NEW YORK (CNNMoney.com) -- Despite claims from mobile phone carriers, the next generation of mobile technology, or 4G, will only be slightly faster than current 3G speeds, at least initially.
Massive costs, soaring consumer demand for data and the logistical nightmare of setting up tens of thousands of new cell sites will prevent 4G technology from reaching its promised speeds for years, according to carriers and wireless experts.
True 4G must generate speeds of at least 100 megabits per second, according to the International Telecommunication Union. Current 3G technology offers speeds of up to 2 megabits per second and broadband delivers 5 megabits per second to the average U.S. household.
Faster may be better, but the road to get there will be tough. In order to fully deploy a 4G network, some carriers will have to install about 10,000 cell sites, which cost hundreds of thousands of dollars each, according to Gartner analyst Akshay Sharma.
The two largest U.S. carriers, Verizon Wireless (VZ, Fortune 500) and AT&T (T, Fortune 500), have both announced plans to unveil 4G networks in the next two years based on a new technology called Long Term Evolution (LTE). Verizon said it would launch its network in 25 to 30 markets this year, reaching 100 million people. AT&T plans on deploying its network in 2011.
The No. 3 wireless carrier, Sprint Nextel (S, Fortune 500), claims to have a 4G network in place based on a different technology called WiMAX, though WiMAX is actually just an enhanced 3G technology. With more than 50 global carriers pledging to unveil LTE networks, some analysts have speculated that Sprint will likely commit to building its own LTE network in the near future.
LTE networks will cost $8 billion to build over the next three to five years and would increase carriers' operating expenses by 30%, according to a study by mobile network consultant Aircom International. That doesn't include other hidden costs, like the $9 billion that Verizon spent at a 2007 government auction for the spectrum it will deploy its network on.
Carriers already have razor-thin margins after spending billions of dollars building out their 3G networks, and trying to balance profits with the need to stay ahead of customers' increasing data demands. As a result, the 3G -- and even 2G -- services will continue to be around for quite some time.
"It will take several years to build out 4G," said AT&T spokesman Mark Siegel. "Our implementation of LTE will be timed to when the infrastructure is fully built out, so we're continuing to invest in our 3G network."
Accordingly, AT&T said it is continuing to invest in its 3G network. Siegel said the company's improvements will double its 3G network's speed to 7 megabits per second for the 10 AT&T phones and devices that are enabled to work with those higher speeds.
A spokesman for Verizon said that AT&T's 3G speeds were theoretical maximums reached in a lab, but that Verizon's new LTE network would be able to achieve actual speeds of 5 to 12 megabits per second when it deploys. Verizon noted that actual average download results cannot really be determined until the 4G network's launch.
Experts remain cautious.
"The transition from 3G to 4G isn't just a flip of the switch," said Kim Perdikou, general manager of Juniper's infrastructure products group. "Five years down the road, there will still be more 3G traffic than 4G traffic."
That means that the first 4G devices will need to be able to connect to 2G and 3G networks in order to get service where 4G isn't available -- which will be most places.
"LTE might only be available in the downtown section of your city on its main street initially," said Sharma. "It will take time."
4G access will also be initially limited to data cards and USB dongles, which look similar to flash drives and provide wireless access. There is speculation that Sprint will offer a WiMAX phone in 2010, but Verizon and AT&T don't expect 4G handsets to be unveiled until at earliest 2011.
When 4G networks are fully operational, capacity will likely be taxed by an enormous increase in demand for data services. Smartphones are the fastest growing consumer electronic segment, and AT&T has witnessed a 5,000% increase in data traffic since it unveiled the iPhone.
With the enormous costs, questionable speeds and a need for carriers to maintain multiple networks at once, it would seem like 4G may not be a worthwhile investment ... at least in the near term.
"It's a question of whether the benefits that LTE bring will be worth it," said Dan Hays, partner at PRTM.
Providers aren't very optimistic, according to a recent study of 200 global wireless operators by mobile software company Innopath. They say Web browsing, e-mail and messaging drive growth over the next five years, and those services are already delivered satisfactorily at 3G speeds.
But down the road, if 4G's potential speeds are realized, the survey's respondents said that a greater return on investment will be reached. More than 60% believe that 4G applications that allow for enhanced functionality like video chatting will enable mobile providers to sell ads and generate profits.
"We're pushing into LTE for what we know is coming up in the not-too-distant future," said Brian Higgins, head of Verizon's LTE lab. "Video, gaming, and anything that will require high bandwidth will require good, solid connectivity."
Still, Hays and Sharma both argued that Verizon and Sprint had less of a choice about upgrading, since their 3G networks are already running at maximum speeds.
T-Mobile and AT&T run their 3G networks on a different standard, which experts say has a maximum speed of about 21 megabits per second -- faster than the speeds LTE will likely be able to offer right off the bat.
Kyle Bass is the founder and chief investment officer of Hayman Capital Management. More
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