Caution over 3G network

By CHRIS BARTON


While Vodafone, TelstraClear and Telecom jockey for competitive advantage in the emerging 3G mobile market, the question all will be worried about is: "If we build it will they [the consumers] come?"

Despite a widespread availability of multimedia and data services on existing 2G and 3G networks, voice calls remain by far the most prevalent use of the 1.28 billion mobile phones worldwide.

Data users of the mobile technology are growing, however, and are expected to number 85 million in the second half of this year.

But is the growth in both subscribers and traffic sufficient to justify the $350-$500 million necessary for a 3G network in New Zealand?

At Ericsson's strategy and technology summit in Beijing last week, chief executive Carl-Henric Svanberg extolled the benefits of 3G - "because it's more cost efficient, it's more powerful and you get an awful lot of new services".

But after the sales pitch he was notably cautious.

"I've learned in listed companies that it's important to give a fair and honest picture. I think in this particular case it's important to at least not give a too positive view."

The view is rather gloomy - a 10 per cent sales decline in the mobile market in 2003 and no growth in 2004. That's apparently because the industry is still suffering from the fallout of the dotcom exuberance - "the final phase of that very dramatic correction".

It's a correction Ericsson knows intimately as the Swedish giant is now half the size it was having shed 60,000 of its workforce, closed about 50 R&D sites worldwide, extracted itself from its loss making mobile handset manufacturing and seen revenues shrink from US$29 billion ($45 billion) in 2000 to US$16.8 billion in 2002.

The pain of restructuring is almost over, with the company down to a 3.9 billion kronor loss (US$505.3 million), in the July-September period compared with a loss of 5 billion kronor, a year ago.

Which begs the question. Why in the face of an obviously over-hyped potential should telcos still be moving to 3G? Part of the answer lies in technology's inexorable forward march. New mobile network equipment is much more cost efficient than before - able to reach further and provide more services for the same or less cost.

In greenfield markets like China, where mobile phone use is at just 19 per cent, that's a compelling argument, although 3G rollouts there are waiting on the Chinese Government to allocate 3G spectrum. Meanwhile the Chinese are flocking - at the rate of 4-5 million subscribers a month - to first and second generation mobile technology. So much so that there are now more mobile users (257 million) than fixed line users (255 million). On the downside most of those are low value voice users.

The lack of user demand for 3G features such as videophone and other multimedia services is the biggest problem facing 3G uptake. Ericsson vice-president of marketing and strategy development Torbjorn Nilsson said the issue was one of availability and costs. He pointed to Korea, which has widespread broadband and 3G usage and has 7 per cent of household consumption spent on communications compared with the 4 per cent OECD average.

He said the two keys to unlocking the potential of 3G - "a complete mini entertainment centre in the phones" that doubles as a credit card - were healthy competition and an effective regulator.

* Chris Barton travelled to Beijing as a guest of Ericsson.