3G: $100 Billion Down The Drain?
(The press just will not turn loose of this, will they?)
(02/23/01, 4:33 p.m. ET) By Barnaby Page, TechWeb News
What if you paid $100 billion for a mobile-data revolution and nobody came?
That's the frightening prospect telecom equipment makers and Europe's network operators confronted this week at the GSM World Congress, their annual get-together in the swanky southern French resort of Cannes.
The reasons for a sudden epidemic of cold feet in the previously super-hot cell-phone market are simple. Operators have spent $100 billion for third-generation (3G, or UMTS) licenses that will let them deploy new services such as always-on Internet and video conferencing through phones—and they're getting through another $100 billion building those services. Handset and equipment manufacturers, meanwhile, need 3G to stimulate slowing market growth.
But big industry players this week warned that 3G will take longer than expected to arrive—while others suggested it may not even be the best way to create new value-added services.
And in the meantime, there's the little matter of servicing all that debt the operators accumulated buying 3G licenses. The Bank of England said $250 billion of telecom loans will be due this year in the region.
"We're facing a situation where an industry is heading for bankruptcy before even a 3G call is made," Intel vice president and general manager Hans Geyer told delegates at Cannes.
While not all forecasts are quite so apocalyptic, most agree that the mobile industry has focused excessively on 3G and now needs to rein in expectations—as well as get on with turning a profit from current 2G services, or the so-called "2.5G" interim technology known as GPRS.
"It's time for a reality check," said Andreas W. Gerdes, chairman and CEO of iWORLD Group, a Malta mobile-business incubator. "We are simply focused on building services which will allow you to keep your customers. We don't see a a need for 3G in that."
"The focus should...be on the current technologies and what can be done with them," said Joe Sipher, vice-president of product marketing at Handspring Inc., which makes handheld devices. "I'm worried that the focus is too much on future technologies and what they will be able to do."
For the network operators, focusing on existing technologies means finding a way to create more value-added services, such as information and transactions, from which they can wring more profit.
"For the next two to three years, voice will still make up the bulk of revenues, but as we go forward we will see 50 to 60 percent of revenues and 30 to 40 percent of profits coming from new services," said Hans Snook, the soon-to-depart founder of France Telecom's recently floated mobile arm Orange.
And that revenue is needed, as operators in both the wireless and fixed-line markets are finding voice less profitable. This week alone, Belgium's Belgacom, Denmark's Tele Danmark, and Germany's Deutsche Telekom have announced or warned of reduced profits.
"A combination of price competition and the cost of acquiring and maintaining ever less valuable subscribers is eroding operators' voice revenues...the creation of new value-added services is crucial to operators' ability to maintain profitability," said Philip Taylor, a senior analyst at The Yankee Group Europe.
"Consumers need better reasons for using the mobile Internet than what is available today," said Lars Godell, a telecom analyst at Forrester Research in Amsterdam.
The big question is what those services will be—and what technology they'll use. WAP was seen as the way forward in 2000, but quickly fell from favor as consumers disliked its slow speeds and implementation on tiny screens.
According to a Jupiter Media Metrix service, what they want most of all is mobile e-mail.
And some believe SMS is a potential gold mine.
Researchers at The Yankee Group Europe in London expect messaging to be more important than the mobile Web at least until 2005, although 3G phones will probably hit the market in 2004. For 2005, they expect messaging to account for 57 percent of a $62 billion wireless data market in Europe. And by the end of 2002, they expect 100 billion SMS messages to be sent monthly.
Indeed, the image of SMS as principally a tool of lovelorn teens already belies the reality that it's becoming big business.
Some Scandinavian operators are already making as much as 10 percent of their revenue from SMS, said Strand Consult, Copenhagen, Denmark.
In the technology's favor is its almost-universal penetration among handsets, while only about 5 percent of phones support WAP. Only 25 million WAP-compatible handsets were sold last year, against projections of 125 million, although some manufacturers remain confident. Nokia, for example, expects 200 million WAP handsets will be bought this year.
"SMS is already being used as a preferred or supplementary channel by the majority of wireless Internet startups, and certainly it still has a significant role to play in creating new VAS [value-added service] opportunities," said The Yankee Group's Taylor.
But WAP still has its defenders.
"WAP isn't crap," Forrester's Godell said. "Network speeds are much more important. Too many people have confused the content-formatting issue with the size-of-the-network-pipe issue. And too many operators over-hyped WAP, with uninteresting services available, slow network connections, and tiny screens.
"With always-on technologies and higher data speeds, WAP will do just fine for a long time to come. There's too much momentum behind it to think seriously of other alternatives for a while."
But he said SMS also has "a big upside potential for years to come."
But while 2G and 2.5G can deliver such services, many are looking to UMTS to enable the more elaborate, bandwidth-hungry applications. And there's a nagging question of when—or if—it will take off. While 2002 was long touted as the launch date, doubts are now growing.
Alcatel, the French telecom equipment giant, this week pushed its estimate for the appearance of the first UMTS handsets back by a year, to 2004.
Others agree: Qualcomm CEO Irwin Jacobs told London's Financial Times that 3G phones using the W-CDMA standard could be expected in late 2004 or early 2005, although those based on the alternative cdma2000/1XRTT standard will appear this year. Qualcomm does have a vested interest in playing up W-CDMA delays, said Michael Ching of Merrill Lynch in New York, because the company "has been the primary advocate of" cdma2000.
And French cell-phone operator Bouygues Telecom believes commercial UMTS services, reaping the revenue benefits of the new technology, could come as late as 2007.
"Alcatel sound more reasonable than other vendors I have talked to," Godell said. "I agree 2004 and 2005 are the years when UMTS will start to take off, but its take-up will be more limited and slower than previously expected."
Some even express the previously heretical viewpoint that UMTS may be unnecessary.
Upgraded 2G networks can handle "80 percent of all services people have been listing for 3G," said Fraser Curley of consultants Arthur D. Little in a Wall Street Journal report.
"Of course there's a lot of life left in the 2G world, we actually think GPRS [2.5G] is the long-term winner," said The Yankee Group's Taylor.
Bandwidth, as well as the cost of implementation, is key—and observers disagree on the performance that will actually be delivered by both 2.5G and 3G.
Keith Woolcock, an analyst at Nomura International in London, said 3G could initially be as slow as 30 to 60 Kbit/s.
Also downplaying 3G, "EDGE [Enhanced Data Rates for Global Evolution, of which GPRS is a subset] looks more and more promising," said Godell, pointing to possible data rates as high as 480 Kbit/s through the use of smart antennae—and, importantly, implementation costs about a third of 3G's.
But in defense of 3G, The Yankee Group's Taylor warned expectations of high GPRS data rates may be too optimistic, and also points out that 3G—which uses different parts of the spectrum from 2—will "alleviate the capacity strain on overburdened 2G networks."
For now, there's consensus on one thing: 2001 is going to be a tough year.
"We are not for a moment arguing that this is the end of the world as we know it.... [but] growth will be concentrated in a smaller numbers of areas, and only a limited number of winners are likely to do well in the longer term," said Goldman Sachs, downgrading its earnings forecasts on Alcatel, Finnish handset giant Nokia, and British electronics group Marconi.
Most of the handset makers have reduced their estimates for sales this year, indicating fewer new users taking to the airwaves: sales growth is seen as leveling off to about 20-25 percent each year, against the 50-60 percent the industry has enjoyed in recent years. Motorola, for example, cut its worldwide estimate of handset shipments from 525 million to 575 million to 500 million.
This slowdown could be a double whammy for carriers, coming at the same time as debt mounts. Borrowing is also becoming harder, and more expensive, for them at just the time they need to develop the new services in which so much has already been invested, according to Audrey Mandela, a consultant who wrote a report on the topic for The Yankee Group.
And the woes of both carriers and equipment makers are hitting European stock markets even harder than the troubles of AT&T, WorldCom, JDS Uniphase, Nortel, Lucent, and their like have affected Wall Street.
Telecommunications is far more important to the European economy than to the American, partly because Europe has few important players in the IT hardware and software arenas. In fact, telecom is the single biggest sector by market capitalization across the continent, worth a now much-reduced $1.4 trillion according to last year's FT 500 analysis, and in 13 different European countries the biggest company by market cap is in that business.
The sector has lost half its value in the last year. So while it may not be the end of the world, as Goldman Sachs reassures, it's surely a case of the higher they go, the harder they fall.
Reuters contributed to this report.
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