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Profit, Loss and Value Added: The Mobile Phone Industry - Activity

Remember the original 'mobile' phone - affectionately nicknamed 'the brick'? Today's mobiles are so far removed from those early pioneers that it is difficult to remember that it was not that long ago when only the trendy had such beasts to hand!

The growth in the use of mobile phones has been dramatic - there are now 2 billion users of mobile phones worldwide. In March 2006, there were 3.19 billion text messages sent person to person in the UK - up by 24% for the same period in 2005. Worldwide, 235 billion text messages were sent person to person in the first quarter of 2006. Source of data: CellularOnline(http://www.cellular.co.za)

Despite the massive growth in the technology, the network operators are not making massive profits. Vodafone reported losses of £6.2 billion in 2003, 9 billion in 2004 and 7.5 billion in 2005, and described 2005 as a 'year of achievement'! Given that the figure for 2002 was £13.6 billion, one can see where they are coming from! Other providers such as Orange and O2 are similarly not basking in massive profits.

Image: How does this phone add value?

The reasons for the lack of profits include:

• The cost of buying 3rd generation licences (£22 billion collectively)
• The product life cycle - existing phones are at the 'saturation' stage
• The huge cost of developing the networks in the first instance
• The degree of competition in the market - despite the alleged accusations of 'collusion'

So why would a company like Vodafone describe such massive losses as part of a 'year of achievement'? Companies do not always make profits. For many companies long-term survival is more important than profit maximisation. Sacrifices now can mean greater returns in the long run, hence the purchase of the 3G licences that have plunged so many of the operators into debt. The aim would be that the new services that 3G could provide will prove to boost sales in the market. The picture here, however, is made tricky by the development by other companies of products utilising existing handsets that can do pretty much the same as 3G promises to do but which is not yet fully available.

3G is the capacity to send all manner of data, video and voice communication through a wireless network - quickly! Such a system will allow network providers to offer added value through the extra features that can be accessed through your mobile. The promise, however, is not always matched by the return. '3' provided by Hutchison have more than three million 3G customers in the UK (April 2005). Despite this, Hutchison Whampoa, the firm's major shareholder reported losses of £2.5 billion in 2004.

The situation in the mobile phone market, therefore, is far from clear.

• There are huge technical problems to overcome before the 3G service becomes fully available through all operators.
• Such services require massive investment to ensure that handsets work properly (e.g. that you can see video clips, etc.) and that the coverage is acceptable and so on.
• The technology moves very fast and what is useful today becomes obsolete tomorrow.
• The necessity to negotiate with partners such as sports organisations, media, TV stations and so on adds additional cost.
• Consumers may be 'happy' with their existing service and are reluctant to switch to another - often at high expense. How do you therefore raise demand?

The report should be 1,000 words in length and will be assessed as follows:

• Your knowledge of markets, profit and added value - 10%
• Your ability to apply these concepts to the mobile phone industry - 20%
• Your ability to analyse the key factors implied by the points you need to include, identified above - 35%
• Your ability to make judgements about the degree of importance of the factors you identify and how far the factors identified will help to resolve the issues in the industry - 35%

Related Web sites for Research:

• CellularOnline - wealth of statistics on mobile phone use (http://www.cellular.co.za/stats/stats-main.htm)
• 3G (http://www.3g.co.uk)
• Vodafone - see Investor relations (http://www.vodafone.com/home/)
• Orange - see Investor support (http://www.orange.com/)
• O2 - see Investor centre (http://www.o2.com/)
• The Guardian - use the search engine for news items on the mobile phone industry (http://www.guardian.co.uk)
• BBC News - use the search engine for news items on the mobile phone industry (http://news.bbc.co.uk)