The case against 3G

“I hope I have left Germany by the time my remarks hit the press,” joked Nicholas Negroponte, the influential US telecommunications thinker, MIT professor and author of Being Digital, just after a speech in early 2001. “It is not what governments in Europe want to hear.”

Negroponte, a one-time advisor to the European Commission, had warned that Europe’s 3G mobile telecommunications project was going wrong – badly wrong. The whole thing had been misconceived, he said. Companies had over-paid for licences, the technology was wrong, the business models wrong. “Most 3G networks will never see the light of day.”

Back then, when the dot-com boom was subsiding but still frothing, many people were saying that 3G operators had paid too much for their licences – some EU150 billion in total. But hardly anyone dared suggest that the UMTS (universal mobile telephone service) project was fatally flawed.

In recent months, Negroponte has been back in Europe, criticising UMTS. “3G has no major advantage [over other technologies such as GPRS, which is already available]. It is kind of Mickey-Mouse.”

This time, however, Negroponte is no lone voice. Now, the Autumn conference circuit is sizzling with searing criticisms of the 3G project and forecasts of its death – mostly slow and painful. Among the most vocal critics: Don Tapscott, author of an acclaimed series of books on the emergence of the digital economy; George Gilder, economic advisor to US governments turned telecommunications strategist and visionary; Peter Cochrane, former chief technologist for British Telecom; Lester Thurow, Professor of Economics at Massachusetts Institute of Technology (MIT); and most recently, Marty Cooper, the one time Motorola executive, and now CEO of ArrayComm, and the ‘father of the mobile phone’. “We engineers knew years ago that 3G as presently constituted is essentially dead,” said Cooper.

All of this ought to have executives at 3G operating companies worried – even if only for a public relations point of view. And it has. Forrester Research recently discussed deployment plans with executives at 26 European UMTS licence holders, and 87% of interviewees “expressed optimism about UMTS”.

But a more revealing figure followed. One-third of those same executives think that 3G “will become a definite success”. Put another way, some two thirds think it may not succeed – and this from the most bullish group of 3G advocates on the continent – executives at those companies that have collectively sunk more than EU200 billion into 3G.

During 2002, the case against 3G has been building strongly to the point where it is nearly overwhelming. The problems are many, but boil down to three factors: cost, technology and competition.

First, the costs of delivering 3G. Once licence fees, build-out and marketing are taken into account, some analysts fears operators will be unable to make enough, or possibly any, profits.

Negroponte pointed to the enormity of the problem in the UK, where some EU38 billion has been committed in 3G licence fees: “You cannot have a successful telecoms system that has a tax of $1000 per head before it is even deployed,” he said. (The exact figure is EU764 per head).

But that tax is only part of the problem: 3G handsets from Nokia and Sendo (a Microsoft backed mobile phone start-up) will initially cost between EU700 and EU 1,000. Operators will be forced to subsidise handsets to reduce prices if they are to attract consumers.

Most of the operators hope to begin to get a return from their 3G investments after between three to eight years, according to Datamonitor, an independent research company. But a recent report by Forrester Research argues that this is much, much too optimistic. It thinks that operators in Finland, France, Italy, and Switzerland will hit break-even earliest – between 2010 and 2012 – while operators in the UK, Germany, Spain, and Portugal won’t see black ink before 2015.

The operators plan to slash these payback periods by garnering large numbers of subscribers and then persuading them to use their phones (or devices) a lot. The key metric is ARPU – average revenue per user. But consumers will only spend more if there is something worth buying – and that means many more applications and services will have to be developed that run better on 3G than elsewhere.

This is where the second problem comes in. When UMTS was initially developed, and when the relevant spectrum was put up for sale, it was said it would give 2 megabits per second – enough for streaming video, and other real time, content rich applications. “The truth is that it has 1.1Mbps channels, which must be shared by people to be economic,” said Cooper of ArrayComm. “In practice users will get about 80kbps.”

This is not the only technological problem: no supplier has yet built a reliable handset that hands over from 2G to 3G networks; national coverage is patchy at best; and the use of a non-IP packet standard means greater cost, in terms of networking middleware, for content suppliers and operators. The technology and cost problems mean that competing services look much more viable. GPRS, for example, currently gives 50 to 60kbps, and is already available and uses existing networks. Unless 3G’s 80 kbps can be improved or dramatic new applications developed, most users won’t switch unless it is very cheap.

The emergence of the 802.11 ‘wi-fi’ wireless Ethernet system has compounded the problem. This computer-based wireless network standard supports 11 megabits per second networking over about 100 metres – far faster than any phones – and hotspots in airports, hotels, coffee shops and offices are already common. These will not compete with 3G per se – since unlimited roaming between ‘hotspots’ will be difficult for decades to come. But a combination of GPRS and wi-fi connections will adequately serve the needs of many consumers.

By 2010, however, some telecommunications specialists believe other systems will have emerged that further undermine 3G. For example, new all-digital wi-fi systems could dramatically extend the range of wireless LANs – possibly to several miles. And a new frequency division multiplexing system could make it possible to build dramatically higher data rate ‘4G’ networks using existing wireless spectrum.

For all the stakeholders in Europe’s 3G projects, these are difficult times – even Negroponte says it is a dilemma and that he doesn’t have any answers. Those holding licences are obliged to develop services – yet in most cases these will be unprofitable for at least a decade and maybe much longer. In Germany, Sonera and Telefonica simply wrote off their EU8 billion investment. Others, especially those with large debts, are sure to follow.

Meanwhile, embarrassed governments may concede that, in charging so much for licences, they have not helped the consumer or the economy. Infrastructure sharing, initially outlawed, is now permitted. Somehow, they must now make it easier for 3G operators, while at the same time encouraging the development of competing technologies that may, ultimately, prove more important.

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Ben Rossi

Ben was Vitesse Media's editorial director, leading content creation and editorial strategy across all Vitesse products, including its market-leading B2B and consumer magazines, websites, research and...

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