Commentary: There's Plenty of Life Left in 3G Wireless

The investment in increased spectrum capacity won't drive growth but stands to lower costs down the road

By Andy Reinhardt

Every day the sense grows stronger that Europe's grand experiment in third-generation wireless networks is dead. No wonder. In the past few weeks, a trio of carriers has canceled or delayed 3G rollouts. Each revelation hammered already battered shares in telecom-equipment makers that stand to lose hundreds of millions in expected contracts. A raft of recent research reports bearing titles such as "3G R.I.P." and "3G Death Throes" has garnered headlines and further unnerved shell-shocked investors. And on Aug. 20, the Netherlands' Royal KPN made matters worse by writing down $8.25 billion in non-Dutch assets and 3G licenses, further proof that such investments won't provide their expected returns.

But behind the scenes, there's a different and surprising story. Despite alarm bells, 3G technology is far from deceased in Europe. The first 3G handset from industry leader Nokia Corp. is set to be announced Sept. 26, though large volumes won't be available until 2003. The region's operators will order roughly $1.5 billion in 3G equipment this year and $5.5 billion next year, figures brokerage WestLB Panmure. Network construction is well under way, albeit at a slower pace than earlier predicted; in Spain, for instance, Telefónica Móviles has already installed 750 Ericsson 3G base stations in 21 cities for a likely commercial kickoff next year. Test networks are running in two dozen European countries, and by the end of this year, commercial 3G services should be launched in Britain, Finland, and Italy. "It's not a question of whether 3G will happen," says analyst Per Lindberg of brokerage Dresdner Kleinwort Wasserstein. "It's already here."

Truth be told, what has bitten the dust isn't 3G itself but overhyped visions for its potential--especially to fire up wireless revenues. 3G was once seen as Europe's answer to the American-dominated Internet, a new mobile revolution that would generate a slew of sexy applications, from instant stock quotes to live video clips of football matches. Now, nobody believes such uses will drive significant growth in the foreseeable future. Telecom researcher Yankee Group in London predicts wireless data services other than messaging will add just $12 billion to operators' top lines by 2005.

If that's the case, why is 3G being built at all? To some degree, operators are merely complying with license agreements that require them to meet coverage targets. But 3G is also much less than its myth: At heart, it's simply a somewhat unglamorous and extremely expensive upgrade to the world's most successful wireless network. Telecom execs aren't spending these big bucks only to fulfill their Internet dreams. Plain and simple, today's digital wireless systems are getting long in the tooth, and networks are running out of spectrum in many urban areas. Operators need 3G to accommodate normal growth--even without snazzy data services. "It's a necessity, not a luxury," says Yankee Group senior analyst Farid Yunus.

Sure, 3G was oversold and the license fees were absurd. But the technology also has inherent technical advantages. It can carry 20 times more calls in a given amount of spectrum than today's digital networks. Ultimately, 3G networks will cost just one-seventh as much to install as 2G did for equal voice capacity. What's more, experts say, when used at optimal levels, 3G can lower operating costs for conventional voice and messaging services by 30%. That's a powerful incentive for a business struggling to boost profitability and find new growth avenues.

In that sense, 3G is much like any other routine but risky capital expenditure. Chipmakers will spend $23 billion this year on new semiconductor equipment, even though sales plunged 32% last year. And airlines, despite turbulent times, have ordered $189 billion in new jets from Boeing and Airbus Industrie for delivery over the next half-decade. All these are cases of companies placing massive bets on future demand and in the belief that new technology will reduce operating expenses and boost profitability.

3G in Europe may never pay back its $300 billion price tag solely through incremental services. But as with upgrades to chip plants or airline fleets, operators have to adopt the newest technology or risk being undercut by rivals who showed more fortitude. Before declaring 3G dead, it's essential to consider how long the industry would survive without it.

Reinhardt covers European technology from Paris.

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