What's the fuss about... third-generation?

A dead duck?

Why do we hear so much about 3G telephony? Quocirca analyst Dale Vile explains...

There has been a lot of fuss about 3G over the past two or three years. It started with the high profile auctions back in 2000 when mobile operators spent over £22bn on 3G licences in the UK alone. The promise was of a world in which high performance multimedia internet services would be placed in the palm of everyone's hand.

Shortly after the auctions, however, a few commentators simply added up the cost of licences and of building the networks and divided this by the number of potential subscribers. It soon became clear that the chances of these operators getting a return on investment in any reasonable time was pretty much zero. Then came the general telco sector crash, which seemed to put an end to the 3G vision completely.

The past year has seen some major steps forward, however. Mobile operators have been quietly rolling out their GPRS networks, an activity that was initially overshadowed by all of the hype surrounding 3G. GPRS is an overlay on the existing voice networks that allows the same infrastructure of base stations and radio masts to be used for transporting data efficiently. In precise terms, it provides packet switching capability allowing the existing networks to mimic the way in which data moves around the normal fixed internet.

The upshot of this is that it is now possible to establish connections over the cellular network and get a user experience comparable to dialling-up over a traditional 56Kbps modem. Furthermore, users pay for the data transferred over the network rather than for the time they are connected so bills are kept manageable. This makes mobile access to the internet or a corporate network both possible and practical wherever a mobile phone signal exists.

Some have pointed out that GPRS is adequate to fulfil most people's needs and have raised the question of whether 3G is needed anymore. Sure, it promises higher speeds than GPRS, but given the level of investment that still has to be made in 3G networks, wouldn't operators be better off pulling the plug and going with what they already have.

But 3G is still important for two reasons. First, it is naïve to think that demand for bandwidth will not increase dramatically as mobile application and device providers evolve their offerings. The early services today already incorporate pictures and it is natural for video, music and other sound to be embraced as the next step.

The second, and probably more important short term driver for 3G, is the fact that the current networks are running out of capacity with the growth in voice traffic. It is already hard to get a voice connection at certain times of day in many locations. GPRS users are dependent on the same fundamental capacity as the voice users as they co-exist on the same physical network. There is therefore limited room for growth meaning that the networks would be brought to their knees long before GPRS penetrated the mass market fully. The additional capacity provided by the new 3G infrastructures is therefore much needed.

As for bandwidth, we have to be a little more careful about setting our expectations. The often quoted theoretical 3G speeds of up to 384Kbps, which would provide an experience similar to a domestic ADSL connection, are unlikely to be a consistent reality for a good time to come.

There is also the issue that 3G coverage is likely to be limited to the larger urban areas and transport routes initially, so any additional bandwidth will not be available all the time for mobile users anyway. Users will roam back onto GPRS when they move out of 3G coverage.

But if the future of 3G is not challenged by the availability of GPRS, it could possibly be challenged from another quarter. Wireless LAN technology, currently based on the 802.11b networking standard, was initially designed as a wireless alternative to traditional Ethernet-based office and home networks. However, there has been a lot of activity amongst the communication service providers to provide wireless LAN access to the internet in public places.

The idea is to target the places in which users frequently gather for periods of time during which internet access would be useful. Obvious examples are airport lounges, hotels, coffee shops, exhibitions and so on. By installing wireless LANs in such areas, service providers create connectivity 'hot spots'. The rollout of public access wireless LAN is only just beginning in Europe. It is more established in the US, however, where it is becoming more common to see users wandering around with wireless LAN enabled notebooks and PDAs asking "Is this spot hot?"

The fear for mobile operators is that public access wireless LAN will eat into the premium corporate market for 3G. The notebook PC is likely to remain one of the most important mobile devices for accessing corporate applications and will probably always be the most demanding device in terms of bandwidth. Public access wireless LAN potentially offers the notebook user significantly higher bandwidth at a lower cost in the places they would be working anyway. The question of why these users would use 3G is therefore very relevant.

But luckily for the operators, it's not just about notebook PCs. Cellular data technology will clearly be embedded in phones, smartphones and other small form factor devices so pretty much everyone will ultimately be either a GPRS or 3G user. The operators will bank on extending their customer relationship to deal with all wireless connectivity requirements. And it is this relationship that is most important as it opens the door to delivering higher value services such as business applications, games, music and video. This is the only way operators have a hope of recouping their 3G investment.

It remains to be seen how this will play out. There is no doubt that 3G will become a reality in the not too distant future. The question is, who will make money from it?

Quocirca is a leading, user-facing analyst house known for its focus on the 'big picture'. For a full summary of its activities see www.quocirca.com.