We consumers have all been sitting patiently, waiting for the wonderful explosion of new capabilities promised by so-called third-generation mobile phones. Why have we waited so long? Why have there been so many apparent false starts? Why for example hasn't the "3" telephone network from Hutchison taken off as hoped in the six months-plus since it has been launched?
The reason for delay so far has been the sheer technical complexity of 3G technology and the difficulties that were encountered in making it work - difficulties that were considerably greater than originally anticipated. But those problems have been largely solved. The chief reason there will be further delays going forward is in large part the failure by your and my phone company to pay proper attention to the most important element of 3G - that is, the handset.
In the world of 2G, the handset is essentially a carrier of voice data and therefore required less sophistication in terms of features and usability - it is an exaggeration, but not an egregious one, to say that a 2G phone is a box that you speak into. But with 3G technology a paradigm shift occurs from voice to content. As operators move toward content provision and content gateways, rather than just conduits for calls, the matter of how the user interacts with his phone becomes much more important than it had been in the 2G world. The operators have misjudged this paradigm shift and underinvested in the handset; as a result, the 3G handsets that did arrive did not meet consumer needs, depressing take-up of 3G services.
Telephone companies have spent an absolute fortune getting ready to deliver 3G. First, they spent an astounding 100 billion euros across Europe to buy licenses to provide this technology. This spending must have brought a rare if temporary smile to the faces of finance ministers across Europe, and a reinforcement of their suspicion that business is always good for a little extra money when push comes to shove. But the acquiring of these licenses didn't actually bring the technology to the customer.
Now, they're spending between 25 euros and 50 billion euros across Europe on the 3G equipment that will receive and broadcast your 3G telephone calls and mine - mostly unnoticed, 3G masts (so-called base stations) and other infrastructure have been sprouting across Europe over the past couple of years. This additional spending brought something of a smile to the faces of the finance directors of Motorola, Nokia and Ericsson (even though the margins on these base stations were thin-to-negative), and perhaps helped prevent the telecom crash from becoming a near-permanent rout. But again, the building of these networks did not actually put 3G into the hands of us, the customers.
At the same time that the telephone network companies have been spending these gigantic sums, from what we can see they have spent almost nothing - sometimes less than 10 million euros from an individual company - in supporting the development of 3G handsets. This task they have left to the handset manufacturers, the most advanced of which (such as NEC) are in the Far East (although followed closely by Nokia, Ericsson and others in Europe).
The agreement that network providers made with the handset manufacturers seems to have been "we will build the networks - you will build the handsets - we will then move forward together successfully." Reflecting this split of responsibilities, the liaison teams that the telcos have set up to work with the handset manufacturers have been small, under-resourced, and underinfluential.
On the other side of this deal, the 3G handset manufacturers have been too preoccupied with the very real technical issues of getting the handsets to work to pay sufficient attention to features, usability, and other such consumer-oriented issues. And the handset manufacturers are in any event at one step removed from us, the handset customer - and so are less likely to understand fully what it is that we need or want.
Somewhat predictably, therefore, the telcos' hands-off (forgive me) approach has resulted in 3G handsets that, when they finally arrived, were big and clunky. Handsets are the most difficult part of the equation to get right. In a handset, unlike with network infrastructure, a giant amount of technology has to be crammed into an extremely small physical space, using just one or two not-very-powerful chips as the basic engine of the phone. Add to this the fact that an enormous amount of testing has to be done with all these mobile phones, to ensure that they work with any UMTS network, anywhere in the world, interacting with infrastructure equipment from any one of half a dozen or more providers, and you face the inevitable consequence that handsets were bound to arrive late and would be inadequate when they did arrive.
Hutchison's "3" has learned this to its cost: the NEC handsets that it has been offering for the past six months have been insufficient to entice many potential customers into signing up. And yet we know that if you can come up with a great handset, customers will rush to buy. In Japan, DoCoMo has so far signed up over three million customers onto its 3G service - over one million in the past month alone, as new and exciting handsets became available. DoCoMo has a history of working very closely with handset manufacturers, to create handsets that customers will want, and will run out to buy. In Europe, the network providers have been less committed to allocating significant resources in that direction.
As we contemplate the gigantic sums that network operators have sunk into 3G, we have to wonder which among them will be the winners. It is becoming increasingly clear that the way to a winning position is to focus on the handset. Traditional mobile phones are under challenge as never before by mould-breaking concepts such as the Blackberry and the Treo. The new Nokia 6000, or the Sony Ericsson 800, both large sellers, are doing better, but don't go anywhere near satisfying what customers want.
For consumers, as the experience in Japan shows, video capabilities will prove irresistible. This new competitive field will be won by the network providers with the best phones. They in turn will be the firms that start thinking and changing their strategic approach to the business, now. These companies will allocate more resources to the handset side: currently the majority of network providers are in detached mode, leaving it to the handset manufacturers to define the features, and accepting more or less whatever they are offered.
Forward-looking network providers should be looking to speed up the pace of progress and improve their process of interaction with the handset manufacturers so that the handsets come quicker and work more effectively with that provider's particular network. And finally, the winners among the network companies will be those who achieve the differentiation -- in both hardware and software - that is then obtainable only by those users who sign up to that particular network.
Getting deeper into the handset space will require a change of mindset, and a different way of organization, for the major network providers. The current allocation of resources - billions for licenses and infrastructure, yet hardly tens of millions for handsets - doesn't make sense. If 3G is to flourish, we need the network providers - the ones who above all know and understand their customers - to focus on the handset, that one part of the whole value chain that customers actually see, touch, and therefore base up to 90% of their buying decision on. If the network providers can make this change of mindset, the explosion of usage in the 3G space will be all that has been predicted, and more - and sooner.
