Mobile operators looking to ring up Christmas bonanza with new services

Hi-tech advances such as picture messaging will test demand for 3G ahead of launch

With a riot of new mobile phones now hitting the high street and a raft of new services to use on them, such as games and picture messaging, the mobile phone industry is gearing up for Christmas like never before.

With a riot of new mobile phones now hitting the high street and a raft of new services to use on them, such as games and picture messaging, the mobile phone industry is gearing up for Christmas like never before.

Orange yesterday launched a Microsoft-powered smartphone – the SPV [short for sound, pictures, video] – which will be supported by a $20m to $25m (£13m to £16m) advertising campaign.

Vodafone, meanwhile, is said to be splashing out €250m (£158m) on an all-singing all-dancing campaign for its new Vodafone Live! service which launches tomorrow.

No wonder then, that Anthony Catterson, the managing director of the Phones4U chain of stores, is predicting trading this Christmas will be "very, very buoyant". He reckons the mobile phone makers and operators are shelling out something in the region of £150m over the course of the next six months on advertising the new services and gadgets.

"Going into Christmas, the operators and the manufacturers are spending fortunes in terms of advertising, particularly for photo messaging," he says. "And that's great news for us."

The logic behind the renewed push from the wireless industry is simple. In Western Europe, where handset penetration is extremely high – exceeding 70 per cent in the UK alone – the mobile phone operators have still to prove that theirs remains a growth market.

They must demonstrate that their customers will be willing to shell out more for new services, such as picture messaging, thereby increasing their closely-watched average revenue per user (Arpu) figures.

Orange reckons its SPV phone, which will go on sale from next month in the UK for about £179, will do just that although it is not yet confident enough to share its targets.

The operator, which launched its picture messaging service in August, has ordered 200,000 SPV handsets, which come with detachable camera.

It is the first Microsoft-powered smartphone and will allow users to send and receive pictures as well as access services such as instant messaging and e-mail. It also allows users to save details such as names, phone numbers and calendar entries onto the Orange network while new software and services can be downloaded or upgraded over the air.

Vodafone, meanwhile, is betting Vodafone Live!, which will contain a picture messaging and games service among other things, will help push up its Arpu figures.

T-Mobile, the operator owned by Deutsche Telekom and formerly known as One2One, was the first to launch a picture messaging service in June with the help of the tennis stars Andre Agassi and Steffi Graf. And mmO ₂, formerly known as BT Cellnet, launches a picture messaging service towards the end of this month but launched a games service at the beginning of last month.

For the mobile phone retailers, such as The Link, Phones4U and Carphone Warehouse, all this is excellent news. "We expect our like-for-like performance to be very strong in the fourth quarter," says Mr Catterson of Phones4U, adding: "I think we're going to see a revival of handset sales."

Consumers, he says, have been so keen to snap up the new gadgets that they are even willing to sign contracts to get them, ditching their pay-as-you-go models. "This year there's been a resurgence for contract business. Whereas the industry was about 70 per cent pre-pay last year and 30 per cent contract, in the last six months that's evened out to something like 55 per cent pre-pay to 45 per cent contract," he says.

And that, he believes, is driven almost entirely by customers wanting the more sophisticated handsets that feature colour screens and picture messaging.

"Customers are quite prepared to pay a monthly line rental as it gives them access to that technology earlier than if they had to wait 12 months for the pre-pay pricing to be sensible," he says.

Furthermore, he reckons 10 to 15 per cent of Phones4U's current sales are coming from the new-generation handsets. But even if consumers are quick to snap up the new gadgets, it remains to be seen just how much they will use the new services once the initial excitement has died down.

The investment community is not entirely convinced the services will be an immediate hit and, if correct, that could spell bad news for the operators.

Analysts at Cazenove reckon it will take a lot longer than the operators expect for picture messaging services and the like to really take off. "Our core belief is that photo messaging and MMS services will be successful but the key for investors unfortunately remains patience," they say. "We do not believe that operators will see any meaningful Arpu uplift from photo messaging for at least a year. Our analysis shows that even if handset uptake is extremely successful, it would at best deliver only a 1 per cent Arpu uplift by next year."

The Cazenove analysts point to Japan where, they say, even the successful photo-messaging service from J-Phone, known as sha-mail, shows a dramatic fall-off in usage over time. "Only 17 per cent of camera phone owners regularly send pictures after 10 to 12 months," they say. That compares with a user rate of 29 per cent in the first three months.

Mr Catterson of Phones 4U believes picture messaging will not really become mass market in the UK until next year. What the industry does agree on, however, is that the services hitting the shelves now will pave the way for the long-awaited third generation, or 3G, services.

But if consumers can get picture messaging, video and the like on existing 2.5G networks, what exactly will the 3G networks the operators spent billions of pounds setting up, do?

Richard Miner, the vice president of Orange Imagineering, says the key applications for 3G will be the same as those on 2.5G but they will work faster. "Talk to a broadband user, they wouldn't give it [broadband] up," he says, comparing how much faster broadband is to a dial-up connection to the internet.

Orange expects its 3G services to go live toward the end of 2003, or the beginning of 2004. Vodafone plans to launch a 3G service next year and mmO ₂ predicts its 3G service will launch in the second half of next year. 3, formerly Hutchison 3G, is braving the market this year and launched a limited service to about 1,000 users at the beginning of the month.

What is clear is that the services the operators are launching now will be key in gauging consumer interest for what lies ahead, allowing them to tweak their offerings for 3G. Whether it has been money well spent and whether the operators will get the sort of pay-back they are hoping for as quickly as they expect will become apparent over the coming months.