Tuesday, September 28, 2004

Ground level view - Skypin' on a jetplane

West Coast arch-VoIP blogger Andy Abramson is coming to Europe, and apparently is carrying more kit than the Iron Maiden road crew. He just Skyped me from his flight, which was still boarding at Newark, using a 1xRTT laptop card. I couldn't tell any difference in sound quality, though he apparently heard a bit of latency. Overall, however, it was better quality than cellular - and free. And thus we have another good illustration of the cannibalization risk for 3G on a longer term view. The European wireless carriers derive a disproportionate level of profitability (relative to international peers) from termination of others' traffic and international roaming, both of which are vulnerable in an IP world.

With data accounting for around 15% of cellular ARPU across Europe on average, the revenue replacement process is going to have to accelerate significantly over the long term in the face of this sort of arbitrage opportunity, and at a pretty punchy margin. Last week, Vivendi Universal said that Vodafone live! customers at its SFR subsidiary generate ARPU 10% higher than non-live! subs, and that overall data ARPU at SFR was up 39% YoY in the first half, to EUR46 per year annualized, or EUR3.80 per month. Assuming that much of this data usage is SMS (and also vulnerable to some substitution in an IP world), they're working from a pretty low base when it comes to "pure" data revenues, as are most operators. (I typically spend GBP2 - 4 per month on my GPRS account with Orange, and consider myself a relatively heavy user, but my GPRS usage has definitely cut into my SMS usage.) Voice minutes of use at SFR, in contrast, grew 5% YoY in the first half.

Realistically, this revenue replacement process is a marathon, not a sprint, with parasitic applications like Skype in their infancy versus the ubiquitous nature of cellular voice. However, with a lot of 3G networks in Europe just getting switched on, investor sensitivities to these issues should come on the radar pretty clearly over the next few months as anecdotal evidence like this begins to circulate. The difference this time is that, unlike the "I'm using Skype from my laptop in a coffee shop on a Wi-Fi connection" scenario we've been used to, the advent of 3G widens the net considerably in terms of opportunities for user substitution behaviors.

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