Put On Your 3G Glasses
By Robert X. Cringely
Illustration by Detmer E. Otto
You can see this one coming: a powerful new cellular technology is
about to set off the next internet investing craze
Tech investors simply love to be in love with the
Next Big Thing. And while the upcoming
investment romances will still generally involve the
field of Internet technology, the specific Internet
technology that looks exciting for the next three to
five years is third- generation wireless, or 3G, the
next iteration of cellular telephone service. If Web
retailers and business-to-business Internet
companies seemed until recently to have
otherworldly market caps, expect 3G
capitalizations to enter a whole new galaxy.
Whether we are assigning credit or blame for this phenomenon, its inspiration
clearly comes from Britain, which in March and April auctioned five 20-year
3G wireless licenses for a total of more than $35 billion--about eight times
more than the government had said it expected to raise. Not only has this
windfall given the government of Prime Minister Tony Blair the biggest budget
surplus in U.K. history, it is being seen as a leading indicator for similar
auctions in the rest of Europe and the U.S. And with the U.S. auction
scheduled for this September, the bidding frenzy should soon be hard upon
us.
Before we consider the breathless sums now expected to be raised in the
U.S. auction, let's try to understand better what exactly that money will be
buying. First-generation wireless is the analog and digital cell-phone services
that have been with us for 20 years. Second-generation wireless is the digital
PCS phone service from licensees like Sprint. It should be noted that the 2G
license auction held several years ago also raised a lot of money, much of
which was never received by the U.S. government because of defaults and
bankruptcies by several winning bidders. Third-generation wireless is really
exciting, an all-digital service that is optimized for data rather than for voice (it
actually treats voice as just another kind of data). The technology promises
peak data rates of up to two megabits per second. That's enough bandwidth
to do a lot more than give you baseball scores on your cell phone--it will let
you watch baseball on that tiny screen and simultaneously browse the Web,
send and receive E-mail, and use a wealth of Internet services yet to be
invented.
So if the U.K. licenses sold for $35 billion, what is the 3G franchise for the
U.S. worth? Only the auction itself will tell, but it's fascinating to look at the
various pricing algorithms currently being discussed. The simplest pricing plan
compares the populations of the U.K. and U.S. and applies that multiple as a
coefficient. With about four times the population of the U.K., then, the U.S.
can expect its licenses to go for a total of around $140 billion. At the other
edge of reality are the bidding strategies that apply Metcalfe's Law.
Originated by Bob Metcalfe, inventor of the Ethernet, this law says that the
value of a digital network increases with the square of its number of nodes.
So if a network with 10 nodes is worth $100, then a network with 100 nodes
is worth $10,000, or 100 times as much.
Pundits are applying Metcalfe's Law to the 3G license auction in various
ways, from squaring the number of U.K. cell phones and the number of U.S.
cell phones and comparing the results, right up to doing the same with the
total populations of the two countries. That latter calculation, by the way,
values the U.S. 3G licenses at about $600 billion. Throw in some auction
frenzy, and a $1 trillion number might be possible. I am not making this up.
It's interesting to note that the Clinton administration, in its plan to balance the
budget and pay down the national debt, has stated that it expects the 3G
auction to raise only around $2.6 billion, which is a huge underestimate no
matter which bidding calculation you believe. The U.S. 3G auction was
originally slated by the Federal Communications Commission to take place in
June, but it was delayed until September to allow more time for all parties to
refine their business plans in the wake of the U.K. results and to develop
better strategies for dealing with the UHF stations that currently hold the
licenses for the spectrum. (Those stations must convert to digital or go out of
business.) By any schedule, it is easy to see the 3G auction as a surprise
addition to Clinton's legacy and a political windfall for candidate Al Gore.
Fortunately, what is not likely to come from this auction are the defaults and
bankruptcies that plagued the U.S. second-generation-wireless auction.
What's different this time around is that the dollars are so much bigger, the
smaller companies that were winners in the 2G auction won't even be in
positions to bid. And the auction itself is being conducted differently by the
FCC. Like the U.K. auction, the U.S. auction will use ascending rather than
sealed bids. In such a system, the bidding goes in rounds and is open. This
technique, which works as well for eBay as it does for governments, leads to
more knowledgeable bidders and to higher prices. This may explain why the
U.K. auction results were so high.
Right now, the potential U.S. 3G bidders are grousing about radio
interference and generally trying to drive down the opening price. But this too
shall pass and they will pay what it takes to win the day. No matter what that
price is, it still will involve a major transfer of public debt to private. It will
also involve generally the same players, because there are only so many
outfits with the technical and financial qualifications to bid. Vodafone
AirTouch, for example, won the largest U.K. 3G license and (partnered with
Bell Atlantic in Verizon) will certainly be a bidder for a U.S. license,
competing with AT&T, Nextel, and Sprint. With these companies bidding so
much for licenses in so many markets, it is possible to imagine that they would
be too financially strapped even to build out their networks, but this is where
the public markets (and the next Internet investing frenzy) comes in.
And when the mania returns, it will have all the now-familiar signs of unreality,
including hordes of investors buying something they don't understand and
doing just fine anyway. For at least a time. Still, it's a good idea to get a
handle on 3G. It has its limitations. It is certainly a clever technology for
always-on Internet access and a credible alternative to present hard-wired
phone service. What 3G probably won't do, however, is challenge broadcast
television. That's because one premise of the system is that bandwidth will be
shared efficiently among millions of users. While 3G may scale to two
megabits per second, it works well only if most of us aren't using that much
bandwidth on a regular basis.
Beyond the investing frenzy this summer's 3G auction will cause, what are the
best investments to benefit from 3G? Probably not the actual license winners,
since these services will be saddled with debt for years and won't have any
associated revenue until their 3G networks are ready later this decade. The
real winners will be the major wireless-equipment suppliers. Lucent and
Nortel will be fighting over the 3G switch business. Each is able to put
together the entire wireless network and will happily do so for any and all
licensees with money to spend. Motorola has plenty of cellular and radio
technology too and in some cases competes (and occasionally cooperates)
with the other two. And of course Motorola makes lots of phones.
But the big winner might very well be Qualcomm, which used to make
phones but is banking for future growth on its W-CDMA and CDMA2000
patents, which are two of the standards for much of the 3G technology to be
used in the U.S. Beyond licensing patents to all comers, Qualcomm also
makes the chips that are at the heart of 3G phones. With hundreds of millions
of chips likely to be sold in the next decade, the San Diego company is en
route to becoming another Intel.
Senior contributing editor Robert X. Cringely is a Silicon Valley writer
and broadcaster. |
