A Wireless Generation Gap

With emerging 4G technologies promising to be cheaper and more efficient than 3G, companies that skip a generation could win big

Call it the great wireless waffle. A year ago, everyone from telecom-equipment vendors to mobile-phone operators was salivating at the prospect of third-generation (3G) wireless networks. These advanced systems, they claimed, would lay the foundation for sending data from one cell phone to another and drive a whole new array of applications, from mobile commerce to streaming video.

Such great expectations led equipment vendors, including Nortel (NT ), Lucent (LU ), and Ericsson (ERICY ) to anticipate billions of dollars of orders for 3G equipment. And mobile-phone operators figured 3G would drive purchases of handsets and supercharge service sign-ups. The hype drove wireless operators around the world to spend more than $100 billion to license the electromagnetic spectrum necessary for 3G networks.

But recent doubts about the systems have led many carriers to slow down their 3G rollouts. And now, some industry insiders believe many operators might have bet on the wrong horse. Carriers that aren't neck-deep in 3G might want to skip the new networks altogether and wait for so-called fourth-generation (4G) systems. That's bad news for the companies that have already assumed mounds of debt paying for 3G spectrum, and for gearmakers that have invested huge sums in designing and producing the systems.


  Why the change of heart? Analysts now think 4G systems will prove far cheaper than 3G, since they can be built atop existing networks and won't require operators to completely retool. Even better, they won't require carriers to purchase costly extra spectrum, since much of what's needed is public and doesn't require a license. And 4G would arguably provide better data services, allowing for real-time video streaming and other bandwidth-hogging applications which voice-heavy 3G networks won't be able to offer.

In fact, unlike 3G, 4G will more resemble a conglomeration of existing technologies rather than an entirely new standard. Analysts define 4G as a seamless combination of existing 2G wireless networks with local-area networks (LANs) or Bluetooth short-range radio technology. Bluetooth allows devices to communicate and access the Internet at high speeds over short distances, while LANs provide high-bandwidth wireless connectivity within a short radius of the base station.

The 4G technology, with its transmission speeds of more than 20 megabits per second, would offer high-bandwidth services within the reach of LAN "hotspots," installed in offices, homes, coffee shops, and airport lounges. There, customers would be able to access heavy data content to watch movies on their phones and handhelds, for example. Away from these hotspots, customers could connect to souped-up 2G networks for voice and rudimentary data coverage.


  Such an arrangement makes sense for several reasons: The 4G systems would be considerably cheaper than 3G networks and would thus be capable of recovering the money invested in them very quickly. Providers would be able to charge for advanced data services to subscribers or businesses that want to maintain hotspots. Cost recovery for 3G systems could be problematic. Although these networks can theoretically zip data at up to 1.4 megabits per second, no one expects that customers will be willing to pay much more than they already do for what remains, essentially, a voice platform.

Wireless LAN "already removes a lot of the immediate applications for 3G," says Brett Stewart, founder and president of Wayport, which builds wireless-data networks for airports. "Someone who's using a laptop and gets 6 megabits per second -- why would they want 3G?" argues Pontus Bergdahl, CEO of Sweden's Columbitech, which develops the software needed to connect LANs with the main networks.

If carriers do sit 3G out, that would hurt the wireless infrastructure market. Technology consultancy Adventis estimates carriers will spend $75 billion in the next few years on 3G equipment. But that number is beginning to look wildly optimistic. For their part, mobile telcos are worried that 3G services might fail to bring in expected revenues. And many carriers still staggering under the debts they assumed to win spectrum auctions now find capital markets closed and no way to fund 3G buildouts.


  For these reasons, some analysts believe 4G might even arrive at the same time as 3G, which will likely be fully deployed in North America only by 2005 -- the same year 4G is expected to debut. And companies that leap-frog 3G might be spending less at the end. How much less? According to analysts from Japanese investment bank Nomura Securities, covering all of Germany with wireless LANs would cost as much as the amount six wireless operators paid for their 3G licenses there last August.

But enough companies have sunk money into 3G to ensure it won't be a total washout. "It's still the lowest-risk strategy to migrate [to newer services] through 3G," says Adventis analyst Andrew Cole. Carriers wedded to 3G will likely combine LANs and Bluetooth with their new networks as well, he adds. That's the plan for Sweden's Telia, which operates wireless networks using different technologies in 30 countries and plans to use both 3G and wireless LANs. Nokia Mobile Vice-President for Systems Research Heikki Ahava calls the 3G and 4G technologies "complementary. They all have their own role."

Indeed, many operators and infrastructure vendors say they don't feel threatened by 4G. Wireless LANs and Bluetooth work only in limited ranges and won't allow for the mobility offered by 3G, says Hakan Eriksson, vice-president for research at Ericsson, which has the most 3G-infrastructure contracts of any company in the world.


  Overlapping wireless LANs could also cause interference and low quality of service, says Columbitech's Bergdahl. And 4G proponents have yet to work out standards to allow users to switch back and forth from wireless LANs back to traditional cell networks. "There are sufficiently large problems with 3G that it's unrealistic to talk of 4G," says Forrester Research analyst Charles Golvin.

But 4G believers counter that such problems can be overcome. And 3G looks wobblier each month. Large carriers, including British Telecommunications and NTT DoCoMo, Japan's largest wireless provider, have postponed 3G offerings after technical glitches. Several European 3G auctions have collapsed. And some European operators are now asking governments to refund the money spent to buy licenses to the 3G wireless spectrum, a dramatic about-face.

All this has made companies building technologies for 4G networks hot plays, according to John Roy of Merrill Lynch -- while companies that bet heavily on 3G, including Ericsson, Deutsche Telecom, and Vodafone, "are in a tough spot," Roy says. That could be an understatement. Some of these players must be wondering if they poured that $100 billion into a wireless black hole.

By Olga Kharif in New York

Edited by Edited by Alex Salkever

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