The frugal and the frivolous: mobiles diverge at the crossroads

Twenty years ago, the telecoms industry offered its customers a simple, if costly, proposition: buy a phone and make calls from more or less anywhere you like. What they got was a device quickly derided as a Yuppie toy: bulky, expensive and designed with function rather than form in mind.

Twenty years ago, the telecoms industry offered its customers a simple, if costly, proposition: buy a phone and make calls from more or less anywhere you like. What they got was a device quickly derided as a Yuppie toy: bulky, expensive and designed with function rather than form in mind.

Today's mobile phone market could not be more different. The move towards the digital GSM standard, in 1992, gave manufacturers the scope for far greater innovation. Digital phones offered new services, like text messaging, and went on to sport colour screens, cameras and, with 3G, support for video calls and live TV content.

At the end of last year, figures from the GSM Association showed that just under 1.7 billion people worldwide owned a digital mobile, and this could top two billion by next year. But the industry finds itself at a crossroads.

In the rich nations, particularly in Europe and such Asian countries as Korea and Japan, the market for mobiles is saturated. ARM, the UK company that designs processor chips for much of the market, estimates that there is, on average, more than one mobile per person in the UK, as high-end users pick different models for work and for leisure.

But at the other end of the spectrum, they remain out of reach for more than half of the world's 4.7 billion people. The challenge for the industry is to make handsets for - and deliver services to - the "next billion" users, while persuading people in wealthier markets to upgrade to a newer, smarter phone and spend more on mobile services.

At the 3GSM World Congress in Cannes last week, Motorola unveiled a low-cost phone designed to boost uptake in emerging markets. It eschews features such as a camera or colour screen, but costs less than $40 (£21) at the factory gates. The GSM Association hopes that competition between manufacturers will cut that cost to $30 or below.

The contrast between the Motorola handset and much else of what was on show in Cannes, the mobile industry's annual showcase, could not be sharper. Five-star hotels on the waterfront were given over to cabinets of sleek devices. The main conference centre halls featured dozens of firms developing content or software for the latest 3G handset models - all marketed with a view to persuading subscribers to spend more on entertainment services. This comes as alternative technologies, such as internet telephony, are poised to eat into mobile operators' revenues.

"The mobile phone carriers do not want to become simple bit pipes [transmitting data], so they want as many services as possible to emanate from their networks," says David Peterschmidt, chief executive of Openwave, which develops software for hand- sets and mobile networks. He adds that, unlike the PC industry, the mobile world does not have a single, dominant standard. But this could be a benefit.

A certain level of standardisation is necessary for the mobile industry to function: text messaging, for example, only started to grow when subscribers could send messages to friends and colleagues on other networks. But Craig Ehrlich, a board member at Hutchison, owner of the "3 network", and the chairman of the GSM Association, says the sector does not want to go the way of the internet, where most service pro- viders earn little or no money from the content carried across their networks.

"We want people to understand our business model," says Mr Ehrlich. "It differs from fixed-line businesses, from the internet and even the motion picture business. And we want it to stay different. We don't want to go down the road of the 'all you can eat' model."

Content owners appear to support this view. Speaking at the congress, Niclas Ericson, head of broadcast and media rights at football governing body Fifa, explained how the association would control rights for big events, such as the World Cup. Mobile users might be prevented from viewing internet or TV broadcast footage on their phones, and instead would only be able to view content authorised by Fifa for a mobile device.

Such issues will become more important as hand-held devices increase in power. Samsung already has a phone with a built-in hard drive on sale in Korea, and Microsoft demonstrated iPod-like handsets optimised to play music as well as make phone calls.

Suzan DelBene, managing director of mobile and embedded devices at Microsoft, believes advanced features such as these will convince subscribers both to upgrade and to sign up to new services. The latest smart phones can store and play music and video. And as processing-power and memory prices fall, they could start to take on the role of personal video recorders as well as storing business information such as email. "When we first came out with the Windows Mobile system, average revenue per user went up: it brings more revenue to the operators."

Adding features such as WiFi-based networking to high-end phones increases their usefulness both as a media player and as a business device, and models with WiFi were a common sight at Cannes. ARM estimates that 20 per cent of phones using its chip designs will be smart phones, 40 per cent "feature" phones, typically with a camera function, and 40 per cent pure voice. But Microsoft will not have the market all to itself, as it faces stiff competition from phones running the Symbian operating system and, increasingly, Linux, which rivals Windows in the market for PC operating systems.

Many mobile users won't care, however. Either they cannot afford a high-end phone with high-end features and a £100-plus price tag, or they simply see no point in them.

By contrast, Stelios Haji-Ioannou used the Cannes stage to announce details of his EasyMobile service. This won't sell phones - Mr Haji-Ioannou expects his customers to use an old model - and his network, supplied by T-Mobile, won't support data services.

But this could be evidence that the mobile industry, after an exuberant adolescence, is entering maturity. Indeed it could mirror the fashion business, with space on its street for both the frugal and the expensively frivolous.