Wireless Web Woes

Telecom players have spent billions, but profits are still far off

Tony Coyle was sure he had latched on to the Next Big Thing. In March, 2000, the 28-year-old British entrepreneur and his two mates launched a nightlife information service called Joe London. The company dished out up-to-the-minute reviews and event listings to cell phones using a technology that reformats Web pages for mobile devices. But people balked at the slow, clunky system. After just three months of scant traffic, the founders pulled the plug. "We saw the hype and the hard landing," Coyle says.

So did a lot of others. Stockholm-based Citikey bored through $16 million trying to launch mobile-phone city guides across Europe before cratering last November. CreSenda Wireless, a Los Angeles provider of software for linking business data from the Web to handhelds, bit the dust in February. British Internet provider Breathe.com took its last breath in March, partly due to an ill-advised push into wireless Web services. All faced similar complaints: Getting information through mobile phones was too darn slow, expensive, and confusing. "Expectations were out of whack with reality," says Niklas Savander, general manager of the Internet applications group at phonemaker Nokia.

These wireless woes strike terror in the hearts of telecom executives from Stockholm to San Jose. The industry has gambled hundreds of billions of dollars on the wireless Web becoming a booming success over the next few years. Now, the problems experienced by Joe London and other startups are raising serious concerns that the high hopes and big promises were little more than marketing fluff. Fears are growing that revenues generated from the new services may not repay the costs of providing them anytime soon.

Nowhere are the stakes higher than in Europe. The Continent's largest telephone companies bet their futures on a surge in wireless data services to propel their growth. Last year, European carriers laid out a staggering $116 billion to license spectrum for speedy third-generation (3G) mobile systems, and they will have to shell out another $150 billion over the next few years to build the networks. With that kind of money on the line, as well as sky-high usage of cell phones, Europe is shaping up to be the testing ground of the mobile Internet. If it doesn't work in Europe, will it elsewhere?

Going haywire. Investors are worried that the experiment is going haywire. The stocks of some European telecom companies have dropped 50% or more since last year. Wireless giant Vodafone Group's (VOD ) shares, for example, have tumbled 54% from their peak last March. Worse, many companies have borrowed heavily to pay for their new licenses and have been crippled under the heavy debt loads. France Télécom (FTE ), Deutsche Telekom (DT ), and British Telecom (BTY ) have $130 billion in debt among them. The Netherlands' KPN (KQIP ) may be in the worst shape: It took on $20 billion in debt and now is selling off its stakes in 20 businesses to pay off its loans.

There's good reason to be nervous. The original vision of the wireless Web was the Internet in your hand: From a mobile phone, you could surf Web pages, scroll through articles in Le Monde, or buy the latest bestseller from Amazon.com. The potential revenues seemed limitless. However, recent studies from analysts such as Gartner Group Inc. and Jupiter Media Metrix Inc. suggest that customers aren't jazzed by many wireless applications and don't want to pay much for them. Rather, they want low-cost, simple-to-use services. For example, short messaging, online games, and targeted information based on your location are proving to be popular. Revenues per subscriber for these kinds of services will rise by more than $6 a month by 2005, says analyst Lars Godell of Forrester Research Inc. But the increase won't make up for the decline in voice revenues caused by fierce price competition. Forrester forecasts a $13 drop in monthly voice sales per subscriber in the same period. Overall, monthly revenues per subscriber are expected to fall from $38 today to $31 in 2005. "Mobile Internet revenues won't bridge the gap," Godell says.

Worse yet, they may not pay back the massive outlays for future networks. All told, the huge 3G expenditures will add, on average, $5 a month per subscriber to the cost of providing mobile service for the next 15 years, Forrester says. Coming up with data services to drive so much incremental revenue will be tough. If carriers can't boost their take, they face financial ruin or massive consolidation.

The math is manageable for some mobile operators, murderous for others. Many countries, such as the Nordics and Spain, granted 3G rights via "beauty contests" in which inexpensive licenses were awarded to operators that best met criteria such as rollout schedules and financial strength. Recovering an investment of $112 million in Spain should be a breeze for a company like Spanish operator Telefónica Móviles (TEM ), even if its subscribers pay only a few dollars per month for data services.

In countries that auctioned 3G licenses, such as Germany and Britain, prices went through the roof. In Germany, Telefónica partnered with Finland's Sonera (SNRA ) to bid $7.6 billion for a license and will spend at least $4 billion more on its network. That $12 billion will be hard to earn back for a company new to Germany. The venture, called Group 3G, is expected to see revenues of only $1.3 billion in 2005, says brokerage Sanford C. Bernstein & Co. At that rate, Munich-based Group 3G might have to merge with a larger partner to remain viable, Bernstein says. "We're not worried about our financial situation," responds Group 3G spokeswoman Susanne Westphal.

U.S. telecom players face less financial risk, if only because they're moving to 3G more slowly. Most carriers are rolling out simple wireless Net services with the radio spectrum they already have. They probably won't bid on new licenses for 3G until late this year or next year--and then they're likely to be cautious bidders, after the European fiasco. "The stakes are quite small in the U.S., but the potential rewards are huge," says wireless analyst Tom Lee of J.P. Morgan Chase & Co.

Still, the story is far from what hypesters originally predicted. In 1999, at the peak of the Internet bubble, analysts forecast that a half-billion people would use wireless phones to get on the Web by 2003. Based on those expectations, hundreds of software and content outfits set up shop near wireless meccas such as Helsinki, Stockholm, and Silicon Valley. Venture capitalists poured $8.3 billion into more than 400 European and U.S. mobile Net startups since January, 1999, according to researcher Venture Economics. Even as late as the first quarter of this year, some $500 million went to nearly 40 companies.

But the first attempts at the wireless Web proved disastrous. Joe London and others tried to create an experience like surfing the Net from a personal computer. They used a technology called Wireless Application Protocol (WAP) that reconfigured Web pages so people could read them from their mobiles. The result: excruciating waits for simple information. And mobile shopping? Unthinkable. The hostile reaction was dubbed "WAPlash." By the end of 2000, just 5% of Europe's 210 million mobile subscribers used WAP services. "The phone is not a surfing machine," says Kimmo Karppi, a Finnish software manager who uses his mobile phone to check the weather when sailing but shuns more elaborate services.

Still, the wireless Net isn't dead. As telecom players and providers of wireless data refine their approach, they are beginning to find services for which customers are willing to pay money. The effort should become easier over the next year as European and U.S. carriers roll out an interim generation of wireless technology, known as 2.5G, that will move data about three times faster than today's pokey 9,600-bits-per-second connections. Better yet, the data will be "always on," which means it will flow in and out of handsets whenever they're turned on. That's a big improvement over current networks, which require users to dial in to check a stock price or sports score. And it's a proven success, at least in Japan. There, a wireless Web service called i-mode has attracted 23 million users who each spend an average of $18 per month.

Impatient startups aren't waiting for zippier technology. They're revising their business plans to take advantage of today's slower networks. After Joe London bit the dust, Tony Coyle and his mates ditched WAP in favor of Short Message Service, or SMS, a simpler technology that allows users to zap brief notes to one another and is built into every digital phone. In March, the trio introduced a new service, called mTickets, that lets customers buy movie and club tickets via PCs on the Web and receive confirmation via SMS on their mobiles. Then, with phone in hand, users flash the screen at the box office and breeze in the door. "It's really a great service," says Nicole Bailey, marketing manager for London's Prince Charles Cinema, which has signed up to use mTickets. Coyle is in discussions with giant Ticketmaster about a possible licensing deal.

"Value added." True, such simple messaging schemes barely tap the interactive potential of the Net. But they're cheap to implement and might well add up to big money. By 2003, predicts investment adviser Durlacher Research Ltd., Europeans will dispatch more than a trillion SMS messages a year, generating annual revenues of $12 billion for carriers. Better yet, as many as 8% of those messages might carry paid content--either ads, which could cost marketers 3 cents to 5 cents each, or infograms such as stock-price alerts paid for by subscribers. Commissions and fees from such "value-added" messages will drop an additional $2 billion annually into the laps of carriers by 2003, predicts Forrester.

Once the higher-speed 2.5G and 3G networks kick in, mobile operators will rake in billions just from moving bits. The business of giving customers wireless access to their corporate networks or the Internet should make up some $25 billion annually in 2005, by far the largest chunk of carriers' data revenues and 22% of their overall sales, predicts Forrester.

Such services, though, may not produce the profits mobile operators seek. That's because messaging and data transport are commodity businesses subject to price competition and customer turnover. To escape that trap, carriers are scrambling to stake out positions in emerging sectors such as mobile commerce, advertising, and content that could help them differentiate themselves, build customer loyalty, and net higher margins. For instance, operators are licensing content from outfits such as Reuters Group and CNN and setting up wireless portals.

The payoff may come slowly. Delivery of news, sports scores, and the like "won't be much of a revenue generator for carriers," says Nick Henry, European vice-president for Seattle-based Web publisher InfoSpace Inc. The reason: Consumers get news free on the Web and won't want to pay for it on its wireless cousin. Better 2.5G and 3G networks could help by allowing for richer content spiced up with audio and graphics. But European carriers will see only $600 million in content revenues in 2003, researcher Datamonitor predicts.

To boost the take, carriers are likely to look for sponsorship deals. But that's no sure thing given that Web advertising has been iffy. Still, companies like Washington-based Spotcast Communications Inc. and Germany's Mindmatics have sprung up to deliver ads using SMS. They argue that different rules will apply in the wireless sphere. One Mindmatics promo offered discount coupons from German health-products e-tailer VitaGo.de to 5,000 WAP users. The result? Nearly 10% responded--20 times better than an average Web banner ad--the site. Anders Hakfelt, managing director of Mindmatics' British office, credits the difference to personalization: Wireless subscribers typically elect to receive ads and provide demographic information in exchange for freebies such as coupons. That could help drive wireless ad revenues in Europe to $430 million in 2003 and $5.8 billion in 2005, predicts Durlacher.

The most successful data services will be those unique to wireless. "The premium we're selling is mobility," says Denny F. Strigl, CEO of U.S. giant Verizon Wireless Inc. (VZ ) None is more promising than so-called location-based services, which exploit the ability of mobile networks to pinpoint the whereabouts of each phone. Using such data, Zurich-based startup Cinergy offers local schedules for movies all over Switzerland. Such services should become more useful when improved location technology rolls out in concert with 3G. By 2003, predicts The Strategies Group, operators will book $2.5 billion from selling data on users' whereabouts. The ability to pinpoint the location of each phone is "a fundamental strategic asset for carriers," says David A. Pearce, European marketing director for SignalSoft Corp., a Colorado company that feeds subscriber coordinates from a dozen operators to more than 180 commerce and content clients, such as Cinergy.

The wireless Internet is unlikely to be the bonanza its supporters once hoped for. As far out as 2005, mobile content, commerce, and other services will generate only $9 billion in revenues, according to Forrester estimates. While some large telecom players and innovative upstarts may fare relatively well providing simpler, stripped-down services, weaker players such as KPN and Group 3G may end up swamped by the billions they're paying for licenses and networks. Many carriers "will never get the license fee back," says Bernstein analyst Andrew J. O'Neill. The best companies could emerge from the shift to 3G more powerful than ever. But plenty of blood will be spilled along the way.

By Andy Reinhardt

Contributing: Peter Elstrom and Steve Rosenbush

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