Wireless secrets and lies

Wireless secrets and lies

While Americans look to cable modems and DSL to fulfill their broadband fantasies, Europeans want bandwidth for their mobile phones. The Continent's major telecom players have spent the last few years wandering in a financial desert, searching for an elusive oasis they are convinced will revive them.

That oasis is the wireless Internet, specifically in the form of the multimedia and much-anticipated 3G, or third-generation, mobile phones.

The persistence is understandable, not least because it's impossible to overstate the importance of wireless technology in Europe. At the start of this year, 63 per cent of European Union citizens had a mobile phone, more than twice the percentage who had home Internet access. In some countries - if you exclude, say, infants and prisoners - mobile penetration is more than 100 per cent.

Like so many Net fantasies before it, 3G promises to run your life more smoothly than ever before, and without wires. Here's how Nokia's Web site describes it: "3G is videoconferencing in a taxi. 3G is watching clips from your favorite soap in the train; 3G is sending images straight from the field to headquarters for analysis; 3G is sharing your Moroccan vacation with your friend - from Morocco."

It's also serious money. Mobile telecommunications in the EU is a $US200 billion industry with a growth rate of 12.5 per cent a year. Europe's various operators spent a staggering $130 billion last year on licenses to offer 3G services and will likely spend as much this year to build out their networks.

But the 3G oasis as it currently is envisioned looks like a mirage. Financial analysts doubt the business proposition, engineers question the technology and consumers emit devilishly mixed signals. Still, the telecoms continue to trudge through. There is no turning back - at this point, they have too much invested in 3G.

In the near future, the wireless Internet may play as important a role in our lives as the PC version does now. But to get there, the wireless industry needs to disavow itself of some pretty overblown myths. They are:

1. Too Hot to Handle

"3G technology will be so revolutionary that it will sell itself."

The promise of experiencing a true multimedia experience - most notably full-motion video - over a handheld device is seductive. That's what 3G technology has long promised: a bridge across the chasm between cell phones and PCs. Consumers know that cramming such rich capabilities into a cell phone is a tough task, and the mobile companies have admitted the challenge, all the while promising that the delays in bringing 3G to market lie mostly in the software.

But skeptics suspect the delay hints at a darker truth: 3G technology doesn't work.

Jack McCue, former CEO of BellSouth Europe and now a senior adviser at UBS Warburg, predicts connection speeds for 3G will be nowhere near as fast as they need to be to deliver the data-intensive transmissions that have been promised. He bases his prediction in part on the claims of Arto Karila, who until recently was a computer science professor at the Helsinki University of Technology. "I don't think the 3G operators have thought about their battery problems," Karila says. "There is no solution available."

According to Karila, the problem would be obvious to anyone who used a 3G phone: The device would become unbearably hot. A battery for a 3G phone operating at 2Mbps would burn out every few minutes, and would make the phone too hot to handle. Karila says mobile engineers have admitted the problem to him and now project maximum speeds of 256Kbps or 512Kbps - which may not be enough to deliver the streaming video 3G companies have hyped.

In late May, when Japan's NTT DoCoMo gave away trial 3G handsets, analysts speculated that they operated at speeds lower than 200Kbps. That was the least of DoCoMo's problems. Last week, the company recalled 1,600 handsets following customer complaints about the new 3G service, including reports that the phones generated excessive heat.

Even if 3G works flawlessly, it will be adopted at different times in different markets. This means that many consumers are going to need "hybrid" handsets that allow access both to 2.5G and 3G services, possibly for several years.

There's only one problem: No one has yet seen such a device.

2. A la I-Mode

"The success of NTT DoCoMo's I-mode in Japan proves there is a lucrative audience for advanced wireless services."

It's true that I-mode has come much closer than any American or European service to providing a wireless Internet. Like the Internet, I-mode breaks up and transmits information in discrete electronic packets, and I-mode is compatible with HTML, so ordinary Web sites can be viewed from an I-mode handset.

Perhaps most important, I-mode has done what almost no Internet company has figured out: get users to pay for content. According to DoCoMo, approximately 30 per cent of the sites designed for I-mode are premium (that is, paid) sites, and about half of I-mode's 23 million users subscribe to at least one premium site.

That sounds impressive, until you look at what they pay: The fees are between $1 and $3 a month. You've got to have a very large customer base to make any money on that kind of pricing. It's going to be some time before the total U.S. or European 3G audience reaches 30 million. Assuming the same rate of premium subscribers, that means a maximum of about $27 million a month available to a few thousand content providers - not exactly an industry tidal wave.

Moreover, the business model that enables content sites to flourish through I-mode depends on nearly all the revenue going back to the content providers. So far, US and European mobile operators have been unwilling to share the wealth at that level. If they continue to balk, they may find themselves incapable of providing the personalised services that make I-mode so popular. If they give over to I-mode's business model, then it's not clear how they can make money. It's a riddle that few companies seem eager to solve.

3. Does Bluetooth Have Any Bite?

"Bluetooth will create a whole new world of devices that will stimulate the demand for wireless services, on and off the Internet. In just three to four years, Bluetooth will operate in more than a billion devices worldwide, letting computers talk to phones, PDAs and regular appliances without any wires."

To many, Bluetooth represents wireless nirvana. Named after a 10th-century Viking king, Bluetooth was developed by two engineers from Sweden's L.M. Ericsson Telephone Co. in 1994. Its basic function is to allow different electronic devices to connect with one another without wires. So your Palm can talk to your computer; your computer can talk to the Internet without a phone line; and both can talk to your stereo.

For that to happen, though, the technology needs to prove it can work. So far, Bluetooth has suffered the quintessential technology horror story: trade show demonstrations that don't work. From California to Hanover, Germany, reporters and analysts have watched Bluetooth demonstrators fall flat on their faces. Bluetooth boosters insist such stories are purely anecdotal, and that the bugs will be worked out.

It's true that Bluetooth is a powerful idea with some good science behind it. And it uses the 2.4-GHz frequency, which, unlike the costly 3G spectrum, has the virtue of being unregulated. Both Compaq and Hewlett-Packard recently released devices that are Bluetooth-compatible.

But Bluetooth has some serious problems that have yet to be addressed. Start with compatibility: In the United States, there are already wireless networking technologies in use. One of them, 802.11 (the horridly technical name comes from an engineering standard) is considered the market leader; Starbucks has announced it will install 802.11 in some of its US cafes to allow customers with laptops wireless access to the Net. But 802.11 is incompatible with Bluetooth, because both use the same frequency spectrum. There are companies working to harmonize the two technologies, but as of yet no firm has been able to solve the protocol problem.

This technological conflict may be why Microsoft, an early proponent of Bluetooth, decided against incorporating Bluetooth into Windows XP.

Bluetooth also leaks like a rusty pail. Both Bluetooth and 802.11 appear to have significant security problems. James Atkinson, a security consultant, believes Bluetooth's architecture is intrinsically insecure. "A couple of high-school kids with a scanner and a soldering iron could crack it in minutes. It wouldn't even slow down a professional," says Atkinson, who has security experience in both government and private industry.

Such predictions, like those of Y2K anarchy, may be bunk. But until Bluetooth technology begins passing some crucial market tests, it's hard to see how it will be widely adopted for any real-world Internet applications.

4. M People

"The wireless world, especially in Europe, is ready and eager to embrace 'm-commerce.'" Scores of companies have sprung up recently promising that in just a few years, Europeans will trade stocks, pay bills and do a good deal of their shopping via their phones. Especially because mobile phones can locate customers precisely, the purveyors of m-commerce are confident that location-tailored telephone commerce is going to be huge.

It is certainly true that Europeans have agreed to pay for certain transactions over the phone, in some cases more quickly than could have been predicted. Approximately 10 billion SMS messages worldwide are sent every month, up from zero just a few years ago. (In the United Kingdom alone, the number will pass 1 billion a month some time this year.) Collectively, those text messages represent real money; some European telecom firms now count on SMS messages for between 10 per cent and 15 per cent of their revenue.

But consumers are billed for those services through their phones, and at pennies per transaction. It's a huge leap from there to a Web-like system where the product or service is not delivered through the phone itself, and where the provider is separate from the merchant. Most mobile providers have no experience or infrastructure for the back end of m-commerce. "The mobile guys have diddly-squat," says Keith Woolcock, a wireless analyst with Nomura. "They're going to have to form alliances with AOL and Microsoft," and that will eat into badly needed revenue.

Then there's the security issue again. Probably the least-discussed barrier to m-commerce is the lack of security and privacy in wireless transactions. A recent survey conducted by Boston Consulting Group uncovered deep mistrust in this area. In Sweden, a country where mobile phones are as ubiquitous as anywhere on the planet (more than seven out of 10 adults use them), an astounding 87 per cent of consumers said they were concerned about sending their credit card number over a mobile network.

That surprisingly high figure could stem from the fact that, compared with many developed nations, Sweden has relatively low credit-card usage. Even so, the figure for concerned consumers in the United States is 74 per cent; in Japan it's 83 per cent. Consumer fears about security leaks in Internet and wireless networks may be overblown. But when a hacker working on a Brooklyn, N.Y., public library computer can steal banking and credit card details from the likes of George Soros and Ross Perot, as happened recently, public wariness seems justified.

Overblown or not, consumer fear is a huge marketing challenge, and one that mobile operators and m-commerce purveyors seem ill-equipped to tackle.

5. Dial "M" for Moneymaker

"The imminent arrival of 3G phones will create a massive market for wireless data services."

This is the mighty myth, the one that launched $130 billion in frenzied license auctions. According to widespread predictions made just two years ago, 3G phones were supposed to be on the market by now, offering customers mobile data speeds of up to 2Mbps. (That is approximately 40 times faster than a 56Kbps dialup connection, and would presumably allow for easy viewing of moving color images.) Instead, 2.5G phones are just now being introduced, and many companies have had to postpone their 3G launches. Siemens AG recently estimated that by mid-decade, only 15 per cent of European subscribers will be using 3G.

By itself, delay does not mean failure. But the pressure is acute because of the debt that major wireless operators acquired in order to obtain spectrum licenses. (At Deutsche Telekom AG, for example, debt reached more than $50 billion, and the company's credit rating hinged on junk-bond status.) Furthermore, the full rollout of third-generation services requires building a vast network of radio towers and base stations. That expense will almost certainly add another $100 billion to the 3G bill, possibly twice that amount. Earlier this month, the German government said it would allow 3G license winners to share network expenses. It's far from clear, though, that such post-auction niceties will withstand legal challenges from those who were outbid.

The longer these services are delayed, the more market share they may lose to cheaper services called 4G. As UBS Warburg's McCue puts it: "I haven't seen one business plan for 3G that makes sense. Not one."

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