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Analysis: 'Third generation' wireless promises high-speed alternative

Industry Standard

(IDG) -- The money is already flowing like water. In the past six months, a dozen or so companies have spent some $100 billion for the rights to the airwaves that will carry high-speed, "third generation" wireless services in Europe. A U.S. auction for 3G licenses, scheduled for next March, is expected to fetch that much alone. And that's just for openers. The companies that win the licenses will have to shell out billions more to build 3G networks, everything from new transmission towers to new handsets. And then billions more on marketing to convince people to pay for 3G services.

Will they? Good question. If you've used any of the wireless data services offered by U.S. cellular carriers like Sprint PCS (PCS) or AT&T (AWE) PocketNet, you're probably wondering what all the fuss is about. Typing out a URL, let alone an e-mail message, on a keypad the size of a business card is a clumsy process at best; reading anything longer than a get-rich-quick stock tip on the minuscule screen is hardly worth the effort. Small wonder that of the 5 million or so Internet-enabled phones now in the U.S. only about a million are used to access the Net. "The wireless Web is an oxymoron," says Mark Caron, founder and CEO of MobileSpring, a venture incubator focused on wireless startups. "The experience you get today is nothing like the Web."

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That's where 3G comes in. While the first two wireless generations - analog and circuit-switched digital - trickle along at modem pace, 3G's packet-switched transmissions gush at up to 2Mbps, promising to make the Web truly wireless after all. Think of it as going from a soda straw to a fire hose, from a few lines of clunky text to rich graphics, high-fidelity music, streaming video and e-commerce. "It's clear to us that the mobile Internet is a revolution," says Tim Connolly, director of Ericsson's New York-based CyberLab. "Thinking of it simply as an extension of the Web is just the tip of the iceberg."

Of course, there will be some wrecks along the way to 3G. The U.S., Europe and Japan all use different types of 2G services - CDMA, GSM and PDC, respectively - and each of them requires its own transition to 3G. In the U.S. the move to 3G will demand staggering amounts of cash. Just one of the 12 licenses that the FCC will auction in March (it's selling rights to two blocks of spectrum in six U.S. regions) could cost as much as $25 billion. While Japan and Europe plan to move to 3G starting as early as next year, U.S. carriers are likely to pause to refuel at 2.5G, an interim technology that provides many of the benefits of 3G without the steep price.

But when 3G does arrive, prognosticators say it will fundamentally alter the global competitive landscape. Think Internet, circa 1995. Just as the rise of the Net caught many old-economy firms flat-footed, the wireless Web promises to kick off a fresh cycle of innovation and wealth creation. Because the price they can charge for voice calls is going down, telecom carriers are now hitching their futures to data services, which are more profitable. Likewise, Net companies realize that an expanding universe of mobile devices will open up vast new markets. The transition will upset the status quo, promises Arun Sarin, CEO of InfoSpace, a Seattle-based provider of news and information to mobile Web devices: "The wireless Internet will change the existing order."

For starters, some surprising contenders could emerge in the March auction. The advent of wireless Web services has made Internet firms interested in what was once purely a telecom game. Companies like America Online and Cisco Systems (CSCO) are said to be contemplating bids - speculation that AOL CEO Steve Case has done little to dispel in his comments on the subject. Even utility giant Enron (ENE) could bite. Add to the mix consumer brands like Virgin that are going into the business of buying airtime and selling mobile services under their brand names, and the very definition of "carrier" begins to blur. "It will be quite a free-for-all," says Keith Shank, director of business management for telecom giant Ericsson.

Nobody knows exactly what the wireless future will look like. There are glimpses in Japan and northern Europe, where mobile phones outnumber PCs by a wide margin. In Finland, where mobile penetration is above 75 percent (compared to 32 percent in the U.S.), a government and commercial collaboration called the Helsinki Virtual Village is rolling out wireless digital services to a square kilometer of the Finnish capital. Residents will be able to download e-money to their cell phones to pay for lunch at the local cafe; they'll be able to track everything from concert tickets to package deliveries on their mobile devices.

But the best picture of a wireless future comes from Japan, where one-third of the country's 27 million Internet users go online via their mobile phones, according to data released in July by the Japanese government. Most do so through the I-mode service offered by NTT's wireless unit, DoCoMo. I-mode is the world's first packet-switched wireless network and the fastest-growing ISP ever. Launched in February 1999, it hit 7 million subscribers and $2 billion in revenue by its first anniversary. In July, 17 months after signing up its first customer, I-mode blew past the 9 million-subscriber mark. It took AOL 12 years to get that many subscribers.

But carriers in search of a return on their huge 3G investments are more intrigued by another number: $76 a month. That's DoCoMo's average revenue per subscriber - the highest in the mobile phone business. And its data subscribers generate 30 percent more revenue than its voice-only customers. In Japan, as in many European countries, people have shown a willingness to pay, say, $3 a month to have a horoscope or a cartoon character delivered daily to their mobile screen. In addition to its monthly I-mode service fee, DoCoMo gets a 9 percent cut of such transactions from its many content partners. "I-mode has shown the model," says Andrew Cole, head of global wireless practice at Renaissance Strategy, a Boston-based consulting firm. "Now other people are trying to emulate it."

They'd better hurry. While most carriers plan to move to 2.5G over the next year or two before going to 3G, DoCoMo plans to go straight to 3G next year. I-mode subscribers can expect full-color, video-enhanced messaging and other services - photo caller ID, e-postcards, animations - all at lightning speed. For DoCoMo, which is having trouble fitting all its customers on its current network, the move to 3G is crucial to accommodate growth - at home and abroad. Moving quickly to lock in its lead, DoCoMo is now pursuing partnerships and spectrum licenses in Europe and the U.S.

What's the message that emerges from all this noise? The phone, it turns out, is a great communication device. "Communication is the No. 1 killer app," says Ben Linder, VP of marketing at (PHCM) , whose WAP services enable many of today's wireless data applications. "Nos. 2, 3, 4 and 5 are very hard to predict." A recent survey of I-mode users showed that the top reasons they use the service are, in descending order: e-mail, voice calling, receiving e-mail anywhere, e-mailing outside of I-mode, e-mail anytime, cheaper e-mail, killing time, because friends use it and Web browsing. Detect a theme? Checking stock quotes and other such pursuits apparently are not very important to I-mode subscribers. Dating services, karaoke and Hello Kitty cartoons are. Indeed, entertainment accounts for more than half of I-mode usage. That stat has carriers and content developers around the globe cooking up new entertainment fare designed for mobile consumers - particularly teens, who could be dubbed Generation M for the fervor with which they've embraced the mobile Net. Sony and DoCoMo are working together to create videogames for mobile devices; Lucent Technologies (LU) has teamed up with Japan's Bandai to bring interactive games and other mobile entertainment to the U.S.

Some of these applications are culture-specific - Americans probably won't go wild for mobile karaoke. But social and community features will likely be huge winners everywhere in the mobile world. Take instant messaging one step further, says Mark Bregman, general manager of pervasive computing at IBM: Your phone could let you know if someone on your buddy list is within five blocks of you. Want to grab a coffee? Just zap them a message.

In wireless, as in real estate, location is everything. Your cellular carrier can now tell roughly where you are by triangulating your signal's distance from various cell towers. Soon - thanks to a new FCC rule designed to improve response to 911 calls - your cellular carrier will know precisely where you are at any moment. Then all sorts of possibilities arise. Navigation is one potentially lucrative category. Webraska, a French startup, can now send real-time maps of traffic conditions to your phone screen; soon it will be able to guide you to the nearest open parking space in some downtown areas. (Alas, this service is rolling out in European cities first.) These maps are pretty rudimentary today, but 3G will allow crisp, full-color images - even live video of traffic conditions.

But the big prize is mobile commerce. Wireless Web companies are enthralled with the idea of m-commerce, as it's being called, because it puts customers in their crosshairs. Passing a Starbucks (SBUX) ? Why not stop in and take advantage of that special offer that just popped up on your screen? Get a free muffin with your Frappuccino. This sort of "push" advertising is seen as the ultimate in consumer marketing. But to prevent your phone from becoming a walking, talking spam can, you'll be able to customize your preferences on your wireless portal.

Because there are times when you'll welcome a message on your mobile - when your flight is delayed, maybe, or when that sold-out CD you've been waiting for is in stock. If you want it right now, you can dial up the Net and order the CD on the spot.

Or maybe you'd prefer streaming MP3s. "You'll be able to listen from any device, anytime, anywhere," says Michael Robertson, CEO of (MPPP).

Mobile video should soon follow. Skeptics like Bill Frezza, president of Wireless Computing Associates, argue that wireless video is a far-fetched proposition at a time when we don't even have a market for wired video. "When was the last time you made a PicturePhone call?" he asks. But even if we're not watching full-length films on our mobile devices anytime soon, video on the go will be a reality. You might peek at a movie trailer on your handheld before you buy a ticket, or get the final minutes of a basketball game transmitted to your mobile device. Wireless operator Orange is planning to release a videophone by year's end; Samsung (KR7000830000) by next May.

Traditional broadcasters are keenly aware of the potential. ABC News and Warner Bros. are among a handful of media companies testing the waters with Packet Video, a San Diego-based company whose compression technology allows video to be sent via today's mobile networks. "We're taking baby steps now," says Bernard Gershon, senior VP of ABC But, he adds, "the opportunity is enormous for us to distribute ABC News-branded content to wireless devices in the next two to three years."

The broadcast industry won't topple anytime soon, but it will be forced to adapt. "What the wireless Internet enables is hundreds of thousands of new broadcasters to jump into the space," says Len Jordan, senior VP of consumer appliances at Real Networks, whose audio player software will be included on an upcoming line of Nokia (NOK) phones. "It puts a lot of competition into the mix." Most people still want a passive viewing experience, but new interactive uses of audio and video will evolve on the wireless Net. "It's no longer a broadcast industry, it's a single-cast industry," says Mobile-Spring's Caron. "People will have total control over what they watch and when they watch it."

Of course, there's the small issue of profit. Companies haven't figured out how to make content pay on the Web, much less on the phone. There will no doubt be advertising - much of it leading directly to transactions. Some observers think mobile commerce will be so pervasive that it will subsidize basic voice service. Free voice calls? Could be. Voice traffic is already becoming a commodity, and the future clearly lies in data. "Wireless data and mobile e-commerce will become the new business model replacing the voice industry," Cole says.

Wireless carriers could use their billing relationships with customers to become aggregators of all sorts of mobile transactions - essentially turning your cell phone into your credit card - and take a cut of every transaction. This will pit phone carriers against credit card companies and other financial institutions as they vie to be the primary billing aggregator. "Carriers will either have to own a bank or offer some sort of financial services," says Cole. He expects as much as 45 percent of all e-commerce to someday come from mobile consumers.

It's not too far-fetched to imagine that in the near future you'll use an AOL phone for voice calls and data services and receive a mobile service bill that includes charges for movie tickets, cab rides and those flowers you ordered for Mom with your PDA. "It's a battle of customer ownership," says Pekka Sivonen, chairman of Digia, a Finnish developer of wireless applications.

Whoever wins, the economy is unlikely ever to look the same again. "There will be massive discontinuities in this market," warns Sarin of InfoSpace. Adds Dave Farber, chief technologist at the FCC and a professor of telecommunications at the University of Pennsylvania: "Nobody's sure what business they're in anymore." Except that if it's the Internet - and what isn't these days? - then it must be wireless.


Why can't wireless devices get along?

In just 20 years the wireless market has grown from a few phone calls to a tangle of competing technologies: CDMA, TDMA, GSM, PDC the list goes on. 3G promises to reduce the confusion, but there won't be real clarity until 4G gets here.

  • 1G: The first generation of wireless service debuted in 1979. It used analog technology and was strictly for voice.

  • 2G: The second generation - digital wireless - arrived in 1990 and is still in use today. 2G networks are circuit-switched (each call requires its own cell channel) and slow. In the U.S., 2G is known as PCS (personal communications services), which encompasses CDMA (code division multiple access), TDMA (time division multiple access) and GSM (global system for mobile communications). These are three competing technologies for dividing the airwaves to fit more traffic. Europe uses GSM, but a version not compatible with the U.S.; Japan uses PDC (personal digital communications), a "packet switching" technology whereby messages are split into packets of data and reassembled at their destination.

  • 2.5G: Most carriers will move to 2.5G networks before making the massive upgrade to 3G. Like 3G, 2.5G relies on packet switching to boost transmission speeds and save space. 2.5G is a quicker, cheaper upgrade than 3G. U.S. and European carriers say they'll move to 2.5G next year; Japan plans to go straight from 2G to 3G in 2001.

  • 3G: 3G systems promise speeds up to 2Mbps, which accommodates high-quality wireless audio and video. But 3G infrastructure will cost hundreds of billions of dollars. U.S. carriers aren't likely to go to 3G until 2003 at best; Europe plans to move in one to three years. One goal of 3G was a global wireless standard. But while European carriers have agreed on the universal mobile telecommunications system, or UMTS, there are competing, incompatible standards elsewhere - and that makes global roaming unlikely anytime soon.

  • 4G: Researchers are already looking ahead to 4G, sometimes called "software-defined radio." 4G should be able to work with any standard, anywhere in the world, by 2010.

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