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Stumbling into a Wireless Generation Gap

By Andy Reinhardt Research analyst Richard Windsor of brokerage Nomura International in London recently released a report about the future of wireless infrastructure -- the networks and equipment that power the world's mobile-phone systems. His conclusions were sobering. Future prospects for European telecom-equipment makers Nokia (NOK) and Ericsson (ERICY) depend more on the acceptance of wireless data than has been previously understood, Windsor says.

Without a successful rollout of third-generation (3G) wireless networks, which will bring cheaper voice calls and zippy information services such as photo messaging and digital video clips, the Finnish and Swedish giants could see sharply limited growth in coming years.

However, another nugget was tucked into Windsor's report that's perhaps even more worrisome -- and, until now, hasn't been widely discussed. He charges that service quality on today's conventional wireless networks is seriously declining.

OVERBURDENED. The reason is simple: With slowing growth in subscribers, sagging revenues per user, and debt up to their eyeballs, Europe's wireless providers can't afford to spend money on maintaining and enhancing their networks. One top exec from an equipment maker grumbles that he typically loses his connection six times between London and Heathrow airport -- a frustration any cell-phone user can surely relate to.

Call it the price of success. Today's wireless infrastructure -- cell-phone towers, radio equipment, and switches -- was designed for less usage than it's getting. Even as new customer growth slows and prices continue to fall, existing mobile-phone users keep racking up more minutes of talk time. In some heavily trafficked areas, such as central London, networks are plumb out of capacity.

European phone companies had predicted such demand growth, but they also mistakenly figured a few years back that 3G would be up and running by now. For that reason, they curtailed investment in current second-generation digital phone systems. (Mobile communications developed differently in the U.S., though several U.S. carriers are now switching to Europe's GSM digital-wireless technology.)

DIRE EFFECT? Now, 3G remains years away, yet European phone companies remain reluctant to pour capital into older technology. The skittishness is only exacerbated by the enormous financial pressure European carriers are under from having taken on so much debt for acquisitions and 3G licenses.

The danger now is that poor wireless voice quality could have a dire effect on the acceptance of data services. First, there's the risk that annoyed consumers could sour on mobile communications in general. That's unlikely, but stranger things have happened. After all, one reason the PC industry is so weak these days is that it has lost its sense of novelty and buzz.

More important, if users can't trust the quality of 15-year-old voice technology, how are they going to believe in the promise of whizzy data services? Indeed, if they can't hold a 10-minute wireless conversation without having to redial several times ("Hello, hello? Are you there? Can you hear me?"), they probably won't be eager to plunk down extra money each month to receive video replays of their favorite team's goals.

Given how important such services will be to the economic success of 3G, it's essential for operators to preempt customer skepticism now by delivering quality voice service.

LOTS OF KINKS. In fact, some kinds of data communication, such as e-mail and text messaging, are less sensitive to network glitches than voice communications. Carrying on a conversation actually requires a steadier, more consistent connection to avoid maddening echoes and delays. But most consumers don't understand this technical distinction. They'll worry that advanced data services could be even flakier than voice.

A growing number of experts now believe it will be three to five years before all the kinks are worked out of 3G and the technology is widely deployed in Europe. It could be even later in the U.S. because the government has yet to settle critical spectrum-allocation issues.

In the meantime, carriers must turn to an interim technology, called general packet radio service (GPRS) -- commonly referred to as 2.5G because it spans the gap between today's 2G digital networks and the 3G networks of tomorrow. Unlike current wireless data technology, where digital information is carried in a voice channel (as with a conventional dial-up PC modem), 2.5G adds a parallel data channel that's faster and stays connected all the time, much like a cable-modem or digital subscriber line link.

WHERE'S 2.5G? European carriers are starting to roll out 2.5G service, but slowly. In part, that's due to the dismal consumer reaction to first-generation wireless data services, which started appearing a few years ago and used a technology called wireless access protocol, or WAP. Such services were hyped to the sky, but the technology wasn't ready for prime time, and there wasn't enough compelling content to win over users.

Trying to avoid the same mistakes, European mobile operators are underplaying 2.5G -- so much so that it's nearly invisible, even though it's available today in much of Europe. In the U.S., 2.5G is so far even less of a factor.

Many analysts think that's a mistake. Carriers, they say, need to trumpet 2.5G to drive data revenues until 3G is available. What's more, 2.5G is an essential testing ground for what lies ahead. Telcos are notoriously weak in data because it's an entirely different business from their traditional voice transmissions.

WHAT CUSTOMERS WANT. They're even clumsier when it comes to building attractive information services, which require setting up relationships with content partners and designing accessible user interfaces. Getting a head start with data services delivered over 2.5G networks will teach phone companies vital lessons about what works and what doesn't before their expensive new 3G networks are in place.

They have a lot of learning still to do. The failure of WAP services signaled that mobile carriers don't really know what customers want and are willing to pay for. The telcos also still need to sort out tricky technical problems, like billing systems and international roaming for data services.

And, more than anything, they've got to begin building a sense of excitement and momentum around wireless data, so that when 3G finally launches, there will be pent up demand from customers already hooked on mobile information who want something even better and faster.

With all these challenges ahead, the last thing carriers should do is scrimp on quality. If today's consumers lose faith in mobile communications, Europe's telecom giants risk forfeiting the future. Reinhardt covers the European technology scene from BusinessWeek's Paris bureau

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