'Digital natives' could make the 4G mobile phone network a success
The much-heralded 3G revolution earlier this millennium failed to excite customers. But despite the limited commercial success of third-generation mobile phones, the industry talk at its annual get-together, the Mobile World Congress in Barcelona in February, was all about the future 4G networks.
We are always too optimistic about the adoption of new technologies. But a new generation of digital-savvy customers combined with the advanced possibilities that 4G offers might make all the difference this time.
Past experience is not encouraging. Seven years after the 3G auction in Britain, a mere 7.8% of customers have taken up the technology that offers faster and more innovative services such as video calls and broadband data. While this figure is closer to 20% in Italy and over 50% in Japan, the majority of global customers cannot see any compelling applications or services in 3G. The technology promised mobile Internet to people who had just started using it at home. But the devices were so bulky and the speed of the network so slow that it never caught on.
The 4G technology may correct these shortcomings. It enables true broadband through a mobile connection and will be much better at connecting to the Internet. Surfing the Web on your mobile device will be much like doing it now from a desktop computer with a standard two megabyte broadband connection.
There are two different 4G technologies, WiMAX and the next-generation 3G, LTE, which could be used to offer these services. Their technical capabilities are comparable but they are backed by different companies. Among vendors, Intel and Motorola support WiMAX while Nokia Siemens Networks and Ericsson are pushing LTE. This division is no disadvantage. The competition will drive speed, innovation and value for the customer.
The second set of players are mobile network operators. Those who have already spent billions in 3G are likely to champion the related LTE technology. It would be not quite as expensive as building a WiMAX system from scratch and their technicians would be more familiar with the system. And, most importantly, the operators are under pressure from those mobile phone manufacturers who are backing LTE.
The technology is only part of the story. Demand is the other crucial factor. While 3G was rolled out at a time when only few people really wanted it, things are much different today. A recent PA Consulting study showed that "Digital Natives" – the generation that has grown up with modern technology – has fundamentally different communications patterns to previous generations. Specifically, they use many different communications channels, such as instant messaging, texting, social networking Internet sites and regular mobile phone calls. According to the PA survey, over 70% of digital natives would see an advantage in true wireless broadband Internet being made available anywhere, anytime. Data services are expected to account for €40 billion ($63.72 billion) by 2012 according to investment analyst firm Bernstein.
As the mobile telecoms' voice markets reach maturity, 4G, unlike 3G, could provide a strong source of new revenues. One side effect is that 4G will change the market's dynamics, encouraging other players – content providers such as Google, iTunes, YouTube, movie companies, etc. – to enter the market.
This, though, would also pose major challenges for the current mobile operators: are they going to become "dumb pipes" that just carry traffic for "dumb prices," or will the consumer lose out as operators may try to protect revenues by controlling the available content?
Much of the demand will likely be just for raw Internet access for which operators could only charge a relatively low, flat fee. In order to increase revenue streams, they'll probably try to sell a whole package of services and applications, such as music downloads and e-mail. It'll be much like a fight between traditional and low-cost airlines. Chances are, many customers will do without the peanuts and go for the raw Internet access. This fine balancing act is not only going to determine the success of the technology, but the make-up of the whole industry.
The other market dynamic is financing. Thanks to the subprime fallout, many Western banks are simply not in a position to provide – and most certainly underwrite – the large sums necessary for the new technology. It would cost at least £1 billion ($1.99 billion) to build a U.K.-wide 4G network, and that's without the IT systems, manpower, marketing etc. Plus, there are the costs for the spectrum. This summer, the British government will auction the spectrum for 4G technology. It's unlikely that it will make as much money as the last time around, when five operators paid about £4 billion each for the 3G spectrum. This time, the whole auction will probably generate not more than £1 billion.
In addition, banks have become more cautious about the industry. A Dresdner Kleinwort executive told us at a recent seminar that "most investment or credit committees have reviewed business plans underpinned by technologies that have subsequently failed to deliver." This has led to "a degree of skepticism," he said.
However, Western banks are not the only option. The Middle East and Asian economies can help finance this technology and seem willing to embrace its potential. The Kuwait Finance House, for example, backed one of the first nationwide WiMAX network operators, Mena Telecom, in Bahrain.
Even though this technology is not going to generate revenues overnight, mobile operators need to be prepared for 4G's potential benefits. However, they must not take the 3G approach to demand management, which was simply "build it and they'll come." History has shown us that this is a fallacy.
Mr. Elliott is a wireless broadband specialist at PA Consulting Group.