The Price of 3G

Carriers are preparing to spend billions on 3G licenses and technology. Will 3G pay off?

In the next few years, 3G services will roll out from Seattle to Singapore.

But today, carriers should be worried about recouping the billions they'll spend on 3G technology. The payback for the astronomical license auction bids, not to mention the massive infrastructure costs, will not happen overnight.

According to Logica's analysis (www.logica.com), it could take 10 to 12 years before carriers can expect even modest returns. And U.S. carriers might have to contend with a dismal economy, as well as an unfavorable regulatory climate before rolling out next-generation networks and services, let alone collecting revenue from them.

To recoup investments, carriers will have to introduce compelling 3G services and motivate consumers to pay for them. That won't be easy. Recently, Australian carrier Telstra (www.telstra.com) said that despite spending more than $148 million in the country's auction, it couldn't identify any major 3G applications not already available on its existing wireless networks. And the carrier said it doesn't expect to get its planned 3G services running cost-effectively until at least 2004.

Most carriers feel Telstra's pain. Foreign carriers have overspent their budgets to acquire 3G spectrum, and U.S. carriers probably will, too.

Although 3G technology today makes many promises but has few guarantees, most industry insiders agree that in a market where voice services are declining in favor of data uptake, it represents the best opportunity for carriers to create a new, high-value, high-margin business and increase revenue per user.

To create this kind of market for 3G services and applications tomorrow, carriers must develop and sell compelling 2G and 2.5G services today.

European carriers saddled with 3G-spectrum debt have sounded the warning bell for U.S. carriers on the 3G evolution path.

According to Adam Guy, Strategis Group (www.strategisgroup.com) senior analyst, mobile wireless research, the real emergencies today are in Europe. In the United Kingdom, for example, $36 billion was spent for 3G licenses among five carriers. The government is considering giving some of the money back because it's concerned about the companies' financial health. In Germany, seven carriers spent a total of $46 billion on licenses, and each is in debt by at least $7 billion.

“I've seen estimates where they think they're going to have to double ARPU in order to get their money back on a 10-year horizon,” he said.

U.S. carriers should heed the lessons learned abroad. 3G data services will have to be pretty compelling in any language to encourage subscribers to double their monthly bills.

The good news is that consumers seem to be interested in 3G services, even if most carriers aren't quite sure what form those services will take or when they will arrive.

In a Strategis Group mid-1998 survey, just 10% of consumers said they were interested in using a phone for wireless Internet and e-mail. At the end of 2000, that number had increased to 40%.

In a year-end 2000 study, The Strategis Group asked consumers how they would use a wireless handset equipped with a big screen that functioned like a computer with graphics and color. The top-three uses named were e-mail, weather and news, and then applications such as e-cards, music, interactive games, attachments and videos.

“Before these things are even available over mainstream wireless devices, people are already starting to say that they're interested in them in pretty substantial numbers,” Guy said.

That doesn't guarantee you'll get your money back on multibillion-dollar licenses and network-infrastructure investments. But it's a good sign.

Before 3G revenue streams start flowing, however, the industry must figure out what services will make sense and money on 2G and 2.5G networks, said Richard Wong, Openwave (www.openwave.com) senior vice president of marketing.

“It's not just about how big the pipes are going to be or how fast they're going to be deployed, but how fast can carriers develop the technology and figure out what services consumers and businesses want to buy,” he said.

Steve Owen, Logica solutions architect, said 2-way text messaging is a proven moneymaker and a good way to prepare subscribers for 3G.

“Get consumers used to using the phone as an interactive device, and then when these 3G applications come along, they'll be ready,” he said.

There's no need to wait for 3G to arrive before implementing “3G” services.

According to Owen, the average Vodafone subscriber downloads four logos to his phone each month. It costs about $4 for one picture of Britney Spears, so that's an extra $12 per month per subscriber.

“That's an enormous amount of money carriers can recoup from simple services available today,” he said.

However, Sal Esposito, Logica senior vice president, wireless Internet business, North America, said few U.S. carriers are leveraging today's technology.

“Value is defined by saving the consumer time and money through the technology available today,” he said. “What can be delivered with the technology today so you can grab that customer base, get them accustomed to using those services and then transition into 2.5G and 3G?”

Brian McNiff, SignalSoft vice president (www.signalsoft.com) of product management, said that once carriers like DoCoMo actually have 3G service rolled out, people will see its value.

“Let's make it real by getting it out there and wrapping around value-added services so that someone can say, ‘Wow, there's a difference here for me,’” McNiff said.

According to Wong, Sprint PCS' (www.sprintpcs.com) new Samsung 5000 handset (www.samsung.com) — with a Web button, graphical interface and Openwave's GUI browser — is a good first step.

“Now you can just press the Web button, and you're there,” he said. “The GUI browser and Web button will get Sprint's customers to use the Wireless Web more, and when they use it more, minutes of use will go up.”

Carriers everywhere hope to make more than they spend on 3G technology, but that may not happen for a while.

For example, Logica estimates that in most cases, in license fees alone, European 2G carriers with 8 million subscribers are paying at least $720 for each existing user. The expense of establishing a new network infrastructure adds another $288 per user.

Here's a scary formula to ponder: Suppose a carrier expects to grow its customer base 25% over the next 10 years. Assume that 5% of customers can be converted to 3G in the first year, and by the end of the 10th year, 95% of them will have changed over. Imagine each convert spends $86 on 3G services in the first year, increasing to $360 a year after 10 years. Then assume that the carrier can make 75% gross margin on the incremental 3G revenue. When you add it all up, it's hard to avoid the conclusion that it will take a carrier 10 years just to break even.

“In order to start recouping some of the money that was invested in 3G, they've got to start rolling out new data services that people will start using,” Owen said. “And either they do that in-house, or more effectively, they partner with companies and take a cut of the purchases.”

A decade is a long time, and there's no telling how European, Japanese or U.S. markets could change in the meantime. For example, the U.S. 3G-license auction has been delayed, meaning that 3G spectrum won't be available for at least two years. To make matters worse, spectrum auctions may hit carriers hard if they have to pour out their wallets to the Department of Defense or broadcasters.

The Strategis Group's Guy said carriers will make their money back. It's just going to take longer.

“People don't make these quantum leaps and all of a sudden start doing everything on their wireless devices, but carriers can take what customers are used to doing and just extend that incrementally,” he said. “If you take it step by step and get the user to do more and more, I think there's a real way to develop a level of comfort or even a level of dependence on having access to information anytime, anywhere.”

For now, the only comfort U.S. carriers may take is that 3G services will roll out in Europe and Asia first.

Even though NTT DoCoMo (www.nttdocomo.com) recently delayed the launch of its 3G services until October, the company still turned a $3 billion profit last year, with most of that derived from wireless data services.

So when it comes to recouping billions of next-generation investments from 3G services, you can bet i-mode will be the first, and maybe the biggest, winner. And that's why this year, when it becomes oh-so critical for wireless carriers to make money, the i-mode experience just might take over the world.

DoCoMo plans to introduce i-mode in Europe and the United States later this year, but Logica (www.logica.com) is set to bring the i-mode experience to European carriers first.

Last month at Europe's IBC show events, Logica demonstrated an “i-mode-type experience” in London, Stockholm and Amsterdam. Logica enabled advanced wireless Internet browsing and animation capabilities. The company ran live demonstrations of an end-to-end wireless HTML solution over both circuit-switched data and GPRS networks.

Logica's i-mode-type experience will bring Europe wireless Internet access to a variety of multimedia services on wireless handsets and PDAs.

“Using these now-available devices incorporating HTML browsers, Logica will be able to show European operators the kind of access that millions of Japanese subscribers have been enjoying for some time, including color screens and live access to Japanese sites designed for i-mode,” said Gerry McKenna, Logica Mobile Networks COO.

Current HTML-based handsets in Japan support color graphics, animated GIFs, polyphonic MIDI ring-tone download, Java and 128-bit SSL encryption. Logica's HTML-based gateway m-Worldgate is designed to run on always-on GPRS networks and offers subscribers faster downloads, greater data integrity and a more enjoyable browsing experience, McKenna said.