Sarah Z. Sleeper - Writer

BY SARAH Z. SLEEPER
INVESTOR’S BUSINESS DAILY
August 15, 2002

What do Japan, Monaco, the Isle of Man, South Korea and Sioux Falls, S.D., have in common? They are among the few places in the world where third-generation, or 3G, wireless service exists.

Once hyped as the cool, new way to send photos and check movie listings with cell phones, 3G is a reality only in tiny spots.

For the few who do have it, 3G is fast enough to send e-mail via a wireless phone, for example, but may not be fast enough to move big files with ease.

Analysts admit that like the dotcom boom and bust, the telecom boom is a bust too, dragged down in part by unfulfilled 3G promises.

Carriers made exorbitant 3G investments, which haven’t brought in any revenue in most cases. It’s not that 3G will never happen, say analysts. It’s just not going to happen soon.

Both European and U.S. wireless carriers are fettered by huge debt. Revenue is hampered by lackluster consumer interest in new data services and gizmos.

Put On Hold
Many carriers, such as the world’s largest Vodafone and the U.S.’ largest Verizon, are upgrading wireless networks, but some analysts say it could be 10 years or more until 3G is widespread.

“Well into the next decade,” said Andrew Seybold, a wireless consultant. Even then, he expects only 30% of cell phone users to ever buy 3G data services.
Combine that uncertainty with carriers’ financial ills, and the result is an uncertain future for 3G.

Cases in point:

—Spain’s Telefonica took a $4.9 billion second-quarter loss after ditching its 3G rollout in Germany. It plans to postpone 3G in Austria and Switzerland too.

—Finnish carrier Sonera surrendered its 3G spectrum license in Norway last August.

—British carrier Orange on Aug. 6 asked to put off its 3G deadline in Sweden from 2003 to 2006.

—Vodafone subsidiary Japan Telecom has delayed indefinitely its 3G launch in Japan.

“We’re going to continue seeing some write-downs on the part of operators saying, ‘We’re not going into the 3G market,’ ” said Sam May, an analyst with US Bancorp Piper Jaffray.

The Fallout
Carriers’ decisions ripple down to network gear and handset makers, says Ronnie Dallal, a vice president at Probe Research. For example, Orange’s delays hurt Alcatel. And whenever European carriers delay upgrades, Nokia and Sony Ericsson suffer.

To spark 3G interest, Ericsson this month sent 15 applications to carriers to try for free. They include mobile videoconferencing, multimedia messaging and games.

Still, Lehman Bros. expects wireless gear makers around the world to see a 20% revenue drop this year and 10% in 2003.Piper Jaffray cut its handset sales forecast for 2002 from 410 million units to 395 million—below last year.

Europe is not the only place where 3G looks sketchy. Japan’s NTT DoCoMo, often held up as a wireless data success story, cut its 3G subscription fees by 40% in an effort to boost use. It expected to have 150,000 users by March, but scored only 115,000 by June.

Even Korea, with millions of 3G subscribers, has naysayers. “Korea launched 3G because of the World Cup,” said Dallal. In an effort to host the games with panache, Korean carriers offered game clips, scores, trivia and other Cup-related 3G services.

Some say the fate of 3G was sealed years ago, when Europe’s carriers spent some $100 billion just on spectrum licenses. “The European governments were great con artists,” said Seybold. Not only did the carriers pay loads for spectrum they may never use, but also they must build 3G networks on new spectrum rather than enhance existing capacity.

“That will require the carriers to build out three times the number of cell towers they have today,” he said. The cost will doom some, says Seybold. Fourth- and fifth place carriers in each market may exit or seek mergers, he says.

Plus, technical difficulties with Europe’s flavor of 3G will need to be fixed. The same weekend that Telefonica announced its 3G drop, Hong Kong’s Hutchison, an aggressive, multinational 3G carrier, said dropped calls will be a problem during a transition between 2G and 3G.

In the U.S., things look a little better. No carriers have canceled 3G. And the cost to U.S. carriers of 3G spectrum will be just $16 billion, says Seybold. Most carriers also will be able to use existing spectrum in combination with 3G. Still, about 86,000 U.S. base
stations will need upgrades at a cost of $500,000 to $1 million each.

Sprint PCS, the U.S.’ No. 4 wireless carrier, says it launched a nationwide 3G network on Aug.8. Analysts give Sprint kudos for its rollout, but they also point out that it may not actually be 3G.

The International Telecommunication Union says networks must shoot data at 144 kilobits per second (2.5 times normal modem speed) to be called 3G. Sprint will Dan Wilinsky, but the average will be 50 to 70 kbps.

Still, Wilinksy says 3G has better prospects here than abroad. “The overseas equation is totally different,” he said. “In the U.S., there’s reason for hope.”

For one thing, Sprint uses code division multiple access, or CDMA, technology, different than Europe’s Global System for Mobile Communications. Seybold says CDMA is cheaper to upgrade and more efficient.

Sprint’s 3G upgrades for 2001 and 2002 cost $800 million, says Wilinsky, plus $3.4 billion for spectrum. The carrier expects to see returns as early as this year, he says.

The average U.S. monthly cellular bill is $49. Seybold says data services would up that by 10% to 20%.

There are other rays of 3G hope. Vodafone put out a statement Aug. 6 saying it would offer 3G services by early 2003. Sonera plans 3G in Finland next month. Verizon offers 3G in limited U.S. areas, as do start-ups such as Monet.

May expects to see wide deployment by 2005. He says carriers that stay the 3G course could start making returns on their investments within three to eight years.