A mobile failure waiting to happen
Simon Rockman warns the third generation mobile vision could crash to earth just like the $7bn Iridium satellite project
Thursday February 8, 2001
The Guardian
As storm-clouds gather over the telecoms market, the peddlers of "third- generation" futurology should be looking to the example set by the eleventh-hour rescue of the doomed satellite network, Iridium.
With a £22 billion debt owed for third-generation licences in the UK alone, and nothing but a portfolio of concept pictures to substantiate the dream, the hype surrounding the 3G Universal Mobile Telephony System (UMTS) demands considerable suspension of disbelief. The same leap of faith was demanded by Iridium, which cost $7 billion to set up, went belly-up and was "saved" in a deal that valued it at a mere $25 million, sweetened by a $72 million contract from the US government. You could see it as a net value of minus $47 million. The alternative was to burn the satellites by crashing them through the earth's atmosphere. It might have been cheaper in the long run.
It's amazing that anyone could have got their sums so wrong. And what is more amazing is that it is about to happen again. The 3G licence debt is already starting to hurt. The mobile networks are finding it hard to borrow money to build the infrastructure they need.
The mobile phone business is hugely profitable. Ten years ago, the mobile was a joke prop in films about Wall Street wealth. Now, there are 700 million GSM phones in use across the world. Each customer spends about £30 a month. It is not surprising that Iridium thought it could make money: it needed less than 1% of the world market to do well.
Where there is a lot of money there is a lot of competition. The rivalry of mobile telecoms, however, is restricted by physics and legislation. Here we have a lucrative, legislated oligopoly. No wonder so many people want a part of it. That's why the UK 3G licences sold for so much. A second reason was that the incumbent networks could see that if they didn't buy a licence they were going to go out of business. The licences effectively became worth as much as the individual companies so long as the sixth bidder kept playing. It's possible that with only three licences, the prices would have gone even higher.
With each network having spent upwards of £4 billion on a bit of paper - just to gain the right to spend as much again in constructing a new national network - the 3G market is going to have to be worth nearly 10 times the cost of GSM. It is hard to see where the money is going to come from to do this. There won't be 10 times as many users. That would mean five phones per person in the UK, from the babe in the pushchair to the geriatric in a bathchair. It is possible that we'll see more than one GSM connection per person as the real futurology starts and the technology starts to get built into devices like vending machines and cars. But 500% penetration is asking too much.
And frankly, will anyone want to use it at all? That was where Iridium went wrong. While Iridium projected over a million users, it achieved only 100,000. There were a lot of problems: coverage problems, frightening prices, great big ugly handsets. All these problems will be revisited with 3G.
Iridium didn't - sorry, doesn't - work indoors. It was based on dual mode handsets, which could use either the ordinary GSM mobile phone network or, for trips further afield, the Iridium satellite network. You had islands of GSM coverage in a sea of Iridium.
Today third generation coverage is being talked about in terms of islands of UMTS in a sea of GSM. Again, we will have dual mode handsets to use the existing GSM coverage, and only switch into 3G in those areas where it is installed. You'll pay a premium for a phone which won't even deliver 3G benefits for a lot of the time.
Quite how much you will pay is yet to be discovered. It is impossible to guess what a handset will cost, but an existing GSM phone has a bill of materials of around $90. This gives a sensible retail price of £180, less a £150 network subsidy common in the UK market, to sell for £30. The low bill of materials is very much down to the economies of scale.
Mobile phone manufacturers, selling into a world market, expect to sell a million handsets over the life of the phone before they turn on the production line. New entrant Sendo, which prides itself on its efficiency, boasts that it only needs to sell 500,000 handsets over several designs to break even.
Those economies of scale will not exist for third generation. What's more, the components will be much more expensive. It is rash to speculate, but a $900 bill of materials might be conservative. The phones will do a lot more. They will have colour screens and a lot of memory. They will also need to feel like a premium product. Subsidising this down to £30 will not be realistic, so the quantities drop and the price goes up.
Traditionally prices would be recouped through call charges, but in the middle of a long-running tariff war there isn't much scope for a premium rate service. Some early adopters might pay a bit more than the typical 15p a minute peak rate, but the mass market is focused on bundled inclusive airtime, with many peripheral services coming in for free. Orange is currently offering free Wap calls at the weekend, Genie flat rate text messaging and One 2 One free voicemail. Selling premium rate services against this, even if the coverage were not patchy, would be nigh on impossible.
The final blow is the unbridgeable gap between selling the concept and facing up to the reality. Concept photos of proposed 3G phones show slimline, sleek models the size of a powder-compact. The pictures bear little or no relation to the handsets that will really be available to early adopters, which are likely to be clunky and ugly, with a poor battery life, heat problems and unimpressive screens.
The technical require ments for 3G are horribly complicated, which means you need a lot of computing power, which in turn bumps up not only the cost but the size of the battery. We could see the new phones drawing something like 50 times as much power as an existing one.
This means third generation phones are going to need enormous batteries by today's standards. Some manufacturers argue that between now and the launch of the first third generation systems in two years, we'll see the improvements necessary to get handset sizes down to be comparable with today's GSM, that's around 100g. This seems incredibly optimistic, particularly given the probable lack of demand.
So the target customers become people prepared to pay a premium for big clunky handsets that occasionally give better performance than their elegant GSM one. The next stage will be for the networks to argue that typical customers will have two handsets: a GSM one for everyday and a third generation one for when they need it. Again this was an Iridium argument.
There is a further problem which didn't affect Iridium: too many handset manufacturers looking for a piece of the pie. There are around 20 mobile phone manufacturers with even more companies eyeing third generation. They all want to be the next Nokia, so they will fight for market share by selling phones at a loss. For the first time, the Japanese manufacturers become a real threat. Until now, Japan has largely missed out on GSM, because it was never launched in Japan. So Scandinavia got to rule the roost.
Things will be different in the third generation. Japan launches its 3G commercial service well before the rest - 2001, as opposed to 2003 in the UK. And it will be in demand. In Japan, the capacity problems we have seen recently on UK networks are increased many times over, because there is a more limited spectrum allocation on the PHS system used there. This means expansion of the existing networks is not an option. Instead, 3G is the solution. So the Japanese market will have a need for 3G that we don't have here, where networks are expanding their capacity into alternative spectrum.
Visible demand will give the Japanese manufacturers more room to manoeuvre. The established order of Nokia leading, followed by Motorola and Ericsson, is severely under threat. The only Western company to have grasped this is Siemens. Currently dicing with Ericsson for third spot and with an excellent product portfolio, Siemens has looked to the future. An infrastructure deal with NEC and a handset deal with Casio will give Siemens an entry into the Japanese market. The Japanese partners can learn a lot from Siemens today, and in a couple of years Siemens will reap the rewards when it is an experienced manufacturer of third generation handsets. Whether even this is profitable remains to be seen.
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