Mobile phone operators still waiting for the third generation

3G licences cost £22.5bn but old fashioned voice calls still look like the 'killer app'

Today Mmo ₂ will announce its annual results, and one question the mobile phone company is bound to face will relate to third generation (3G) services or, more specifically, why there is such a dearth of them in the UK.

Today Mmo ₂ will announce its annual results, and one question the mobile phone company is bound to face will relate to third generation (3G) services or, more specifically, why there is such a dearth of them in the UK.

Japan and Korea have them, Germany and Portugal have also got them now, but having splurged billions on 3G licences (Vodafone spent £5.96bn alone in the UK) there is still only one commercial 3G mobile phone service - Hutchison Whampoa's "3" - available to consumers in this country

The question is all the more pertinent because next month will be the fourth anniversary of Gordon Brown's extraordinary achievement of persuading the telecoms industry to part with £22.47bn for licences to run 3G services.

These, we were confidently promised, would revolutionise the mobile phone industry and the way we all communicate. But having spent all this money on buying the right to run 3G networks in the UK, the amount of capital expenditure being spent by mobile phone companies to develop their businesses has actually fallen since 2000. This would hardly seem to be the action of an industry convinced it is in possession of a revolutionary technology.

Experts are now asking themselves whether the great 3G auction will go down in history simply as a very expensive way of the mobile operators buying extra network capacity to carry more and more voice traffic.

Rather than sexy high-speed data services, such as live video-calls, that were supposed to send us flocking to Carphone Warehouse to upgrade our mobiles, is 3G really about carrying boring old voice traffic after all?

Jason Chapman, principal telecoms analyst at Gartner, said: "It is a good question because when the 3G licences were being awarded everyone was talking about video streaming and video calling that would fill these huge new data-pipes. But the other thing they all kept quiet about was the extra voice capacity. After all, who would want to be seen spending billions just to provide voice capacity?"

Neil Mawston, of Strategy Analytics, the specialist telecoms analysis firm, said: "It is a question we have asked ourselves on many occasions." Phil Kendal, a colleague of Mr Mawston said: "Certainly over the next couple of years that premise is pretty safe. A lot of high-end services won't get huge amounts of traction.

"Long term, however, we are reasonably optimistic that there is a value proposition there. You can never underestimate the value of giving people something to do when they've got five minutes to kill.

"The time-wasting value of mobile phones is increasing. For instance, a spike in usage at lunchtimes and during the commuter periods is already evident, so giving people the chance to take features such as the news headlines from the BBC or trailers from movies means there will definitely be interest from some parties."

Mmo ₂ will tell those people who ask about 3G today that it, like most operators, is adopting a softly-softly approach to 3G services. Far from being a Big Bang adoption by consumers, it will be an evolutionary process.

Meanwhile, all that additional voice capacity on the new 3G networks, built using a technology standard called UMTS to replace existing GPRS or 2.5G technology, will prove a crucial asset to have as the mobile operators expand their business in the future, claim the mobile operators.

But analysts remain sceptical. "As to them realising some profit out of that huge investment, that's another question," Mr Chapman warns.

The big idea behind 3G, the "killer application" in technology parlance, was to have been data-rich services. With a 3G mobile phone you can see the person you are talking to, live, thanks to video calls. You can receive highlights of the Premiership thanks to video streaming and you can download music videos, computer games or the latest BBC news headlines.

The figures in the chart show that the crucial data element of mobile phone revenues has been growing while voice data has been increasing as well, albeit at a more sedate pace.

This is good news for 3G services as it shows a growing acceptance of data services, although the figures include revenues from text messaging, the surprise success of mobile phones. However, the trend for data is clearly going in the right direction and 3G services should, presumably, capture this growth.

Although many similar data services are already available on existing 2.5G services, the 3G networks will deliver the material, faster, cheaper and with better quality.

"There isn't actually a single, killer application that you can hang a 3G business case on; it's more a cocktail of applications. So better pictures, improved video content and the ability to download content more easily is what it's about. We think it is an evolving investment rather than a seismic shift that we are seeing for 3G," Mr Chapman said.

Vodafone's 3G launch in the UK has so far been a data card for laptops that allows people to send and receive large files via e-mail. As the company points out, this is as far away from voice traffic as you can get and will set the scene for future phone services planned for later this year.

Like the industry as a whole, Vodafone is seeing its data revenues as a percentage of total revenues encroaching on voice. In December it reported data revenues accounting for 15.9 per cent of its income, up from 13.9 per cent a year earlier. A similar total for data services is reported by "3".

But according to "3" the established mobile operators face a paradox over 3G which goes deeper than whether data revenues will ever count for much against voice. And this paradox, it claims, helps explain why the all-singing all-dancing 3G services have failed to appear and show no sign of doing so, four years after the industry collectively spent more than £20bn on 3G licences.

The problem that companies such as Vodafone and Orange face is how do they cope with changing the commercial status quo?

In other words, how do they migrate their large, revenue generating and highly profitable customer bases from 2.5G services to 3G services without subsidising an enormous new handset programme and fighting a costly price war with "3" over the cost of services.

Although "3" has had its high-profile problems, including a chronic shortage of handsets last year, it believes its aggressive pricing leaves no alternative for rivals coming into the market but to join battle and match it on price. In Hutchison Whampoa it has a very rich parent.

"3" is offering 750 voice minutes on its 3G network for £35-per-month plus £10 for unlimited video services, including Premiership football, games and music.

Another problem lies in the handsets available in the shops. "There is a lot of hype but in the UK and Europe we are only expecting 3G handsets to account for 4-5 per cent of sales this year," Mr Mawston said. " That is out of a total of about 135 million in Europe of which we expect about 22 million total mobile sales in the UK this year. So 3G is still a relatively small amount of the total volume. We don't see that changing until 2006.

"Subscriber acquisition costs are very high and the applications on the phones are still expensive for customers to actually use. The size and weight of the handsets are still issues. The footprint of components inside the devices is too large. That won't be solved until first half of next year and although there will be a big 3G push this Christmas, handsets are still too large," he said.

There have also been some fairly high-profile arguments between the mobile operators and their cousins in the handset and network equipment markets over who is to blame for the lack of decent phones for consumers. Both blame each other.

Anyway, 3G is slowly becoming a reality although too late for many investors. Mmo ₂ last year decided to write off £9bn attributed to the value of its various 3G licenses, including the £4.03bn its former parent, BT Group, paid for the UK licence. Vodafone has yet to write off the value of its licences although it is expected to start amortising them this current financial year now that the networks are up and running.

The battle for data revenues promises to be a long and hard one. It seems that bog-standard mobile phone calls will remain the bedrock of the industry for years to come. As a spokesman for "3" said: "Voice is still what people understand. You sell (services) on voice and you have to sell them in a language that people understand. People understand the value in voice."