3G looks for right connection: until now the 3G buzz has been about low-cost voice. That's fine, but it's hardly going to set off the mobile multimedia revolution

Telecom Asia, Feb, 2005 by Robert Clark

Telecom pundits have spent a lot of time in recent years taking the temperature of those two notoriously over-capitalized and over-supplied sectors, 3G mobile and long-haul bandwidth.

The inventory of telecom and tech analysis since 2000 would be considerably slimmer but for the contribution of these two segments. It is not just the poor performance and the massive evaporation of shareholder value, but the yawning gap between promise and performance that has filled the tech news pages.

And while 3G in 2004 once again didn't disappoint editors, the actual product failed to go mainstream as its backers had hoped. The expected huge Christmas sales, on the back of a flood of sexy new handsets, just did not eventuate.

Not that Christmas was a complete misery. UMTS or WCDMA services have now garnered 16 million subs worldwide, according to the UMTS Forum, up from 10 million in September.

Of this, NTT DoCoMo and Vodafone Japan combined have 10 million, while Europe--primarily 3's UK and Italian operations--accounts for most of the rest. Nice growth, but just a sliver compared with the 1.3 billion GSM customers worldwide.

3G adoption is driven by the inter-related factors of handsets, pricing and user experience, or just plain buzz. Until now the buzz has been about low-cost voice. That's fine, but it's hardly going to set off the mobile multimedia revolution.

While prices have come down, the handsets are just not there. In the best traditions of 3G boosters, the UMTS Forum implausibly claims that more than 100 W-CDMA handsets and PC cards are "available".

But Hong Kong's CSL took its 3G service to market just in time for Christmas but with just two Nokia phones. So much for "the widespread availability of a choice of attractive W-CDMA terminals" claimed by the forum.

This is really a problem for the W-CDMA side of the 3G fence. CDMA 1x, with its smoother upgrade path, has had little trouble in creating a huge community of mobile multimedia users in Japan and Korea.

A question of scale

The problem with 3G is it is a technology-driven, supply-push exercise. Virtually all of the W-CDMA licensees in the region's developed markets will have commenced service by the middle of the year. One hopes the greater scale will drive 3G into the mass market.

Most seriously, the financial outlook is murky at best. Hutchison Whampoa has forecast break-even by 2006, yet its customer acquisition cost has risen in recent months (up to 270 euros in November from 252 euros four months earlier, according to the Economist) while ARPU over the same period actually fell, from 51.5 to 44.5 euros.

While the 3G sector continues to grapple with reality, the bandwidth business has faced catastrophic financial failure as well as fraud.

Thus Reach's exit from the international data wholesale market comes as no great surprise. It's just the latest step in consolidation. Global carriers like AT&T, Sprint and BT are still players in the Asian wholesale market, but they are more aggressive about their managed services business.

Nonetheless, the region's market is still over-supplied, with local players SingTel/C2C, AsiaNetcom, FLAG, and VSNL slugging it out with the global guys.

Reach will no longer sell bandwidth to third-party customers after the completion of its existing contracts and devote itself solely to servicing its parents, PCCW and Telstra.

The decision also means lower sales and marketing costs, though Reach will still trade in the voice market.

Nonetheless, it's a case of two steps forward, one step back for the bandwidth business. Global Crossing has signaled it will return more aggressively to the Asian marketplace. God only knows why.

But Inside Line's attention was caught by Asia Netcom COO Bill Barney, who confidently told industry newsletter CommsDay Global that the company's offshore capacity business will be a "very, very important" part of parent China Netcom's IPO.

Unless China Netcom is struggling at home far more than we thought, that's surely a case of talking up the company just a little bit more than is necessary. Or maybe we should rejoice that, after all the years of shock and woe, the industry feels it's time to start gilding the lily once again.

Robert Clark is a Hong Kong-based technology analyst and journalist(rclark@protocolresearch.com)