Mobile Telecom Firms Question Benefits, Price of 3G Technology
By DAVID PRINGLE and KEVIN J. DELANEY
Staff Reporters of THE WALL STREET JOURNAL
February 20, 2001
When French mobile phone operator Bouygues Telecom SA balked last month at the
4.95 billion euro (4.53 billion) cost of a third-generation license, it wasn't just a matter of
price.
Already France's third-largest operator with five million subscribers, Bouygues now
believes that for most mobile services, pumped-up versions of today's
second-generation systems -- which can be rolled out for a fraction of 3G's cost -- are
more than adequate. Third-generation technology, says company Chairman Martin
Bouygues, "is no longer indispensable for mobile multimedia applications" ranging from
live video to wireless Internet access.
He's not alone in his thinking. As mobile operators from across the world hold their big
annual conference in Cannes this week, other industry experts are also questioning the
tens of billions of dollars spent by mobile phone operators on 3G technology. Citing
recent advances in data compression software and growing pessimism about the
capabilities of 3G networks, they contend that 2G networks will be able to offer most key
services at a fraction of 3G's cost.
"Eighty percent of all services people have been listing for 3G can be done with"
upgraded 2G, says Fraser Curley, a Germany-based mobile phone specialist with U.S.
consultancy Arthur D. Little.
Such sentiments mark a significant new phase in the debate over 3G, which is formally
known in Europe as universal mobile telecommunications systems. Eyebrows were
raised last year over the huge amounts coughed up for 3G licenses by the likes of
Vodafone Group PLC -- nearly six billion pounds (9.49 billion euros or $5.79 billion) in
Britain -- and Deutsche Telekom AG (8.5 billion euros in Germany), but doubts are now
also being raised about the 3G technology itself. Such concerns will have particular
resonance in the U.S., where most mobile operators are only now choosing their
technology for the coming decade.
The European operators that have bought 3G licenses insist the quality of their services
will be superior, and they express no regrets. They also point out that they needed the
extra spectrum offered by 3G licenses, because 2G networks are becoming saturated.
Most European governments licensed new mobile spectrum on the condition it be used
in conjunction with 3G technology, but U.S. operators have no such constraints.
"The U.S. operators will roll out [new technologies] based on profits rather than licensing
requirements," says Phil Kendall, a London-based analyst with U.S. research firm
Strategy Analytics. "There's no way they will rush a rollout if it means losing money in the
process."
So the U.S. operators will closely monitor a growing list of developments that have shed
fresh doubts about 3G:
New compression software dramatically reduces the amount of network capacity
needed to operate most wireless Internet services, so they can be run over souped-up
2G networks. British Telecommunications PLC, which last year bought a 3G license, is
also deploying software that can boost the apparent speed of its 2G mobile system by a
factor of five by filtering out unnecessary data, says Stuart Newstead, general manager
of wireless data at BT's wireless unit.
Today's 2G networks can be upgraded through new software and hardware to run at up
to 180 kilobits per second, or about three times the speed of a dial-up Internet
connection via a personal computer. Analysts say these upgrades cost about one-fifth
the cost of building a 3G network.
Constraints in handset design and network capacity will result, analysts say, in some 3G
networks running at speeds well below their potential. Keith Woolcock, a London-based
analyst with Nomura International PLC, says 3G networks might initially only carry data
at speeds of 30 kilobits to 60 kilobits -- well below the hundreds of kilobits eventually
promised by some operators.
When European consumers were asked recently by research firm Jupiter what they
wanted from the mobile Internet, e-mail access was the top choice by far. With a
relatively low-cost upgrade, even today's 2G networks can handle most e-mail easily.
Per Lindberg, an analyst with Dresdner Kleinwort Wasserstein in London, says that the
wireless Internet service run over 2G by Japan's NTT DoCoMo "has been spectacularly
successful at [a slow] 9.6 kilobits per second because it is very cheap, which will not be
the case with 3G."
In some public places, businesspeople may prefer to use short-range radio technology,
which is far faster than 3G. Swedish operator Telia AB has installed high-speed
wireless LAN, or local area networks, in more than 100 hotels, airports, train stations
and the like, and is aiming to increase that number threefold by year's end.
It's not clear exactly when inexpensive, lightweight handsets that can run on both today's
2G networks and 3G networks will be available. TTPCom Ltd., a U.K. handset
technology company, maintains that such phones won't be available until the end of
2004. However, the world's largest phone maker, Nokia Corp., says it is confident that it
will be shipping "millions" of 3G handsets toward the end of 2002.
Having spent a total of 86 billion euros on 3G licenses in the United Kingdom and
Germany alone, European operators don't readily admit to any doubts about 3G. Many
remain confident that it will be worth the investment regardless of any technical glitches.
Vivendi SA boss Jean-Marie Messier said recently, "Whether [3G] arrives six months
before or six months after what equipment makers had predicted, we know the
technology is good." Vivendi's mobile phone affiliate, SFR, has applied to the French
government for a 3G license.
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Is the Technology Already Here?
In Bouygues Telecom's vision, people will be able to access high quality multimedia
services, (top table), using networks that are already up and running (bottom table)
Evolution of Digital Compression
Technology progress reduces need for bandwidth, in Kb/s
1995 Today 2002
CD quality (sound) 256 60 4
Mobile telephone quality (video) - 64 20
Hand-held computers (video) - 100 30
Television quality (video) 6000 800 200
Mobile network bandwidth
Launch date Theoretical bandwidth (Kb/s)* Real-world bandwidth (Kb/s)
GSM 1996 23 9
GPRS 2001 92 22 to 80
EDGE 2002 276 60 to 180
UMTS 2003 2000 44 to 384
*Kb/s: kilobits per second
Source: Bouygues Telecom
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Proponents of 3G claim that 2G services will be much lower quality than their 3G
equivalents. "Can video be compressed down to [2G speeds of] between 20 and 40
kilobits per second? Yes, but it will look like a petrol station security camera," says
Dougal Scott, senior manager at Spectrum Strategy Consultants, which advises mobile
phone operators. Mr. Scott says that Bouygues will be able to compete at the low end of
the market, with "young, fun-type services" such as basic video, but will lag behind in
offering reliable business applications. "At some point they will find that the application
and handset development is increasingly devoted to 3G, and their services become
markedly inferior," he says. "It is not clear whether that will be three years, five years or
eight years."
In any case, some of the biggest operators say the debate over technology is secondary
to practical concerns over capacity. Third-generation licenses "will principally give us
capacity in zones where we have saturated the frequency," says Jean-Francois Pontal,
chief executive of France Telecom SA's Orange SA wireless unit. Similarly, executives
at Vivendi say their existing network will be saturated in 2005 if they don't have access
to the 3G spectrum.
But most European governments are extracting a heavy price, in addition to the license
fee, for that spectrum. In Europe, 3G licenses typically insist that operators cover most of
the country with 3G technology within a seven-year time limit. In a larger country, such as
Germany, analysts believe that achieving that kind of coverage would cost an operator
more than five billion euros. In the U.S., operators that purchase new frequency aren't
expected to have any such geographic obligations, so they could limit 3G to populous
and affluent areas.
For Mr. Lindberg, the London analyst, the U.S. approach makes much more sense.
"European governments will have to rethink their license requirements," he says. "It is
lunacy to build six 3G networks across Germany."
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