(FORTUNE Magazine) – The 21st Century, just four months old, has already seen its share of big gambles: a mammoth tax-cut package, a maverick campaign-finance reform bill, and a CD featuring the vocal stylings of Kathie Lee Gifford.

These all pale in comparison with the wireless industry's biggest play yet. European mobile carriers have paid $100 billion for so-called third-generation (or 3G) wireless licenses; they'll spend an estimated $200 billion more to build compatible networks. U.S. wireless operators will jump into the game in the fall of 2002, when the FCC should start auctioning licenses. Expect to see some serious spending.

For what? Well, that's a bit fuzzy. Wireless operators insist that these phones will be able to transmit data at speeds of up to two megabits per second, fast enough for videoconferencing, downloading a few tunes, or catching a TV show. This goal is exciting (though perhaps misguided--who really needs to watch Survivor on a cell phone?), but the massive capital outlay comes at a time when shares of wireless companies have plunged 56% in the past year, and their debt levels have risen considerably. Analysts warn that 3G spending could send a company or two into bankruptcy. Says Jane Zweig, CEO of international wireless consulting firm Shosteck Group: "There's a real possibility 3G could be a big bust."

If not a bust, 3G will almost certainly disappoint. Carriers seemed to get swept up in the hype without considering the realities of 3G. Analysts say data speeds will be much slower than promised--between 64 kilobits and 144 kilobits per second, a tad brisker than the 56K modems that link most home PCs to the Internet but not fast enough to stream video. Others say phones with big enough screens and powerful enough batteries won't be mass-produced until 2004. Carriers haven't heeded these warnings: Japan's NTT DoCoMo will be the first to roll out a 3G network in Tokyo this month; European and U.S. carriers plan on launching their 3G services primarily in 2002 or 2003.

In the meantime, emerging technologies may render 3G obsolete, says Phil Redman, a research director at the Gartner Group. "A number of companies are installing wireless networks that give people 11-megabit wireless access in airports, hotels, and public spaces," he says. "We see this as a technology that could be very disruptive to 3G." Yet another threat is an intermediary step called 2.5G. By overlaying existing networks with relatively cheap software, some European carriers are already offering e-mail, limited mobile commerce, and short-messaging services. Says Seamus McAteer, a research fellow at Jupiter Media Metrix: "A lot of investors are really going to become concerned when it becomes evident that 3G cellular isn't going to be that radically different from 2.5G cellular."

There are also doubts about whether carriers will ever earn enough money from 3G to make the upgrade worthwhile. Fearful that they would be locked out of key countries, operators bid aggressively for European 3G licenses last year. This spending has left carriers buried under mountains of debt. British Telecom's $43 billion debt load now approaches its $53 billion market cap. And some investors, irate over the free-spending ways of Deutsche Telekom CEO Ron Sommer, are asking him to step down.

Carriers are desperately trying to find ways to clean up their balance sheets. British Telecom is planning to sell off businesses worth $14 billion to reduce its debt; some mobile operators are hoping to turn in their 3G licenses for refunds, says Andrew Cole, an analyst at Adventis Consulting. (That won't be easy; most governments have earmarked that money for spending.) Still others are talking about sharing networks, which could reduce buildout costs by as much as 15%, say analysts at Lehman Brothers. But in this competitive industry there is plenty of resistance to the notion of sharing. "Control of the infrastructure is the key to success," says Julien Billot, development director for France Telecom Mobiles.

U.S. wireless companies will face all these problems and more when they begin bidding on licenses next year. The three different and incompatible technologies deployed by U.S. operators will result in different paths to 3G. Sprint, for example, will offer 3G faster and cheaper than say, AT&T, because of the savvy technological bet it made when building its original wireless network. AT&T, on the other hand, basically needs to build an entirely new network; it won't launch 3G until 2003 at the earliest.

The nation's second-largest wireless operator, Cingular, isn't even planning a 3G rollout. It lacks sufficient spectrum, and its parents, SBC Communications and BellSouth, each use two types of wireless technologies. Cingular executives say they believe demand for 3G will be soft. "We're not taking the position of 'If you build it they will come,'" says Bill Clift, Cingular's chief technology officer. "I'm a bit skeptical about putting tremendous investment into a technology that is in its very early stages and expecting the revenues will be there on day one." Maybe there will be a winner after all.

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