3G: What's the payoff?

Soaring licensing costs leave observers wondering how wireless providers will ever make their money back

Despite the huge money-making opportunities presented by third-generation (3G) mobile phone networks, consumers will still be willing to spend about the same amount of money on wireless services, say experts. And that leaves the wireless providers who have paid billions for 3G licences with a dilemma: how are they to make their money back?

Generally, 3G services and the mobile Internet are seen as a market opportunity of similar proportions to the Internet itself. That is basically because mobile phones, unlike PCs, are easy to use and portable, and tend to become part of the everyday lives of those who use them -- even if the user isn't interested in technology.

As a result of this ease of use, mobile Internet users are predicted to outnumber those of the wired Internet. In three years two-thirds of all Internet access will be wireless, predicts Graham Opie, director of Vanson Bourne. Internet-enabled mobile phones have already outnumbered Internet-connected PCs in Japan, after their introduction only last year.

But 3G is not just a standard mobile phone connected to the Internet. It turns a phone into a broadband, always-on mobile terminal, and this entails huge costs for the providers. Besides building an entirely new infrastructure, wireless companies are now facing an unexpectedly huge bill for the licence to use the spectrum on which 3G is based.

The five British UMTS (Universal Mobile Telecommunications System) licences alone have cost wireless providers £22.5bn, and other European UMTS auctions are still pending. (UMTS is the European implementation of 3G.)

"The cost of the licences is a bigger issue than people expected," says Tim Sheedy, senior mobile analyst with IDC. "Everyone had an idea what the infrastructure costs would be, because they've already built the GSM infrastructure. But the licence costs have come as a major shock."

That has left wireless providers, investors and industry analysts wondering how 3G could possibly be worth all the effort and expense. After all, it's just an improvement on what we already have today, isn't it?

Yes and no, experts respond. Because of new 3G capabilities such as high speed and always-on connectivity, the technology will not just be used in mobile phones or personal wireless terminals.

"Human users could be a tiny percent of the total users on any sort of mobile network," says analyst Sheedy. "There are big opportunities in telematics, telemetry, remote diagnostics. There could be a UMTS chip in every car." 3G could be used by car companies to monitor your car's operation and detect breakdowns before they happen, for example, Sheedy says.

Consumers could use it for all sorts of non-telecoms-related functions such as paying bills. And with each new function, the wireless providers will have another revenue opportunity.

As on the wired Internet, business-to-business use could grow to be a significant proportion of revenues. "Business use could be two or three times that of consumer," says David McKenzie, director of pervasive computing for IBM Europe. "When you come to applications such as access to professionals on the road, email without a laptop, these things could become essential for businesses."

Wireless providers could also capitalise on their close billing relationship with customers, becoming gateways for all sorts of e-commerce and taking a cut with each service or product purchased.

"That really is an opportunity for mobile phone operators because they then get a piece of the retail action instead of just providing the channel," says analyst Opie. "Like a credit card company, they can take a merchant fee, and make a profit off of billing functions that are already in place."

Those profits would not add to consumers' costs, because they would come from m-commerce providers. Japan's NTT DoCoMo already takes commissions on its customers' Net phone purchases.

Security worries could make customers reluctant to transmit their credit card details over a mobile phone, and more willing to see pizza purchases, book orders and video rentals appear on their mobile bill, Opie suggests.

Consumer use will be the most significant aspect of 3G, analysts generally agree, but it is not yet clear what exactly people will want. Wireless videoconferencing and downloadable video are usually mentioned, but no one can predict what will take off, just as no one could have known three years ago that Short Messaging Service (SMS) would become an indispensable accessory for millions of Europeans.

Whatever the services are operators have a stake in making them useful. "People will have to think hard about how to present these mobile applications to the user," says Opie. "If they don't do it right, it will strangle demand at the consumer end. Once the novelty wears off of showing it in the pub, as something that's colourful and fast, it's got to be something you can use."

Do consumers really need 3G bandwidth to have useful mobile applications? Perhaps not, say some critics. "GPRS (General Packet Radio Service) offers 100kbit/s or more, and that's plenty, that's loads," says Jan ten Sythoff, wireless programme manager at Frost & Sullivan. "What do you want with more bandwidth on your phone than you have on your PC? They talk about videoconferencing and video streaming, but for me that's not particularly compelling."

IBM's McKenzie, however, notes that Internet consumers have had no trouble using up all the bandwidth that's been thrown at them. "The bandwidth on UMTS will be absorbed just as bandwidth on [wired PCs] has been absorbed. A 100kbit/s network was once considered adequate, but now 100mbit/s is not adequate."

At first 3G and predecessors such as GPRS will be simply a faster version of services that already exist today, such as WAP or i-mode, acknowledges McKenzie. But once 3G technology is in place new ways of using it and making money from it will come along, just as the Internet has made possible completely new kinds of services, such as online auctions and B2B exchanges.

"There will be applications that take advantage of 3G in new ways, we can only speculate what they might be. They always come along," McKenzie says.

The wireless road ahead won't be an instant bonanza for just anyone, however. "There will be some spectacular failures, and some spectacular successes," McKenzie predicts.

Find out about competing 3G standards.

The technology of 3G - get technical!

Read about the 3G devices of the future.

Find out about the security issues.

Who could be the big players of the future in 3G? 3G startups.

What do you think? Tell the Mailroom. And read what others have said.