The huge sums paid for third generation mobile phone licences last year were seen as a drop in the ocean compared with the billions the network operators would make from launching the technology.
3G promised a high capacity connection that would give users a range of new and exciting services from fast internet access to videoconferencing on the move.Operators paid out $100bn (£70bn) for licences across Europe, and despite a few raised eyebrows from industry watchers, most believed the investment was a good one.
But then, in a wave of investor disapproval at the huge fees, large sums were wiped off the firms’ market valuations, causing a drop in equipment spending that hit manufacturers’ profits and forced them to make job cuts.
As profit warnings poured in from makers of the handsets, the microchips used in them, and the equipment for base stations and network infrastructure the world over, the firms were seen as hapless victims of network operators’ corporate naivety, and the so-called ‘lemming effect’ of the 3G licence auctions.
In the UK alone, five operators paid £22.5bn for licences covering a market of 30million users. These fees are likely to be just a third of the overall cost of 3G, when the investment in building the new networks, services, sales and marketing is taken into account.
To cover this huge cost, every mobile phone user in Europe would have to throw away their existing handset and spend at least $1,000 (£700) on 3G services. And now some experts are beginning to question whether the technology will make it on to the market at all. So what went wrong?
The theory sounded fine. With up to two megabits of bandwidth available, fast internet access would be a reality for third generation mobile users. They would be able to receive video clips; videoconferencing would be possible.
The new technology would offer ‘always on’ internet connection, with no need to dial up to receive e-mails or information, plus more sophisticated text, colour, higher speeds and a greater degree of animation than is available on today’s GSM phones.
It would also offer location-based services, because the technology allows each user’s whereabouts to be pinpointed. This would give companies far greater contact with their remote engineers or sales representatives.
But the industry got caught up in a frenzy of optimism. Handset makers helped create the hype surrounding the technology, which pushed operators to spend ever-greater sums to get their hands on the licences, thinking they couldn’t afford to be left out. But ‘equipment makers were wildly optimistic about the capabilities of the technology, and over-optimistic about the timescale for producing the equipment,’ says Keith Woolcock, head of technology research at Nomura International.
The manufacturers are now paying for this optimism in increasing pressure to bring 3G’s launch date forward from the debt-laden telecoms operators, who took a huge financial gamble in buying the licences, says Woolcock. ‘The handsets will be the bottleneck. The networks can be rolled out, but the handsets will trickle on to the market, so the equipment makers will be under pressure to deliver.’
The industry has a poor record in producing the goods on time, says Nigel Deighton, telecoms research director at technology consultant Gartner. ‘Everybody believed the hype that 3G would be on time. But if you look at the industry’s record, each new generation of phone has been six to 12 months late.’
BT claims the first 3G phones will be available by the end of 2002. But many believe it will be closer to 2004 before the handsets are produced, the infrastructure put in place, and the service is in full operation.
Both BT and Japanese operator NTT DoCoMo have delayed launching the technology. NTT is running a local 3G trial in Tokyo, but the test has been plagued by software glitches. The company has been forced to delay its full commercial launch until October, and it is likely to be a year before the service covers the whole of Japan. BT also had to delay the launch of its first 3G network on the Isle of Man until late summer. The service was to be a testbed for the technology, but it has been hit by network problems.
Because of these delays, research firm IMS has revised its projections for 3G uptake. It had predicted there would be 11 million 3G subscribers worldwide by the end of 2002, but it now expects less than four million.
Both operators and equipment makers underestimated the task of producing the new handsets and network infrastructure quickly, says Deighton. 3G phones need more memory, more complicated colour screens, more processing power, and much more powerful batteries. ‘Putting all this together into a small package attractive to consumers is going to be no easy task.’
Then there is the infrastructure. To roll out the technology across the UK, at least 30,000 new base stations will have to be built. But nobody wants these eyesores in their backyard, especially given the widespread, though unproven, fears about their danger to health.
The stations will also require some co-operation between operators. Unless the country is to be littered with more than 150,000 base stations, the operators will be forced to share at least some sites. BT and Deutsche Telekom last week agreed to share masts and infrastructure, in a deal likely to save them both up to 30% of the cost of building 3G networks in Germany and the UK.
Even if all operators share, building even 30,000 new base stations will cost billions. Analysts fear this will be pushed on to the customer in higher fees. So will customers be prepared to pay for the technology?
Not likely, says Peter Cochrane, former head of technology at BT and co-founder of ConceptLabs, which develops internet technology. 3G will prove a big disappointment, and the operators will have to subsidise the service, he says. 3G is ‘over hyped, over complex, overpriced, with poor, unwanted services, and no sound business plan’.
The basic problem is the much-hyped extra bandwidth offered by 3G. Despite the big promises, the network is likely to be too crowded to make these ambitious services a reality during busy times, says Cochrane. ‘The system is overloaded already, so you aren’t going to get two megabits. On a good day you might get 56 kilobits – but that’s only about the same as a fixed-line modem.’
The experience of internet access via a busy 3G network will be similar to that of going online on a home PC – slow and frustrating.
Most people are still unsure what 3G’s killer application will turn out to be. Cochrane says: ‘I can’t think of a single business proposition or service that would excite me. Quite frankly, you can sit there and navigate through a morass of Wap-like stuff, or you can hit a number and ask somebody.’
Oh yes, Wap. Before 3G, Wap – wireless application protocol – was seen as the next big thing, with industry experts predicting that everyone from sales executives to schoolchildren would use the technology to access the internet on the move.
A year later, the technology has flopped. Figures are kept quiet, but industry insiders talk of stockpiles of phones running into hundreds of thousands, sent back to their manufacturers by retailers unable to sell them.
The reality is that Wap was too slow, making it expensive to use, and the services offered were not inspiring enough to attract users in large numbers. Sound familiar? Analysts fear the backlash from this failure will hit the future prospects of 3G. But the industry has learnt from it, says James Kennedy, business development director at consultant Roadwarrior. ‘All the networks are incredibly worried about over-hyping 3G, because that is the big lesson they’ve taken away from WAP.’
Gone are the days when BT was advertising ‘Surf the BT Cellnet’ and conjuring up images of wireless internet access.
Meanwhile, some believe this debate may be purely academic. The big leap is already happening, says Kennedy. The first Global Packet Radio Service (GPRS) handsets, or 2.5G phones, are already entering the market. Like 3G, these will offer ‘always on’ internet technology, giving them a huge advantage over Wap.
GPRS will also offer many of the other services of 3G, albeit at a slightly slower pace. It could provide pointers to 3G’s likely success. ‘It will be a significant leap: new uses will start to evolve under GPRS, and all 3G will do is to make the bandwidth much wider,’ says Kennedy.
Many analysts believe companies could find 2.5G meets all their communication needs, at a much lower cost. While videoconferencing will not be possible, users will be able to browse the internet, send e-mails, access product databases, schedule jobs and receive continuous route advice.
And while doubts surround the telecoms companies’ ability to bring 3G on to the market at all, GPRS is with us now. Without spending £70bn.
Sidebar: The generation game
The 2G phones most of us still use today are based on circuit switching technology. When you make a call there is a continuous connection between you and the other phone until someone puts a phone down.
Packet switching, used in both 2.5G and 3G, allows terminals to be ‘always on’. This means your handset can be constantly receiving e-mails while it is in your pocket. Jonathon Harvey, chief technical officer at Siemens Mobile Networks, says: ‘A packet switched connection splits the information, including voices, into individual packets, which are then routed around the network.’ These packets can be sent in different directions around the network, and put back into the right order when they arrive at their destination. This gives more people access to the network, as more than one person can use a single connection.
3G networks are based on wide-band Code Division Multiple Access rather than time slots. This spreads the data in a signal over a much greater bandwidth, giving more network capacity – up to 384 kilobits/s, compared with 9.6 kilobits/s on most 2G networks.
3G also allows users to grab hold of multiple codes, or channels, simultaneously, so they can access the internet, or connect to a video conference, while still on a voice call.
Wap technology, meanwhile, can be used over 2G, 2.5G or 3G. It shrinks and simplifies the data held in a website so it can be transmitted and displayed on a mobile phone screen.