Wireless communication is revolutionising our lives, but with the technology transforming so quickly the future is up for grabs. In the first part of this Ebulletin special, Angus Kidman goes in search of the holy grail of 3G.

Published in The Bulletin, June 26 2002

Telecommunications companies haven't been shy about putting money into third-generation mobile phone networks. Worldwide, telcos have invested upwards of $US200bn ($352bn) merely to acquire 3G spectrum licences, while the most recent spectrum sale in Australian netted $1.17bn. 3G has provided a useful one-off revenue kick for governments, but can telcos themselves possibly make money on such large investments?

The appeal of 3G is its ability to deliver high-speed data services. The existing GSM mobile network in Australia can be used for basic data services such as email, but its speed is limited to 9600bps, less than a quarter of the speed of a typical modem. 3G requires new networks to be rolled out but in return promises speeds of up to two megabits per second, which is enough to easily send videos directly to your phone.

When 3G investment began in the late-'90s, telco shares were riding high and mobile phone use was growing ­rapidly. That climate drove prices to a peak, especially in Europe. "They had massively overly extended expectations when they paid for those licences," says Jeremy Green, research director at the Ovum research group. "I don't know what they'd been smoking." Some companies are now trying to have their licence fees reduced to avoid bankruptcy, while other pundits have suggested that governments should hand back the money or confiscate unused spectrum. The problem wasn't universal.

"The carriers in Asia-Pacific learned some lessons from the European market, and were more reasonable in their bids," says META research group program director Mark Bouchard. "But they've still paid pretty hefty price tags, and they have to roll out the networks on top of [what they've paid]."

Meanwhile, the climate has changed. In 2002, a tech-suspicious market is keeping share prices flat and mobile phone sales have tailed off. A recent study by Forrester Research found that mobile phone ownership in some European market segments was declining. The more immediate short-term problem for 3G aspirants is that there's not yet an obvious market for their services. "The demand for mobile data services is not ramping up in the way carriers had anticipated," says Bouchard. Green is blunter: "People are staying away in droves."

Even telcos don't see speed as important in the short term. "Customers aren't saying 'we need more bandwidth'," says Craig Cameron, Telstra managing director for wireless data solutions. "They want applications."

Opinion is divided over what applications high-speed 3G networks will be used for. Some argue that merely giving remote access to email or other existing systems may not be enough to convince businesses to shell out on new handsets and pay hundreds of dollars a month in subscription fees. "It's going to have to be more compelling than that," says Bouchard. Green is not so sure. "It will introduce some new applications, but that aspect has been over-hyped. The more important element will be doing more of the same things, faster and cheaper. Current networks are expensive for the capacity. 3G uses radio spectrum much more efficiently."

As well as the networks, device design may play a role. "A lot of new phones will have colour screens and faster processors," says Siemens business development manager Sven Vogeler. "That will enable us to deploy lots of new applications because of the enhanced user interface."

The only market where multiple 3G services are already battling under real-world conditions is Japan. Japanese telco KDDI claims to have signed up 334,000 subscribers in its first month of operation, a somewhat better outcome than rival DoCoMo, which launched its FOMA 3G service in a flurry of bad publicity last October, five months behind schedule. Observers believe that major growth and profitability for the Japanese service is still some years away. "Backwards compatibility with existing networks is absolutely crucial," says Green. "When DoCoMo launched FOMA, they had single-mode phones and limited coverage."

Dual-mode phones, which allow users to switch between current and 3G networks depending on coverage, have proved more popular. While much ­discussed, some question whether the lessons of Japan's market are universal. "It's very unsafe to assume that the behaviour patterns in the Japanese ­market will translate to other markets," says Nitin Shah, general manager of ArrayComm, which has a data-only 3G licence in Australia. Why? Japan is a unique market, often driven by novelty applications that don't translate to other cultures.

In Australia, payoff for 3G investment is a distant prospect. The first services aren't expected until 2003 and even then availability is likely to be limited. The "big-league" 3G spectrum owners in Australia – including Telstra, Optus, Vodafone and Hutchison – are hoping to acclimatise users to data services with a range of so-called 2.5G services before investing in 3G. The most prominent of these is GPRS (general packet radio service), which provides higher data throughput and greater reliability while retaining the existing GSM network. Telstra is also promoting the data transmission benefits of its analog-replacement CDMA network.

Bouchard is sceptical about the appeal of 2.5G packages. "Is greater mobility worth five times what you're paying [for net access] now? In most cases, the answer is no." Pricing is a difficult issue. Telcos have charged high prices for some early wireless services to try and recoup costs, only to scare off customers. Shah calculates that a profitable business model should be able to deliver about 150 megabytes of information a month for about $72. That's far cheaper than existing ­services, but still pricier than fixed dial-up or broadband access.

Despite the sceptics, if the pricing is right, data services can be highly appealing. The outstanding example is SMS (short message service), the GSM text-message system which has taken telcos by surprise with its popularity. In Australia, an estimated 200 million SMS messages are sent each month at an average retail cost of 20¢ per message. About 50% of Telstra's wireless data revenues come from messaging services. It is on the basis of such figures that market watchers believe 3G retains long-term potential. It may also provide a much-needed boost to sales of mobile phones, which have stagnated in recent years.

Consultancy ARQ predicted recently that worldwide phone handset sales will climb from 385 million in 2001 to 880 million in 2007, driven largely by demand for 3G services. However, to do that, prices will have to drop.

Green says that the cost of manufacturing a 3G handset is seven times higher than for existing phone ­networks. "Long term, 3G and wireless has to be a sensible thing to be doing," says Green. "More and more things and people are mobile."

Building that network will still necessitate deep pockets and eventually telcos will earn a return. The question is which ones will survive long enough to see salvation.