3G's growing pains hurt WiMax more

• Tags:
• Markets,
• Profits,
• Wimax,
• Alcatel Lucent

Leader ZDNet.co.uk

Published: 16 Oct 2007 15:43 BST

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For a $500bn industry that's roped in nearly half the world, mobile telecommunications is in a nervous mood.

Ericsson, which accounts for around half of the mobile-infrastructure market, has just issued a profits warning that's seen its shares drop by almost 30 percent, following similar news from number-two player Alcatel-Lucent. Both companies have said that reduced spending in the developed market has hit them hard, while low margins are offsetting strong growth in developing markets.

One big truth lies behind this: operators aren't making much money from new services. This means there's no urge to spend heavily on network upgrades to support ever-faster variants of 3G — and, without that, newer, more attractive services will be slower to appear. Mergers and acquisitions will take priority over organic, investment-led growth. And, in Asia and other newer markets, strong competition from indigenous vendors and late-adopter advantages are keeping profits lean.

This has profound implications for a market used to a high-spending, high-profit life. The most exciting developments will move to areas where costs can be cut, such as with Broadcom's innovative 3G-on-a-chip design, which will expand the market for advanced services by reducing their cost of entry. Better use of existing infrastructure, as demonstrated by BT and FON's link-up, will also become increasingly significant, driving the development of services to build healthy revenues in place of reliance on overpriced lock-ins. Operators will have to adjust to fit. That will be painful.

Perversely, these problems are even worse news for WiMax. With GSM/3G, WiMax finds itself preparing to fight a technology that's already on a war footing, already engaged in ruthless margin battles, with strategic billing, security and worldwide roaming infrastructures already in place, and with two-billion-plus foot soldiers already rallied across 200-plus territories.

Competition will take place at the service level rather than the physical level, where it remains unclear what advantages and unique revenue models WiMax will bring. It's very clear what level of investment will be needed to bring it into proper contest with the incumbent: no matter how good your services are, you won't make a penny if your network's not there.

Have no doubt. Cheap, universal, high-speed wireless access will happen. But it takes a bold person indeed to bet against the pachyderm already in the room, even when it's nervously complaining about elephantine growing pains.

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