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Europe will wait for 3G
With Vodafone and MMO2 backing away from 3G rollout dates, what can investors learn from Europe?
October 23, 2003: 10:49 AM EDT
By Eric Hellweg, CNN/Money Contributing Columnist

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SAN FRANCISCO (CNN/Money) - Last week, already-anxious investors in U.S. cellular and telecommunications companies received worrisome news from Europe.

Speaking at the ITU Telecom World conference in Geneva, Arun Sarin, CEO of U.K.-based Vodafone, announced that Vodafone couldn't offer a specific time frame for the release of the company's next-generation cell-phone services, something its investors had hoped to receive.

The outlook for next-generation (also known as 3G) services looked even murkier when Peter Erskine, CEO of European mobile-communications company MMO2, explained his stance on 3G. According to he told the gathering, "There is no point in launching technology before customers are ready to use it."

With AT&T Wireless, SBC, Sprint, Verizon, and other telecoms all hard at work developing their own stateside 3G cellular services, such as lucrative high-speed multimedia data transmissions, how ominous are those clouds over Europe?

The answer is, Not as ominous as you might think. To see why I'm not worried, investors need to understand how the European and U.S. markets do and -- more important -- don't reflect each other.

Important differences

First, let's look at the differences. High-speed cellular services in the United States operate on not one but several different standards, including GPRS and CDMA. In theory, the free-market forces allow these standards to compete on quality and price, leading to stronger technologies and cheaper products.

In Europe the situation is completely different. A governing body determined that all carriers would use a single standard, GSM, and it even set rollout dates, which some companies are still struggling to meet with technology that isn't quite ready.

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Another important difference is that European telecoms famously overspent on 3G spectrum in 2000, buying at the height of the market. They've been trying ever since then to recoup the staggering costs. Thanks in part to the Federal Communications Commission and the way it botched the initial auction of high-speed spectrum, U.S. companies will be purchasing spectrum in a much more realistic market, which should lead to lower prices and more manageable costs.

U.S. telecoms have already learned a couple of important lessons from the Europeans, says IDC analyst Shiv Bakhshi: "not to overpromise" on service quality and not to assume people will adopt the services.

After the European cellular companies purchased cellular spectrum in 2000, the industry was abuzz with rosy scenarios that soon every cell-phone user would download music onto his or her device, watch movie trailers on a handheld screen, and send copious data through the pipes.

"Everyone was in a state of euphoria after the 3G spectrum licenses in Europe, and they couldn't deliver the demand," Bakhshi says.

U.S. companies are now in the toe-in-the-water stage, slowly rolling out limited offerings in select cities such as Indianapolis and San Diego. AT&T, Cingular, and T-Mobile are still sticking to their long-held plan of launching a nationwide next-generation service called Edge before the end of next year.

Lessons learned

Perhaps the biggest lesson U.S. cellular companies have taken away is that they have to work to create consumer demand for new services.

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Wonder why you're seeing so many camera phones these days? It's because carriers are seeding the market, creating demand for the kind of data-intensive offerings that 3G will enable.

But the success of camera phones -- they're outselling digital cameras -- doesn't mean that the 3G market is about to turn into a revenue gusher. IDC estimates that while revenue from U.S. cellular data services will grow by a compound annual rate of 54.3 percent during the next four years, the revenue figure will amount to only $15.39 million in 2007.

Investors, therefore, should be cautious if companies start promising quick consumer adoption and fast revenues from 3G rollouts. Investors in European companies bought into that vision when the companies in their portfolios snapped up spectrum in fevered bidding. Now, three years on, those licenses are being sold for pence on the pound.

CORRECTION: In a recent column on the California recall election, I stated that both Hewlett-Packard and Technology Network California PAC donated $5,000 to Cruz Bustamante's 2003 election campaign. In fact, both organizations donated to Bustamante in 1998. According to California Common Cause, Bustamante held on to the donations and reallocated money to his 2003 recall campaign election fund.

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