Are 3G licences a waste of money?

"I have the fear that it could perhaps be a disaster. I suspect that we don't have the time, the manpower, or perhaps even the money to deliver the full potential."

This was the startling confession of Jorg Kramer, vice chairman of the Global Systems for Mobile Communications (GSM) Association and group director of Vodafone Mannesmann's mobile division, Mannesmann Mobilfunk, at a high-level conference of world telcos last week to discuss third-generation (3G) mobile networks and mobile commerce.

Some of the world's largest mobile network operators, including Deutsche Telekom and Vodafone Mannesmann itself, gathered at the Comverse User Forum in Marrakesh to thrash out how they might possibly be able to recoup the billions of dollars they've invested in the new mobile technology.

The news wasn't good. Not only will 3G be frighteningly expensive, they found, it also will not deliver much of the functionality that was originally promised.

"Our estimates show that we will need to double income per capita simply to pay for the licence and the construction of the network," admitted Dirk Hemmerden, director of product development with T-Motion, the mobile arm of Deutsche Telekom.

As a result, he explained that network operators desperately need to boost their revenues to try to offset this cost. "This represents income of $2000 per year per subscriber, plus an additional $30 per year for maintenance of the system," he said.

Vodafone Mannesmann has already invested more than £10bn to win its 3G licences, which promise to provide mobile devices with data transfer rates of up to 2Mbps, enabling them to run streamed audio, video and mobile commerce packages. The total amount spent in the countries where licences have been awarded - the UK, Germany, France and the Netherlands - now exceeds £60bn.

But while network operators debate how much they can feasibly charge consumers for lightweight applications such as downloaded ring tones and automated voice diary and messaging systems, it is still unclear whether it will even be technically possible to deliver such services.

Testing times
In practice, early trials have revealed that universal mobile telecommunications system (UMTS) networks will be able to transport data at only 64kbps rather than the 384kbps that was believed possible earlier in the summer. This is much lower than the theoretical limit of 2Mbps and is only marginally faster than the 56kbps offered by Orange's existing high-speed circuit switched data SIM card.

"Our tests show that 384kbps is possible," said Kramer. "But only if you are the only person using the cell, standing next to a transmitter and not moving."

Vodafone Mannesmann found in tests that streaming video over UMTS networks could only deliver an image of a moving head of passable quality. But this doesn't bode well for the company's planned services, which include unified messaging, videoconferencing, and the ability to download music.

Even worse, Vodafone Mannesmann admits that when it rolls out UMTS in the fourth quarter of this year or the first quarter of 2001, its 3G network will still be incomplete. "Companies are pushing forward the deployment of 3G because they simply can't afford to wait," said Kramer. "But at the same time, that doesn't give us time to complete the infrastructure."

As a result, the company will have to rely on using a mixture of 3G and 2.5G transmitters - something that could result in many dropped calls. "Users will effectively roam between GPRS and UMTS networks," Kramer explained.

The outcome of having to wander between 3G to 2.5G coverage could be phone crashes, dropped video in multimedia calls, or suspended internet connections. "It could affect service quality, particularly for data calls," he said. "But then again, we aren't offering guaranteed levels of service on 3G."

Not only will networks be incomplete, but Kramer believes that phone manufacturers are unlikely to deliver 3G handsets in time for Vodafone Mannesmann's launch of its 3G service. "We have to put pressure on them, but it is likely at the time of launch that the only handsets available will be from Japan," he said.

High-end phones are also expected to cost consumers up to $1000 (£600). To try to mitigate these high prices somewhat, however, the company plans to subsidise the cost of handsets for at least a year, which means they will cost nearer $700 if purchased with a contract.

Kramer admits that this is extraordinarily expensive when GSM phones are available for less than $100, but he hopes to build a loyal user base while the subsidies are still in place. "We hope that after a year or so, they will be addicted," he said. "The pressure is on us to create a need."

Under attack
But some critics accuse the network operators of having over-reached themselves in a highly competitive market. "The problem with network operators is that they aren't technologists," said Phillippe Lucas, chairman of the GSM Association services division and research director of Dolphin Telecom. "They buy this stuff, and it's only later that they realise it doesn't work."

This means that the winners are more likely to be companies such as Comverse, which sells a range of mobile network service offerings ranging from enhanced messaging servers and music download applications for phones to micro-payment systems that facilitate mobile commerce.

But another problem for the operators is knowing which applications will generate the magic $2030 income levels they require to break even. "The terrible paradox is that consumers, in our experience at least, won't pay for these services," said Francis Bernard, vice president of French company Bouygues Telecom.

Bouygues is currently testing a service that gives pre-paid subscribers free airtime in exchange for ads which interrupt their phone calls every 20 seconds. The company is currently making a small profit, but Bernard admits free services aren't a popular idea in the boardroom right now. "The attitude is that if you can't bill it, kill it," he says.

Trying to attribute blame for this mess is going to be difficult, however. The network operators must take a lot of responsibility, but the governments of the countries that held the auctions must also be held accountable. All that's pretty academic right now though. Once again, it seems as though it will be the poor old user who suffers - and pays for it - in the long run.