The Economist

3G MOBILE NETWORKS

MAY 29TH 2003

Third-generation (3G) mobile-phone networks face a new rival: so-called

4G. And, astonishingly, the new networks may even be profitable

"THE future always comes too fast," Alvin Toffler, an eminent

futurologist, once said, "and in the wrong order". The state of

wireless telecoms is a classic example. Even as "third-generation" (3G)

mobile networks are being switched on around the world, a couple of

years later than planned, attention is shifting to what comes next: a

group of newer technologies that are, inevitably, being called 4G. More

hubris from the technology-obsessed industry? Not exactly. Some 4G

networks are operating already, with more on the way. A technology once

expected to appear around 2005 is here now.

Interest in 4G owes much to the mess surrounding 3G. Operators spent

EURO100 billion (about $100 billion) buying licences to run 3G

networks, only to find that the technology that most had agreed to use

was harder to implement than expected. Even where 3G networks are up

and running, demand for the snazzy video and multimedia services they

make possible is still uncertain. Expectations are being scaled down:

3G could end up merely as a way for mobile operators to boost their

capacity for voice calls in overloaded parts of their networks, rather

than a goldmine of new revenues from multimedia services. Last week,

mmO2, a European operator, wrote down the value of its 3G investments

by nearly $10 billion--although this week, despite reporting a pre-tax

loss of $9.6 billion (reflecting write-downs of goodwill related to

acquisitions), Vodafone chose to postpone its inevitable 3G reckoning.

As 3G has stumbled, another wireless technology, called Wi-Fi, has

inspired a mania unseen since the great internet boom. Wi-Fi provides

high-speed internet access to suitably equipped computers within 50

metres or so of a small base-station. It is widely used in homes,

offices and universities. Several firms offer fee-based Wi-Fi access in

airports, coffee-shops and other public places known as "hotspots". But

because of the short range of Wi-Fi technology, universal coverage is

impractical. Although a dozen or so start-ups are working on ways to

extend the range of Wi-Fi, it now takes hundreds of Wi-Fi base-stations

to cover the same area as a single mobile-phone base-station.

BEST OF BOTH WORLDS

But what if you could combine Wi-Fi-style internet access with the

blanket coverage, and fewer base-stations, of a mobile network? The

various 4G technologies developed by such firms as IPWireless, Flarion,

Navini, ArrayComm and Broadstorm offer just such a blend. There is no

formal definition of 4G, but what such technologies have in common,

says Andy Fuertes, an analyst at Visant Strategies, a research firm, is

that they are high-speed wireless networks covering a wide area,

designed above all for carrying data, rather than voice or a mixture of

the two. They can pipe data to and from mobile devices at "broadband"

speed, typically 10-20 times faster than a dial-up modem connection.

Such 4G wireless-broadband systems can be seen in two ways: as a rival

to Wi-Fi that offers wider coverage, or as a wireless alternative to

the cable and digital subscriber-line (DSL) technologies that now

provide broadband access to homes and offices. Mostly, the wireless

operators evaluating 4G see it as the first, and fixed-line telecoms

operators as the second. But the convergence of wireless and broadband,

argues Chris Gilbert of IPWireless, is actually entirely new: a fast

internet connection that follows you around. Navini calls it "nomadic

broadband"; ArrayComm's term is "personal broadband". Mike Gallagher of

Flarion, a firm backed by Cisco, likens Wi-Fi to cordless phones that

work within a limited range of a base-station, whereas 4G is akin to

mobile phones that work anywhere.

Numerous 4G technologies are working today. The first commercial

deployments are in parts of America, Canada, New Zealand, South Korea,

Germany, Italy and the Netherlands. Vendors are licensing 4G to

telecom-equipment makers such as Alcatel, Nortel and LG Electronics for

high-volume production. So far none of the 4G vendors has secured the

endorsement of a leading "tier one" operator for a nationwide

deployment, but many claim to be close to this goal.

Regulatory and technical differences will determine which technologies

are likely to be adopted where. Flarion's technology is well-suited,

for technical and regulatory reasons, to both America and South Korea.

In Europe, the IPwireless system may appeal more. When mobile operators

bought their 3G licences, extra spectrum for high-speed data services

was often thrown in, and IPwireless's technology uses this spectrum.

(IPWireless's technology uses a protocol that technically falls within

the European definition of 3G.) Flarion and other vendors hope that

Europe's regulators will relax the rules to allow their technologies to

be used in this 3G spectrum too. In South Korea, operators have tested

every 4G technology; which will be adopted depends on the regulators,

who are due to decide later this year.

Advocates of 4G technology argue that, unlike with 3G and Wi-Fi, the

business case for 4G is sound. 3G was predicated on consumer demand for

multimedia services that may never materialise. Nobody is sure how

commercial Wi-Fi hotspots will make money--the number of connections

per day at most hotspots is still tiny--yet even so a "land-grab" is

under way, with dozens of operators rushing to build thousands of

hotspots. But 4G is being priced like fixed-line broadband, a service

for which millions of users worldwide are already willing to pay about

$50 a month. Emphasising speed first and mobility later, 4G networks

may be built initially in regions where cable and DSL are unavailable,

to capitalise on pent-up demand for broadband, then expanded later to

provide blanket coverage for mobile users.

4G could thus prove a very disruptive technology indeed. Fixed-line and

cable operators will face a new competitor in the broadband market.

Wi-Fi hotspots will seem hopelessly limited. Mobile operators will find

that there is yet another hole in their 3G business plans. Unless, that

is, they decide to embrace 4G as the technology that 3G should have

been all along.

Some operators may be leaning in this direction. In America, Nextel, a

mobile-phone operator, is said to be considering skipping 3G altogether

in favour of Flarion's 4G system. In Europe, some operators may scale

back 3G plans and adopt IPWireless's technology. As their 3G licences

entitle them to do this, they may not be as worthless as they now seem.

Mobile operators already own the key sites for base-stations, unlike

fixed operators or new entrants, so they are well-placed to build 4G

networks fast. They are already attacking the fixed-line voice market.

4G would let them attack the broadband market too--and neutralise the

Wi-Fi threat.

It is not clear how investors would judge an operator that decided to

favour 4G over 3G. So far, operators have kept quiet about their 4G

plans, to avoid confusing the marketplace. Yet when Telefonica, a

Spanish operator, abandoned some of its 3G investments last year, its

share price went up, notes Mr Fuert