3G Rollout: This Time It's For Real

The mobile technology looks primed to take hold in Europe. Will huge investments ever pay off?

Third-Generation mobile-phone service is taking off in Europe. You read that right: The famous 3G technology has finally arrived, with its promise of cheaper voice calls, fast wireless Internet access, and sexy multimedia services such as streaming video clips and online gaming. In case you have forgotten, this is the same 3G that provoked a $120 billion spectrum-licensing frenzy during the dot-com boom and then nearly destroyed Europe's telecommunications industry with multibillion-dollar losses. Now, two years late, 3G is here -- and not just from a few hardy pioneers in a handful of test markets. Giants like Vodafone (VOD ), T-Mobile (DT ), and Orange (FTE ) are rolling out business and consumer 3G service from the Baltics to the Mediterranean, even as 3G remains a distant dream in the U.S. The monster that ate telecom has been tamed at last.


Almost three years after NTT DoCoMo started the world's first 3G mobile service in Japan, European launches are piling up fast and furious. Hong Kong's Hutchison Whampoa Ltd. (HUWHY ) led the pack in May, 2003, kicking off 3G under the name "3" in Britain, Italy, and Sweden. But the trailblazer struggled with immature networks and clunky handsets.

Now the technology is vastly improved, and a dozen operators are signing up paying customers. In May alone, Deutsche Telekom's (DT ) T-Mobile unit began 3G in Germany, Telefónica Móviles (TEM ) switched it on in Spain, and Telecom Italia Mobile (TI ) launched in Italy. The most aggressive operator is Britain's Vodafone Group PLC, which has started up 3G service in seven European countries since February. "The building blocks are finally in place," says Jason Chapman, a mobile-telecom analyst with researcher Gartner Inc. "3G is really happening."

The pace will pick up even more later this year. France Telecom's (FTE ) Orange unit expects to offer 3G in 30 cities across France and Britain by October. England's mmO2 PLC (OOM ) will expand its service in Germany and add Ireland and Britain by the fall. T-Mobile will boost its coverage to 50% of Germany's population by yearend. "We're surprised by how fast the offerings are coming," says Phil Kendall, a mobile analyst with telecom researcher Strategy Analytics Inc. in London. From roughly 1 million 3G users today in Europe, he figures, the number could top 5 million by the end of 2004.

All this good news can't obscure nagging concerns, however. When operators bid sky-high prices for 3G licenses in 2000 and 2001, they were betting that data services such as videoconferencing would counteract sagging prices for voice calls and drive big revenue growth. Now that premise looks dubious. Consumers have shown limited interest in shelling out for mobile multimedia, while voice prices continue to fall. The experience of Hutchison 3G UK Ltd. is sobering. Scrambling to sign up the millions of customers it aimed for, Hutchison resorted to slashing voice tariffs up to 50% below rivals' prevailing 2G rates and even giving away pricey 3G handsets.

That raises the question of whether carriers can ever pay back the estimated $250 billion that they're spending for 3G rights and new networks. Bruno Duarte, a director with consultancy Arthur D. Little Inc. in Paris, thinks data services will compensate for falling voice revenues. But, he says, "we do not expect mobile multimedia to significantly boost average revenues per user in the short term." Making matters worse, in the years since 3G licenses were issued, new wireless networking technologies such as Wi-Fi and WiMax have emerged that could siphon off data revenues from mobile operators.


Mobile operators downplay the concerns. Many have set up Wi-Fi hotspots of their own, so that customers will be able to use either type of connection. And they're heartened by nascent signs of consumer interest in mobile media, even on slower 2.5G networks. Indeed, Vodafone and Orange have both had success with easy-to-use mobile portals on their 2.5G networks that offer services such as picture messaging and weather reports. Vodafone has signed up 6.8 million users for its Vodafone live! portal in Europe and claims they spend, on average, 7% more than other users. "Customers aren't interested in the technology," says Peter R. Bamford, Vodafone's chief marketing officer. "They're interested in services."

Even the experience of Hutchison offers hope for 3G. Because of the introduction of new services and phones, Hutchison's global subscriber base in five European countries, plus Hong Kong and Australia, surged 70% between March and May, to 1.73 million.

What's more, customers are waking up to multimedia features: During the rugby world championship this spring, British subscribers downloaded a remarkable half-million video clips of game highlights. "People are paying for content because they want it now," explains Graeme Oxby, Britain's marketing director for 3 UK in Maidenhead, England. Users are even paying up to 92 cents to receive trailers for upcoming movies -- a marketer's dream.

Without a doubt, the biggest factor holding back 3G has been a lack of good handsets. That situation is improving. New models such as the Sony Ericsson Z1010, Samsung Z105, and Nokia 7600 are finally on the market. Still, they are dazzlingly expensive. The Samsung model costs up to $842 in Portugal and $730 in Spain. But by the fourth quarter, analysts expect handset prices to fall by 40%, thanks to higher volumes and new introductions. The pricing of services is also very much in flux.

Some operators are offering buckets of 100 voice minutes for $37 per month but charging princely sums, up to $1.25 per megabyte, for data traffic. Others, like Hutchison, don't charge for data directly but instead bill customers by the event -- anywhere from 46 cents for a photo message to $4.58 a minute for premium videos.

The saving grace for 3G, no matter what pricing model prevails, is its economics. 3G handles both voice and data much more efficiently than 2G, reducing the cost to provide mobile service by as much as 80%. "Operators will be able to sell voice for less and still make more money from it," explains Strategy Analytics' Kendall.

There's a great deal of work ahead to finish the rollout of 3G. The competitive challenges are mounting. And it may never pay back the cost of those licenses. But by all accounts, the worst of the crisis is past. Now it's time to see whether 3G can excite the masses.\

By Andy Reinhardt in Paris, with Kerry Capell in London, Jack Ewing in Frankfurt, and bureau reports

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