Mobile data growth could damage profits

BARCELONA (Reuters) - Mobile carriers risk congested networks and exploding costs if they go overboard with offers of unlimited flat-rate Internet access -- which has become a standard in the fixed-line world -- to mobile users.

Operators have been able to stimulate sales of mobile data by offering flat-rate packages, making growth rates as high as 50 percent or more not uncommon, allowing them to show impressive top lines even in mature markets.

But in some competitive markets, operators are already selling mobile broadband below cost, sacrificing profitability to grab market share, telecoms consultant John Strand said.

"It's a goldrush," Strand said.

Consultancy Accenture estimates the western European mobile data market to be worth 29 billion euros ($36.5 billion) and forecasts it will grow 21 percent a year until 2011. The mobile voice market is worth 120 billion euros but is static.

Actual usage of data services, however, which leads to higher operating costs for transporting data between base stations and operators' core networks, is expected to more than double every year until 2011.

The industry has been keen to see mobile data finally take off, years after it spent billions of euros on licenses to build third-generation mobile networks offering high data speeds.

It has supported mobile broadband with attractive prices -- which was not initially a problem.

"Growth of data usage has been soaking up that spare capacity that existed in the network," Margaret Rice-Jones, chief executive of network consultancy Aircom, told Reuters.

"It's really only as everybody is saying: 'Look! The takeup is really great!' that you stand back and say -- yes, and how many more of those subscribers can you load?" she said.

IRRATIONAL PRICING

Executives noted examples such as Sweden and Austria.

"Sweden has always had the characteristic of selling capacity at too low a price. It was so for ADSL, it was so for cable TV companies offering Internet access ... it is speculated to be so for high-speed mobile Internet access," Telenor Chief Executive Jon Fredrik Baksaas told Reuters.

"The irrationality on pricing needs to be addressed in parallel as we are seeing the customer pickup taking place."

The chief executive of Belgian operator Mobistar, Benoit Scheen, cited the example of Austria, saying operators there offered large packages at prices as low as 10 euros a month, which brought the risk of congesting the network.

Mobistar has lower caps on usage and charges extra for additional use, making the offer unattractive for power users.

"By limiting this to 1 to 2 gigabytes ... we address around 85 to 90 percent of the market. And between you and me, that's fine," Scheen told Reuters.

"I prefer to address the 90 percent of the population that will indeed use it without exploding the capacity on our network," he said.

Swedish operator TeliaSonera said it will change its data tariffs in coming months and could introduce either extra charges once the usage limit is exceeded, or reduce a user's download speed, typically high enough to check email but not enough to watch YouTube videos.

Operators can also throw in add-ons, such as virus and spyware protection or better spam filters, which increase the perceived value of the package and justify a higher price.

Another option is sharing radio networks to cut costs, but infrastructure sharing is something that carriers have pondered but not pushed very aggressively so far.

Orange, the main brand of France Telecom, has experimented with offers tailored to specific groups: it offers a special phone and tariff for consumers who spend a lot of time on social networking sites such as Facebook or MySpace.

Access to those Websites from the mobile phone is unlimited, but other data usage is metered.

"We want to make sure that customers can get specific tariffs for specific areas where they want to go," the head of Orange's mobile business, Olaf Swantee, told Reuters.

"We think in specific targeted pricing, as opposed to a broad, peanut-buttering approach."

(Additional reporting by Kate Holton; Editing by David Holmes)

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