A New Year, Same Old Story?
By Dan Briody, Mon Jan 07 00:00:00 GMT 2002
Parting is such sweet sorrow, except in the case of 2001, which everyone in the wireless industry can't wait to kiss goodbye.
After a year like this, it's hard to fault anyone in the wireless industry for looking ahead to 2002. Between disappointing handset sales, deflated 3G expectations, mass layoffs, and four straight quarters of poor earnings, 2001 is looking like a good year to forget.
The good news is that 2002 is shaping up decidedly better. After all, it couldn't get much worse. And while the coming year may not fulfill everyone's wildest wireless dreams, it will at least begin to show the promise of some great new technologies. And that makes 2002 a year worth looking forward to. Relatively speaking.
Wireless carriers probably had it the worst of anyone in 2001. After spending more than $100 billion dollars (US) on 3G spectrum license auctions in Europe in late 2000, wireless operators found themselves in the unenviable position of having to justify the exorbitant costs...immediately. This, of course, was entirely impossible, since the benefits of 3G will not be realized for years to come. But that didn't stop investors from trashing wireless stocks as the returns on investment in spectrum were not forthcoming.
Worse, it forced carriers to hype up 3G services that were not ready for prime time, and rushed operators into setting up 3G networks well before it was appropriate. Japan's NTT DoCoMo was the unfortunate recipient of reams of bad press when its 3G network was delayed after months of hype. But they were just the first.
In the coming year, carriers will continue to spend gobs of money, this time on building out the expensive 3G networks that are so crucial to their future success. And it is this continued high level of capital expenditure that will drive an enormous wave of consolidation among the wireless industry.
Although some analysts believe that operators will continue to cut back on capital expenditures. Pip Coburn, UBS Warburg's technology strategist, believes that cap ex spending will be down in 2002 over 2001, an ugly trend for equipment manufacturers. Some blockbuster deals along the lines of the Deutsche Telekom acquisition of VoiceStream are anticipated in 2002 as wireless carriers huddle together for warmth during the long, wireless winter.
In particular, analysts are expecting a great deal of international interest in the United States, as European and Asian powerhouses attempt to tap into the immature US market. According to Martin Dunsby, wireless analyst at Deloitte Consulting, says that carriers are slowly coming to recognize "that is doesn't really help to have six completely different parallel networks that don't talk to each other."
In fact, much of the consolidation has already begun, as carriers look for creative ways to cut costs and better manage their expensive networks. As wireless operators continue to encounter the high costs of upgrading their networks, from 2G to 2.5G to 3G, they are seeing the benefits of working together.
Experts say that in 2002, network sharing will be the order of the day. British Telecom and Deutsche Telekom have already set the trend in motion when they agreed to share networks throughout Europe. More of the same is expected for the rest of the year.
Meanwhile, 2002 should see an onslaught of mobile virtual network operators (MVNOs), an arrangement pioneered by mega-conglomerate Virgin, when it became the fastest growing wireless service in the U.K., without even owning its network. Since then, Virgin has struck a deal with Sprint PCS in the U.S., and other similar deals are on the way.
One of the biggest X factors in the wireless game in 2002 will be wireless LANs, or 802.11 networks. How carriers choose to tackle this stickiest of situations will say a lot about their long-term viability. A recent report from U.K.-based market research firm Analysys says that wireless LANs could usurp as much as 15 percent of 3G revenues from carriers. That would be a cut in sales that carriers cannot afford.
So look for carriers to start getting involved in the wireless LAN business, by either acquiring start-ups that specialize in the fledgling technology, or by growing wireless LAN divisions organically.
A helping handset
To say that 2001 was a long year for handset makers would be the world's greatest understatement. Expectations for handset sales were bloated since the beginning of the year, and eventually it became clear that original estimates of over half a billion were gradually pared down to under 400 million. Delays in 3G handsets continue to dog the industry.
Making 2001 a distant memory in 2002 will require some serious technological advancement on the part of handset makers. With next-generation networks in various stages of development, consumers will be looking for devices that can operate over multiple wireless networks, using a variety of protocols. These so-called multi-mode, or dual-mode phones will force handset makers to concentrate on hardcore engineering, challenging their ability to add more features without sacrificing price or battery life.
And the adoption of newer devices, and services, like Research in Motion pagers and Palm.net, have put added pressure on handset makers to keep themselves relevant in this fast-evolving market. Whatever they do, handset makers will have to give consumers a compelling reason to upgrade their cell phones, rather than relying on first-time sales. With saturation levels reaching as high as 90 percent in some European countries, that gravy train is about to run dry.
Basic building blocks
For the folks that make the infrastructure foundation of the mobile Internet, 2002 will not be without its challenges. After a 2001 full of vendor-financing deals employed just to keep their customers afloat, equipment manufacturers are faced with making mobile networks ever-more efficient, helping carriers to squeeze more dollars out of the costly beasts. Last year was the worst year in the history of two of the worlds largest telecom equipment manufacturers, Motorola and Lucent, who collectively laid off enough people to populate a mid-sized American city.
According to Brian Modoff, analyst at Deutsche Banc Alex Brown," every week there is news of yet another European carrier announcing a delay in its 3G commercial launch, with 3G handset availability, or lack thereof, being the primary culprit." The more these networks are delayed, the less hardware gets sold. In fact, even Nokia which gave upbeat guidance for the first quarter of 2002 said nothing to make anyone believe the infrastructure market was going to get better in 2002, points out Modoff.
Working against the equipments makers is the trend towards network sharing. With more and more carriers looking to consolidate networks and operations, that means far fewer base station equipment being sold, and lower revenues across the board. The same thing goes for consolidation, which will essentially halve the customer base for hardware manufacturers. Not a pretty picture.
Ironically, one thing that could save the beleaguered hardware makers is the need for more efficiency in networks. Carriers, desperate to improve their coverage and quality of service, in many cases have no choice but to add more cell sites, which can bridge the gap between dead spots in a network, and help handle a greater load of callers. Each cell site is going to require millions of dollars of hardware, all of which bodes well for the equipment manufacturers.
Gotta get going with 3G
Ultimately, carriers are going to have to come up with compelling reasons for consumers to switch to 3G services, and the answer is not going to come from stock quotes. As of today, all of the benefits of next generation networks are apparent to the mobile operators in the form of higher bandwidth, better efficiency, and broader coverage. But it is not clear yet what's in it for the consumer.
The industry-standard platform for enabling advanced application services has yet to be determined. The two most promising contenders are Microsoft with its as-yet-unreleased Smartphone 2002 solution and Symbian with its Symbian OS (already in use by the Nokia 9210 and forthcoming Nokia 7650). Microsoft will be leveraging its corporate connections against Symbian's widespread industry support. The dire need for advanced application services will force the two contenders to slug it out sooner than we might anticipate.
One positive thing that may come out of 2002 is the emergence of two dominant programming languages (or runtime environments) for wireless devices. Qualcomm's BREW (binary runtime environment for wireless) and Sun's Java 2 Micro Edition (J2Me) figure to slug it out over the next 12 months for the hearts and minds of software developers. Java has the advantage of being around for longer, but BREW has an edge in that it was specifically developed for mobile applications.
Application vendors are also going to have to kick it in to high gear. Thus far, the killer application - one that consumers not only have to have, but are willing to pay more for - has not been found. Even though the dominant means of communicating wirelessly continues to be voice, text messaging has made serious headway in Europe and Asia.
In Europe, some progress is being made with deals like the one Vodafone inked with the Manchester United football team. Vodafone has proven that people are willing to pay more for a service that rings you every time Manchester United scores a goal. It's a simple application, but effective nonetheless.
Even more advanced would be things like Formula One is considering - a helmet camera on Michael Schumacher's Ferrari so fans can see the race from a driver's point of view, right on their mobile device. Something like that will consume the type of bandwidth that carriers need to justify the high costs of their networks.
And wireless companies are expecting a big takeoff in the use of business applications. Things like sales force automation and real-time processing are hooking directly into back office systems and enabling new efficiencies for businesses. These types of applications will create the usage and revenues that carriers need.
There is every reason to think that we are going to slog through the next year, not unlike last year, trying to pick up the pieces and get the wireless boat headed in the right direction.
But most analysts do believe that we have bottomed out, and things may remain flat for the time being. But at least they won't be getting any worse. And in this day and age, that can be considered good news.
After failing miserably at every attempt to become the next great American author, Dan Briody settled in San Francisco and started writing about the technology revolution in the mid-90s. Today he is the author of Red Herring's Wireless Watch column, and he is still trying to write the great American novel.