Advertisements hyping the future of the wireless lifestyle are ubiquitous these days. Cellular carriers have plastered our world with images of consumers happily using their mobile phones at all hours of the day to do anything from anywhere at warp speed. The idea of chatting, surfing the web, zipping snapshots of loved ones back and forth, and using the same phone in Bangkok, San Francisco, and London is appealing. But whether this dream will become reality is largely unclear, say many experts at Wharton and elsewhere.

While some think that so-called third-generation, or 3G, wireless networks will be viable and necessary, others believe 3G is a largely a waste of money for governments, carrier companies, consumers, and applications developers alike.

Dial C for Confusion

First-generation wireless networks used analog technology to transmit voice; the second generation (2G) went digital, adding capacity to the network, increasing voice quality and letting data be transmitted as well. 2.5G technology lets packets of data be sent separately from voice, allowing always-on data connectivity. The third generation, or 3G, promises super-fast data transmission and increases in capacity, a major issue for overburdened wireless networks.

A veritable alphabet soup of abbreviations has sprung up to describe the standards for these networks. Most of the world uses the Global System for Mobile Communications (GSM) standard. General Packet Radio Service (GPRS) is the 2.5g upgrade for GSM. Enhanced Data Rates for Global Evolution (EDGE) gives GSM networks the ability to handle 3G-level data transmission speeds. A competing network standard, Code Division Multiple Access (CDMA) and its upgrade, 1XRTT, allow data speeds comparable to those of GPRS.

No Killer Apps?

Wharton public policy and management professor Gerald Faulhaber is pessimistic about the future of 3G. “I just don’t see 3G as having legs. Essentially, 3G is supposed to be broadband for your cell phone. It was originally touted as a 2 megabits/second system. In the real world, it’s more like 200 to 300 kilobits per second or less,” Faulhaber explains. “It was an intriguing notion. But the first thing that occurred to me when I heard of ’broadband-to-your-pocket’ was, what instrument would we use?”

Faulhaber notes that mobile devices have been getting smaller – not exactly the optimal trend for a system that promises rich media delivery. “How am I going to work it? There’s probably not going to be a keyboard, and the screen will be small. What can I do on it, and does it matter what the bandwidth is? Show me the device. Then, show me the application that’s going to make people want to use it,” he says.

The current front-runner, notes Faulhaber, is in Japan, where NTTDoCoMo has launched a mobile phone service very popular with teen-agers. “The best thing out there is NTTDoCoMo’s iMode. It has a fairly large screen, and yes, it can show you web clips. But you can’t do too much with it. There’s no keyboard, and it’s difficult to navigate. Even in Japan, its primary use has not been web access,” says Faulhaber, alluding to the fact that many users send messages or play games on iMode devices instead of surfing the Internet.

“The Japanese have some motivation to move this technology forward; they don’t have as much experience as the U.S. with PC-based Web access. But even so, they can get what they need with narrowband – why do they need broadband?” asks Faulhaber. “Sure, they’re more likely to use it in Japan, but there the problem is the device. I just don’t see the Japanese going for larger devices.”

Faulhaber is skeptical of the promised uses for 3G technology, pointing out that much of the information people need on a mobile device doesn’t require real-time updating at blinding speeds. “E-mail? Yes, but you can do that now. Stock quotes? Same thing. That’s all narrowband. I just can’t imagine burning up the spectrum. People say they’d play music from their cell phone. But we have MP3 players for that – and I don’t need it every second. That’s why we have radio. To find the closest restaurant? Sure, but I don’t need that information updated to the minute!” he says, and such a restaurant-finding service can be done with 2.5G.

“I believe the killer app in the enterprise space is e-mail with mobility,” says Dave Williams, vice president of strategic planning for Cingular Wireless. “That’s a pretty compelling service. In the consumer space, it’s adding the ability to send and receive digital images on a color-screen phone in a cost-effective package.” Still, he concedes, most of these services can be deployed over GPRS networks, so in itself they might not be driving forces for 3G.

Andrew Grant, a 1990 graduate of Wharton and managing director of Virgin Mobile Australia, thinks it’s merely a matter of time before compelling consumer applications are developed. But he, too, sees deployment of high-speed technology as a gradual change. “Our vision is to develop a substantial community of customers in Australia who look to us to provide more than just a mobile phone as part of our service offering. We already have the microbrowser technology on the screens of our customers’ handsets today to bring this vision to life. It’s not whether it’s GPRS or 3G technology; the challenge is to develop a service proposition that consumers find valuable,” he explains.

“Our approach, therefore, is to spend our time on service development more so than on technology,” adds Grant. “Our SMS ‘Flirt Fest’ for Valentine’s Day was a huge success. 3G will arrive, we have no doubt. In the interim, we see multimedia messaging – combining, say, a small photo and an audio clip of a kid’s birthday party – as an important ’bridge’ to 3G.”

European Test Kitchen

The Europeans, explains Faulhaber, jumped on the bandwidth bandwagon but have yet to prove that it is viable. Many countries held auctions last year to divide 3G spectrum among various carrier companies. Racing to outdo each other in bids, companies ponied up billions of dollars to get a piece of the pie. Governments (especially the U.K. and Germany) made lots of money from the licensing fees, but now carriers are scrambling to get a return on that investment.

Faulhaber believes the telecom companies weren’t adequately prepared. “In the early 1990s, the FCC held the first PCS auctions in the U.S., and did a pretty good job setting them up,” he says. “Wireless companies hired economists to try to game the system. So the FCC hired the same people, minimized the gaming opportunities, and got more money. Both sides spent time acquiring expertise in auctions. The Europeans got some people to help them out too, in setting up their auctions, but the telecom companies didn’t have much experience in it. So I put what happened there down to inexperience. People were playing up 3G, but nobody thought hard about what the business model was going to be.”

Indeed, says Williams, expectations for short-term returns might be a little optimistic. “I personally think the classic European 3G business case is a little flawed. There is a natural upgrade path, but they all dove straight in. I think in the long term, 3G will pay for itself, but we’re looking at a 10-year payback.”

Williams says that Cingular’s strategy is to move gradually. “We’re doing a GSM/GPRS overlay across our network, and also overlaying EDGE as part of that, over the next two years. Our investment is not as significant as those of some of the European players. We can study what happens in the rest of the world and evolve over time.”

Capacity Constraints?

Wharton 1993 graduate Rajeev Chand, a wireless technologies equity research analyst for Rutberg & Company, believes that 2.5G is adequate for the near term, at least in the U.S. “It’s good enough for the present, with its always-on connectivity. That in itself represents a revolutionary step forward. Application developers, Internet service providers, etc. can all start figuring out how to make money. Carriers are not interested in big investments without seeing what it will be used for.”

“In Europe, however, voice capacity may drive 3G. Within six to 12 months, carriers might see capacity reach critical levels for GSM systems. So that might keep 3G from dying there,” Chand says. “In the U.S., carriers are not so badly off from a capacity standpoint. They are still just experimenting with data and I see the 2.5G technologies lasting for quite a bit of time.” Williams sees things differently. “I don’t think we’ll have a capacity issue,” he says. “In many areas, some carriers have half or even less capacity than other players do and it really isn’t a problem. So I don’t think spectrum will be a big deal.”

The long-term question, notes Chand, “is will there someday be rich media applications that are compelling enough for that kind of system? There’s just no market visibility right now. It’s a matter of whether or not one believes in the mobility of information technology.”