Take 3

Larry Lang, general manager of Cisco Systems' mobile wireless group, feels cautiously optimistic about the U.S. third-generation (3G) cellular phone and data services market. That's because, like other network and telecom equipment makers, Cisco wants to tap into a significant new revenue stream as U.S. mobile carriers revamp their networks to provide 3G services. Yet Lang isn't impressed by what he's seen so far. "We have aggressive plans for 3G," he says, "but currently the bulk of our 3G business is being done elsewhere." In other words, outside of the U.S.

By now, mobile phone users were supposed to be able to routinely access the Internet at speeds rivaling both at-home and in-office broadband technologies. Although such an environment may exist in some areas of the world, such as in parts of Europe and Asia, most U.S. cellular users must still settle for connections with data speeds slower than landline dial-up rates. "Only now is the 3G infrastructure finally coming into place," says Tole Hart, mobile and wireless analyst for research firm Gartner. "It's been a long wait."



After years of vacant promises and blown deadlines caused by the economic downturn, war, competing mobile broadband technologies and numerous other factors, service providers are finally beginning to offer 3G support over large swatches of the American landscape. Verizon Wireless, for example, now supplies 3G service in more than 30 cities, serving nearly 75 million people. Sprint, which currently provides 3G service in more than 39 metro areas with a combined population of about 129 million, plans to implement the technology systemwide by early 2006. Most other major carriers also have ambitious 3G expansion strategies in place. "I wouldn't say we're racing down the runway, but it's taking off," says Shiv Bakhshi, wireless and mobile network infrastructure analyst for research firm IDC.

Great expectations
For equipment makers, the long-awaited U.S. 3G rollout holds the promise of a sales bonanza. That's because the technology requires carriers to purchase or upgrade everything from base stations to switches to test equipment. Handset makers also stand to benefit from 3G's emergence, as consumers are encouraged to buy flashy new handsets on which to access streamed music and video content. "Opening up the 3G pipe to music and other streaming media services is going to help drive handset sales in the U.S.," says Murray Kawchuk, vice president of Nokia's North American mobile phones unit, "but at this point, we don't know exactly how high."

For equipment vendors, 3G's potential riches have yet to materialize, and the ultimate payoff may be less than what many companies hoped for or expected. To be sure, U.S. carriers are stepping up 3G hardware purchases to meet the need created by their growing networks. But many of these purchases are coming at the expense of 2G and 2.5G equipment acquisitions, which carriers are ratcheting back as they build up their 3G infrastructures. Most 3G subscribers, meanwhile, are simply swapping one type of handset for another. And so far there's been no great rush toward the new technology—despite the carriers' best efforts.

In fact, handset makers have yet to see any significant sales increase that can be directly attributed to 3G's U.S. rollout. In 2004, according to IDC stats, worldwide mobile phone shipments experienced their strongest year-to-year increase in history, rising 34 percent over 2003, with 692 million units shipped in a massive expansion driven by the demand for color displays and camera phones throughout the world. According to a mid-2005 mobile phone forecast from IDC, worldwide market growth is expected to continue in 2005, but at a slower pace, because a large number of new phones were purchased by subscribers in 2003 and 2004. "3G remains a market driven largely by other areas of the world," says Bakhshi.

Steadily falling handset prices and ever-increasing competition, leading to tighter margins, are also keeping handset makers from enjoying a 3G gold rush. "The prices are creeping down, says Hart. "I recently saw a Verizon 3G phone for $169." Hart believes that 3G handsets will soon drop below the $100 benchmark. "I don't know if it will be by this holiday season, but certainly by next holiday season," he says.

In fact, future sales growth may not come from new phone models, but by building 3G capabilities into other types of mobile devices. "I could see more games and all types of stuff for kids," says Hart. "Maybe a smartphone or a regular PDA [targeted at] executives."

Media players represent another ripe market for 3G service, as carriers begin streaming all sorts of content over high-speed links. Although most new 3G phones can play music and video on tiny screens and speakers, output quality is often marginal at best. Therefore, manufacturers of boom boxes, portable DVD players, vehicle entertainment systems and other larger, yet mobile, consumer electronics devices may want to add 3G capabilities to their products to bring their users immediate content delivery.

The digital camera market also stands to benefit from 3G technologies. Samsung's new SPH-V7800, for example, is actually more like a camera featuring built-in 3G capabilities than a 3G camera phone. The device includes an array of advanced digital camera features, including a 5 megapixel resolution, linear zoom, 4x digital zoom, auto focus, ISO settings, automatic exposure bracketing (AEB) and flash. It also provides 16 shooting modes, including self-shot, couple-shot and night-shot.

The manufacturers of wireless chips are also feeling the effects of slowing handset sales. Even with the expansion of 3G unit shipments, the overall growth of mobile phone semiconductors will slow to 6 percent annually from 2004 to 2009, forecasts IDC. The picture is even worse for base station chip vendors. Mobile base station semiconductor market revenue grew in 2004. Yet aggressive cost cutting, innovative chip design and only moderate demand for 3G services point to a flat to down market through 2008, according to Gartner.

Wireless threat
As 3G finally begins spreading its footprint across U.S. cities and suburbs, competition looms on the horizon in the form of WiMAX. Unlike today's WiFi hotspots, which generally cover no more territory than a home, office or coffee shop, WiMAX promises to blanket entire metropolitan areas with seamless wireless coverage. Wireless IP phones may use WiMAX to connect to low-cost voice over Internet protocol (VoIP) services.

Handset vendors are responding to the wireless threat with dual-mode phones that will allow users to roam between cellular and wireless services, opening yet another revenue stream for equipment vendors. Yet WiMAX may not be as big a threat as many 3G carriers fear. Research firm In-Stat (a division of EB's parent company) forecasts that only 3 percent of total (fixed and mobile) broadband subscribers, or 8.5 million subscribers worldwide, will be using WiMAX by 2009. Just 4.5 million of these customers will also subscribe to voice over WiMAX (VoWiMAX) services.

Ultimately, the impact of 3G's U.S. rollout may not be fully felt by equipment makers for several years, because much depends on how many subscribers the carriers are able to eventually attract. And that matter rests largely in the hands of the carriers and their suppliers. "What is really needed is greater ease of use and better pricing plans," says IDC's Bakhshi, "the kind of business elements that make for a technology's diffusion."