Enemy at the Gate: Wireless LANs and 3G

Nov 30, 2001 12:00 PM

Over $120 billion has been spent in Europe on 3G license fees, and the cost of network buildout is estimated between $5 to $7 billion per market. Many mobile operators, however, that have won licenses are concerned about recouping their investment and uncertain as to the level of consumer interest and eventual take up of services.

In contrast to 2G (and even 2.5G) services, which derive their competitive differentiation from geographical coverage, 3G business models' competitive edge will reportedly come from delivering high quality data "content." The problem is that no one really knows today what this high-quality data content should be? Successful and coveted applications address real needs, hence they become killer apps, whereas the services proposed for 3G are more a rerun of current wireless data services with the addition of some interesting features such as full motion video and VoIP (see Table 1). Wireless data in 3G is still a technology looking for a killer application. It is not clear as to why consumers would need 3G's high data rates when all they are downloading is the weather report or restaurant information.

3G's other benefits, such as always-on connections for the end-user and packet switching for the operators, are being delivered through the deployment of 2.5G services. The technology also faces other widely reported problems -- such as its complexity -- which have led to widespread delays in network deployment coupled with an absence of handsets and even spectrum in the U.S. Last but not least, the general malaise in the telecom market and the $650 billion industry debt load is having major effects on 3G's business case.

The bottom line is that the business case for 3G mobile services is rapidly eroding and the value proposition of the technology is being widely questioned within the industry. Will 3G's promised services and benefits justify the necessary and enormous investment? Will customers even want 3G's services, and will carriers make any money providing those services?

In the ruthless high-tech world, when the value proposition of a technology is questioned, it automatically opens the door for competitive products and services. In the hotspots market, 3G's nemesis will prove to be wireless LANs, which can be deployed at lower costs and provide higher bandwidth as well as the types of data services that are actually in demand by customers. The "hotspots" market, or the public domain, includes areas such areas as airports, hotels, convention centers, coffee shops and train stations where 40 million to 45 million road warriors spend a great deal of unproductive time. Mobile service providers will lose valuable revenue from these lucrative customers with the incursion of wireless LANs, and they will be wise to make up for lost revenues by taking an active role in the deployment of this technology. 

Wireless LANs

Several issues are making wireless LANs the poster-child of wireless Internet technologies. These include the 2.4 MHz unlicensed spectrum, the standardization of the technology, the high bandwidth, the technical feasibility, and the potential ubiquity of the product in the home, the enterprise and the public domain market. 

Consumers and particularly road warriors are most interested in high data content services, such as email with attachments, Web browsing and access to company networks and servers rather than limited-content Internet access (via cell phones). Users usually perform these tasks while in a portable (stationary) mode on laptop-like devices and not while mobile, which is the ideal venue for the usage of wireless handsets. All PC vendors, including Toshiba, Dell, Compaq, IBM and Sony, are now selling wireless LAN-enabled laptops, and Microsoft is supporting 802.11b in the new Windows XP.

3G systems, in effect, are mostly designed around voice, and the amount of data that can potentially be transmitted through the channel will be capped at 384 kb/s for wide area/high-mobility/portable mode and up to 2 Mb/s for local area/low-mobility/stationary coverage. Road warriors, however, need to access and manipulate their corporate files and surf the Internet, all of which can be accomplished in a more streamlined, easy-to-use manner with 11 to 54 Mb/s wireless LANs.   

Although 3G systems are designed around voice, networks are expected to generally derive their revenues from data services and content, both of which require bandwidth. However, long before the rollout of 3G, real data applications will be delivered over wireless LANs in the hotspots market and further erode 3G's business case for wireless data. 

In addition, the deployment costs of wireless LANs in the hotspot market and dense metro areas are far more cost-effective then 3G systems. The bandwidth and cost discrepancy between 3G and wireless LANs will become even more apparent with 802.11a, which is expected to offer bandwidth of 54 Mb/s. Wireless LANs are also available currently, whereas the general consensus regarding 3G is that it will not be available in the United States before 2005, Europe before 2004 and Japan before 2002.

Seamless mobility: Way of the future

Although wireless LANs will no doubt put an additional dent in 3G's business case, the bottom line is that the wireless world is moving toward seamless mobility, and those operators will be the ultimate winners that see this trend in advance and are able to provide seamless services across various types of networks. 

The hotspots market is still undeveloped due to the weak business models of some wireless ISPs, the half-baked assistance programs of wireless LAN vendors and the demise of the telecom capital markets in general. Although the current weakened state of the telecom market is not conducive to trail-blazing thinking or bold marketing strategies, the wireless service providers are in the best position to deploy wireless LAN networks and take advantage of the seamless mobility trend, which will benefit both the providers and their consumers.  

A number of factors point to the wireless service providers as the ideal candidates for wireless LAN-based networks in the hotspots market. These operators need the revenue, have the experience and own the customer relationship. 

It is estimated that it will take anywhere from five to seven years before investments in 3G networks are paid off, assuming revenue from data services is included in the equation. Although the wireless LANs have not had much success through the wireless ISP business model, the success of the Microsoft/Starbucks/Compaq/MobileStar alliance and consumer uptake could potentially be a turning point for the technology in both the U.S. and Europe. This success would once again open the coffers of the capital markets as well as vendor financing. The wireless service providers would lose not only a golden opportunity to be the primary providers, but also revenue for data services from their most lucrative customers, the business user on the move. 

Wireless LAN services would help operators to not only increase their average revenues per user but also bring in additional revenues while building their 2.5G and 3G networks. In addition, carriers can collect and capture significant revenues from e-commerce or content services that are provided over wireless LANs which are more amenable to full Internet browsing than cellular phones. 

Carriers already have relationships with customers as well as the back office systems to support and nurture the relationship. Subscribers are looking for maximum mobility at minimum cost with the ability to roam between locations without having to reconfigure their laptops, worry about additional charges or deal with several service providers. The standardization of wireless LANs around 802.11b and the integration of the technology into Windows XP has solved a large part of this problem. Wireless service providers are the ideal candidates to offer customers a single bill for both their cellular and wireless LAN services. Sonera is currently offering this service in Finland with its wGate product. 

Two years ago, wireless LAN vendors were targeting the incumbent wireless service providers, especially in the U.S., as potential customers.  These operators however would not even consider the 2.4 GHz band because of its unlicensed and "open to all" quality. Today, the spectrum constraints in the U.S. have created a different environment. Wireless service providers are worried that their current and future data needs with the advent of 3G may mean that they have to use up all their spectrum for flat-rate data, and they are concerned about the cannibalization of their voice services. As a result, overlay networks have garnered some interest, and the possibility of using the ISM band to offload some of the data requirements instead of buying more frequency has taken on a sense of urgency.

Who are the players?

Some European operators, especially the visionary Scandinavian ones -- Telia, Sonera and Telenor -- have embraced the trend toward seamless mobility and have opted to install wireless LAN systems in the hotspots market, complementing their wireless networks. 

Telia's HomeRun service, for example, offers wireless LAN service in more than 100 sites in Sweden, including airports, train stations and hotels. Sonera offers the wGate wireless LAN service in airport lounges and convention centers in Finland. Sonera is pursuing seamless interoperability of wide and local area wireless networks, and as a first step the company now supports Nokia's SIM card-based WLAN connections in its wGate service, enabling a single bill for both GSM and WLAN subscriptions.

Telenor and Ericsson are involved in a joint project called H2U to evaluate and test an integrated UMTS/wireless LAN system as complementary radio access technologies to add capacity in typical hotspots. The testing involves a laptop roaming between a HiperLAN2 wireless LAN network and a 3G CDMA WAN network providing seamless mobility to the subscriber. The laptop includes both an 802.11b network interface card as well as a prototype CDMA modem (which is currently too large in size). Ericsson is already shipping cards that add 802.11b capability to CDMA base stations near hotspot areas. 1xEV cards are expected by the end of Q4 2001.

In the U.S. however, the strategy of mobile operators regarding wireless LANs is currently not very clear or public. Sprint is conducting wireless LAN trials with Nortel's eMobility suite of products, but the company is not commenting publicly.  AT&T Wireless, Verizon and Cingular Wireless have made no public announcements.  We hope that these operators are not too consumed by the deployment of their 2.5G networks as well as gaining access to the elusive 3G spectrum to lose track of a wireless data application and network that could actually be used by subscribers.

Goli Ameri is the President of eTinium, Inc. She can be reached at gameri@etinium.net or (503) 968-8437.

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