Yuppiedom was bowled over the mobile. It was a limited love affair. No one yet knows who has the market's number.
A few years ago, when yuppies were the only people with mobile phones, journalists took to describing them, with no great originality, as 'the latest fashion accessory'. They may, for once, have been more prescient than they realised. One of the last things that Stafford Taylor, managing director of Cellnet, did before he left in October to take up a top job with BT, Cellnet's majority shareholder, was to have talks with the head of a major high street fashion chain about stocking cellphones in his shops. It's a natural progression, says Taylor. Up till now the mobile phone has been thought of as a piece of consumer electronics, a 'male' product. But why not think more like a woman and re-position it as a fashion item? 'It's a very important channel to market. What I'd like to see are cellphones hung up in Marks and Spencer beside the knicker counter.' It may yet happen. The mobile phone industry is in transition. The big question is the nature of the transition. Is it evolutionary - just a speeding up, an amplification, of present trends - or is it revolutionary?
Crudely put, Vodafone, the largest cellular radio operator (it had 947,000 subscribers at last count) believes in evolution, while Cellnet (776,000) and newcomer Mercury One-2-One are revolutionaries. The last of the four players, Hutchison Microtel, which will launch its service next April, is an unknown quantity, but probably tends towards the revolutionary camp.
The evolutionists and the revolutionaries posit very different views of the future. Ask how many mobile phones there will be in the UK by the year 2000 and the spread of opinion is enormous - Vodafone suggests 5.6 million - 10% of the population - while the other three talk of between 8 and 10 million.
Two things are certain. First, they cannot all be right. Second, if either of the two extremes turns out to be correct then the companies at the other end of the size spectrum - if they have not, in the meantime, adjusted their strategies - will have large helpings of egg on their faces come the turn of the century.
Though Vodafone and Cellnet, the two companies which started the mobile phone industry back in 1985, could scarcely be wider apart, the one thing they do agree on is where their basic disagreement lies. Vodafone believes that the lion's share of demand for some years ahead will continue to come from business. There will certainly be some demand from the residential sector, says MD Chris Gent, but mostly from the ABC1s - people with high disposable incomes. His best guess is that the market will split three-fifths business, two-fifths domestic. 'If it turns out to be seven or eight million we'll be happy chaps,' says Gent, 'but our view is it's more likely to be less than six million by the end of the decade.' Cellnet by contrast, believes there is a pent-up demand in the domestic sector, just waiting to be released by lower prices.
In the eight years since cellular radio was launched in the UK, the two original operators, Vodafone and Cellnet, have recruited 1.7 million subscribers. So to reach Vodafone's predicted 5.6 million means putting on 600,000 new customers every year for the next six years, more in fact, since there is always a drop-out factor as some people cancel or fail to renew agreements. To get to eight million subscribers Vodafone, Cellnet, One-2-One and Hutchison need, between them, to attract one million subscribers a year from now to the end of the decade. To reach 10 million would require 1.4 million per annum.
These are big numbers, but, to put them in perspective, they are much smaller than those regarded as feasible and manageable by government and industry just four years ago when the government put out to tender licences for the new mass-market PCNs (Personal Communication Networks) - the cellular networks which One-2-One and Hutchison are now laying down. At that stage, in 1989, it was confidently forecast there would be 10 to 15 million UK subscribers by the turn of the century.
The cautious observer of what is happening now would have to point out that, in the wake of recession, those figures have begun to be regarded as a ludicrous overestimate and the licensing system has since deteriorated into chaos. The Government awarded PCN licences to three international consortia in December 1989. Two years later with customer predictions radically scaled down, no fewer than nine international companies had withdrawn from the various consortia, and only two licensees - Mercury One-2-One and Hutchison - were left. Despite that debacle, Cellnet, Mercury One-2-One and Hutchison are still convinced that a breakthrough into the mass market is not only possible but imminent.
Two-and-a-half years ago, says Taylor, Cellnet carried out research on future segments of demand for mobile communications. 'What we found was that if you started to drop the fixed cost of mobiles - the handset and the line rental price - then people started to become very interested in having mobile communications. The issue is price, technology and packaging, but particularly price, and we are going to see this technology get cheaper and cheaper in the next seven years.' He predicts that demand for the mobile phone will follow the pattern set by video recorders. The demand curve will hit an 'elbow', then shoot up. 'Video started slowly then, all of a sudden, it became something you had to have. Once you reach the elbow, this thing is going to completely take off. I think we're very close to it. We're within a year of it.' Richard Goswell, managing director of newcomer Mercury One-2-One, which is jointly owned by Cable and Wireless and American company US West, thinks that the fall in fixed costs may come a lot sooner than anyone had previously thought possible. Within two weeks of One-2-One's launch in September, he says, he had handset manufacturers offering him prices he hadn't expected to see for five years. The trick in stimulating demand, he suggests, is going to be not just reducing prices but changing perceptions. The public at large has to start thinking of the mobile phone the same way as it thinks of the television set or the car - an ordinary, everyday item that everyone has as a matter of course rather than a luxury.
'We believe that people have been deterred from mobility because it has been the sort of service which they have perceived as belonging to a bit of the community of which they weren't part,' says Goswell. 'It was always somebody else. Yuppies have those, business executives have those, people who drive Jags have those - not me.' What we've tried to do is to make people realise this is an affordable mobile phone for everybody - the mobile phone for every day for everyone.' Ironically, Mercury One-2-One's opening shot in its attempt to change public perception has involved presenting the company not as the new kid on the block fronting up to Vodafone and Cellnet, but as a rival to BT and the fixed phone network. 'BT is our real target,' said Lord Young, chairman of Cable and Wireless at the launch. 'By the end of the decade the telecommunications market will have changed beyond recognition.' The challenge to BT was backed up by an ingenious, headline-grabbing marketing ploy - free local calls at off-peak times. The 'freebie', available at evenings and weekends, does two jobs - it lures in potential customers and it hurts BT, since every minute spent on a free local call on One-2-One would be a minute lost to BT. One-2-One is pushing the idea with a £10-million advertising campaign.
The $64,000 question, of course, is: will it work? We shall not know for quite a while - Goswell has decided not to release subscriber figures for at least six months - but it will probably depend on how people read the offer.
It will be an added incentive for those who were already predisposed to consider going mobile, but it is also possible that it will backfire. Lord Young said that people would have to be mad to use a BT fixed phone in preference to a One-2-One cellphone for local calls in the evening and at weekends, but, as BT and several other commentators rapidly pointed out, the 'free' call is not quite as free as it seems. As The Independent noted a couple of days after the launch: 'Lord Young's free calls are only free once you have bought a handset for £250 and paid a monthly fee of £14.69, and are prepared to pay tariffs up to 17 times those charged by BT to use the Mercury telephone at peak periods.' So was the offer clever, or just too clever by half?
Gent of Vodafone accepts that the free calls idea was a publicity coup but One-to-One has got to make all its rates, including the peak-time 25p a minute one, work for it too. Having run One-2-One's costs and tariffs through its own computer, Vodafone reckons it will be six to seven years before it breaks even and that assumes, says Gent, that subscribers are using their mobile phones actively during the day as well as at night. 'If they don't use it actively Mercury has got a major problem. They won't make the break-even numbers we're talking about unless people use it actively during the day as well as when it's free at night. I suspect that if you're pitching to people who've got alternatives - the office phone at work, or their BT phone at home - they won't use their mobile phone unless they're out and about during the daytime.' Cellnet's analysts make a similar point. Although certain, like One-2-One, that the key to a mass market is low fixed costs, they are intrigued to know how One-2-One's variable cost equation will work out. They have not, of course, had access to One-2-One's business plan but the belief at Cellnet's Slough headquarters is that it must envisage significantly higher traffic than the established networks are getting today - perhaps two or three times as much. If that is so, ask the Cellnet experts, how are they going to do it? Driving up usage, as BT and others have found, is very difficult. 'They must have built their business plan based on traffic at least three times that which Cellnet is experiencing today,' says ex-Cellnet boss Taylor, 'yet we have all the business customers, all the heavy spending people who spend £1,000 a month. So they've got to find ways of driving that traffic up very dramatically and I think that's quite ambitious. Free calls might drive up your traffic at night but I'm not sure it necessarily does much for your bottom line.' Vodafone and Cellnet may question One-2-One's arithmetic, but they are not underestimating their new rival. Vodafone, for instance, has introduced a new service called MetroDigital, which is, in effect, a PCN lookalike system, and both companies have significantly adjusted tariffs to make them more competitive with One-2-One.
More price manoeuvring is a certainty, but what is not likely is an all out price war. Vodafone and Cellnet have no incentive to dilute their present very profitable revenue streams by price-cutting and the newcomers simply could not afford it. Laying down a PCN cellular network costs about £1 billion and, even with the present tariffs, One-2-One is not expecting to be in profit for at least five years. Price-cutting in those circumstances would be just one risk too many. The same has to be true of Hutchison.
If there is to be a war it will be a style war and that, perhaps, is where Taylor's vision of the mobile phone as a fashion item comes in. The cellphone has already moved into the high street through electrical retailers and, more recently, specialist cellphone shops, but soon perhaps we will find them turning up in clothes shops, chemists and all sorts of other places. If that does happen, the mobile phone companies are going to have to find a way of simplifying their offers. At present customers have to chose between three network operators, two technologies, 10 tariffs and a variety of handset makers. When Hutchison launches there will probably be another three tariffs.
The danger is that if life becomes too difficult for retailers because they are being asked to cope with a mobile maze they will simply walk away from the business.
The four main players
A joint venture between BT (which owns 60% of the shares) and Securicor (40%.) Under the terms of its licence it is obliged to operate at arm's length from BT but is obviously unlikely to do anything that might upset its parent. It has spent £700 million on its network to date. The network reaches 98% of the population and has 755,000 subscribers. The company is very profitable. It made a 39% return on a turnover of £377 million in the year to March 1993.
Formerly a joint venture between UK electronics company Racal and US communications company Millicom. Shares migrated to Racal until Vodafone was floated off as a plc in 1991. It is a 50% stakeholder in equipment maker Orbitel and has interests in mobile phone networks in 13 countries around the world. It has 927,000 subscribers and made profits of £322 million in the year to March.
- Mercury One-2-One
A joint venture company owned equally by Cable and Wireless and American company US West. It is one of two licensees for PCNs. It launched its service in the London area in September and anticipates covering two-thirds of UK population by early 1996.
- Hutchison Microtel
The second PCN licensee. Part of the Hong Kong-based Hutchison Whampoa group, it expects to launch in April 1994. It will initially be available to 50% of the population.
Cellular radio was launched in Britain in January 1985. Before that the only way to communicate on the move was by radio telephone which depended on high-powered transmitters covering very large areas. There were a lot of callers but only a few transmitters so there were often more people queuing for a line than there were using one. Cellphone technology turns the radiophone system on its head. Instead of a high-powered transmitter covering a large area it divides the country into many small cells, usually only a few miles across, each with its own low-powered transmitter/receiver. When a call is made, the nearest transmitter/receiver is contacted and the message sent on its way into the telephone system. The system constantly monitors the strength of the signal being received from the handset and can tell when the caller is approaching and then crossing the boundary between one cell and another. As the caller crosses the boundary, the call is automatically switched from the original transmitter/receiver to the adjoining one.
PCNs, introduced by the new entrants to the mobile phone market, use a very similar system, except that PCN cells are smaller and work at higher frequencies. They are designed to work with small, lightweight, low-power handsets. The aim is to make it a mass-market, low-cost system.