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Tete-a-tete. Interview with Lothar Pauly, member of Siemens ICM, mobile phones department

This interview was made in the end of June, but there were some reasons not to publish it. Many events concerned mobile terminals market were occurred during the last two months and now many ideas sound differently. Lothar Pauly is a member of Siemens ICM, mobile phones department. His job is connected with infrastructure and mobile phones.

Eldar Murtazin (E.M.) Let us start from the latest figures published in the very end of April by IDC and very begin of June, which are the latest figures about the market share of mobile terminals. According to IDC you were at the third position in this market in the forth quarter 2002 and now you takes only the forth one.
Lothar Pauly (L.P.) I am responsible for mobile networks and mobile phones. Indeed, the situation around mobile phones is the following. We have been crawling in the first quarter of 2003, but the market was obviously crawling quicker. We lost some small percentages of market share in the point from 8.2 to 7.8, precisely we can’t estimate it. Specifically Samsung has one of the strongest market shares. Now you have to see also one fact that Samsung is addressing not only GSM market, but primarily addressing the CDMA market, we are not addressing the CDMA market, so, our roughly 8-percent market share, which we have, is in GSM. As GSM is 60-65% of total world, our share is about 12-13% of GSM market. Yes, we have lost competition to Samsung. The primarily reason is that Samsung has a very strong offer in the top end of mobile phones, specifically with high resolution screens and also a very good camera technology, what takes the market share from everybody and the result we had seen in the last quarter.

E.M. Yes, it is true that Korean companies play role not only on GSM market but also on CDMA. But they also very aggressive on GSM-market, there are lot of new products here. Also, Nokia has a strong position. What do you except in the next quarters?
L.P. We have introduced 20 new models in the last months and we will push with new models to a market now very strongly. We will have new high-end models, for example, SL55 and we will have also a new model, which is called SX1 shown to the public on CeBIT. These models, for example, SX1 has an integrated camera and a high-resolution screen. The SL55 is specifically designed for a high-end, fashion addicted consumers, it’s a very nice toy. So, we will push back and come with new phones to the market and crap back our market share.

E.M. What about SX1? It was delayed to October, as far, as I know?
L.P. No, it wasn’t delayed to October; it will be on the market in July, August.

E.M. What do you think about Xelibri line? Was it successful on the market?
L.P. It is now on the market for 4-6 weeks, and specifically, in so-called fashion cities, as London, Paris, Rome, Milan. Now we also started the shipments to Singapore and Shanghai. It is too early to say whether it will be of huge success or it will have no success. But the first weeks have been very encouraging. Sales of Xelibri phones are very good, but we have to see if they are going to be stabilized. I would still be careful to make any judgments about Xelibri line after six weeks, but I think we’ll be able to meet our target to see. Of course, we have to face a situation in Singapore and Shanghai across SARS situation; the current sales are not good. We have seen warning of Motorola on Monday. To us the situation is not so terrible, because we are not so much exposed to Chinese market relatively as Motorola is, but also we feel this situation.

E.M. One more question. Compared to Samsung Siemens has very strong position in low-end segment in Europe on GSM market. On the other hand, Samsung has very strong position in high-end fashion segment. Are you going to launch few models in top segment of the market this year, something like SL55, SX1? As far as I know, you plan to introduce three new middle and low-end class phones in July.
L.P. Yes, SL55 is just now hitting the market, the first volume set will be shipped in the end of May and SX1, as I said, will hit the market in July, August. With these two models we want to make our Christmas business in autumn (September, October, November) in the high-end. SX1 is a typical high-end phone; the SL55 is a high-end phone in terms of design and functionality. So, these will be the two high-end phones.

E.M. So, only two high-end phones will appear?
L.P. Yes, but I think it is sufficient to cover the high-end market. We shouldn’t forget that the real volumes of the market, especially on such specific market as here in Russia, are not in the high-end. High-end is a teaser to generate attention and of course, we also had better margins in the high-end, this is also true. Therefore, we have to position ourselves better in the high-end but with such phone as S55 a pretty new one and it is very well expected in the business segment.

E.M. But on the other hand, Rudi Lamprecht said that we could see polarization of the market. Main volumes are moving to low-end and high-end segments from middle class. And now you said that S55 was very successful in middle class as business phone. It’s true, but in high-end we could see rising interest of the end-user and there is stabilization in the budget segment. How could you comment it?
L.P. Of course, it’s true what Rudi Lamprecht said. But we have a market, which is more like that. The real middle class is shrinking. You have the high-end class where the latest features and the latest fashion are always in demand. You have budget class, where you have lesser amount of features, but also high functionality and nice design. I regard S55 as a phone, which is in upper-end. It is not in the middle class. S55 is an upper-end phone for a business user. We think that functionality, which you have there, for example, synchronization with Outlook is a high-end feature, but typically focused on a businessman. As always our S-class phones, as S45, S35 have been in their time in the high-end, not on the very very top, but in the high end and this remain the same.

E.M. Siemens has license from Microcell to use hardware platforms. Which models for? S55, SL55, other models?
L.P. Only for Xelibri phones. May be we are going to expend it, but currently we use only what Siemens made. SX1 and SL55 are Siemens made and they have nothing in common with Microcell.

E.M. Is it your own platform from Siemens R&D?
L.P. Yes, it is. We used Infineon chipset and there is nothing from Ericsson’s mobile phones. In Xelibri we have Microcell platforms.

E.M. For all phones?
L.P. Yes, I think for all phones.

E.M. What do you think about your market position here? Especially in infrastructure segment, do you think that Huawei could offer more interesting solution than you company has?
L.P. We regard ourselves as a market leader in Russia and we are a number one here. The closest our competitors are Ericsson and Alcatel, but we are a number one and are very successful with MTS. We have huge networks with Megafon, and we have other networks in several regions. So, our market position is very good. Yes, the Chinese are entering the market, not us. We are entering aggressively the market, but we see it not only in Russia, we see it in several countries and we are going to fight them. We have better products, more reliable service; we are a part of local economy and not just came in and flying out again. And I am sure that customers will recognize that they get a better product and service concept from Siemens, not from Huawei.

We will crab their market share. But I am not expecting that they will make significant inroads, even in China you can’t see currently significant market shares, games from Huawei or ZTE. In fixed networks, yes, we have significant games market share, but in mobile networks we are not so advanced. We have technologies and then respectively we’ll have market share.

E.M. Currently not, but you didn’t answer my question. China companies are very aggressive. I think they can gain a market share. What do you think about it?
L.P. Our own assessment is about 25% of market share, Nokia and Ericsson have around 20%, not Nokia, sorry, Ericsson and Alcatel have around 20% each, then follow Nokia, Motorola and Lucent with smaller market shares about 5-10%. In networks it is always more difficult to estimate real market shares, equipment and service around you and this is a kind of differentials. But we regard ourselves as clearly a number one. Coming back to Huawei, yes, they will gain market share. If you come from zero and you enter aggressively a market you will gain market share and the question is that on whose expense are they going to gain market share. If you look on Lucent, for example, it has GSM here in Russia and it has better position than in the world. So, one and half year ago or two years ago we decided to leave GSM market, we were also going to leave Russia in GSM. So, there is still space to move for the remaining players. Our Russian customers, I think, have clearly recognized and acknowledged to have our local setup, which we have here at Siemens Russia. We are very strong player and more reliable player and not the company, which is going in and out, the company, which states to be a partner.

E.M. Do you have any benefits which you could offer to mobile operator, not only infrastructure but also mobile terminals. For example, mobile operator could get from Siemens not only infrastructure, but also mobile terminals, in Russia it is MTS. Do Siemens has a similar situation in other countries?
L.P. It’s always to concern how market in these countries has developed. For example, retailers sell all mobile phones in China. We sell only infrastructure to mobile operators and no phones. But in most countries of Western Europe, like Germany, Italy we sell infrastructure and mobile phones to operators. Regularly this business is not very much attached. You have different purchasing organizations within the operator. But there are certain faces which are very much attached. The face for example was the market entry of GSM in Brazil. The operators immediately demanded also to have low-end phones for a Brazilian market. Your chances to get infrastructure were by far higher if you were also able to offer mobile phones, specifically budget phones. We have been able and we have done a big success in Brazil with our A-class phones. We had even to open the factory in Monaos because of customers issues in Brazil. And currently we have 60% of market share in GSM-phones in Brazil, which is due to early market entry and also due to our sponsorship of footbul cap of Brazylian players and it\s helps a lot. There are also other areas where you need to have a bunled offer between networks and phones, for example, introducing UMTS network operators ask very much for every available model and this is currently popular in UMTS. But you need also to test your network infrastructure with all of different kinds of phones. So, you test with phones of your one, but you also test with Samsung and Nokia and other phones. So, regularly special situations, where it is attached, but if you have the situation like here in Russia where you sell infrastructure to MTS, which is too empty and you sell mobile phones too empty it’s quietly attached. Regularly, it’s different consumer organizations and also the sales organizations. The lower our Siemens Mobile had involved both businesses is divided.

E.M. What do you think about GPS functionality in GSM networks? Would it be interesting for end-user? Will it be available only in 3G networks? Are you going to launch any products with AGPS features on GSM-market?
L.P. We are going to execute trails for Vodafone with AGPS feature, forward GSM networks, you don’t need to have 3G for that, you can do it regarded which kind of area or the place you are using for the AGPS. The question is, of course, which kind of applications do you enable to AGPS? Do you really need very high exactness of measurement of your location? GSM, as it is today, can provide cellular ID certain exactness depend on the size of the phone. In the city like Moscow you can also go down to the exactness of 5 hundred meters. So, as we say download of advertising or download of your environment, where you are and looking for the next cinema, whatever, I think you can do a lot with Cell-ID. But for security features, monitoring your kids, always knowing exactly where your kids are, if you follow their way from school to home, that is a determined way which AGPS of course can do, but are better, because of the very high exactness. Yes, we have the technology, we are going to in-build it now in trail for Vodafone, but the main question is what are the applications which should be in general apply to GPS.

E.M. Are you sure that a lot of people will be able to pay for that? I mean, for the services based on AGPS? It’s a typical question of application.
L.P. It’s a typical question and a difficult question. With the technology, which is build-in a GSM-network you have already quite a high exactness, at least in cities. Which kind of application you are looking for, the people are prepared to pay for AGPS or for CELL-ID. And we are going to develop completely new business models, for example, downloading of advertising. Imagine I am in the city of Moscow crossing the Manege square but I am getting to download of advertising of best restaurants around, of the nicest shops around. Yes, ok, but I am not prepared as a user to pay for advertising downloading, but the shops who are doing this downloading, they should be prepared to pay to operator for the advertising. So, this is completely new different business model. If you go in the shop and buy cloth or what ever because of the advertisement, and then shops repay also commission towards a mobile operator, may be even the payment can be done over mobile phone depending on the size of the bill, regularly of course you can pay everything with a mobile technology is available and than a commission should go from the shop owner to mobile operator which is something completely different from what you have today with minute based billing or time based billing and transaction based billing on SMS basis. So, the charging situation we changed completely if you have something like advertising.

E.M. Yes, it’s clear but my question was what would be that services which should be paid by users? What is an expected share of top users who could be paid for it? How many of them would be willing to pay themselves, pay for some new services based on GPRS technology? Will it be about one or two or three percent?
L.P. I am not executed so much in survey Moscow for GPRS technology. It’s a very specific question. Again I am told you that people were prepared to pay for security a lot of money. We are not very price sensitive if we can improve security for ourselves or for the children or the family by the technology provided by mobile phones. Of course only few people are anxious by this issue, but wit few people and sufficient money to pay very high fee. I expect here that the security market will be quite interesting. Then we have also telematic services which could be interesting solutions instead of having your navigation systems in the car inbuilt, you can have also a navigation system on mobile phones if you have a mobile phone in the size of the screen like SX1 which has a screen like a palm of a hand, you can have a smaller navigation system in your car and with AGPS technology that of course better and able than today had CELL-ID owner.

E.M. But AGPS is provided now only by high-end phones or smartphones, not ordinary phones, for instance by S55 business-class phones and in future by end of this year or beginning the next year what will be? Where, which handsets will it be supported?
L.P. I expect in the high-end terminals like SX1 it will be supported because in-building of GPS is not so cheap because of licenses you have to pay to GPS providers, so, it is not a feature for budget phones, at least in the beginning it will start in high –end phones.

E.M. But what do you think about such project as Wi-Fi in mobile phones? Some companies are promoted and probably they could become competitors to operator’s business. They states that could build a lot of hotspots and provide fast access to network. What do you think about this? Would it be a different technology or symbiosis between operators and such carriers?
L.P. We regard Wi-Fi technology as a complementary towards mobile networks, specifically of course mobile networks like EDGE network or UMTS network, which is focused on mobile data. But it can be also a complementary towards GSM GPRS network. Why I say it is a complementary? Because mobile network is typically designed for people which are on the move. Wi-Fi network, wireless network is designed for people who want to access a network wireless, but they are not on the move. They are sitting here like we are sitting here and accessing Wi-Fi network but they are not moving around. So, first of all, we have two different kinds of applications. Secondly, Wi-Fi is only designed and only possible (if we are talking about public, we are not talking about residential now) public for hotspot areas. We have, for example, built out the biggest European Wi-Fi network in Paris, just 20 thousand kilometers and provide coverage of 20 thousand kilometers you need 63 base stations. 20 thousand kilometers is very small and 63 base stations is very small area. Now you can imagine what it means, for example, to build it out for Diego or for big hotels here in Moscow city. You need lots of base stations, all of them stations need to be connected, transmission links, you need service technicians who are permanently monitoring the state of the network, you have a lot of these base stations, of hundreds and hundreds of base stations and you need to replace and repair. So, it is very difficult to maintain such a network. So, that is the reason why it is signed and will be limited to hotspots. But we are working intensively on what I called a cellular integration to have a capability of a network that mobile user who has SIM-card of MTS is roaming to a wireless LAN-network and is continuously built by MTS or Megafon, or whom ever it is subscribed. Because what you have today is you go to the airport you are going to a special reception desk, you have to find a special reception desk and you go there and you ask for something like 10 Euro, credit card, so that you can make your Wi-Fi session. This is extremely uncomfortable. If I am going to the airport, I have maximum one an hour to do some work, I can’t go to the reception desk and may be 5 Euro are remaining on my credit card I have not used it, you can forward away, this is all not convenient, this is not convenience we are used from mobile phone and therefore it would be very convenient and we have implemented the software in Paris, for example. Which is also, which is major advantage from mobile operator because he keeps the customer relationships.

E.M. Wi-Fi technologies provide the broadband access to data. Last year or a couple years ago there was a lot of materials, a lot of relative visions about views of the economists as competitors not complementary technologies. Moreover it was said that Wi-Fi meant that 3G-technologies were not necessary because the major applications could be provided by Wi-Fi. And these are primary needs of business users, these users are very important for operators?
L.P. I think that a business user is an important user but all the other conclusions are, sorry to say so straightforward, stupid because Wi-Fi is very expensive. It was an example for 20 thousand kilometers, 63 base stations. Each base station is very cheap, but the connection of the base station, you need to connect each and every base station is extremely expensive. But I can only tell you, you believe it or believe it not that it is extremely expensive to connect it. Obviously Wi-Fi base stations are extremely bad, not because it is such a cheap technology. It is not comparable with GSM base stations, which is working for redundantly and everything; it is not comparable with UMTS base stations. Further point, if you have several users of Wi-Fi, you are sitting in a coffee shop and you have a Wi-Fi coverage several users are trying to make their data sessions, data rates are generating very quickly but data rate which is given to each and every user, it is not permanently 11 Mb, which is claimed for, it's moving lower down. Than security issue. Are you prepared (I am not) to make confidential e-mail over Wi-Fi? I am doing no confidential e-mail over Wi-Fi. I am doing it by GPRS, it is not a problem, because it is encrypted. Wi-Fi is not encrypted. It’s hand over soft, it is not soft. I am sitting here in this corner, my friend is down there and taking my laptop moving to the friend I will lose my connection, I have dial-up again. It depends if you have two same base stations, but if you go to the next base station you will be lost.

E.M. It is only the beginning of this technology, now it’s not working, but later it would be hand over between base stations. Next month Intel will announce encryption for Wi-Fi and the speed of connection will be increased. Now we have low data rates. Later they will be higher and it could become a competitor to EDGE-network and 3G networks, because now operators and vendors couldn’t show benefits from high rates on mobile phones for end user . You could receive e-mail but you can’t work easily with them, you could receive video but you have only the small screen. What are the benefits of high data rates in networks on small terminals for end user, not for business user but for ordinary user?
L.P. Again one remark to Wi-Fi and this arguments, yes, the technology will be advanced and several of issues will be fixed but Wi-Fi is providing any kind of constant public coverage. It is simply too expensive, it is impossible if you imagine that one can cover Moscow with Wi-Fi networks, simply impossible. It is not necessary and therefore it is a complementary situation between a Wi-Fi network in the hotel and airport and a public mobile network, which is covering the city of Moscow. This is a reason why I talk about complementary situation and cellular integration.

E.M. But at the same time, if we are talking about 3G, it’s also not necessary to provide a proper coverage and the assessments of analytics are that a total coverage by 3G-networks in Germany will be reached optimistically in 2010?
L.P. But the total coverage in Germany means each and every wood, each and every forest, each and every small city and here I just talked about Moscow. So, why you are turning permanently about these arguments?

E.M. Back to terminals let me ask you the last question about Xelibri series. One international Chinese manufacturer stated that they developed two models for Xelibry line and another Taiwan manufacturer said that they developed and produced for Siemens two other models, and you said that Xelibri was based on Ericsson platform?
L.P. No I said that it was based on Microcell platform. May be Microcell is using Ericsson’s platform, I don’t know.

E.M. And what about Cellon statement in such case?
L.P. I think that Cellon has developed one of the four Xelibri phones and Microcell – three, something like that, I am not sure. But Microcell has developed also Xelibri phone.

E.M. Are planning to work with Cellon in developing other Xelibri phones in future?
L.P. Yes, we have a continuous competition of OEM-manufacturers for the next Xelibri line, which will be available on the market in autumn and there is a continuous competition and Cellon is a competitive company of that.

E.M. And other companies Lite-On Technology from Taiwan; do they plan to produce next Xelibri too?
L.P. If they are elected, there is currently a tender out and several OEM manufacturers are competing on this tender and this Taiwanese company has also a chance. Yes, but there are only four phones. But in our main line, in our classic mobile line we will use more OEM manufactures than we use today because you have permanently to spread the amount of models, which is available and this you can’t achieve as anymore only by own R&D and own design and own platforms to buy complete models and then may be doing Siemens design. For example to take very good and successful Chinese manufacture, which is broad are currently with TCL line to line as a number one in the local brands, they have wireless module from Siemens, this is a complete technology, the whole electronics is made by Siemens.

Eldar Murtazin ([email protected])

Published — 06 August 2003

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