3G:Gamble, Game, Generation
BACKGROUND
In the late nineties, the concept of third generation wireless networks was formally introduced to the world. From that time, it has gained a lot of attention to from both industry and academia. Currently, there are three main standards approved by ITU. They are WCDMA, CDMA 2000 and TD-SCDMA. Among them, WCDMA and CDMA 2000 could be categorized as FDD based standards while TD-SCDMA is TDD based. WCDMA and CDMA 2000 are all having industrialized examples now while TD-SCDMA is still several steps to industry now. At the end of 2003, there were a total of 117 licenses for 3G networks are issued in 33 countries. 114 of them are WCDMA and the other 3 are CDMA 2000.
OPERATORS
According to the reference [1], the current operators who are already running 3G networks are 12 on WCDMA and 4 on CDMA 2000 1x EV-DO. Here it would be interesting to take one typical case to study. Among the 12 WCDMA operators, 7 are actually running under the same name which is also the one in Sweden---Tre (3). One company based in Hong Kong is named Hutchison Whampoa. This is called as a giant gamble by the media [1]. Since 2001, Hutchison Whampoa has already invested more than 22 billion dollars and it is continuing to make more investment in this telecom business by even selling its own profitable P&G shares. The running cost of 3G network in the whole of Europe for Hutchison Whampoa is almost 10 millions euros. In those saturated markets like UK and Italy, as a new comer, Tre use the low cost strategy. They halved the cost for normal voice service compared to the local operator. Meanwhile, the video call is the only killer application which indeed brings more customers to Tre in the market. Let us take a closer look on the development of Tre in Sweden. Before it has the current packages like “Fri-Start” “Fri-90” etc, the number of subscribers was very limited. However, a very large increase on the sales happened after the low cost packages were introduced. This was done very recently. Hutchison Whampoa is still at risk of suffering from cash flow problems, even though the economic situation is improving for the entire value chain, from terminal manufacturers to customers. They had to sell several important shares to support the money burning project. From the very beginning when Hutchison Whampoa decided to invest on third generation wireless network, it has been the focus of all industry players. Hutchison Whampoa has no way back now and its success of failure will be more like a signal for the whole industry.
Based on the running situation and licensing situation of those 3G network operators [1], we can categorized them into four groups, Leading, Following, Waiting or Potential. Currently, only NTT DoCoMo in Japan, SKT and KTF in Korea are in the leading group. They have a good market size and higher ARPU (Average Revenue Per Unit) than 2G users. Tre is one of the followers. The characteristics of this group are reflected in three aspects. First, the number of users is still relatively small with slow growth. Secondly, the ARPU is basically the same as 2G. No advantage comparing to other 2G network operators is the third one. There are also several operators who have gotten the licenses and wait for the development of the market before putting more money into it. Vodafone group, Orange, T-mobile are the typical cases in this group. Orange was one of the four operators who got the licenses in Sweden. Recently, Orange returned its license to the Swedish government. This is another side proof to say that the current situation in 3G networks business is not very optimistic. Of course, there are also some potential 3G network operators who have not gotten the license from the government. China Mobile could be in this group.
In simple words, the development of 3G networks for operators is more like a gamble. Those late comers in 2G campaigns wish to catch up in the new battle while the traditional leaders don’t want to lose the position in the new wave. Everybody is pushed and has to invest a lot in 3G which will lead to a reshuffle for the market. However, someone will definitely have to quite the game before the reshuffle is finished.
STANDARD & MANUFACTURERS
Besides the battle between operators, there is also an ongoing debate concerning the standards. The decision from every country government about the standard will have big influence on the equipment manufacturers. A typical case study for this field could be the situation in the biggest market of the world—China. China is expected to be the largest single market for mobile phones. The estimated market size for 3G networks in China is about 125 billion dollars. With a penetration of just 15% into its massive 1.3 billion populations [2], it has already overtaken the US in subscriber numbers. According to this, western companies that make the wireless equipment for 3G have been watching the Chinese government’s position on standards very closely. Until now, Chinese government has not release any license for 3G network to any operator. For those three most common 3G standards, the government approved all three. We can got some idea that the home-grown standard—TD-SCDMA will be given a large part of the whole share given the hint from the investment happened in China, especially those local companies like Huawei, ZTE, Datang etc. Thomas Jönsson, spokesman for Nokia, said: “We are actively following developments and have made some R&D investments into TD-SCDMA. WCDMA is the best architecture for wide-area coverage, but we are following the local situation.” This could be the very typical thought from those equipment manufacturers about the current standard debate. That is the importance of Chinese market which make all the manufacturers think about TD-SCDMA. Let us consider what has happened in China telecommunications industry. Huawei technology has more than 3500 R&D engineers on 3G networks, and accumulated investment is about 0.5 billion dollars. Datang invested 0.2 billion dollars and more than 1000 R&D engineers on TD-SCDMA. All of this makes the 3G development in China a big gamble too. The only thing different here is the government’s support. China is really willing to have an advanced position in the newly coming wave and also provide opportunity for local industry. Jason Chapman, senior analyst for the market research organization Gartner, said “In China, the adoption of TD-SCDMA has a lot to do with China wanting to drive a particular 3G standard. But the Chinese market is still rapidly expanding based on 2G technologies. You have to look at the demand for 3G.” This is actually the reason why Chinese government delayed releasing licenses again and again.
Still using the Chinese market as the study case, equipment manufacturers like Nokia & Ericsson are getting more and more deals on so called 2.5G or 2.75G. That could be a temporary alternative for 3G network. EDGE, GPRS are getting more and more recognized in many worldwide markets due to its compatibility and better data service compared to GSM. However, this could also been seen as the way found out by those manufacturers to support themselves before getting revenue from 3G development. Half of the network equipments of Ericsson are sold to the Chinese market. However, what is the continuous development of manufacturers in this huge market? What if TD-SCDMA is finally mainly adopted in China and those local companies take the large share of the whole cake? In worldwide area, how can the manufacturers play with three standards efficiently? It must be a big challenge to all of those equipment manufacturers.
USERS & SERVICE PROVIDERS
Actually, till now, the interest of the most important part in the whole value chain---The User is not spoken for in this evolutionary game. Every market revolution or evolution must have a driving force. Either the users are having more and more request which need the both academy and industry to create new services to satisfy them, or the users are not driving the demand for new services and then the demand must be cultivated through marketing campaigns. The former case will be more natural and make the life for industry easier while the latter one will need the industry to have more patience before getting the benefit. 3G is a very typical “High investment, Slow output” evolution. Most of the current 3G network subscribers are actually those advanced users during 2G or 2.5G. They are actually the highest part of the whole user pyramid structure. Although their ARPU could be very high, the limited number will not bring any obvious benefit to all the industry investors. The service requests from normal users are still at the voice and simple data service stage. In other words, the high data rate provided by 3G networks are not that necessary to users. Those high rate services could be fun or interesting. However, how many users will pay more for things which are only interesting but not necessary? Of course, users could be persuaded to adopt a new lifestyle with high rate data service. This brings a new problem concerning the service provider. Video call could be called a killer application on 3G network. Is there anything else? Maybe the emergency position locating could also be one. How important are the current services on 3G network which could lead users to change from quite good 2G to a somewhat new 3G? According to this, one concept is now accepted by most of the industry. That is to sell the 3G services with 2G prices. Then the add-on services will be the main obstacle for users’ migration. With more and more killer applications, the ARPU could be enhanced which finally will validate the whole industry value chain and benefit all of the players. At least by now, the 3G network is more like a game only prepared for rich users who will pay that amount of money no matter whether it is provided by 2G or 3G. Service providers and maybe battery producers are facing the very good opportunities now. However, one principle should be followed anyway. LISTEN TO THE USER! Design the system which can really benefit people’s life instead of designing a game prepared for a small amount of users.
SUMMARY
Based on the analysis from above three aspects, 3G network is more like a game which is developed by academic and R&D departments of big industry leaders. After that, all the participants in the industry value chain look this game as a good opportunity for a reshuffle from the old situation of 2G networks. Having this in mind, the prestigious 3G battle began with a huge gamble and everybody invested only because they did not want to be left out of the race. However, there is no clear end point by now. The most pessimistic ending for 3G network is to be skipped and never evolve to a profitable stage as 2G is now. If that is the case, whether 3G is really a Generation or Gamble Game? Is there still time for us to think more about this before it really evolves in the pessimistic way?
BACKGROUND
In the late nineties, the concept of third generation wireless networks was formally introduced to the world. From that time, it has gained a lot of attention to from both industry and academia. Currently, there are three main standards approved by ITU. They are WCDMA, CDMA 2000 and TD-SCDMA. Among them, WCDMA and CDMA 2000 could be categorized as FDD based standards while TD-SCDMA is TDD based. WCDMA and CDMA 2000 are all having industrialized examples now while TD-SCDMA is still several steps to industry now. At the end of 2003, there were a total of 117 licenses for 3G networks are issued in 33 countries. 114 of them are WCDMA and the other 3 are CDMA 2000.
OPERATORS
According to the reference [1], the current operators who are already running 3G networks are 12 on WCDMA and 4 on CDMA 2000 1x EV-DO. Here it would be interesting to take one typical case to study. Among the 12 WCDMA operators, 7 are actually running under the same name which is also the one in Sweden---Tre (3). One company based in Hong Kong is named Hutchison Whampoa. This is called as a giant gamble by the media [1]. Since 2001, Hutchison Whampoa has already invested more than 22 billion dollars and it is continuing to make more investment in this telecom business by even selling its own profitable P&G shares. The running cost of 3G network in the whole of Europe for Hutchison Whampoa is almost 10 millions euros. In those saturated markets like UK and Italy, as a new comer, Tre use the low cost strategy. They halved the cost for normal voice service compared to the local operator. Meanwhile, the video call is the only killer application which indeed brings more customers to Tre in the market. Let us take a closer look on the development of Tre in Sweden. Before it has the current packages like “Fri-Start” “Fri-90” etc, the number of subscribers was very limited. However, a very large increase on the sales happened after the low cost packages were introduced. This was done very recently. Hutchison Whampoa is still at risk of suffering from cash flow problems, even though the economic situation is improving for the entire value chain, from terminal manufacturers to customers. They had to sell several important shares to support the money burning project. From the very beginning when Hutchison Whampoa decided to invest on third generation wireless network, it has been the focus of all industry players. Hutchison Whampoa has no way back now and its success of failure will be more like a signal for the whole industry.
Based on the running situation and licensing situation of those 3G network operators [1], we can categorized them into four groups, Leading, Following, Waiting or Potential. Currently, only NTT DoCoMo in Japan, SKT and KTF in Korea are in the leading group. They have a good market size and higher ARPU (Average Revenue Per Unit) than 2G users. Tre is one of the followers. The characteristics of this group are reflected in three aspects. First, the number of users is still relatively small with slow growth. Secondly, the ARPU is basically the same as 2G. No advantage comparing to other 2G network operators is the third one. There are also several operators who have gotten the licenses and wait for the development of the market before putting more money into it. Vodafone group, Orange, T-mobile are the typical cases in this group. Orange was one of the four operators who got the licenses in Sweden. Recently, Orange returned its license to the Swedish government. This is another side proof to say that the current situation in 3G networks business is not very optimistic. Of course, there are also some potential 3G network operators who have not gotten the license from the government. China Mobile could be in this group.
In simple words, the development of 3G networks for operators is more like a gamble. Those late comers in 2G campaigns wish to catch up in the new battle while the traditional leaders don’t want to lose the position in the new wave. Everybody is pushed and has to invest a lot in 3G which will lead to a reshuffle for the market. However, someone will definitely have to quite the game before the reshuffle is finished.
STANDARD & MANUFACTURERS
Besides the battle between operators, there is also an ongoing debate concerning the standards. The decision from every country government about the standard will have big influence on the equipment manufacturers. A typical case study for this field could be the situation in the biggest market of the world—China. China is expected to be the largest single market for mobile phones. The estimated market size for 3G networks in China is about 125 billion dollars. With a penetration of just 15% into its massive 1.3 billion populations [2], it has already overtaken the US in subscriber numbers. According to this, western companies that make the wireless equipment for 3G have been watching the Chinese government’s position on standards very closely. Until now, Chinese government has not release any license for 3G network to any operator. For those three most common 3G standards, the government approved all three. We can got some idea that the home-grown standard—TD-SCDMA will be given a large part of the whole share given the hint from the investment happened in China, especially those local companies like Huawei, ZTE, Datang etc. Thomas Jönsson, spokesman for Nokia, said: “We are actively following developments and have made some R&D investments into TD-SCDMA. WCDMA is the best architecture for wide-area coverage, but we are following the local situation.” This could be the very typical thought from those equipment manufacturers about the current standard debate. That is the importance of Chinese market which make all the manufacturers think about TD-SCDMA. Let us consider what has happened in China telecommunications industry. Huawei technology has more than 3500 R&D engineers on 3G networks, and accumulated investment is about 0.5 billion dollars. Datang invested 0.2 billion dollars and more than 1000 R&D engineers on TD-SCDMA. All of this makes the 3G development in China a big gamble too. The only thing different here is the government’s support. China is really willing to have an advanced position in the newly coming wave and also provide opportunity for local industry. Jason Chapman, senior analyst for the market research organization Gartner, said “In China, the adoption of TD-SCDMA has a lot to do with China wanting to drive a particular 3G standard. But the Chinese market is still rapidly expanding based on 2G technologies. You have to look at the demand for 3G.” This is actually the reason why Chinese government delayed releasing licenses again and again.
Still using the Chinese market as the study case, equipment manufacturers like Nokia & Ericsson are getting more and more deals on so called 2.5G or 2.75G. That could be a temporary alternative for 3G network. EDGE, GPRS are getting more and more recognized in many worldwide markets due to its compatibility and better data service compared to GSM. However, this could also been seen as the way found out by those manufacturers to support themselves before getting revenue from 3G development. Half of the network equipments of Ericsson are sold to the Chinese market. However, what is the continuous development of manufacturers in this huge market? What if TD-SCDMA is finally mainly adopted in China and those local companies take the large share of the whole cake? In worldwide area, how can the manufacturers play with three standards efficiently? It must be a big challenge to all of those equipment manufacturers.
USERS & SERVICE PROVIDERS
Actually, till now, the interest of the most important part in the whole value chain---The User is not spoken for in this evolutionary game. Every market revolution or evolution must have a driving force. Either the users are having more and more request which need the both academy and industry to create new services to satisfy them, or the users are not driving the demand for new services and then the demand must be cultivated through marketing campaigns. The former case will be more natural and make the life for industry easier while the latter one will need the industry to have more patience before getting the benefit. 3G is a very typical “High investment, Slow output” evolution. Most of the current 3G network subscribers are actually those advanced users during 2G or 2.5G. They are actually the highest part of the whole user pyramid structure. Although their ARPU could be very high, the limited number will not bring any obvious benefit to all the industry investors. The service requests from normal users are still at the voice and simple data service stage. In other words, the high data rate provided by 3G networks are not that necessary to users. Those high rate services could be fun or interesting. However, how many users will pay more for things which are only interesting but not necessary? Of course, users could be persuaded to adopt a new lifestyle with high rate data service. This brings a new problem concerning the service provider. Video call could be called a killer application on 3G network. Is there anything else? Maybe the emergency position locating could also be one. How important are the current services on 3G network which could lead users to change from quite good 2G to a somewhat new 3G? According to this, one concept is now accepted by most of the industry. That is to sell the 3G services with 2G prices. Then the add-on services will be the main obstacle for users’ migration. With more and more killer applications, the ARPU could be enhanced which finally will validate the whole industry value chain and benefit all of the players. At least by now, the 3G network is more like a game only prepared for rich users who will pay that amount of money no matter whether it is provided by 2G or 3G. Service providers and maybe battery producers are facing the very good opportunities now. However, one principle should be followed anyway. LISTEN TO THE USER! Design the system which can really benefit people’s life instead of designing a game prepared for a small amount of users.
SUMMARY
Based on the analysis from above three aspects, 3G network is more like a game which is developed by academic and R&D departments of big industry leaders. After that, all the participants in the industry value chain look this game as a good opportunity for a reshuffle from the old situation of 2G networks. Having this in mind, the prestigious 3G battle began with a huge gamble and everybody invested only because they did not want to be left out of the race. However, there is no clear end point by now. The most pessimistic ending for 3G network is to be skipped and never evolve to a profitable stage as 2G is now. If that is the case, whether 3G is really a Generation or Gamble Game? Is there still time for us to think more about this before it really evolves in the pessimistic way?
