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The recent bidding war for the licences to run third-generation (3G)

mobile phone networks in the UK may have left the Treasury #22bn richer,

but it has left the winners wondering whether they can deliver what they

promised. As the bidding went far higher than anyone expected, analysts

are now saying that the winners may have to rip up their business plans

and start again.

For content and e-commerce providers, the broadband 3G networks will offer

a new platform to deliver a range of life-enhancing services to their

users, enabling them to infiltrate all areas of their customers’ lives at

work, at play as well as via everyday activities such as paying a gas

bill. The networks will provide access to a huge customer base, and are

desperate to work with the best providers in order to retain that user

base.

”The bottom line is that each operator has to find a way of generating

traffic,” says Stephen Warburton, marketing director for the technology,

communications and entertainment practice at Ernst & Young. Warburton

estimates that expenditure per user will have to increase five-fold to pay

for the licences alone. Networks are already searching for applications

and content, despite the fact that full 3G services will not be available

before 2002.

One reason for this is that, before full 3G, the existing networks will

all upgrade their equipment to a new standard - sometimes known as 2.5G -

called General Packet Radio Service (GPRS). Networks and developers are

likely to use GPRS as a testbed. It will allow some bandwidth-heavy

3G-type applications; they will just not be ”as fast or as pretty”, as one

executive put it, as full 3G applications. GPRS will, for example, allow

users to record and send video stills on phones equipped with cameras.

This postcard mail facility is expected to be popular, with friends

sending each other snaps of what they are up to when they are out and

about.

It is estimated that upgrading to GPRS will cost the networks between

#1.5bn and #2.5 bn. The first network to take the plunge is BT Cellnet,

which is expected to go live with GPRS in the early summer. Orange will be

launching its 3G-type services, such as the Orange Videophone, later this

year, which will allow full-colour video-conferencing at 12 frames per

second, along with high-speed internet access.

After GPRS has been rolled out in the next 12-18 months, full 3G will

begin to be offered - probably islands within GPRS in major cities and

built up areas at first. Full 3G will support real-time video applications

more effectively than GPRS.

By the time we get to full 3G, each network is likely to have set up its

own mobile internet portal, through which content and applications are

accessed, much like BT’s Genie. ”This primary interface may be an area of

differentiation for networks, but there is a debate about how sticky

portals can be,” says Paul Long, BT Cellnet’s general manager of 3G

marketing. ”We think it will be about personalising the information in a

snazzy way and making it accessible. It is a question of how attractive

and easy to navigate it is, as each portal will access much the same

content.”

The best applications are likely to run on each of the five networks

eventually, but initially the five 3G networks will be distinguished to

some extent by the mix of exclusive and non-exclusive applications they

offer, and how they are packaged. Networks will not have time to prepare

as comprehensive a service as they would like set up, nor indeed will be

it be clear at the outset what the market wants.

Although there will be a high degree of portability for applications

across networks, developers seeking to write applications and provide

content for 3G are initially likely to find themselves working with one or

another of the networks.

”The tools of this trade are very similar,” says Ian Germer, product

director for Vodafone Multimedia. ”We have common standards, so what

differentiates you is the ability to draw different applications providers

to you.”

Each network might seek to flavour its offering by positioning its

services as enhancing an individual’s life in a different way. Orange, for

example, says: ”The intention of Orange is to become a life-management

services provider. This will see Orange providing health, travel, music,

games, information and home management services, all using the Orange

network.” However, it is keeping its cards close to its chest with regard

to the types of commercial ventures it will be pursuing. An Orange

spokesperson says: ”We’re not in a position to give names. We are working

hard at developing commercial relationships across a wide range of

companies across multiple industry segments.”

Newcomers to the UK, Canadian company Telesystem International Wireless

(TIW) and Hong Kong’s Hutchison Whampoa paid #4.3bn for the largest

allocation of spectrum and are expected to invest another #3bn in building

a network.

TIW already has mobile operations in Canada, Brazil, Romania and the Czech

Republic, and has a majority shareholding in Dolphin Telecom in the

UK.

TIW/HW has yet to decide its strategy for the UK licence, but one

possibility is that the Dolphin network of 650 client sites might be

adapted for 3G.

”3G will be more of a corporate market at first, instead of one involving

ordinary people browsing the internet,” says a spokesperson.

”Traditionally, business users are the early adopters of technology like

this, so we are looking at the opportunity in that segment.”

Among the first decisions to be made is at what stage to join the

market.

This might involve building a network based on GPRS, which has around five

times as much bandwidth as existing networks, and is being used by the

four existing operators as a stepping stone to 3G. The alternative would

be to delay entry until a full 3G network can be built.

The company is still at the early stages of its plans and is working on

the request for proposals from companies seeking to provide equipment to

build its network. It says its thinking will be clearer when that decision

has been made around September and will then start working with

application developers.

Of the four existing networks that will upgrade for 3G, Vodafone is the

odd one out. For, while the other three have licences to use 25MHz of the

spectrum, Vodafone has a licence for 30MHz and has paid #1.9bn more for

the privilege. This extra range, the company says, means it will be best

placed to operate applications that require a high bandwidth, such as

those using a lot of video. This could suggest a corporate target

market.

For example, an application might be developed to allow an engineer in the

field to dial in to see a video of how to mend an unfamiliar piece of

equipment.

Tim Harrabin, strategy director of Vodafone Airtouch, describes the extra

spectrum as ”very significant”. He says: ”We see a big future for

high-bandwidth services, especially those that use video. We will be seen

as the leading network for high bandwidth services. We enjoy a high market

share for corporate customers - over 50 per cent of the market - and this

is a very important area for applications developers. We need developers

to focus on specific areas like utilities, transport, or retail, for

example.”

The company says the extra capacity will allow it to upgrade its existing

network more quickly and get to market at an early date. For applications

writers and content providers, this might offer the chance to get an early

return on investment.

In terms of applications, the networks are looking for applications in

three areas - consumer, business (small to medium-sized) and corporate -

and are all trying to work out, as BT’s Long puts it, ”what killer

applications there will be”.

Services for consumers will include: sophisticated telephony and

information services, including internet, intranet, travel, games,

shopping and entertainment; multimedia services, including the sending and

receiving of text, audio and full-motion colour video; and e-commerce

services, such as electronic money schemes for payment and accessing

accounts.

Handset video is an important new development (likely to arrive before 3G

with GPRS) that will, for example, allow vendors to send pictures of an

item for sale to a potential buyer. Others applications might allow users

to dial in when they are away to check that their home is safe, or see who

is at their front door.

The point will be to make the services as relevant as possible to

individual customers. ”It will be about delivering services to customers

that are directly related to them as individuals rather than market

segments they might fall into,” says Germer.

Another possibility is location-based services, as the networks will use

triangulation (the position of the handset relative to the nearest three

transmitters) to assess location with an accuracy of 100-150 metres.

If, as it may be, Global Positioning Satellite data is involved, this

could become accurate to 10-20 metres.

”You could have ’let people know where I am’ type services,” says Jay Saw,

One2One’s business strategy manager. ”You might opt in to some kind of

dating services, or you might use the function to meet people in crowded

places.”

In the business segment, many of the applications will be about extending

the workplace into the field or the home. Video-based applications

specific to a line of work - for example allowing doctors to see an injury

and advise on initial treatment remotely - are likely to be

significant.

Video-conferencing is another obvious application. But most of the

excitement will be around applications that are not just existing ones

ported to mobiles from other devices like home PCs or video cameras, but

wholly new ideas. Long says: ”We are looking for applications that excite

us. There will be a race to develop the killer applications, if there are

any. It is a question of working out opportunities not covered by the

current networks. For example, tracking may be possible with cars or

pets.”

Saw agrees: ”At the moment, video is one of the few applications that

needs the 144 megabyte/second of data transmission that will be available,

but as soon as you have extra capacity or processing speed you find

applications will come along that can use it - things we can not imagine

today.

”The whole data thing has not been developed, as people do not understand

what they can do yet,” says BT’s Long. ”Also the whole area of the

cashless society - paying vending machines and other similar things with

your phones - is another new area that will take some time for developers

to get to grips with.”

One wholly new opportunity is one arising for applications around

advertising.

Commercial messages of some sort are likely to feature on all networks,

but it will be more like sponsorship than advertising. The thinking is

that the best applications will not just be saying ”buy this”, but will be

more about provision of information that customers will appreciate. The 3G

technology allows fantastic targeting to individuals about whom a lot is

known.

”A network might send a message saying: ’We know you are interested in a

certain thing. Before you make the next call, listen to an offer and we

will pay for that call for you’,” suggests Germer. ”Or information could

appear as text saying: ’Do you want the latest news on Yamaha

bikes?’.”

Services will, of course, be fully location-dependent, allowing companies

to target specific places with offers or services. The crucial thing for

these applications is that the mechanism should suit the customer’s needs

at the time. That way everyone wins: the advertiser gets an audience that

is interested in its product, the customer gets a useful service.

The way advertising deals are structured is still being hammered out, as

are arrangements surrounding access to content and applications. Issues

such as who is responsible for selling the ad space - the content provider

or the network - and how consumers will be charged for 3G phone use are

also unresolved. Charges could, for example, be based around a flat

monthly fee, or depend on the amount of bandwidth used.

Who will come out on top in all of this is anyone’s guess. Ernst & Young’s

Warburton says: ”It is far too early to say which of the networks is best

placed. Everyone has taken a gamble - this is far more money than anyone

expected to pay. There is a big potential market, but a lot of money has

been invested.”

A POTTED HISTORY OF THE MOBILE NETWORK PLAYERS

ONE 2 ONE

Current market share* 18.5%

Network coverage At least 98%

Sum paid #4bn

Spectrum allocation 25MHz

GPRS coverage starts autumn 2000

One 2 One came into the mobile market with the second - generation GSM

networks.

The offer of free off-peak calls within the M25 area led to rapid

growth.

As one of the two later additions to the market, the current phones work

at 1,800MHz, which means the company needs more transmitters in its

network.

The company was bought last autumn by Deutsche Telekom.

ORANGE

Current market share* 22%

Network coverage 99%

Sum paid #4bn

Spectrum allocation 25MHz

GPRS coverage starts from the end of this year

Orange was last of the four networks to launch, joining the party in

April1994, in the second-generation network phase. The company was owned

by Hong Kong-based group Hutchison Whampoa, but was bought by Mannesmann

before the German firm was acquired by Vodafone Airtouch. As part of that

deal, Orange had to be sold and France Telecom acquired the company in

May.

VODAFONE

Current market share* 32.3%

Network coverage 99%

Sum paid #5.9bn

Spectrum allocation 30MHz

GPRS coverage starts from the end of this year

Vodafone is the UK subsidiary of Vodafone Airtouch, the global group which

operates in 25 countries . Publicly-owned Vodafone has the biggest current

market share, having been one of the two mobile operators in at the

beginning of first-generation mobiles.

BT CELLNET

Current market share* 27.3%

Network coverage 99%

Sum paid #4bn

Spectrum allocation 25MHz

GPRS coverage starts July 2000

BT Cellnet was started as a joint venture between BT and the delivery

service Securicor in 1984, pioneering the UK mobile market alongside

Vodafone.

After changes to the rules which regulated it, BT took over the whole

company. In the 3G market, it faces the prospect of its home market being

eroded by its two European rivals, FT (Orange) and DT (One 2 One), but is

determined to fight hard.

TIW

Current market share none

Network coverage none

Sum paid #4.3bn

Spectrum allocation 35MHz

GPRS coverage starts data not available

This joint venture bid for and won the licence reserved for a new

player.

It is at the early stages of working out its strategy for using its

spectrum allocation, which, at 35MHz, is the largest of the five. It is

expecting to invest #3bn to build the network from scratch, and is seeking

partners for the construction process.

*Source: Oftel (31/3/00)

How fast is the next generation?

The first generation of mobile phone networks were analogue - good for

nothing except having a conversation. The current systems are digital -

which is the second generation. Networks have a bandwidth allowing

handsets to receive 9.6 kilobytes of information/second. Some handsets are

data-compatible, allowing text messaging and access to internet content

through the WAP protocol.

GPRS, the so-called 2.5G, is likely to allow transfer of around 50

kilobytes/second.

The third generation - 3G phones and networks - simply involves more

bandwidth.

This could be as much as 384 kilobytes/second, but most people expect more

modest speeds of around 144 kilobytes/second to be typical at launch.

A typical MP3 music file is three megabytes, so, for example, it would

only take about 20 seconds to download a track to your phone.

At this speed, users will have considerable extra functionality in their

phones - live video for example, only requires 64 kilobytes/second. Many

people access the internet at a speed of 28.8 kilobytes/second using a

modem and a PC at home -3G phones could be five times faster than

that.

While this is technically possible, the problem could be network

capacity.

Each ”cell” (small area served by a transmitter) will have two carriers

each allowing, say 144 kilobytes/second of data transfer. That is probably

only enough capacity for three simultaneous video calls at a time,

although different network operators say different things. Orange, for

example, says video might only involve 28.4 kilobytes/second.

The capacity problem could be offset to some extent by a high cost to

consumers, which is likely to be proportionate to the amount of bandwidth

used. For example, if a 9.6 kilobyte/second calls costs 10p per minute,

video might cost #1.50 per minute at 144 kilobytes/second.

Despite the high charges that the auction prices mandate, Telecom analysts

estimate 3G phones will reach 22 per cent of the population by 2010.