3G Business Models

Pundits warn that vendors don't understand the market for 3G wireless services. And they are right: It's difficult to "understand" a market that doesn't yet exist. But you can bet your bottom dollar a market for 3G wireless services is on its way -- and it will be huge.

Most handsets are powerful enough to perform personal digital assistant (PDA) functions and communications functions at the same time. Radio locating can be performed by briefly interrupting communications. Voice recognition must be performed off-line. However, the situation will be different in 18 months, when voice recognition and radio locating will be standard features on most handsets -- perhaps running continuously in the background. The limiting factor will not be processing power, but software. Savvy operators will set up special Web servers to "rent" new software (over the air) to handsets as it becomes available.

These days, computer companies are adding ".com" to their names, and many wireless vendors will do the same. Although the integration of mobile telephone service and Internet access largely is experimental right now, it eventually will become a requirement. It's not just about 2-way messaging and mobile access to e-mail, however. It costs less to transport voice over IP networks and, ironically, wireless networks are digitizing voice more rapidly than their wireline counterparts. To wit, there are millions of digital wireless phones in use -- cellular, PCS and residential cordless -- while the phone hanging on the kitchen wall is still analog.

Competition among carriers also will drive the migration to 3G. Carriers cannot all expect to succeed using the same business model. Nor can they expect -- in an era when the business world is changing in so-called "Internet time" -- to pick one business model and stick with it for five years. What carriers need is a technology platform powerful and flexible enough to support new business models on demand.

The question is not whether carriers will build out (or upgrade to) 3G infrastructure, but which services will they offer and how will they profit from them? There are no set answers to these questions. Carriers will need to find the right combinations through experimentation. Therefore, they will need a technology platform that supports a range of services, subscriber devices and end users.

* Types of services: Services may be defined in terms of technical characteristics such as 1-way vs. 2-way; average throughput; average and maximum latency; number of simultaneous sessions; and dedicated vs. switched. Imagine at least three extreme service scenarios using 3G: offering high-fidelity voice communications to the masses; offering high-speed Internet access to the few willing to pay; or communicating with millions of things, such as automobiles, utility meters, vending machines and security sensors.

* Types of users: Should 3G services be targeted at all users? Traditionally, new high-tech products and services were targeted at business users first, often starting with vertical markets. But the Internet is overthrowing many long-held assumptions. Today consumers demand the best performance.

* Types of subscriber devices: It seems clear that 3G services never will achieve their full potential if they are used exclusively with wireless phones. Other devices that are likely to include built-in 3G wireless communications include notebook PCs, PDAs and portable computers. Less obvious are portable GPS receivers, digital cameras and digital multimedia gadgets. There also are non-portable mobile candidates and fixed devices.

A NEW BUSINESS MODELThe key issue in determining 3G's success or failure will be the business models embraced by carriers. Internet-based e-commerce is overthrowing traditional business models.

Traditional wireless-service business models include long-term service contracts, month-to-month service (with purchase of a handset), usage-based pricing, flat-rate plus usage pricing, pure flat-rate pricing and prepaid services. Subsidizing the handset prices also has become a tradition in the wireless-service business.

Now look at Internet e-commerce. Here companies offer products and services at zero margin, sub-zero margin and even free. Many of these businesses hope to make their profit off of advertising. There also are auction sites such as eBay and reverse auction sites such as Priceline. Finally, some Internet e-commerce sites charge commissions for facilitating transactions between other parties and sites that charge tolls for routing users to specific destinations.

Could these new business models invade the wireless communications service business? You bet they could. It only takes one carrier in any given market to decide to make money the new-fangled way to strike terror in the hearts of more conventional competitors. Imagine a carrier that offers free wireless communications service to subscribers who are willing to accept wireless voice, text and even video advertisements. How many consumers would continue to pay for a service they could get for free?

Third-generation wireless is going to happen because the world is changing so rapidly. It's time to stop asking "why" and start asking "how."