Spanish telecom firms are yielding to the reality of recession by selling new superfast mobile services at no extra charge, offering a cautionary tale for European peers which hope premium 4G prices will help them return to growth.
Many consumers in Spain, where unemployment stands at 26 percent, are unwilling or unable to spend up to 800 euros ($1,100) on a 4G-enabled smartphone and then sign up to a more expensive monthly plan - despite the promise of download speeds that are five times faster than existing 3G services.
This mood spells trouble for operators in France, Britain, Italy and even in stronger economies such as Germany, which have spent billions to build 4G networks in the hope that the new technology will help reverse years of falling prices.
Maria Angeles, a hospital worker who was shopping for a tablet at an Orange (Pozuelo de Alarcon, Spain) store in downtown Madrid, typifies the cautious consumer across Europe and even in some booming but highly competitive markets beyond, such as South Korea.
Maria Angeles - who declined to give her family name - remained unmoved by carriers' massive advertising push, such as Vodafone (Alcobendas, Spain) posters on city buses saying "Madrid, you are now 4G!".
"I have no idea how 4G works and I don't think I need it. They definitely shouldn't charge for it," she said.
Fourth-generation telecoms, also known as Long Term Evolution (LTE), not only speed up browsing speeds but improve the quality of video streaming and video calls on smartphones made by the likes of Apple (Cupertino, CA, USA) and Samsung (Seoul, South Korea).
Such networks don't come cheap since operators often lay out hundreds of millions of euros just for mobile licenses. In the relatively small market of Austria, for instance, a 4G auction is already drawing bids totaling about four times the starting price, according to Reuters calculations.
Mobile spectrum auctions in France cost operators 3.6 billion euros, and in Britain 2.34 billion pounds.
European operators had hoped to emulate the U.S. market, where leaders AT&T (Dallas, TX, USA) and Verizon (New York City, NY, USA) have seen a boost in revenues and cash flows as consumers increased mobile data usage since the advent of the original 3G smartphones and tablets.
Since 2007, the monthly bill of U.S. mobile users has grown 25 percent to $49 (39.24 euros), while in Europe it has fallen 15 percent to 24 euros, according to Sanford Bernstein.
But early 4G launches in Europe show that customers can shun higher prices, especially in competitive markets such as Britain's and Spain's with challengers like Hutchison's 3 (Maidenhead, UK) or Yoigo (Alcobendas, Spain) promising 4G at no extra charge.
Surveys by consultants Bain and Deloitte show high awareness of 4G in Europe but low interest, apart from among high-spending consumers with handsets such as Apple's iPhone.
It will also take years for people to upgrade to smartphones that can handle the new technology. Less than 1 percent of handsets in the European Union were 4G-enabled at the end of last year, a proportion industry group GSMA expects to increase to around 20 percent in 2017.
As a result, Europe's operators are taking a market-by-market approach to 4G pricing, depending on the intensity of price competition, with little consensus on what works.
ADAPTING TO 4G REALITY
In Spain Yoigo, which is owned by Scandinavian operator TeliaSonera (Sweden, Stockholm), is offering a 4G contract with 1 gigabyte of data for 9 euros a month - a price matched by Vodafone, which throws in 1.5 GB of data. The most expensive 4G contract is Vodafone's Red 3, offering unlimited minutes and 5 GB of data for 70 euros.
Spanish operators have cut back on offering subsidized phones to contract customers, so most consumers have to buy their own. At department store chain El Corte Ingles the cheapest 4G-enabled smartphone is a Blackberry for 389 euros, though most 4G handsets sell for between 500 and 800 euros.
However, some operators provide handsets which the customer buys by installments added to the monthly price.
"We are adapting our tariffs to the reality of 4G," Yoigo chief executive Eduardo Taulet said last month. "Clients are going to demand ever more data, and voice will be seen as a value-added service."
Hundreds of thousands of Spaniards have ditched their mobiles or switched to cheaper operators over the past year. Average revenue per mobile connection dropped 10 percent to 35.69 euros a quarter in the six months to end-June from 39.69 euros, according to the telecoms regulator.
"It's clearly not an environment in which mobile operators can realistically expect people to start spending more on their mobiles," said Rosalind Craven, senior analyst at research firm IDC.
Yoigo was the first to promise free 4G services in May, Vodafone and Orange, Spain's second and third biggest operators, quickly followed suit, while market leader Telefonica (Madrid, Spain) said last month it would also charge no premium.
In Germany, where the economy is much healthier and mobile phone competition less fierce, operators have largely succeeded in holding onto 4G premiums in the roughly 18 months since the service was launched.
Nevertheless, even Vodafone Germany (Dusseldorf) - which holds about 33 percent market share - dropped a 10 euro 4G surcharge on its high-end contracts when it overhauled its pricing last October. However, it cut 3G prices at the same time so the superfast service remains dearer.
Its similarly-sized rival Deutsche Telekom (Bonn, Germany) said increased data usage was driving its service revenues. Still, average revenue per user (ARPU) fell 6.3 percent year-on-year to 15 euros in the second quarter, a sign of the strain of a growing price war that even a 4G premium cannot offset.
In markets where operators have launched 4G with a premium, such as Britain and France, maverick players could yet force prices downwards. Three is still building its 4G network but is expected to adopt its usual unlimited data stance, while in France low-cost player Iliad (Paris, France) is silent on its plans.
All of the established competitors in France are hoping to charge a 10 euro monthly premium but they must await Iliad's pricing to see if this is possible.
In Britain, EE (Hatfield, UK) - which had a headstart as the only operator offering superfast mobile internet until August - reported a decline in service revenue for the first six months of the year, even though ARPU for customers who switched to 4G increased by 10 percent.
In Italy, Telecom Italia (Milan) and its rivals are building up their 4G networks in similar, although less severe conditions, to Spain of recession and a furious price war.
Swedish 4G services were introduced at a premium, mainly for dongles and routers but this was later stripped away by companies such as TeliaSonera. The firm now bases pricing plans on the amount on data used rather than the technology, a pattern likely to be repeated in other countries.
To justify higher prices and get customers hooked, many operators are adding streaming music services or free sports content to 4G plans. Vodafone (Newbury, UK), for example, is offering British customers Sky Sports Mobile TV or music streaming system Spotify Premium in its superfast plans.
"All markets that have launched LTE have a short period of about six to 12 months, where one could say that it's possible to distinguish premium pricing... After that, LTE is included in general offers," said Bengt Nordstrom, who heads telecoms consultancy Northstream.
Earlier this year, South Korean operators warned Europe of the "curse" of 4G networks, saying making money from the technology was tough.
"It's a bit of a prisoner's dilemma in the sense that if consumers respond to lower prices than most operators will have to follow suit," said Alex Bhak, partner at consultancy Bain.
($1 = 0.7387 euros)
(Additional reporting by Harro ten Wolde in Frankfurt, Olof Swahnberg in Stockholm, Georgina Prodhan and Angelika Gruber in Vienna; editing by David Stamp)