3G rolls out: the technology is hot, but the profits are not

Chief Executive, The, July, 2005 by Russ Mitchell

The rollout of third-generation mobile telephone systems around the world begs at least two big questions: Is anybody making much money on fancy new cell phone services? And will customers around the world flock to the kind of high-speed mobile offerings just now being launched in Korea and other hot spots around the globe?

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The answers are "not yet," and "we'll see." But even if the answers remain unclear, there may be no better place to ask the questions than in Korea. "Korea is showing the way," Gerry Collins, vice chairman of the industry group UMTS Forum, said at the "3G and the Future of Wireless Telephony" panel. His group is attempting to guide users of the Global System for Mobile Communications (GSM) cell phone technology into third-generation standards.

In many ways, Korea is a test bed to find out what will work elsewhere. "Korea is by far the center of the universe," said George Mansho, Asia Pacific vice president at the CDMA Development Group, another industry organization. "You, as business people, vendors, service providers, can provide the guidance, the assistance to those who need help. You're on top of the game. You're moving ahead."

But "on top of the game" doesn't yet translate into "money machine" in high-speed mobile services anywhere in the world, even in Korea. SK Telecom, Korea's top mobile service provider and a growing force worldwide, is still struggling to boost profits as shrinking margins on voice traffic and high capital spending on new networks hit the bottom line. And SK Telecom is hardly alone; nearly all cell service providers will be in the same boat soon.

Roughly speaking, the first generation of mobile telephones was represented by those big mobile car phones with handsets around the size of a loaf of bread. The second generation is the cell phone service most of us use today: voice connections that range from excellent to lousy depending on where you live and where you travel, and puny little data rates that work for email and other text messaging, but make Web browsing an exercise in patience.

The promise of 3G is something more akin to broadband at home--over DSL or cable modem--with Web browsing, music downloading, interactive multiplayer gaming, video conferencing, downloading, file sharing, and even real-time TV available in an instant.

The theoretical bandwidth promised by the various 3G schemes is quite high--14 megabits per second or more, or far faster than the DSL line or cable modem now in use in the United States. But in practice, the delivery rates will be far lower. Whether video delivery, for instance, is smooth or halting and choppy will depend on whether 3G will deliver at rates of 1 megabit per second or above. In many cases, at least over the next several years, the users of 3G service won't come close to that speed.

The industry is in danger of overhyping 3G. That wouldn't be a first in marketing, but in this case, the level of user disappointment or excitement will help determine how much they're willing to pay for the service--or whether they'll choose to buy it at all.

Rob Chandhok, who runs Qualcomm's mobile video Mediaflo project, says if 3G services are marketed realistically they'll be compelling enough that customers will flock to them. Everyone, he says, should understand that a new high-speed handheld mobile device is not meant to be like a desktop or a laptop. "This is a mobile device," he said. "People [in the industry] automatically jump in and say, 'This should be personalized, you should have your own personally recorded videos available to be delivered to you.' I ask them, 'Who will pay for the delivery of those bits?' They say this is not the problem. Well, it is the problem." But offer broadcast television, and a platform for delivering photos and simple video clips, and people will flock to 3G.

If two-way video sucks up inordinate bandwidth and requires too much network switching expense, Chandhok believes customers will flock to plain-old television. "Market studies show that interest in TV and a willingness to pay for it exceeds things like gaming by three to five times," he says. "My parents, for instance, won't play video games on the phone, but they will watch the World Cup if they're not in the house when it's on."

SK Telecom began providing 11 channels of real-time television to mobile handsets via satellite in May and 1,500 customers a day are snapping it up. The quality is a bit choppy, but no worse than a TV show sent over a DSL line, and SK plans to expand the television services. But whether TV will be the so-called killer application that drives 3G technology is unclear--without more data on customer interest, none of the panel members would go that far.

All the panelists said "personalized services" will distinguish 3G service, though they have different interpretations of what it will be. Collins defines it simply as access to "your sports, your news, your music."

Shin Cho, senior vice president for the strategy and planning group at SK Telecom, however, looks a few years farther into the future, when network intelligence might provide each user with a "cyber-friend" to help with day-to-day decisions, using information gleaned from a customer database. "This 'friend' says, 'It's been a long time since you've called your mom, why don't you call right now?' So I just push a button and connect with my mom. The 'friend' might say, 'How do you feel today?' and I might say, 'Well, bad,' and he says, 'Well, why don't you go to a movie tonight,' and automatically goes to a Web page to make a reservation."