Telecom arms for G3 wars

By RICHARD BRADDELL utilities writer

A year ago, Vodafone looked poised to wipe Telecom off the floor in the mobile phone market.

When it took out BellSouth in 1998, Vodafone had only 20 per cent of the market. But aggressive selling, backed by infrastructure investment and sheer determination, soon drove its share up to a third.

It was not all bad news for Telecom. Even while it was losing market share, its subscriber base was burgeoning as the proportion of people with a mobile phone jumped from 20 per cent to 55 per cent.

Telecom's general manager of mobile, Mohan Jesudason, says those figures have improved and the decline in market share has been reversed.

Of course, there are arguments about how market share is measured, particularly since it is not clear that Vodafone and Telecom measure active connections in the same way. Telecom relies on market research among random samples of the population.

According to Telecom's research, its turnaround has been evident since last May and has gathered pace after a repositioning of the mobile business began 15 months ago.

Mr Jesudason says Vodafone has not been doing anything wrong, but Telecom has been effective in rebuilding its brand through sporting and other sponsorships and an accredited dealer programme.

It has also helped counteract the consequences of serious price cutting by reducing customer turnover among the high teens from 33 per cent two years ago, and by forcing down the cost of sales by negotiating better handset deals with suppliers.

As for the "landgrab" for customers, Mr Jesudason tells a similar story to his Vodafone counterpart, Grahame Maher. Customer numbers are great, but to develop a worthwhile business, Telecom and Vodafone both must drive up average revenues per user (ARPU).

New Zealand ARPUs are low by European standards, but Mr Jesudason sees potential for them to rise by $15 to $20 a month in the next two years, helped by growing use of short messaging, e-mail to phones and through people simply using their phones more.

Another change will be a sharp reduction in the level of handset subsidies. At present, around $200 of a $300 handset is subsidised, and the amounts are larger on more expensive phones that can cost up to $1000 apiece.

The so-called third generation (or 3G) mobile will play a huge part. Telecom reckons its new CDMA digital network to be launched commercially in the middle of this year will deliver value-added services equivalent to those expected when 3G arrives, although it will not be able to do top-quality streaming video.

Telecom's CDMA will compete head-to-head with the GPRS overlay Vodafone has put on its network. The advantage of both services is that their packet nature means they are "always on," thus eliminating the need to spend time dialling in to make a connection. But in spite of their always being connected, charges will reflect actual use only, ensuring it does not run out of control.

With the help of a CDMA add-on, which goes by the less-than-engaging name of 1XRTT, Telecom will also be able to offer true data rates of 144 kbps, or more than 2.5 times that of current fixed wire dial-up modems.

With this advantage, Mr Jesudason's view that CDMA will give Telecom a technological lead over Vodafone for 18 to 24 months seems justified. Certainly, vendors who sell both Vodafone's GSM network equipment and CDMA say the latter offers excellent voice and data capabilities.

Curiously, Telecom seems in no rush to shift large swathes of its user base to CDMA. Instead it will be sold as a premium product which should be attractive to business users, if only because it will be the first time they will be able to roam to Australia using a Telecom phone.

Unfortunately, if they switch to CDMA, they will also have to change their prefix number since the CDMA network will be accessed via 027 rather than 025. Mr Jesudason says the decision to go with 027 was made because only a limited number of new 025 numbers are available.

The question remains what Telecom will do with its Australian mobile business. Construction of its Australian mobile network is on hold and seems unlikely to be resumed. While Telecom could combine its mobile business with those of the smaller Australian players, it would still not be a significant player.

Another option is to become an MVNO (mobile virtual network operator). Under such an arrangement, Telecom would lease network backbone and radio interface from an existing operator and put its own intelligent network on top of that.

Ideally, Telecom would reach such a deal with Telstra, which has a national CDMA network. Telecom already has intelligent network equipment left over from its aborted CDMA network.

But while that would allow Telecom to manage its customers on both sides of the Tasman, Mr Jesudason sees that as only one solution. It could just as easily do an MVNO deal with a GSM operator.

Also, after all the hype surrounding spectrum auctions in Europe as well as here, it is still questionable whether true 3G will ever come. Mr Jesudason thinks it will, eventually.

One advantage New Zealand mobile operators have over their larger European counterparts is that they spent about a third less on third-generation radio spectrum.

That still leaves the question whether Telecom backed the right horse when it went for its version of CDMA - a standard widely adopted in the US, but rejected in Europe.

When European operators go to 3G, they will follow a migration path from their GSM networks that will end up with a 3G standard known as W (for wideband)-CDMA. That differs from the path that Telecom might be expected to follow, which would be to go to CDMA2000.

That would not matter but for the increasing likelihood that W-CDMA is increasingly looking like the global 3G standard. In fact, America's AT&T has just put a GSM overlay on its network in anticipation of a W-CDMA evolution.

In the end, it may not matter much that Telecom is outside the natural W-CDMA evolution path, since the evolution from GSM is not that comfortable either.