Dueling Realities

Handset makers sit uncomfortably wedged between the carrier and the customer. For their grief, all they want is a little market share.

Pity the poor handset vendors. There hasn't been a scintilla of good news for the band of firms in the last year. They've been clobbered by employee layoffs, plant closings, budget cuts and tumbling stock prices. And that was the upside of the bad news.

Sure, bad times for telecom companies in 2001 isn't exactly a news flash. But it just isn't getting much better for these telecom guys. The latest upshot in the travails of the handset vendors is the expectation that they deliver 2.5G and 3G phones that will make carriers delirious, consumers eager and networks full. Underscoring that are concerns about fragmentation and scale. Oh, by the way, did they mention they need a million units by Wednesday?

It's clearly a symbiotic relationship between carriers and handset makers. Bottom line: The carrier is king of the hill because it pays the bills. Add to that the changing dynamics of how carriers are ordering handsets. Carriers are trying to eke out more savings from the supply chain, but they're also finding that the new players such as Samsung are making inroads, according to Andrew Cole, head of the wireless practice for Adventis. That's causing more headaches for the established players.

“Carriers as kingpins is important because it affects everything, including the fact that they know they can get away with whatever they want and that includes squeezing the handset players,” Cole said. “They are increasingly saying to vendors, ‘OK, I'll take your phone in a small quantity, see how that goes, and then if I like it and if it seems to work, then I need you to do volume very quickly.’ It's the nightmare of nightmares for all of the vendors.”

Beasts of Burden

Right now, carriers are looking for the best way to launch non-voice services. But they stand at a crossroads. GPRS and 1XRTT networks are ready to launch nationwide, and carriers are desperate to load traffic on those 2.5G networks. This intersects with a slowing wireless market and a flaky economy.

Nevertheless, carriers need to kick-start wireless data growth. To do that, they need cool new devices that can execute their cool new services. Where services are the engine that will drive growth, handsets are the vehicles.

Carriers need to kick-start wireless data growth. To do that, they need cool new devices that can execute their cool new services. Where services are the engine that will drive growth, handsets are the vehicles.

Pierre Bardon, managing director for SFR, France's No. 2 wireless carrier, verbalized what most European and U.S. carriers think about 2.5G and 3G services. He told a recent press group that he expects GPRS networks to boost cell phone use next year and forecasted that 67% of the French population would use a mobile by the end of 2002.

However, according to a new year-end report, GPRS hasn't been very successful at escalating customers' use of mobile services. After surveying 28 carriers that have added GPRS, Strand Consulting found the level of wireless use has remained the same.

When asked why, carriers blamed Nokia for not having a GPRS phone ready. They claimed this “obstructed” the development of the mobile Internet. And though Nokia today offers a number of GPRS phones, the level of use remains largely unchanged.

Therein lies the symbiotic rub. Sure, carriers have the services, but if they don't perform, it must be the handset. Handset makers become convenient whipping boys when it comes to delays or malfunctions.

Telltale Signs

It's a story as old as wireless. Ask George Schmitt. He's been around the wireless block a few times, serving as an executive for Mannesmann Mobilfunk, Omnipoint Communications and most recently with VoiceStream Wireless. He's also renowned for restating the meaning of GSM nearly 10 years ago.

Chomping at the bit to get his company's GSM networks flooded with traffic, Schmitt found he couldn't get new GSM phones fast enough. At a subsequent industry event, Schmitt announced that GSM didn't stand for Groupe Speciale Mobile any longer, but rather God Send Mobiles.

“History has definitely repeated itself,” said Schmitt, who now also serves on the GSM Association board. “It will be two years ago last February that I made my last speech at the GSM World Congress in Cannes. I told people then that we were at least two years away from widespread availability of GPRS handsets, even though everybody was saying they were going to launch later that year. There are now GPRS handsets available in Europe. There are some experimental models available here… but none manufactured in large quantities for the U.S. market.”

According to Schmitt, it takes about two years after the network is reasonably stable before you can expect handsets availability.

As formulaic as that might seem, Schmitt insists that handset development is a far trickier proposition today. GPRS handsets were the first to carry the equivalent of packet data transmission. And while they offer increased data speeds of up to 115 kb/s, they're not 3G, which promises 384 kb/s.

New generation handsets will have to do things that no handset has ever done before, said Schmitt, which is to hand off between base stations at 384 kb/s, plus complete handoffs standing still up to 2 Mb/s.

“That's magic, Schmitt said.

New generation handsets will have to do things that no handset has ever done before, said Schmitt, which is to hand off between base stations at 384 kb/s, plus complete handoffs standing still up to 2 Mb/s.

He said there has never been a tougher challenge. “When we did GSM, it looked hard. When we did CDMA, it looked hard. When we did GPRS, it looked hard,” Schmitt recalled. “But those things were all works in progress for years before you got to the point where you had to deliver. And we were still late every time. 3G is going to be murder.”

While production of 2.5G phones should reach about 30 million units this year, 3G handsets are another story. Schmitt predicted it will be another three years before there's widespread availability of 3G handsets.

“They can work on them; they can fiddle with them,” he said. “There's no way to stabilize a handset until the network is stable.”

Stabilizing the Handset

One of the biggest challenges for the handset lies in handoff requirements.

The first phones listened to the towers they were communicating with as well as transmissions from the next nearest tower. They then reported back the signal strength and waited for the network to tell them to hand off when the signal strength of another tower was stronger than the first.

In the soft handoff performed by 2G and 2.5G networks, the phone actually transmits and receives both towers during the transition so the handoff is completely transparent to the user. However, when the handset uses dual network technology, not only does it listen for broadcasts from towers from the same network, it also listens for other towers of differing networks. The phone reports that information back to the network and makes a decision on how and when to do the handoff. That requires far more complex electronics in the handsets.

Besides basic transmission issues, new models of phones have to find a way to get easy access to compelling data content. That comes in the form of browser and application access.

According to Randy Roberts, Nokia director of digital convergence, carriers want Java and XHTML. Carriers look to Java as a technology that will give them the ability to download applications to the handsets.

In the past, subscribers bought their handsets and didn't change any of the predetermined applications. They could add names and contacts, but if they didn't like the calendar or the games, tough, they were stuck with them.

“Java gives operators the ability to offer a new source of software that can be downloaded to the handsets to add new games or replace the calendar or to download an instant messaging client,” Roberts said. “It gives the operators a new business opportunity to offer downloadable applications over the air.”

XHTML, the next-generation browser technology, gives users access to any kind of Internet content from their wireless phones. Although this was the WAP promise, it never quite made it. XHTML can eclipse WAP's vulnerabilities because it features cascading style sheets. This allows developers to create the content one time and then it can be rendered for whatever end device happens to be accessing that content.

Adding these technologies to new generation phones likely will increase usage of the wireless Internet. However, the Open Mobile Architecture Initiative, which was introduced at Comdex last year, is necessary to keep all of the players heading in the right direction, said Roberts.

The Open Mobile Architecture Initiative is designed to make many of the wireless data protocols compatible among various manufacturers. Carriers and handset makers backing the plan include AT&T, Cingular, NTT DoCoMo, Vodafone, Ericsson, Fujitsu, Matsushita, NEC, Samsung, Sharp, Sony, Siemens and Toshiba. The initiative is based on current mobile standards and protocols such as XHTML, MMS, Java, GSM, sync ML and the Symbian operating system. Nokia is making the software available as separate client pieces or as a package in the series. The package version includes a Symbian operating system, the user interface style along with the enabling applications of Java, MMS, XHTML and digital rights management.

On the plus side, the initiative promises to reduce fragmentation in the U.S. market and speed products to market.

If Microsoft and Palm strike out on their own, new splinters no doubt will appear as carriers seek out their primary 2.5G customers in the enterprises — entities quite conscious about operating software protocols and standards.

“The strategy that happens to make sense from our standpoint is having a common platform, having a common base technology, then building in flexibility to be able to meet the individual carriers needs,” said Tom Dietrich, vice president of Ericsson's American Standards Product business unit. “So I'd be able to plug in a Verizon-specific or Sprint-specific kind of module into the phone, be able to modify the front cover, look at the customization phase in the factory to make sure you can meet the needs of an AT&T and a Cingular, for example.”

According to Dietrich, it's building in flexibility while trying to best maintain the economies of scale, which is desperately needed to control R&D expenditures.

However, critics of the initiative have expressed concern that Microsoft and Palm would counter with their own standards in the platforms of Stinger and OS, respectively. If Microsoft and Palm strike out on their own, new splinters no doubt will appear as carriers seek out their primary 2.5G customers in the enterprises — entities quite conscious about operating software protocols and standards.

Up Scale

Many handset makers bear the scars of the earlier difficulties in delivering advanced technologies. But the environment could be on the upswing for some handset vendors because of scale improvements, said Martin Dunsby, Deloitte Consulting partner.

“My guess is there are already 20 to 30 million GPRS handsets in production at the moment in Europe and Asia,” Dunsby said. “The U.S. carriers are going from a position where they were the only buyers of their own technology to being part of a global market, so they are going to find things much better.”

In AT&T's case, it had to buy its own TDMA phones. Because few carriers used that particular technology, it was a costlier proposition. And once Cingular equalizes its two networks, it can move into the global market as well.

“They're going to be in great shape because you have an addressed market of over 10 times the size of an individual carrier in the United States,” Dunsby said.

Market Snare

Wireless handsets are expected to number nearly 1 billion by 2005. Despite the headaches, carving out a share of that market holds appeal for an increasing number of handset companies, though only a few will wind up winners. (See Table 1.)

Table 1: Global market share estimates (2001) for handsets

Nokia -- 33% Motorola -- 17% Ericsson -- 8% Siemens -- 7% Matsushita -- 5% Samsung -- 7% Kyocera -- 3% NEC -- 4%

New companies are joining the handset ranks regularly. In the last 24 months, LG InfoComm, NEC and Kyocera have entered or re-entered the handset market. And companies such as Toshiba and Siemens are trying to calculate how they can increase their presence.

But there's not enough business to go around, according to most handset vendors.

“It's difficult to compete in the handset market in a sustained sense unless you really have volume,” said Ericsson's Dietrich. “You have to maintain one of the top four or five kinds of roles to really be sustainable in a long run sense.”

In order to survive, companies need deep pockets, a portfolio of products and the ability to deliver product quickly in order to win the business of large carriers.

“As companies enter and exit, it really upsets the dynamics of the market,” Dietrich said. “Every quarter for the last three years, there has been somebody exiting the market and dumping product on the way out. It drags the price down across the entire market and makes it a very tough place for the big players.”

As if it weren't already.