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3G waits for cue

Krishnan Thiagarajan

With unsure markets, there are fears that `mobile Internet' might not go places, after all.

IN January 2001, Nortel Networks announced that its fourth-quarter earnings would fall short of expectations, stating that capital was tightening within the telecom sector. A month later, Nortel cut back on both its revenue and earnings estimates for the year, citing the economic downturn and the concomitant cutback in infrastructure spending by network operators. It also announced phased layoffs affecting about 10,000 employees. And in mid-March, Nortel once again lowered its revenue forecast for the f irst quarter of 2001 and announced further layoffs numbering about 5,000 employees. This time around, the senior management stated that given the breadth of the economic downturn, it was not in a position to provide earnings guidance or comment on the pr ognosis for the entire telecom industry.

On March 12, Ericsson, the Swedish wireless infrastructure vendor and handset manufacturer, issued a loss warning to the tune of $ 500 million in contrast to an earlier forecast of break-even in the first quarter. As if to compound matters, the company a lso added that it would miss the previous revenue target of 15 per cent.

On March 13, Motorola, whose wireless operations were turning gloomy, announced that it was slashing 7,000 jobs in its handset division on account of a revenue slowdown. These job cuts were close on the heels of a planned reduction of 9,000 employees ann ounced between December and February 2001.

On March 15, Nokia, the Finland-based handset manufacturer, announced that it was scaling down its revenue-growth forecast from 25-30 per cent to 20 per cent. The company, however, indicated that it would meet the first-quarter earnings forecast. With th e steady stream of depressing news from key infrastructure vendors in the wireless sector, is the European vision of ``mobile Internet'' lying in tatters? To some extent, yes. But is this likely to put the concept of mobile Internet on the backburner? An unequivocal No. Moreover, the stream of depressing news has cut away the excessive hype surrounding the technology. And that will work in favour of 3G or third generation technology - the latest in the mobile Internet revolution - in the long run.

Before we get into a debate on why investments in "mobile Internet" have become inevitable, let us dwell on how this innovative technology emerged and what it promises consumers in the long run.

Mobile Internet and its potentialMobile Internet emerged through the integration or convergence of two technology mediums - mobile phones and the Internet, both considered the biggest innovations in infocommunications in the past decade. The combination, it was felt, would help telecom players tap the true potential of both mediums. Mobile Internet is poised to usher in the single-largest technological revolution since the advent of the personal computer in the 1980s.

Fundamentally, 3G aims to transform the mobile world from a "voice communications" medium into a highly-interactive "mobile multimedia" platform offering high-speed Internet access and broadband capabilities in the form of streaming audio and video. On t he applications side, 3G can offer always-on access to the Internet, provide mobile infotainment, mobile commerce and location-based services. Why the pall over 3G?The crisis facing 3G can be traced to massive over-bidding for licences by European networ k operators in West Germany, the Netherlands and Great Britain between the second and third quarters last year. Unlike Finland, where licences were offered free of cost, some key European countries chose to auction frequency spectrum to network operators / telecom carriers. Given the overall bullish sentiment in the telecom industry and the hype surrounding 3G, players in the UK, Germany and the Netherlands bid close to $ 100 billion for five licences in Britain and the Netherlands and six licences in Ge rmany. The licensees ranged from UK-based Vodafone (which had grown through acquisition of Airtouch in the US and Mannesmann in Germany), the wireless outfits acquired by British Telecom, France Telecom and Deutsche Telecom and a couple of mobile consort iums.

As enthusiasm waned for telecom stocks towards the third and fourth quarters of 2000, financiers, investment bankers and analysts took a hard look at the debt portfolio of the licensees and the business projections of 3G investments. And, suddenly, the e xtraordinary debt burden and the possibility of long paybacks led credit rating agencies to downgrade 3G licensees to ``near-junk'' status. It forced most players to undertake a massive restructuring of debt and reorganisation/ sale of assets to raise fi nancial resources for 3G network construction and deployment. To some extent, the massive restructuring is likely to contribute to a slowdown in 3G network construction. This, along with the US slowdown affecting handset sales, has hit the financial pros pects of infrastructure vendors such as Nortel, Motorola, Ericsson and Nokia. And this was reflected in the depressed revenue/ earnings forecast of the companies. Trends in EuropeSo, can we conclude that 3G is doomed or, at least, poised for a slow start in different parts of Europe? Well, to say that 3G is doomed might be unjustified because network roll-outs are expected to be the fastest in Europe, with the possible exception of NTT DoCoMo of Japan. And a slow start, too, seems unlikely as the slowdo wn in investments might be temporary, until existing licensees reorganise their debt/ asset portfolios. The resurgence of investment flows into 3G by network operators/ infrastructure vendors by the third/ fourth quarter of 2001 is inevitable because:

The switch from voice-centric to data-centric applications has made considerable headway in the European region.

The continuous growth in subscriber base, especially in the European region, has created the need for greater capacity and robust networks.

The markets for existing mobile applications are saturated and consumers are clamouring for 3G and 3G-like services. While mobile penetration in the European region has exceeded 55 per cent, the range of mobile applications has remained stagnant. Given t he rich possibilities afforded by 3G, most players will make early investments to exploit newer applications.

In the future, the following trends are likely to dictate developments in the 3G landscape in the European region:

Accelerated roll-out: Most telecom analysts have forecast that the payback on 3G investment would be about seven years where licences were provided free and 15 years, where licences were auctioned. Hence, countries such as Finland (free licences) and Spa in (nominal licence fee) start off on a strong footing compared to countries such as West Germany, the UK and the Netherlands where, in turn, the pressure is greater on network operators to accelerate the roll-out of 3G networks and earn revenues early. And obviously that will trigger a spate of investments in the 3G arena.

Shakeout on the cards: Among infrastructure vendors, a major battle for marketshare appears to be on the cards. As 3G spectrum auctions have turned out to be expensive for most network operators, they are likely to drive a hard bargain for project costs associated with network roll-out from infrastructure vendors such as Nokia, Ericsson, Motorola, Nortel, Alcatel and Siemens. In addition, network operators are also likely to expect vendor financing for network construction to ease their financial proble ms. The cut-throat competition among vendors and the risks associated with vendor financing may result in a shakeout in the infrastructure vendor market, leaving only a couple or, at the most, three players to exploit the market space.

Low margin of error: The intense pressure to generate faster paybacks makes it imperative for operators to organise highly co-ordinated networks, timely delivery of handsets aligned to the 3G launch and most-attractive portfolio of applications to rope i n customers. After the huge investments made in 3G auctions, it is a case of "deliver" or "perish" for network operators, leaving hardly any margin for error. The second part of this article will look at "The lessons of the European 3G experiment for the Asia Pacific markets". It will be featured in the e-World edition dated May 2, 2001.

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