2nd March, 2004

Inset above : Mobile Video Service Revenue, 2003-2007

Europe : During 2003, 3 launched a full portfolio of video services—comprising telephony, messaging and content—in five markets across Europe. Most other European MNOs are set to follow suit upon the commercial launch of their own WCDMA offering. In the meantime, many are looking to preempt 3G by bolstering their existing non-voice offerings with the introduction of video content and messaging over GPRS. This research note explores the potential for video services in Europe and assesses the prospective pitfalls.

We predict limited adoption of mobile video services during the next two to three years:

· 3’s emphasis on video services in its marketing was a flop. Both video telephony and content services featured heavily in its early promotional campaigns. When subscribers did not come flocking, 3 was forced to adopt price discounting as its main customer acquisition tool.

· Other multimedia services have failed to spark any great interest among subscribers. In Western Europe, the vast majority of non-voice revenue in Europe continues to come from SMS.

· There is no great demand for video services among end users. In the 2003 Yankee Group European Connected Consumer Survey, we questioned more than 3,200 end users about which services they use and which they are likely to adopt in the future. Only 23 percent of respondents indicated an interest in video telephony and 24 percent in video messaging. These compare to figures of 34 percent for picture messaging, 45 percent for push-to-talk and 54 percent for instant messaging. Within these categories, however, there are some wide variations. The respondents most interested in video services are those from Spain (where 35 percent are keen to try video messaging and 37 percent video calling) and the under-20 age group (where the equivalent response rates are 44 and 39 percent, respectively).

· Video telephony requires handset penetration to reach a particular level. Potential customers without a fellow video telephony user within their peer group will find the service virtually useless. Even video messaging requires that both sender and recipient have relatively high-tier handsets.

Trend Impact
As shown in Exhibit 1, in 2007 the mobile video market in Western Europe will be worth almost €4 billion, less than 3 percent of all service revenue. The market will be divided quite evenly among telephony, messaging and content. The impact will be proportionately much greater on data services, where 6 percent will come from video, compared to voice, where video telephony will generate only 1.4 percent of revenue. The most prominent video revenue generators in 2004 and 2005 will be streamed and downloaded information and entertainment content. Video messaging will follow the pattern of MMS, by taking a while to fix itself in the collective psyche of the user base. Usage of video telephony will only pick up as video-enabled WCDMA devices begin to reach mass-market levels in 2006 and 2007. As penetration grows and familiarity with the service increases, usage will grow, but video telephony will remain a niche application due to the price premium over traditional voice and moderate additional value to most end users.

MNO Recommendations
· Wait for 3G if it is required to ensure video content is compelling. GPRS is not the optimal technology for delivering many video services. Providing a substandard service over 2.5G now will put customers off using the superior 3G equivalent later.

· Do not over emphasize video telephony when marketing 3G services in the next two to three years. Video telephony will remain an unattractive proposition until penetration of handsets is sufficiently high to allow communication with a significant proportion of the user’s peer group. 3’s initial marketing push based on person-to-person video services was erroneous and should not be repeated.

· Insist on WCDMA handsets featuring video telephony. SMS is popular because virtually all handsets support it. A huge marketing push was not required; users discovered it as penetration rose to a significantly high level and the utility was proven. Handset features will always be two to three years ahead of mass-market service adoption. Therefore, for video telephony to succeed in the future, handsets must feature the functionality now. Demand will snowball with increasing ownership of compatible handsets. Although nothing approaching a mass market will occur until 2006 or 2007, MNOs must sow the seeds among early adopters now.

Vendor Recommendations
· Include video telephony on all WCDMA handsets. Carriers, with long-term usage in mind, will demand the inclusion of video telephony functionality. The immediate need is not the issue. Claims by the handset providers that there is no demand for video telephony are a self-fulfilling prophecy. While penetration is low, takeup will remain low.

· Introduce handset segments within your portfolios that are optimized for video services. The form factor and design of a handset are always powerful tools in making customers aware of the functionality embedded in the device or the network. The handset often does a better job at creating awareness of new mobile services than any MNO marketing campaign.

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