Commentary: Why 3G May Still Come Up Short

Wireless networks like Wi-Fi and WiMax could slow its troubled take-off

Since the technology crash, the annual mobile-phone conference in Cannes each February has been short on hoopla and long on sober realism about telecom's troubles. Until this year, that is. Despite a freak southerly storm that dumped a million metric tons of wet Sahara sand on the French Riviera a day before the expo, the mood was positively ebullient.

No wonder. Mobile network orders are up and handset sales are soaring. Wireless operators are thriving, with debt way down and new revenue sources such as downloadable games kicking in. Best of all, third-generation mobile services are finally set to launch widely in Europe this year, providing cheaper, crisper voice calls and speedy delivery of data and video services.

The relief over 3G's imminent arrival is almost enough to make people forget the $120 billion that Europe's carriers spent on spectrum licenses, the ensuing financial crises and writedowns, and the technical glitches that delayed 3G's coming by two years. "We've put all that behind us," said France Télécom (FTE ) CEO Thierry Breton, announcing plans to roll out 3G in a third of France and 60% of Britain this year. Also going live are networks from Britain's Vodafone (VOD ), Germany's T-Mobile, and Swedish-Finnish operator TeliaSonera (TLSN ). All told, figures Forrester Research (FORR ), Europe will have 2.9 million 3G users by yearend.

The worst does seem to be over for 3G. But worrisome new threats now loom. While Europeans nursed complex and expensive 3G technology through its gestation, engineers elsewhere churned out a profusion of cheaper, more flexible alternatives for sending data over the air. Some of these, such as Wi-Fi wireless networking, have already caught on. Others will no doubt fall by the wayside. But the fact remains that 3G is no longer the only game in town for broadband wireless.

This is a battle for the soul of wireless communications. On one side are traditional cellular technologies such as 3G, created by giants such as Ericsson (ERICY ) and Nokia Corp. (NOK ) through years of costly engineering and negotiations over standards. Such systems -- long the jewel in Europe's technology crown -- operate in regulated frequencies and require huge front-end investments to blanket an entire country.

On the other side are largely unregulated, grassroots approaches such as Wi-Fi and a faster, longer-distance successor called WiMax. These systems emanate mostly from the U.S., with backing from companies such as Intel Corp. (INTC ) that aim to upend telecom's old order. Most of them are built around cheap Internet technologies, rather than telecom standards. And they can be deployed by just about anybody -- even hotel chains -- precisely according to customer demand.

Nobody predicts that scrappy newcomers will bury 3G. But by siphoning off wireless data revenues, they could undermine its business model. After all, 3G's big selling point is data services -- not just voice. If customers flock to alternatives such as WiMax, carriers could see expected revenues vanish. Next year alone, figures Forrester, some $500 million in revenues are at risk. And it will only get worse: By 2006, researchers forecast nearly 20.6 million active Wi-Fi users and 831,000 WiMax subscribers in Europe, vs. 21.2 million 3G subscribers. "Investors and vendors appear to be in denial about the shakeout waiting in the wings," says Richard Dineen, wireless analyst at Ovum, a London telecom research firm. At the very least, new technologies could shift the balance of power in wireless away from Europe.

Some companies are responding to the threat. The latest version of Nokia's Communicator phone/organizer hybrid works on both Wi-Fi and mobile networks. Swisscom (SCM ) intends to offer 3G in the future, but the Switzerland-based carrier is already Europe's leading Wi-Fi hotspot operator, with 1,500 locations.

Others, though, seem to be forgetting a vital lesson. From the Internet explosion to the victory of VHS over Betamax, cheap, dark-horse technologies have often beaten out sophisticated front-runners thanks to greater flexibility, faster improvement, and sheer volume -- attributes shared by the new Net-based wireless systems. Europe's telecom leaders must heed this warning and lead the way in all types of wireless technology -- not just 3G -- or they risk seeing their global advantage slip away.

By Andy Reinhardt

    Before it's here, it's on the Bloomberg Terminal.