3G in Asia-Pacific - building momentum

Nathan Burley, Research Analyst

Is 3G building momentum? Many of the underlying trends are positive: 3G-based packages are forming a greater percentage of the overall mix; 3G handsets continue to improve in quality and performance; and certain services such as full-track music downloads and mobile TV are piquing interest.

Quickening migration to 3G services is a global trend - 2006 is the year in which 3G is gathering momentum. In terms of indicators, in Western Europe net additions to WCDMA accounted for a staggering 95% of total regional net additions in the first quarter. Make no mistake, this is exciting news for many operators and indicates that market migration to 3G in 2006 is going to be far higher than originally expected.

Figure 1 Migration to 3G in Western Europe, % sequential net additions: GSM vs WCDMA

Source: Wireless Intelligence

Asia is, of course, more heterogenous and fragmented: 3G leaders such as Japan and Korea rub shoulders with markets where licences have yet to be awarded. Leading markets, such as Japan and Korea, have been showing declining 2G subscribers for some time now. KDDI's au Corp brand now has less than 800,000 customers on cdmaOne networks (compared to 22.8 million on CDMA 1X and EV-DO), while NTT DoCoMo is upgrading around 1 million 2G subscribers to 3G each month: it has 26.2 million WCDMA customers. NTT DoCoMo announced that it would accept vendor proposals on LTE-compliant equipment in July, foreshadowing its closure of the 2G PDC network. So much for the advanced markets. But what of the swathe of markets from New Zealand and Australia up through Singapore, Malaysia, Hong Kong and Taiwan?

Here too, we believe the signs are encouraging. In Australia, WCDMA subscribers passed the 1.6 million mark at the end of June 2006 (8% of connections) and 3G is an increasing part of the portfolio mix of all operators. Looking ahead, we expect Telstra's migration to UMTS 850 to boost the 3G base still further.

Outside Japan and Korea, Hong Kong currently has Asia-Pacific's highest proportion of 3G subscribers, at 14% of total subscribers. In fact, 2G subscribers have declined every quarter since Q1 2005 as users migrate to 3G. We expect close to 20% of connections will be using 3G by the end of 2006.

Despite the lack of a new WCDMA entrant, in Singapore the existing operators are battling it out for subscribers: 10% of the user base had migrated to 3G at the end of May 2006. Total 2G connections had declined 10% by May 2006. We are seeing considerable user interest and we expect connections to also be close to 20% of the user base by December.

In Taiwan (a market with some of the lowest data usage worldwide) around 8% of the subscriber base has moved to 3G; however, not all have 3G handsets. New entrants Vibo and Aurora (an MVNO) along with the GSM operators are stepping up the competitive pace.

We expect continued acceleration of 3G migration in these markets and similar growth in New Zealand and Malaysia.

Unlocking this potential value is the tricky part

Many of those that have upgraded have done so as part of the natural upgrade cycle and are unaware of their phone's new 3G abilities. However, many 3G subscribers will be of potentially higher value - upgrading as a result of being attracted to a particular 'iconic' handset or piqued by interest in a particular service.

The larger 3G subscriber base now gives operators an increased base at which to target new services and grow revenues. Almost all are extensively marketing a range of services, and several are seeing traction. Full-track music downloads, streaming video (particularly sports) and adult content offer the most near-term potential. Yet for the majority of mobile phone owners, (non-messaging) mobile data usage is not habitual. And it can still be expensive even in the presence of flat-rate packages. This makes it questionable whether the network effect of a wider 3G base will deliver much financial gain. In Japan, the combination of flat-rate data, a high installed base and a wealth of off-portal content has led to increased spend on mobile content. We believe the main financial benefits of 3G will be on the supply side (capacity and efficiency) in the medium term, rather than from the widespread adoption of multimedia services.

Nathan Burley is a research analyst at Ovum. Nathan covers the Asia-Pacific wireless industry, specialising in consumer services, 3G, wireless broadband, fixed-to-mobile substitution and emerging markets.