By Ari Bensinger The mobile phone market will likely add between 200 to 220 million new subscribers in 2001 from the approximate 700 million registered in 2000. Robust penetration rate growth over the last couple years and reduced prepaid subsidies in the European markets is slowing down new subscriber growth. While new subscriber growth in Western Europe slows, Asia Pacific should experience strong demand, especially in China where more than five million new subscribers are being added per month. Major phone maker Ericsson (ERICY) expects mobile subscribers to grow at a long-term compound annual growth rate of 14%, more than doubling over then next five years.
The key to future growth in the wireless handset market is dependant on the handset replacement market, which should account for about 50% of total units sold in 2001 (approximately 220 million units). Given the sluggish U.S. economy, mobile subscribers are less prone to buy new phones. With the exception of voice recognition platforms, there has not been any major killer application introduced over the past year to induce customer upgrades. On average, the life cycle of a mobile phone is about two years, but without the introduction of attractive new phone features, consumers are prolonging the life cycle of their existing phones until new data enabled general packet radio services (GPRS) phones are readily available.
THE STEPPING STONE. The promise of third generation (3G) products will not materialize in the consumer market for a few more years, with Europe leading the way and the U.S. market lagging behind. In the meantime, several transitional technologies, known as 2.5G, are being developed to offer faster data speeds than are currently available.
Two technologies are jockeying for market position: general packet radio services (GPRS), designed for the global system for mobile communications (GSM) standard, and CDMA2000 1X for the code division multiple access (CDMA) standard. These technologies use packet switching rather than circuit switching, offering data speeds of greater than 100 Kbps. Both allow operators to upgrade existing base stations and core networks at a relatively modest expense compared to 3G.
The rollout of 2.5G technology is an important stepping stone to the eventual deployment of 3G networks. This technology will give developers and operators the opportunity to evaluate network performance, create new services and applications (like short messaging, or SMS, which is a cross-carrier cellular phone version of instant messenger), and gauge likely demand and price points. Equipment vendors have already recorded substantial orders for 2.5G wireless infrastructure, although these systems likely won't begin to ramp up to significant volumes until mid-2001.
Mass commercial launch of GPRS phones should occur during the Christmas holiday season. Ericsson estimates that 20 million to 25 million GPRS phones will be sold in 2001, with four to five times that amount to be sold in 2002. The widespread adoption of 2.5G depends on several key factors, including the availability of 2.5G handsets and applications, packet data billing software, and seamless switching between voice and data services.
SLOW TRANSITION TO 3G. The mobilization of Internet services by third generation (3G) phones will offer rates up to 384 Kbps in wide area applications and two megabits per second (Mbps) in local areas. This compares to 64 Kbps for the fastest existing digital systems.
There are two primary standards competing for third generation networks: wideband CDMA (WCDMA), designed by European phone makers Nokia and Ericsson, and CDMA2000, developed by Qualcomm. WCDMA is derived from the European global standard, GSM, which is used by more than 60% of the world's mobile phone market. The increased compatibility with other countries allows service providers to take advantage of revenue generating roaming fees. Also, WCDMA will have a wider range of equipment and handsets available, effectively lowering their costs.
CDMA2000 utilizes bandwidth more efficiently than WCDMA, and also uses less complex and less expensive chips. In addition, it requires lower power levels, which would lead to smaller batteries, longer battery life, and lighter phones. Its lower cost and greater convenience would encourage subscriber usage.
Approximate transfer time for a 3-minute MP3 song
Various technical difficulties have prolonged the time frame for mass 3G deployment. Japanese operator NTT DoCoMo recently decided to postpone its 3G-service introduction by at least five months from its previously announced May 2001 target date. BT-International has stated that its WCMDA trial on the Isle of Man was experiencing considerable delays due to technical software glitches.
The most critical problem is ensuring a smooth handover between base stations for continuous connections. Standard & Poor's believes that 3G will undergo an extensive experimental trial period until it meets the required quality of service standards for mass deployment. 3G-related products will probably not be commercially available until 2003 or 2004. It will be rolled out first in Europe and Asia, with the North American market to follow.
"ENORMOUS" GROWTH POTENTIAL. While near term growth in the wireless equipment market is clearly decelerating, the growth potential for next generation mobile technology is enormous. According to the UMTS Forum, an industry group promoting the universal mobile telecommunications system for third-generation mobile telephony, 3G services worldwide will represent a cumulative opportunity worth as much as $1 trillion by 2010. Given the rapid descent in voice service revenue, telecommunications operators are forced to pursue data service like 3G to try to increase profitability. As new applications and features are eventually rolled out, the replacement cycle will be fueled by demand for higher-end phones. Bensinger is a technology analyst for Standard & Poor's