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Monday, August 1, 2011

3G: The Unfulfilled Promises

2G wireless needed only basic voice and text to ignite a revolution where “mobility” was the killer app. But 3G started with high expectations deliver a new, unplugged broadband experience that would support a whole new breed of multimedia applications. The dominant theory at the time was that users would pay more for the new, rich set of broadband services that 3G could offer, presenting a large revenue opportunity.
The expectations were so high that at some point leading wireless carriers in Europe paid a total of $70 billion for 3G licenses.9 Unfortunately, this “irrational exuberance” led to over 160 billion in debt and an average drop in stock price of 60% among these same companies. 3G services have been extremely slow to penetrate the market and deliver real revenues.

Outdated performance targets

When 3G standards development started in 1998, residential roadband penetration in the world was relatively low. Speeds typically were in the 256 to 284Kbps range for DSL and cable modems. As a result, the reference point for 3G was to design a system that offered 128Kbps to moving cars, 384Kbps to mobile pedestrians, and 2Mbps to fixed users. As fixed broadband penetration continued to advance around the world, speeds above 1Mbps became commonplace and made a target like 384Kbps seem obsolete. In reality, 3G was unable to deliver even the target levels of performance due to unexpected wireless performance issues following launch. As 3G failed to meet the increasing thirst for speed, High-Speed Packet Access (HSPA) was introduced to enhance the performance of existing GSM-based cellular systems. This offered the potential for much higher bandwidth for an individual user (in excess of 7Mbps), but at the expense of reduced capacity for other voice and data users.

As a result, carriers are rolled out HSPA carefully in their existing service areas and HSPA+ was developed to increase the speed and improve the overall capacity per cell.

Intellectual property ownership

By moving to CDMA as the technology platform for 3G, IP and licensing costs became a significant issue. Only a few companies, like Qualcomm and Interdigital, owned a significant share of the necessary IP for Universal Mobile Telecommunications System (UMTS) (over 256 related patents). This meant paying several dollars in royalties per handset and significantly more for base stations that used Wideband CDMA (WCDMA). In 2007, Qualcomm and Ericsson (one of the largest UMTS equipment providers and royalty payers) reached a settlement to resolve the IP/royalty dispute. However, licensing costs remained an issue for 3G devices. This was a major factor in the Chinese deciding to develop their own standard, SC-TDMA. In addition, the CDMA standard requires GPS for timing. The Chinese government did not want to be in the uncomfortable position of giving the U.S. government the power to turn off its cell phone network! However, the Chinese 3G standard was then delayed several times as they found themselves scrambling for a wireless broadband solution for the Beijing Olympics in the summer of 2008. They ended up relying on 2.5G technologies to bridge the gap. (This fallback strategy allowed Chinese carriers to offer decent speeds for watching multimedia coverage of the events and capture significant data and voice roaming fees during the 2008 Games.)

WiFi disruption

WiFi had a crippling effect on the rollout of 3G. The impact starts with the disruptive economics. Because the bandwidth is higher (11Mbps and greater versus less than 1Mbps), the spectrum is free (except for the supporting broadband access charge, if any). And an access point costs hundreds versus hundreds of thousands of dollars. Therefore, WiFi can achieve a much lower cost per bit transmitted. The drawback of WiFi had always been lack of coverage versus cellular. But as hot spots have become ubiquitous in public areas, offices, and homes, that disparity has been diminished. Many users seek out hot spots to get the higher bandwidth and lower cost (if not free). Now that Skype and other VoIP providers offer mobile versions of their service (like Pocket- Skype), WiFi is also attacking the 3G voice market in addition to just data. Any calling taking place within a WiFi hot spot can be sent through WiFi at zero incremental cost over the broadband access itself. This is not something the carriers anticipated when 3G was on the drawing board and they were shelling out billions for licenses.

One carrier saw the early signals of WiFi disruption and went on the offensive. That was T-Mobile, the wireless arm of Deutsche Telkom. It bought access rights to key public areas such as airports and train stations. It cut deals with top retailers like Starbucks, Barnes & Noble, and others to play both sides of the war. Instead of offering a “best-effort” service like WiFi typically provides, T-Mobile sought to provide a higher-quality managed experience that would cater to high-end mobile professionals. Other carriers sneered at this strategy as being a money loser. Meanwhile, T-Mobile is the leading hot spot provider in the United States. It can give customers a seamless experience by offering handsets that support roaming between WiFi and 3G and offering generic wireless access (sometimes called Unlicensed Mobile Access [UMA]). This gives users the benefit of browsing at high speeds and no-cost voice over IP when in range of a hot spot. And they can still access the broader coverage of cellular when WiFi is unavailable.

Lack of compelling applications

So where is the killer app? That is what a lot of carriers were asking after the initial rollout of 3G. Other than faster web access, no other real bandwidth grabbers were being heavily used. Promising apps like networked gaming and mobile TV were still relatively nascent when 3G was being deployed. You could argue that some of this was having devices that could render a rich interactive experience.

Handset limitations

Until the iPhone, the basic handset design changed only incrementally as bandwidth started to increase. Browsing the web still required a sluggish translation to have the page content fit the small screen, offsetting many of the improvements in bandwidth.

A key insight here is that Wireless providers overinvested in 3G on the promise of wireless broadband revenues, but it has fallen far short of expectations.

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