Videophone Service Takes Center Stage in 3's Australian Debut

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1 Gartner Dataquest Alert Videophone Service Takes Center Stage in 3's Australian Debut Hutchison 3G Australia, a subsidiary of the multinational Hutchison Whampoa Group, launched its third-generation (3G) mobile service in Australia on 15 April The service branded like all Hutchison's global 3G networks as 3 has aggressive prices and a bundle of applications designed to attract early take-up among consumers. The marketing focus of the launch is a terminal-to-terminal video service called Videotalk, which the operator claims will cost the same as a standard voice call on some other Australian networks. It is the first wideband code division multiple access (W-CDMA) 3G service to be launched in Asia outside Japan, and follows 3's launch in the United Kingdom and Italy. Key Service Features Costs 3's tariff has no minimum usage or contract terms; subscribers pay only for the calls made or services used. Video calling within Australia will cost A$0.50 (US$0.30) per 30 seconds, plus an initial connection fee of A$0.25 (US$0.15). Video calls to 3's U.K. and Italian networks will cost A$0.85 (US$0.51) per 30 seconds plus the connection fee. Voice calls are charged at a flat rate regardless of the time of day. The first 10 minutes of a call to other Hutchison Orange and 3 customers are free; calls to all other national mobiles and landlines are A$0.15 (US$0.09) for 30 seconds plus the A$0.25 connection fee. Charges are capped at A$99 (US$59) per month. Short Message Service (SMS) text messages cost A$0.15 (US$0.09) each; Multimedia Messaging Service (MMS) picture messages are A$0.25 (US$0.15), video messages A$0.50 (US$0.30) and is free until the end of 2003 and A$0.10 (US$0.06) per message thereafter. Content service charges will vary from A$0.10 (US$0.06) for a map, A$0.50 (US$0.30) for a game or video download, up to $1.50 (US$0.90) for a ring tone. Browsing weather, horoscopes, text stories and sports scores will be free. Handsets Two handsets are available in quantity at launch: the Motorola A830 and the NEC e606. The Motorola A830 is a tri-mode (W-CDMA, GSM and GPRS) and tri-band (Asia, Europe and the United States) handset and costs A$480 (US$288) for outright purchase. Although it ships with a camera accessory, it cannot make Videotalk calls. 16 April Gartner, Inc. and/or its Affiliates. All Rights Reserved. 1

2 The dual-mode (W-CDMA and GSM), dual-band (Asia and Europe only) NEC e606 has a built-in camera and costs A$768 (US$461) for outright purchase. It does not support general packet radio service (GPRS) and therefore cannot send picture messages over GSM networks. Both handsets can be bought with two-year contracts instead of outright. After an initial connection charge of A$100 (US$60), monthly fees are A$20 (US$12) for the A830 and A$32 (US$19) for the e606. The contracts include free video calls each month, up to the value of the monthly payment. Two more handsets will be available soon. In May, the NEC e808n (which includes a larger screen, "thumbpad" keyboard and full personal digital assistant functionality) will be added to the range, followed in July by the Motorola A920, a full-featured smartphone based on the Symbian platform. Recognizing that handset models and features will evolve rapidly, buyers of the NEC e606, e808n and Motorola A920 will be entitled to return their handsets after 12 months for a credit of A$300 towardanew3handset. Coverage Initially 3G services will be available only to subscribers in Sydney and Melbourne. Adelaide, Brisbane and Perth will gain coverage in July. Roaming on GSM networks in the rest of the country will be provided by an exclusive contract with Vodafone. Gartner Dataquest Analysis As the smallest and newest of four mobile operators in the mature Australian market, 3 needed to make a splash with this launch and has certainly done so, producing surprisingly aggressive handset prices and service tariffs. The entry-level Motorola A830 handset costs little more than a midrange GSM phone. The A830 does not support the Videotalk service, unlike the NEC e606, but this too is pitched at affordable levels, especially on monthly payment terms. Despite the aggressive handset pricing, 3 claims that its subsidy amounts to no more than A$100 (US$60) per device. This shows the economies of scale and pricing pressure that a global player can exert on handset vendors. It also shows that 3 has learned from its experience in the United Kingdom, where handset prices fell from about 500 (US$786) at launch to 199 (US$313) within one month. For more information, see "Hutchison's Fixed-Price 3G Tariffs Hold Promise" (FT ). Videotalk is very much the marketing centerpiece of 3's offering. The carrier is emphasizing its ability to enable terminal-to-terminal video conversations not just in Australia but also to the United Kingdom and Italy, and other 3 networks as they launch (such as Austria in May and Hong Kong in July). Again, the pricing is designed to lower the barriers to its use. On a per-minute basis, Videotalk costs are similar to those of second-generation prepaid voice services in Australia. Another surprise is 3's aggressive prices for conventional cellular services such as voice, SMS and MMS. These are all priced well below the current offerings of all Australian mobile operators, most of which have raised SMS prices to A$0.25 (US$0.15) per message; with picture messages typically costing A$0.75 (US$0.45) each. While 3 badly needs and will actively promote the Videotalk service to differentiate its services from the voice and data offerings of Telstra's nascent cdma April Gartner, Inc. and/or its Affiliates. All Rights Reserved. 2

3 1x service and Vodafone live, the attractive pricing of conventional services will be another reason for customers to move from their current operator. Other applications in 3's "walled garden" of content-based applications are interesting, but do not appear to command compelling "must have" status. The carrier is promising more applications in the coming months and the introduction of some of its globally developed applications and content by the third quarter. Details have not been disclosed, but this will presumably include U.K. Premiership soccer highlights. The operator is also reviewing the possibility of adult and gambling applications, but has made no announcements. Clearly the success of the 3 offering will depend on continuing innovation in services and applications, and Hutchison has invested heavily in content development activity in Australia. Company officials at the 3 launch believed that average monthly revenue of A$80 (US$48) per user is achievable, compared with an industry average of A$49 (US$29) in Australia during Clearly, Hutchison has a long way to go to establish its presence among the broader base of Australian consumers. Its Orange-branded service in Sydney and Melbourne had 264,000 connections at the end of 2002, or just 2 percent of the total mobile connections in the country. The Brisbane launch of 3 has been pushed back to July, but the Perth and Adelaide launches have been brought forward from later in the year so that all three cities will launch together. It is initially not clear to what extent the roaming agreement with Vodafone will support data services and whether the difficulties with roaming between W-CDMA and GSM networks seen in United Kingdom will be repeated in Australia. 3 believes only a small proportion of traffic (up to 5 percent) will require roaming support. Challenges Ahead After some delays and following the initial launches in Western Europe, 3 is now in business in its second-tier markets and facing similar challenges on the long road to profitability. 3 needs to stay on track with its planned rollout so as not to dent consumer confidence and to achieve a credible level of coverage in the Australian market. Telstra's cdma2000 network was similarly limited in size at its launch, but has expanded quickly to other key cities. The carrier has to overcome network interoperability issues to preclude the types of handover problems between 3G and GSM networks that have troubled users in the United Kingdom. The battery life of the first batch of 3G handsets will remain a challenge for 3's marketing team. Poor battery performance is only just being overcome in Japan's FOMA network. Consumers in Australia may defer purchases if they know that W-CDMA terminals will improve rapidly. Nokia has a firm grip on the Australian handset market, accounting for about 70 percent of terminal sales. It is therefore critical that 3 can source early supplies of Nokia's 6650 phone, and that software interoperability problems between the network, services and handsets are rapidly overcome. Despite the challenges, we are impressed by what 3 is offering as an initial, first-to-market service. Given 18 months and new revisions of handsets, the company has the chance to establish a good lead on other rivals and will have learned a lot about the market in the process. In addition, we believe that 3 will stimulate greater awareness and new interest in mobile data services on existing GSM networks. 16 April Gartner, Inc. and/or its Affiliates. All Rights Reserved. 3

4 By Robin Simpson, Andrew Chetham, Ben Wood and Nick Ingelbrecht 16 April Gartner, Inc. and/or its Affiliates. All Rights Reserved. 4

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