European telecom operators are planning to charge customers more for faster new fourth-generation (4G) mobile services in the hope of recouping massive network investments and clawing back lost pricing power.
It's a risky approach since it could put off recession-weary customers and slow the adoption of a technology that benefits telcos by lowering operating costs and helping reduce network overload.
The strategy also differs from what U.S. operators Verizon (New York) and AT&T (Dallas, Texas, USA) have done in their 4G rollout. They incorporated the new technology into all of their offers without extra charges, something they could afford to do because they already charge higher prices.
European operators are expected to spend $15.25 billion through 2015 on upgrading their networks to get to faster 4G speeds, according to Rethink Technology Research. But upgrades are lagging in much of Europe compared to the U.S. and Japan.
Where operators have launched - such as in the Nordic countries, Austria, and Germany - few customers have rushed to the service because 4G smartphones have not been available. Nearly all of the current few hundred thousand users of the new technology in Europe are using laptop dongles or home routers.
With smartphones now finally trickling to market, some of the early movers, including Vodafone (London) in Germany and Teliasonera (Stockholm, Sweden) are seeking to sell 4G service plans as a separate, more expensive option for tech-savvy users.
Others, such as Deutsche Telekom (Bonn, Germany) in its home market, are taking a different tack, more akin to the U.S. approach. All customers will be on the 4G network where it is available, and the company hopes to lure customers by playing the network quality card.
Deutsche Telekom wants to have fast services available in about 100 cities in Germany by the end of 2012 and has now far more than a quarter of that target covered.
France Telecom (Paris) will likely seek to charge more once it launches 4G in a handful of cities including Marseille early next year. It is now testing various tariff structures and doing consumer studies before settling on a final pricing strategy, said Chief Financial Officer Gervais Pellissier.
"If we are able to multiply speeds by five or ten, people will use more services on line, browse more, do e-commerce," said Pellissier. "We think we can monetize that: why should it cost the same as not having access to those services?"
Getting the business model right will be key for European operators, which are already suffering from a toxic cocktail of price competition and regulatory pressure that has eroded profits and sent sector valuations near ten-year lows.
Investors will be expecting a return on the billions global operators are spending on 4G.
Unlike their U.S. peers Verizon and AT&T, Europe's telcos have not yet been able to take full advantage of the mobile revolution of recent years that has made smartphones and tablets must-have devices. They don't have the same pricing power in markets like the UK, France or Spain as the U.S. operators do and as result their profit margins are lower, analysts say.
Yet seeking to use the arrival of 4G, also known as long-term evolution (LTE) technology, to claw back profitability may not pay off in the end.
"People are not willing to pay a significant premium for speed alone, particularly when in the initial period there is limited coverage," said Thomas Wehmeier, analyst at Informa Telecoms & Media. "Customers will feel pretty aggrieved if they are paying 60 euros a month but a big proportion of the traffic is going over the old network."
Wehmeier argues that the better approach is the one taken by Verizon which aggressively rolled out 4G technology to its network starting in 2010 and gave all customers access as part of existing monthly plans. Then it focused its marketing on Verizon's faster speeds than rivals, emblazoning ads with the slogan "America's largest 4G LTE network: experience the speed and power in more places."
By the end of April, Verizon's LTE network had coverage for 200 million people, or about two thirds of the U.S. population. AT&T now has coverage in about 39 cities and promises coverage for almost 150 million of the population by the end of 2012.
When operators roll out 4G, they do it gradually over several years by adding new equipment and software to existing mobile towers. Users can eventually get speeds of up to 100 megabits of data per second, more than double even the fastest 3G networks.
But even after operators launch 4G services commercially, the actual speed that users experience when surfing the web can vary widely depending on if their city has been covered and the number of people accessing the same mobile tower at the same time.
Teliasonera, which launched the world's first 4G network in late 2009 and now counts 140,000 subscribers, just began marketing its first LTE-enabled smartphone this quarter. It offers four monthly service plans from roughly $14-$57 per month, but users get the highest speeds and mobile data allotment only if they sign up for the most expensive one.
For example, the $14 plan offers 10 megabits per second download speed for 2 gigabytes of data, while the $56 one has speeds of 80 megabits per second for 40 gigabytes of data.
Hakan Dahlstrom, who heads Teliasonera's mobile business defended the unconventional pricing approach. "It's very important that we are brave and explore how to make money from mobile data," he said in an interview.
The pace that European customers adopt 4G adoption will also depend on how generously operators subsidize the new smartphones. Today there are only a handful of 4G mobiles and tablets that work in Europe; Apple's iPhone and iPad do not.
However, some of Europe's big operators have been taking the knife to the generous subsidies, including Telefonica and Vodafone in Spain, in another effort to boost margins.
"My feeling is that 4G will not develop if we don't subsidize the handsets," said France Telecom's Pellissier. "We are bring to market more segmented offers on mobile data for big users who are willing to use more and smaller ones who aren't. At least at the beginning, we see 4G being sold at the higher price and not open to all customers."
(Additional reporting by Sinead Carew in New York; Editing by Hans-Juergen Peters)