Fixed-mobile convergence brings as many problems as opportunities for telcos that own a cellular network. Access to a wireline system, either owned or via a partnership, offers new bundling opportunities to boost customer retention and ARPU, but the need to offer an MVNO deal to the wireline carrier can cut into margins and create internal competition that damages market share and brand recognition. Cingular will be able to offer unlimited local calls using co-owner AT&T's local lines, but its quest to retain its number one position in subscriber numbers may be hit by that newly merged telco's launch of an MVNO. Vodafone is facing similar dilemmas as it looks to persuade wireline customers to go mobile-only by offering low cost, flat rate voice services at home, even over the 3G network. These have been a strong success in Germany and will be replicated elsewhere, but eat into the margins the cellcos once hoped to make from the efficient 3G networks. Vodafone also sits in an uneasy position with its first MVNO partner, BT, with a fixed-mobile partnership that increases its UK revenues and sees off some competitors, but risks losing valuable enterprise users to the Vodafone brand. As the network owners mull whether to welcome MVNO deals, trading risk-free additional revenue for brand share, they are also looking for ways to sideline the virtual operators, especially as the 3G networks get busier and so can generate enough revenue using the primary brand. Vodafone may even launch a low cost, no-frills brand of its own to take on these challengers.

The newly completed merger of SBC and AT&T, now using the latter brand name, illustrates clearly the pros and cons, for a cellular operator, of convergence. On the one hand, access to a local wireline network can give mobile carriers the option to bundle low cost landline calls with mobile access, a combination that can, if well priced, help keep out challengers using newer solution, such as broadband wireless plus flat rate VoIP. The cellcos can also use networks to greater capacity through leasing to their wireline sister companies or partners, increasing return on investment in the early, underused phase of 3G. On the other hand, such combinations can cut into margins dramatically and reduce the cellcos own market share as it is forced to compete with its MVNO partner. And some argue that the local connection could be achieved via a fixed wireless connection for a more modern,easily maintainable network, with some wireless-only carriers looking to WiMAX or HSDPA for this option.

AT&T-Cingular bundles:
AT&T, now proud owner of a local lines network in SBC territories, the major share of the US largest cellco, Cingular, and a modern long lines system across the US and many other countries, illustrates the point perfectly. So does another large player with critical decisions to make, Vodafone, so far sticking to its mobile-only roots but increasingly mirroring the convergence moves of its mixed-network equivalents, with tactics such as flat rate voice pricing and its own MVNO partnership with local line provider British Telecom.

Cingular is gaining the option to offer its subscribers unlimited local calls on the AT&T network, as part of SBCs move to integrate its various services more tightly to gain market share, increase margins and improve customer retention. Calls between Cingular and AT&T lines would be unlimited under the proposed plan, as long as the caller has a combined account with both units. In a trial in Connecticut, the flat rate for the Mobile2Home service was $5.99 a month.

Although such deals cut cruelly into the margins that cellcos were gaining from the increasing trend to use the mobile handset as the primary phone, they do help ward off the VoIP providers, especially as VoIP turns up on handsets as well as laptops, and they are a major influencer on customer loyalty.

Homezone services:
In Europe this approach is becoming especially notable in Germany, where high landline rates have prompted the mobile-only carriers to announce their own homezone offerings, providing a low flat rate when the subscriber is within a given distance of home, falling back to full cellular rates when travelling further afield. While home-mobile plans are a no-brainer for converged carriers, increasing usage of both networks as well as reducing administration costs, for a mobile carrier, it is a more aggressive strategy, since the aim is to steal business from landline and VoIP providers by making it attractive for customers to use the mobile phone in all circumstances and bypass the fixed connection altogether.

The increasing interest of operators in these homezone services is a major driver for convergence, as a recent research report from Analysys highlights. Germany has been a strong testbed for these services, which include Vodafone's ZuHause and O2 Germany's Genion. As well as helping to fend off the threat from VoIP providers by offering low cost, flat rate calls over the cellular network while in the home neighborhood, the cellcos that offer homezone options have seen that they drive migration from payas-you-go to the more lucrative postpaid usage.

Mobile operators are aggressively targeting fixed telco voice revenue as the trend to substitute fixed lines with mobile gathers pace. With its global presence and strong brand and marketing, Vodafone could make homezone services into a major threat not just to VoIP specialists but also to large wireline operators, even while it is biting into the prices and margins it had once hoped for from the efficient 3G networks. Now it is using that efficiency to deliver low cost voice, retaining market share if not margin, and hoping to sell further services to that expanded base. And in the early years, before full competition from IP-based services cuts in, homezone services can significantly boost ARPU by putting a customers whole communications activity in one operators hands Genion, an early launch in 1999, has helped O2 achieve the highest ARPU in Germany and in June 2005 had 3.2m customers.

Vodafone Tango?
The next move may well be to take on the budget MVNOs. Again, Germany is a key battleground that could be the blueprint for other markets. So much so, that Vodafone is reportedly planning to launch its own budget mobile brand in Germany to rival existing services such as EasyMobile. The new Vodafone backed brand will be called Tango and will offer no-frills, low cost services to consumers in Germany, again taking advantage of the efficiency and over-capacity of currently rolling out 3G networks, even while biting into their potential margins.

Tango may not debut for a while German press reports indicate that the head of Vodafone in the country, Friedrich Joussen, is against a hasty move as the company is still enjoying strong subscriber growth, but in markets where such growth starts to wane, Tango is in the wings, with Italy apparently another possible early launchpad.

The move would establish Tango as a rival to Simyo, the budget mobile brand launched earlier this year by Dutch carrier KPNs German unit E-Plus. Other players in the German low cost mobile market are EasyMobile, backed by Danish operator TDC, which offers cheap calls to any provider in Germany for a flat rate of 16 eurocents, (19 US cents), and debitel and store chain Tchibo, which offer calls at 15 eurocents a minute.

The MVNO dilemma:
The mobile-only players may be fighting against the wireline and MVNO operators, but they cannot ignore the temptations of leasing out their networks entirely. Vodafone, in the past hostile to leasing capacity on its network to potentially competitive brands, is now starting to be converted, mainly as a way of boosting its growth and profitability in the tough Japanese market (it expects to sign an MVNO or two next year). However, a complex MVNO deal can also bring a mobile carrier a virtual wireline local network, especially in a country where landline rates are reasonably low and so migration from fixed to mobile lines within the house is slower. Hence we see BT and Vodafone working together on the ground breaking Fusion service, in which customers use a single handset to access the landline via Bluetooth, for a low cost flat rate, when in the home zone, or the Vodafone mobile system when travelling. This model will be emulated not only by AT&T but many other operators, either converged or in partnerships.

But despite the attractions of MVNOs for network owners increased revenue and ROI without additional customer acquisition and support costs; partnerships with companies that address markets that the cellco itself does not; gaining a convergence solution without having to invest in fixed lines there are many challenges and conflicts of interest too, and these will become more acute as markets saturate and margins shrink.

Vodafone, like all large network owners with their own strong brands, needs to weigh easy increased revenue against supporting competitors that may cannibalize its own base. The dilemma is clear for Cingular as AT&T gears up to launch its own MVNO from within the same stable. The AT&T-branded service was originally conceived last year when the companys deal to resell services of its former subsidiary AT&T Wireless (now part of Cingular) was ending. It was to use the Sprint network but now, post-merger, is set to use the Cingular system. Initially, there was speculation that Cingular would rebrand as AT&T, a move that co-owner BellSouth indicated it would not oppose, but now it appears that the AT&T branded cellular service will be a separate offering for certain defined geographies and markets. When Cingular was formed by SBC and BellSouth in 2001, both companies retained the right to launch additional mobile services under their own brand, a route that BellSouth seems to be pursuing using pre-WiMAX build-out rather than Cingular 3G.

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TeliaSonera expands UMA trial to Wi-Fi

Scandinavian carrier TeliaSonera has completed the first phase of its pilot of Unlicensed Mobile Access (UMA) technology, and will now enter a second phase, testing Wi-Fi rather than the current Bluetooth as the method of integrating fixed and mobile access with a single handset. The company is conducting user trials in Denmark with 50 families to gauge consumer interest in a possible new UMA-based service, and says the feedback from the initial phase has been "generally positive. UMA is being trialled by about a dozen European operators, 10 of them working with Motorola, a major exponent of the technology.

UMA, part of the specifications from cellular standards body 3GPP, has in fact been embraced initially by wireline carriers like BT or by converged operators more than by 3G providers. It allows calls to switch between GSM mobile networks (and in future 3G) and local networks, where a connection is made from the customer's mobile phone to a landline using a short range wireless technology such as Bluetooth or Wi-Fi. This allows people to use one handset for their mobile and domestic fixed line calls, and only be charged at fixed line rates when they are within range of their home access point.

TeliaSonera will use Motorola handsets in its Danish trial and is also piloting UMA in Sweden using Ericsson equipment. Spokeswoman Charlotte Süger said the operator cannot say at this stage how long the second phase will last, but is keen on exploring opportunities for a commercial service, mainly for residential customers, though it would also investigate a possible enterprise offering, as BT is doing.

In a research note from analysts at Ovum, Jeremy Green wrote: "The [TeliaSonera] trial, which has hitherto been based on UMA using Bluetooth as the bearer, also marks the transformation of UMA from a de facto specification to a technology standardized by 3GPP. The advent of UMA as a full standard has important implications. It means that operators can now have more confidence that UMA-based solutions will work across vendors' offerings - so that there will be interoperability between one vendor's devices and another's access points."

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The AT&T brand still carries significant weight in the US and so an MVNO looks well poised to succeed, especially in the business market. However, it will not be so happy for Cingular, whose brand has less value, and which is struggling to retain the number one market position (by subscriber numbers) it gained by taking over AT&T Wireless. Nearest rival Verizon Wireless has added more than 5.4m customers in the first nine months of this year, nearly 70% more than the 3.2m Cingular added in the same period. Cingular ended the third quarter with 52.3m customers, compared with Verizon Wireless' 49.3m.

Now it could find itself losing some of its market share to its own sister company, especially if AT&T ventures out of the enterprise market into the consumer sector. Even if it stays among business users it could still slow Cingular down in share terms, if not revenues,since the cellco has been targeting corporate accounts as a major growth route.

More changes will be needed before the new AT&T is truly in a position to cash in on its multiple networks and huge base. This, at least, is one problem Vodafone does not have to worry about (except perhaps in its own joint venture, with Verizon, in the US). At least it has a single brand and identity to defend, while AT&T has the potentially nightmarish situation of three large and overlapping entities newly merged AT&T, Cingular and Bell-South all in-fighting rather than presenting a single front to the rampaging Verizon, the cablecos and the VoIP and WiMAX challengers.

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This article originally ran in Wireless Watch, a publication of Rethink Research. Reproduced with permission. For information on the weekly Wireless Watch Newsletter and other Rethink Research products and services, click here.