MARKET COMMENT
Do We Really Want 3G?

By David Kuo (TMFDragon)
April 23, 2002

Mobile telecom operators have spent billions on licences that allow them to run 3G services. The five companies that won the right to operate 3G in the UK paid out £22.5b to the Government for just that privilege. That was back in 2000 and until now only mmO2 (LSE: OOM) has an up-and-running 3G service, and that only extends to a trial in the Isle of Man. The Manx Telecom operation should provide mmO2 with an insight into customer demand, as well as highlighting any pricing and billing problems. But what would happen if customers were to tell mmO2 what it doesn't want to hear, namely that 3G is a complete waste of time. That is indeed a scary thought not only for mobile operators but also for the millions of investors who have bought into the wireless dream.

Just cast your minds back to Mondex. Does the name ring any bells? Perhaps not and that is not in the least surprising. That is because Mondex was an unmitigated failure, for now anyway. It was hailed as the cashless revolution that would, in time, transform all of our lives. Mondex, it was said, would do away with the need to carry pocketfuls of change and wads of cash. This was because our daily cash requirements could be transferred from our bank accounts onto that Mondex card. We could then draw down the cash balance on the card as and when required. Trials were carried out in the swanky town of Swindon and terminals were installed in every possible outlet including buses and taxis. However, the sophisticated Swindonites gave Mondex the thumbs down. It was perhaps a concept just a little ahead of its time.

The same fate that befell Mondex could happen with 3G. Third generation mobile telephony is intended to provide customers with broadband communications on the move. It does however raise the question as to how many of us really want to communicate whilst we are moving around. A more realistic appraisal of end user demand might be broadband communication on the pause. BT Group (LSE: BT.A), as indeed are the likes of IBM (NYSE: IBM), Motorola (NYSE: MOT), Cisco (Nasdaq: CSCO) and Nokia (NYSE: NOK), targeting this particular user base with Wireless Local Area Network (WLAN).

In the UK, BT expects to have 400 key public sites that include airports, hotels, bars and coffee shops hooked up with WLAN by this time next year. And up to 4,000 sites where users can access the Internet through their own laptops and handheld devices via a wireless adaptor will be on stream by June 2005. That level of coverage should just about deal with most parts of the UK that matter. So could WLAN's simple low-cost solution be the undoing of 3G? Perhaps it could and this would make 3G one of the most expensive mistakes in the history of telephony.

The writer has a beneficial interest in Motorola and Cisco.