Third Generation: Unfulfilled Promises
2G wireless needed only basic voice and text to ignite a revolution where “mobility” was the killer app. But 3G started with high expectations to deliver a new, unplugged broadband experience that would support a whole new breed of multimedia applications. The dominant theory at the time was that users would pay more for the new, rich set of broadband services that 3G could offer, presenting a large revenue opportunity. In fact, the Strategis Group predicted that 3G-related revenues would reach $33 billion in 2000. The expectations were so high that leading wireless carriers in Europe paid a total of $70 billion for 3G licenses.9 Unfortunately, this “irrational exuberance” led to over $160 billion in debt and an average drop in stock price of 60% among these same companies. 3G services have been extremely slow to penetrate the market and deliver real revenues.10 (Actual revenues were about $5 billion in 2004 using a generous definition of 3G services.11) So why did 3G fail to deliver after 2G was so successful? The primary impediments to 3G’s success have been the following:
- Outdated performance targets—3G was designed to be competitive with broadband speeds in 1998 of about 250 kilobits per second (Kbps). These speeds recently have increased dramatically, to well over 1Mbps, but 3G did not.
- Intellectual property ownership—Because of the technology selected for 3G (CDMA), IP and licensing costs became a significant issue. A few companies (Qualcomm and others) own a significant share of the supporting IP, resulting in royalties of several dollars per handset.
- WiFi disruption—Because of its higher speeds and disruptive economics due to free spectrum and cheap devices, WiFi’s growth may have undermined the rollout of 3G and its perceived benefits.
- Lack of compelling applications—So where is the killer app? Other than faster web access, no other real bandwidth grabbers were being heavily used, because TV and wireless gaming were still relatively small markets.
- Handset limitations—Until the iPhone, the basic handset design changed only incrementally as bandwidth started to increase. Browsing the web still required a sluggish translation to have the page content fit the small screen, offsetting many of the improvements in bandwidth.