Mobile Companies Shift Focus From Next Generation of Networks

For more than a year, the wireless industry has heralded the promise of third-generation technology and the coming of do-it-all phones with high-speed Internet connections and streaming video.

Now, however, the mobile companies are changing their tune. Battered by low stock prices, slowing phone sales and the prospect of investing billions of dollars on new radio spectrum and networks, many companies say the shift to so-called 3G high-speed cellular networks isn’t so urgent after all.

Instead, many wireless carriers have shifted their focus to intermediate technologies nicknamed “2.5G” to signify the position between today’s second-generation networks and 3G wireless nirvana.

Although the definition varies, 3G wireless systems are generally described as the wireless equivalent of broadband Internet access, giving users Web connections at peak speeds of 2 megabits per second to 5 Mbps, and making mobile phones capable of handling bandwidth-intensive data such as music and video. The most advanced features would require a new generation of mobile phones.

By contrast, today’s “second-generation” wireless networks hit a maximum speed of 19.2 kilobits per second. The planned 2.5G systems would provide speeds of more than 100 Kbps--a respectable pace, even in the wired world.

“We have over-promoted 3G by saying ‘It’s coming! It’s coming!’ without saying when these things will be ready,” said Mike Walters, system marketing manager for Nokia. “We’ve heard a lot about streaming video and all of that, but the truth of the matter is that we need to start U.S. consumers on a weak diet” of less exotic services, such as text messaging.

There are second thoughts in other parts of the world, too: Singapore has scaled back 3G plans; Latin American companies are talking about a measured “evolution” to 3G. Japan Telecom Co. has delayed its 3G launch until 2002 and giant NTT DoCoMo Inc. will proceed with a limited 3G introduction that may not even be noticeable to its 20 million iMode users until next year.

Until recently, enthusiasm for 3G was running high. But for most companies, the transition requires expensive new spectrum and licenses, plus costly new equipment. Wall Street, discouraged by slowing subscriber growth and the faltering economy, has punished wireless companies with lower stock prices, making it more difficult for them to raise funds for 3G projects.

A 2.5G system, on the other hand, can work on a carrier’s existing spectrum and trigger a less costly equipment overhaul.

Part of the pullback stems from troubles in Europe, where wild enthusiasm for 3G led carriers to bid more than $100 billion for new licenses. The mobile operators are moving ahead with 3G roll-out plans, but the high price of spectrum has left companies with crushing debt and diminishing prospects for raising the billions of dollars needed to build the new networks.

Government regulators are considering ways to salvage the situation, possibly by allowing companies to jointly build the networks or by lowering license payments.

“I think everyone is very concerned about Europe, because I think what’s happened there is not good for the industry. It puts a pall over everyone,” said Perry LaForge, executive director of the CDMA Development Group, a consortium that backs the adoption of a wireless technology called code-division multiple-access, or CDMA.

Rod Nelson, chief technology officer at AT&T; Wireless was equally blunt: “The European so-called launches are maybe not doing the industry any good,” he said last week. “I believe people shouldn’t launch services before they’re ready to withstand the scrutiny of real customers. There are not enough handsets, and they don’t work well.”

There are other forces at work, too. In the United States, many wireless companies will need additional spectrum before they can offer bandwidth-hogging 3G services such as video alongside a growing base of voice customers. But the availability and sale of the extra spectrum remains several years away.

Mobile companies are realizing that 2.5G networks could provide many of the benefits of 3G systems at a fraction of the cost. In addition, the success of NTT DoCoMo’s iMode service--which loads data at a mere 9.6 kilobits per second--has proven that high speeds and sophisticated networks are not the only path to profits.

Thus, at the Wireless 2001 trade show last week in Las Vegas, the mood was restrained, with much of the buzz focused on 2.5G services and the expansion of existing cellular features such as short messaging and Web browsing.

In the United States, 2.5G technologies will take different forms, but they will share one key characteristic: The connection will be constant, eliminating the current need to dial for an Internet connection.

Cingular Wireless, formerly Pacific Bell Wireless in California, plans to launch an 2.5G service in California, Nevada and Washington state in the next three months. Cingular did not outline prices or the planned data transmission speeds, but the company’s selected technology is capable of peak connection speeds of 115 Kbps and typical user speeds from 10 Kbps to 56 Kbps, according to the research firm Gartner Group/Dataquest.

Rival Sprint PCS Corp. said it has plenty of spectrum to forge ahead with its four-phase shift to 3G, starting with a 2.5G-like upgrade later this year.

The company’s initial upgrade will increase voice capacity and yield data connection speeds of up to 144 Kbps, or typical user speeds of between 90 Kbps and 130 Kbps, according to Gartner Group. Late next year, Sprint PCS said its network will be upgraded again to provide transmission speeds of up to 307 Kbps, with progressively higher megabit speeds to follow in 2003 and early 2004.

“Despite the speculation and buzz about the delay of other carriers’ 3G services, Sprint is on track for 3G migration starting at the end of this year,” Sprint PCS President Charles Levine said.

Still, wireless executives stressed last week that the advanced networks won’t be a hit with consumers unless they come with compelling applications and features.

“There is a lot that can be done with [2.5G],” said Nelson of AT&T; Wireless. “The focus will be to start with a great phone, add a packet-data network, create a compelling user experience that is fun, easy and adds just a few extra things to the phone.”

Already, new phones are starting to include Java capabilities, color screens and enhanced messaging features--all aimed at enlivening the wireless Web and making the phone an all-purpose personal device.

At the same time, growing industrywide economic troubles could put a crimp on things. Many U.S. carriers have announced slowing subscriber growth, and handset makers Motorola and Ericsson have been hit hard by sluggish mobile phone sales.

Ericsson recently announced plans to outsource its money-losing phone production operation, and Motorola this month unveiled a plan to cut 7,000 jobs in its handset business and another 4,000 jobs in its network equipment units.

Levine, the head of Sprint PCS, remains upbeat amid the dour news.

“I think we’re seeing some panic in the ranks,” he said last week. “There will be some resettling of investment and expectations, but I wouldn’t be surprised if a year from now there is a handset shortage.”