Verizon’s move is at once a gamble and a necessity. Nothing was untouched in the fiscal earthquake that rocked the telecommunications industry last year. Wireless, once touted as not only the Next New Thing but also the Next Sure Thing, felt the tremors, too. Mobile-phone sales slowed, particularly in Europe, where the devices have been commoditized. Competition in the United States drove prices down, from an average of 56 cents a minute in 1995 to 14 cents last year. And investors began asking hard questions about 3G: is there a business model that justifies all the investment in new infrastructure and licenses to the electromagnetic spectrum allocated to 3G? But there’s opportunity, too. At the same time new technology means not only a chance to sell new equipment but also the ability to offer profitable new premium services.
The third generation–Generation One was analog cellular service and Two was digital–is all about speed. It’s about the ability of a mobile network to carry not only voice but also digital files without subjecting subscribers to painful waits. The official 3G minimum speed, set by the International Teleommunications Union two years ago, is 144 kilobits per second (Kbps). That’s about 10 times the data-transfer rate of current second-generation mobiles, which were designed to carry voice rather than data like text and imagery. The Wireless Applications Protocol (WAP) technology in today’s Web-enabled phones has been a bust: slow and unattractive. The idea behind 3G is to gradually bring wireless devices to speeds that will make them seem plausible alternatives to broadband services like digital subscriber lines (DSL).
At that speed, the mobile phone is a new platform. Some of the possibilities are clear from the way the Japanese use iMode, an Internet-capable second-generation service that has attracted 30 million subscribers with its ability to forward still images from one phone to another, and to allow users to play games on their mobiles. Other uses are suggested by the unexpected triumph in Europe of Short Message Service (SMS), where mobile phones can exchange bursts of text–160 characters at most, or about 25 words. Last year SMS was a savior for European wireless carriers. It accounted for about 15 percent of total telecom revenues. And it did so on 2G phones.
With 3G, it will be possible to extend the SMS concept to multimedia messaging services (MMS), in which a text message can be sent with sound and image attachments. MMS will also include videoconferencing over the phone, though initial quality may be poor. Last fall NTT DoCoMo rolled out the world’s first 3G service, called FOMA. Initial sales have been disappointing, as users complain about dark, distorted images on cramped screens. But critics miss the point, says Ziv Eliraz, vice president for business development of Emblaze Systems, an Israeli company that sells wireless video technology to mobile carriers. “Their analogy is that video is what they see on TV,” he says, but MMS isn’t and can’t be television. It’s a phone service, and its primary aim is connection with another person. “People aren’t yet understanding how powerful video messaging will be for [creating] community,” says Eliraz. “I don’t know if you’ve ever video conferenced with someone you love. Try it. It’s a completely different experience.”
The popularity of music downloads to personal computers suggests that 3G customers would also welcome the ability to capture music files on a phone equipped with a media player and a decent set of earphones. Others might go for “event-based services.” An example: a subscriber tells his mobile carrier that his favorite baseball team is the San Francisco Giants. Every time a San Francisco player hits a home run, the carrier sends a message to the subscriber’s phone, saying that Barry Bonds has done it again, and do you want to see a video replay? You push the yes button, and the fee is added to your monthly bill.
There will be business applications, too. Raney expects Express Network subscribers to do what she calls “field-service automation”–remote access to information stored on the corporate network, such as product inventories and reference materials. Real-estate agents could send buyers real-time, on-site images from an open house at a for-sale property, along with text about such data as square footage and annual tax bills. Insurance-claims adjusters could send live images of property damage to the home office, accompanied by labels stating the owner’s claims.
Applications now unknown will doubtless emerge, especially in a few years when 3G speeds will be more than 10 times the ITU minimum. “Remember when microwaves came out?” asks Raney. “What did people do with them? They defrosted things. Then gradually, food packagers developed products specifically for the technology.”
But the question remains: What’s the business model? How will carriers amortize the costs of acquiring 3G spectrum and building the networks? Carriers everywhere have been sobered by the British and German experiences; spectrum-license auctions drove prices so high that the winners now find themselves short of money to build the infrastructure. This will be less of a problem in the United States, where licenses have been cheaper. Still, says Ken Hallman, vice president for convergence at VeriSign, a northern Virginia maker of encryption and payment services for the mobile Internet, “the carriers appear to be very practical… They’re not going to roll out full 3G yet.”
When they do, how will they charge for the new services that 3G enables? One model comes from cable television: basic versus premium services. The carrier gives, say, voice and paging services at one price, and charges a flat monthly fee more for MMS, online games and other advanced services. Another model is pay-as-you-go. The carrier charges by the byte, and the more bandwidth you demand from the network, the more you pay. In this model, users of real-time video will pay plenty, music-download fans somewhat less. In any case, argues David Berndt, a senior analyst for the Yankee Group in Boston, there is an incentive for carriers to go to 3G “even if they don’t make a penny from new services, because it makes their networks more efficient.” More bandwidth means serving more customers without bank-breaking investments in infrastructure.
And when will that happen? On its Web site, Verizon Wireless boasts of “speeds bursting up to 144 Kbps.” Sprint PCS makes a similar claim for a service launching midyear. The rhetoric amuses Emblaze’s Eliraz: “Maybe if you put the phone within inches of the [base-station] antenna, you’d get 144.” It might, he suggests, be more accurate to call these services “2.5G,” industry lingo for technologies halfway between the second and third generations. In fact, both companies concede that actual speeds will average less than half the ITU minimum for 3G at least for the next year or so. “We’re setting customer expectations at 40 to 60 kilobits,” says Raney, “but that’s a big jump from 14.4.” Verizon Wireless and Sprint PCS both base their claim to 3G networks on their use of a technology called CMDA 2000 1X, developed to enable 3G. In their view, 3G technology equals a 3G network, regardless of actual speeds achieved. Maybe the speeds don’t matter. “It’s a big argument with lots of mudslinging,” says Berndt of the Yankee Group, “but in the end, it’s whether the customer gets what he wants, like the ability to take a picture and shoot it to a friend on the phone. If he can, he doesn’t care whether it’s 2.5G or 3G.”
That’s almost certainly true. If mobile carriers can deliver compelling services at lower speeds, they’re in business. But here’s the catch: companies that develop services for a new technology have no incentive until it has a user base. And users have no incentive to adopt the new technology until there are services they can’t already get. Forging ahead is a necessity–but a gamble.
