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http://www.forbes.com/2001/10/08/10083g.html
Archived: 10/08/2001 at 23:58:20
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Communications
Settling For Half A Loaf NEW YORK - The last thing shell-shocked telecom investors want to hear is that third-generation wireless might turn out to be another Iridium or HDTV--an innovative but expensive communications device with no market to support it. So we're not saying that, even though it may turn out to be true. The encouraging news, however, is that the march toward 3G has led wireless carriers to an interim technology--known as 2.5G--that should prove profitable. 
AT&T Wireless (nyse: AWE - news - people) and Cingular Wireless already are offering limited 2.5G service in Seattle, and Sprint PCS (nyse: PCS - news - people) and Verizon Wireless are among the carriers moving to offer it nationwide. This service will deliver an always-on Internet connection and limited data services. That falls far short of 3G's original promise. But it's comforting to realize that even if 3G never gets here, there are still growth opportunities in wireless, and that the carriers plan to exploit them to the fullest.
As originally envisioned, 3G meant delivering a wide range of broadband Internet services over a cell phone, or over a laptop hooked up to a cell phone. But when Japan's NTT DoCoMo (nyse: NTT - news - people) rolled out the world's first 3G service a week ago, it was much reduced in concept and limited to a few thousand users in Tokyo. Don't fret about DoCoMo--it already makes plenty of money from I-mode, a less ambitious 2.5G wireless service that is hugely popular in Japan. DoCoMo will proceed with 3G slowly and carefully, and will continue to profit from I-mode in the meantime. That's a strategy telecom investors would do well to emulate. First-generation wireless--the original cell phones--offered only analog voice services. Second-generation technology was digital, offering voice and limited data. 3G also is digital, but will require the carriers to spend billions to upgrade their networks. And that's on top of the billions many of them have already spent to acquire 3G radio-spectrum licenses. That's a lot of money to bet on a technology that has not been perfected and for which no overwhelming market demand is evident. "3G is hard," says Merrill Lynch technology strategist Steven Milunovich. By comparison, 2.5G is relatively easy, requiring only an upgrade of the carriers' current 2G networks. Of course, 3G would offer extremely faster Internet connections. But Milunovich points out that there is no proof that people will pay big bucks for full-fledged mobile broadband access, not when cheaper wireless alternatives will be widely available to supplement 2.5G cell-phone services. New technologies such as Wi-Fi, a wireless Ethernet standard, will soon give people broadband access over their laptops when sitting at home, in an office, in a Starbucks or in any number of other fixed locations. Milunovich theorizes that 2.5G and the wireless Ethernet together will undercut demand for high-priced 3G. That could be bad news for carriers such as Deutsche Telekom (nyse: DT - news - people), which spent billions for 3G spectrum licenses, and for equipment firms like Ericsson (nasdaq: ERICY - news - people), which hope to build the 3G infrastructure and sell higher-priced 3G phones. So Milunovich recommends telecom firms, such as Sprint PCS and DoCoMo, that will benefit most from 2.5G and that therefore have less to lose if 3G never materializes. That makes sense even if Milunovich turns out to be overly pessimistic about 3G. Third-generation wireless remains a beautiful but distant dream for telecom investors, whereas 2.5G is a prosaic but potentially profitable reality.
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