response will have a “signal effect to the entire group,” said Rene Schuster, who heads rival Telefonica’s German operations.
The Spanish company and operator of the O2 wireless brand in Europe today reported a 2.2 percent increase in German mobile service revenue for the fourth quarter, while profit margins in the country increased 2.5 percentage points to 26.1 percent.
When European operators, including Deutsche Telekom (DTE) and Vodafone, spent about 50 billion euros on licenses in 2000 for LTE predecessor UMTS, profits were years away as the networks weren’t opened to the public until 2004 and high-bandwidth applications weren’t widely consumed. This time, phone companies are hoping to recoup their investments much sooner.
“In my experience, customers are prepared to pay an appropriate price for really high-class service,” said Vodafone Germany CEO Friedrich Joussen, whose unit is spending about 1 billion euros annually on its network and aims to finish rollout by 2015. “It will show that the strategy to drive innovation is worthwhile.”
Unlike U.S. carriers, European operators are free to choose whether to quickly boost their user base or aim for higher prices because they don’t face the same urgency of network congestion, said Mathieu Robilliard, a Paris-based analyst at Exane BNP Paribas.
Operators “have to drive a skimming-off strategy and set a higher price from the get-go to see how people accept it,” said Torsten Gerpott, a professor at the Mercator School of Management at Duisburg-Essen University. “For the mass market they can then still decide to lower the prices. But they mustn’t set the price too low initially because they won’t ever be able to bring it up again.”
New networks offer download speeds exceeding 100 megabits per second. In everyday use with multiple users sharing a cell, much lower speeds are expected and the main advantage may be latency reduction, meaning websites and photos start loading about three times faster.
“It would be extremely important to get the Internet speeds that I have at home on the go,” said Andreu Vidal, a 20- year old engineering trainee at Samson AG in Frankfurt. “When you pay something like 70 euros, you pretty much expect to get the fastest connections possible.”
LTE offers the possibility to differentiate offerings and improve customer loyalty, said Ben Verwaayen, CEO of Alcatel- Lucent (ALU), which competes with Huawei Technologies Co. and Ericsson (ERICB) AB to provide infrastructure and components to phone companies.
“Next generation technology will give operators an opportunity to make a choice on whether to be a commodity- provider or not,” he said in an interview. “If you have a me- too attitude and a me-too product, then you will get a me-too price.”
‘Hunger for Speed’
Germany will carry its lead in LTE among major European markets through 2016, when more than 20 percent of mobile-phone users will have switched, Informa Plc (INF) estimates. Meanwhile, carriers need to justify the investment. Germany’s monthly average revenue per user, at 15.62 euros in the final quarter of 2011, was one of Europe’s lowest, just ahead of Greece and little more than half that of France, Informa data shows. The figure has fallen 61 percent from 40 euros at the start of the last decade, according to the researcher.
2012 will be “the year of LTE” as “the hunger for speed grows week by week,” said Bruno Jacobfeuerborn, chief technology officer for Deutsche Telekom’s German home market. The former phone monopoly will start offering LTE tariffs for phones “in coming months” as it deploys networks in more than 100 German cities, he said, declining to comment on pricing.
German operators, including Royal KPN NV’s (KPN) E-Plus division, poured almost 4.4 billion euros into mobile-phone frequencies in 2010, with some spectrum converted from analogue television use. So far, Vodafone, Telefonica and Deutsche Telekom have offered LTE as a means to connect to the Internet from home, as an alternative to cable and DSL.
“We’re watching very closely,” said Rafal Markiewicz, chief technology officer of E-Plus, the one operator that won’t offer LTE this year. “It will be quite interesting to see how much customers will be willing to spend and what a price point you choose at the outset, because that will set tariff expectations for years to come.”