Interest in “third-generation” 3-G mobile services is reviving, thanks to the positive reception that European users are giving to multimedia mobile services based on earlier technology. Following a delay of nearly three years, the largest mobile operators have begun to test the new technology, known as UMTS, with their major customers. Large-scale commercialization of 3-G could come to Europe by the end of this year, or by the beginning of next year. Nevertheless, some experts still see too many uncertainties concerning both supply and demand.


UMTS, the English abbreviation for Universal Mobile Telephony System, was expected in August 2001, but still hasn’t been rolled out. When the technology is fully developed, it will allow cell phones to access the Internet and video conference at high speed.


Joan Enric Ricart, a management professor at IESE, believes that the delay of 3-G “happened as a result of a combination of factors. On the one hand, terminals (enabled for 3-G) were not available on time. In addition, the technology was not developed and major investments in infrastructure were still necessary. At the same time, the technology boom was coming to a close. Finally, 3-G involved investing in a new technology for which demand wasn’t very clear.”


Back in 2000, euphoria about third-generation telephony led Europe’s biggest telecom companies in a ferocious race to acquire licenses from European governments. In Germany, the licenses cost telecom companies a total of 50.5 billion euros. In the United Kingdom, that figure reached 37.5 billion euros. At the time, companies thought that if they didn’t pay the high prices, they would never get the licenses, thereby losing their change to be players in this exciting new technology.


Only a few months later, however, those very same companies began to announce indefinite delays in the launch of their third-generation operations. As Ricart recalls, “companies reacted by starting to negotiate with governments about lowering the cost of their (license) obligations. They wanted to share the cost of new infrastructure and delay launching the new system.”


The harshest moment for 3-G came during the second half of 2002, when telecom operators began to write off the entire cost of the enormous investments they had made just two years earlier. First to do so was Telefónica, the largest telecom company in Spain and Latin America, which announced it would write off almost 5 billion euros on its financial ledgers, the entire cost of its investments in UMTS. A few months earlier, the company had frozen its 3-G activities in Germany and delayed its arrival in Italy.


The Boost from Multimedia

In recent months, the picture has changed. Late last year, Telefónica announced that it will invest one billion euros by 2005 to develop its UMTS network. The firm also announced that it has signed an agreement with Ericsson, the Swedish manufacturer of telecom networks. Together with Germany’s Siemens, Ericsson will be one of Telefónica’s suppliers of the new technology. Moreover, Telefónica is already testing the new technology with its large customers. Commercial service will begin sometime this year.


Once again, UMTS is making newspaper headlines, thanks to the warm welcome for new multimedia services, and the insistence of European governments that this system get up and running. During the Christmas season, demand for mobile terminals equipped with cameras, color screens and stereo sound exploded. Investment bank Goldman Sachs estimates that multimedia mobile devices based on earlier-generation technology already capture almost 15% of the entire cellular market in Europe.


The novelty of multimedia is giving another boost to the business. The three mobile companies operating in the Spanish market – Telefónica Móviles, Vodafone España, and Amena – currently generate revenues of more than 1.2 billion euros from multimedia services – 10% of their entire sales – and the companies expect multimedia revenues to double in less than two years.


“Clearly, the market is already on the threshold of third-generation mobile systems,” notes Iñigo Herguera, a professor of quantitative economics at the Complutense University in Madrid. “Nevertheless, there are still many uncertainties, especially on the demand side. It could turn out that consumers don’t put as much value on these new advances as the telecom operators do.”


First Attempts

That theory is supported by the unsuccessful experience of Hutchison Wampoa in Europe. On March 3, 2003, the Asian company launched its 3-G technology in the United Kingdom in advance of other telecom operators. A week later, it began to sell mobile devices for the system. Within just one month, it had 20,000 active customers – a respectable showing. However, eight months after the launch, there were still no more than 50,000 customers and revenues of only 11.5 million euros.


“It’s one thing for customers to say they are ready to pay more, but it’s another thing for them to actually pay,” notes Herguera. Ricart adds: “The key for the [3-G] business will be what services they offer, and at what price. Until now, the problem has been that there are only a few services and the terminals are very large and very heavy. The devices have to come down in price, and they have to clarify exactly what software and services’ will be offered.


In that regard, an important event took place this month in Japan. DoCoMo, the telecom giant, launched the first 3-G terminal that has a size, weight and battery life much like earlier ones. According to Herguera, “everyone is looking at Japan, where DoCoMo, is out in front with its i-mode.” That system allows users to pay only for the Internet content that they use rather than for the time they connect to the Net. Nevertheless, Herguera adds, “the mobile telephony sector in Japan is not comparable, because different technological systems are competing there, which isn’t happening any more in Europe.” If third-generation technology is to reach its true market potential, “it has to achieve a large scale. It becomes interesting when 3-G can serve four million customers from night to morning.”


In Europe, the newest trendy multimedia service is called GPRS (General Packet Radio Services). Also known as “two-and-a-half generation” technology, GRPS is based on a technology platform known as GSM (for Global System for Mobile.) Its main appeal involves another factor that has delayed the launch of third-generation systems. GPRS “didn’t require new investment, and it allowed consumers to become educated (about multimedia mobile telephony),” Ricart says. Herguera agrees, and goes further: “The growing interest in multimedia terminals in recent months demonstrates that companies have yet to take full advantage of the success of GPRS.”


A Changing Business Model

“For companies, UMTS involves a radical change in their business model that could ultimately hurt them,” explains Herguera. “Until now, with GSM technology, the entire revenue stream has gone to the telecom operator, from the moment when someone began a call until when he or she hung up. But with the arrival of mobile Internet, mobile operators will have to share their revenues with other companies. For example, in order to make a hotel reservation, you will have to share revenues with the hotel chain.”  In his view, “that breaks the value chain, and mobile operators run the risk of becoming mere conveyors of information. Apart from inevitably changing the volume of their business, this means that competition will become more intense.”


One of the biggest problems is the attitude of companies in this sector. “If UMTS is going to be launched for real, mobile operators will have to decide to do so,” suggests Herguera. “In the end, the sector comprises a few companies that operate as an oligopoly. Before making a launch, each company is looking around at all the other companies to see who is going to take the first step.”


According to Ricart, “the operators are going to try to lengthen their time periods for paying off the cost of this technology. Those who have a license can move forward. But, for the moment, they are waiting to see what happens, and they putting their own affairs in order. The return on this system is still unclear.”


With UMTS, Ricart adds, “the key to success is to have ‘killer applications’ that give value to this tool. Until now, however, no one is certain where to find such an application. No one is sure what application can justify changing mobile technology on such a massive scale.”


Despite a lack of confidence in its immediate future, Herguera is certain that UMTS will make its mark in telecom in the coming years. “When it is launched for real, [UMTS] is going to mean an enormous revolution, and it will mean the cannibalization of other formulas – not only other mobile systems such as GSM, but also fixed-line service, because access to the Internet will take place through mobile telephony.”


Optimism on the Stock Exchange

As 2004 begins, analysts at brokerage houses are optimistic about the sector, and shares of mobile phone operators have risen by about 8% more than shares of traditional phone operators during the past half-year.


Major manufacturers of telecom equipment are also transmitting optimistic messages. One such firm is Nokia, the world’s leading maker of mobile phones. Shares of the Finnish company have shot up by about 20% since the beginning of the new year – after Nokia raised its sales projections – mostly because of strong demand for terminals equipped with cameras. Analysts at Merrill Lynch believe that Nokia is going to benefit in coming months from the increased spending on third-generation equipment by its main customers, including mm02, the British operator; and T-Mobile, the German subsidiary of Deutsche Telekom.


Analysts at Goldman Sachs believe that UMTS services for the mass market probably won’t come until the beginning of 2005. But they are confident that “on stock exchanges, the third-generation train will be leaving the station during 2004, because the market will anticipate revenue growth toward the second half” of this year.


Ricart, however, sees some problems that could make it harder for third-generation technology to take off. “One technology that could restrain UMTS is Wi-Fi,” he says. It allows people to connect to the Internet without a cable, using a portable computer, from locations that are equipped for the service. “It is not exactly the same as UMTS, but Wi-Fi gives you a partial solution to problems of Internet access. As a result, a system that allows me to get on the Internet through a mobile device doesn’t appear all that interesting.”


“Whenever a technology is delayed, another technology can wind up substituting for it,” Ricart says. “However, I don’t think that’s likely to happen here.”  Adds Herguera: “You have to consider that enormous investments have been made in UMTS by major companies.” Indeed, UMTS has cost a fortune. So far, the main companies in this sector have spent more than 240 billion euros, the equivalent of almost 40% of the Gross Domestic Product (GDP) of Spain. As a result, “the companies are interested in introducing the technology, step by step.”