Tuesday, May 18, 2004

Daiwa EuroTelcoblog No. 41: Tuesday 18th May, 2004 - BT Bluephone launch

BT today confirmed recent media speculation and unveiled an MVNO agreement with Vodafone in the UK for the introduction of the long-awaited Bluephone product, originally expected by April (http://www.btplc.com/Innovation/Mobility/everywhere/) and held a webcast press event at BT Centre (http://www.btplc.com/News/Presentations/Industryanalystspresentations/Mobility180504.htm). Bluephone is a converged fixed/mobile product which effectively extends the fixed phone subscription into the WAN using GSM. Conversely, it might be viewed as a GSM product which employs Bluetooth to make calls over the fixed network when in range of a Bluephone access point (AP). The service has passed through trials with 50 users over the past two months, and a 1,000-user softlaunch will follow later in the summer with commercial launch late in the year. BT will continue to honor contractual MVNO agreements with both T-Mobile and O2, but will begin migrating customers to the new service after launch.

The service uses a protocol developed by Ericsson called UMA (unlicensed mobile access), which allows GSM/GPRS features to function on other bearer technologies. The first handset will be a Motorola V-series with a Class 1 Bluetooth chip embedded in it, and will reportedly be identical in form factor and price to its pure GSM counterparts. Effective range indoors is estimated at 20 - 25 meters, and so is comparable to DECT coverage. Voice quality is said to be superior to GSM. BT claims to have seen very strong interest from other Tier 1 handset suppliers, so no doubt more is in the pipeline in this category. We understand that Motorola is in development with a version also including Wi-Fi. BT has also established a Convergence Alliance, whose other charter members are Korea Telecom and Brasil Telecom.

BT has long talked about the high proportion (30%) of mobile phone calls made from within the home, and previous OFTEL surveys into mobile usage showed a strong propensity for teenagers to make mobile calls from within the home due to privacy issues or the fixed line being unavailable at the time. This is BT's initiative to claw back some of that usage, albeit at a lower price point. Bluephone access points can handle four concurrent calls, which we think will probably appeal to families where there may be competition for the phone line, or where parents may be concerned at the mobile bills being racked up by their kids. Additionally, within the enterprise there would appear to be a clear savings to be had from effectively reclassifying GSM traffic as internal calls. Within our own organization it is common for members of the IT department and other quasi-nomadic staff to make in-building calls via our commercial supplier's GSM network in order to find their colleagues out on support calls. The Bluephone concept should prove an attractive one from this perspective.

The other really interesting angle on this is the potential to capture usage which would normally be entirely lost to the mobile networks in a WAN environment. As we understand it, the Bluephone handset will always give priority to a Bluephone AP (even mid-call, via seamless handover), and can register on any Bluephone AP. As the subscriber authentication resides in the SIM card, there are no issues related to billing when effectively using another person's AP (or "phone line"). In this sense, a Bluephone AP could be likened conceptually to a public Wi-Fi hotspot, offering a price arbitrage opportunity for the GSM subscriber in places like coffee shops and stores, which we think would be a very attractive selling point for BT. On the downside, with each AP reportedly only capable of handling four concurrent calls, we suspect high traffic locations (or homes) might potentially risk losing the benefit of cheaper fixed calls if too many "roaming" handsets are trying to use the AP at once, unless the "home" AP is capable of prioritizing the signal of the primary user (which we would expect to be the case). These and a number of other questions remain, but nevertheless, we think this looks like an interesting outreach technology for the fixed network, while offering a unique selling point to the conventional MVNO business, which is a key issue in this market.

We need to go away to a quiet room sometime soon to try to have a crack at what the revenue opportunity might for this product, but BT is targeting GBP1bn in annual revenues from mobility in five years' time, and we think a unique product set such as this underlies a lot of that growth assumption. Just for reference, the last official data from defunct regulator OFTEL, from Q2 2003, showed mobile market revenues of GBP2.6bn for the quarter, of which 83% related to voice. We think BT's five-year target revenues equate to a 5% revenue share of the market, which we do not believe to be too aggressive. BT currently counts 113,000 business connections on its MVNO, and the consumer side has 60,000 users since launching last October, adding 15,000 per month. This makes it significantly smaller than Virgin Mobile, which added 257k subs in Q1, for 3.9m users overall, but the target markets are entirely different. We think we may see net adds to BT's service increase significantly as Bluephone is introduced, and it will be interesting to see how the marketing message is delivered. The obvious appeal is "why pay outrageous fees for calls over your mobile phone when you're in your own home?" but there may be sensitivities around that message. It will also be interesting to see how other operators, especially Vodafone, react in their marketing and product development to the arrival of a product which has clear deflationary implications for mobile market pricing, if it takes off.

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