The Long March to 3G

+8* ABL Column ChinaPublished August 18, 2008 at 3:38 am 5 Comments

+ This article is a monthly column written for the Chinese magazine Asian Business Leaders in June 2008 +

From the point of view of operators, all is probably well in China’s mobile sector, but many service providers, manufacturers, investors – and even some mobile subscribers – have been asking themselves if they will finally get their share of mobile happiness when 3G comes around.

Every time we participate in yet another event talking about 3G, it often seems that speakers and attendees are in a trance, as if 3G was going to be the long-awaited solution to all problems. Though the history of 3G worldwide is relatively short – a mere 7 years since NTT DoCoMo launched its FOMA service in Japan – looking back can shed some light on the reality of what good 3G might bring, or not.

3G business models

When reflecting on the benefits of 3G, it seemed so far that its main business models have been to

• (1) Sell 3G licenses
• (2) Sell 3G networks
• (3) Invest and sell a company with “3G” in its name
• (4) Organize conferences about 3G.

Some experts have been saying half-jokingly that 3G’s success lied in “Games, Girls and Gambling”, which we have to rule out in the case of China. Fortunately, there is more to learn from the experience of 3G pioneers such as China’s neighbors Japan and South Korea. Both countries have been running some form of 3G since 2001, and have been through all the growing pains one can imagine. With a combined 130 million users, Japan and Korea represent a large share of the world’s 3G market, and enjoy the longest experience.

Japan

• Population | 128 million
• Mobile subscribers | 103 million (only 5% prepaid)
• Mobile penetration | 80%
• 3G standards | Mostly W-CDMA, Some CDMA
• 3G users | 89 million | W-CDMA: 59 million, CDMA 1x: 30 million
• 3G penetration | 87%

South Korea

• Population | 49 million
• Mobile subscribers | 45 million (only 5% prepaid)
• Mobile penetration | 92%
• 3G standards | Mostly CDMA, migrating massively to W-CDMA
• 3G users | 42 million (estimate) | CDMA 1x: 34 million, W-CDMA: 8 million (estimate)
• 3G penetration | 85%

The key issues Japan had to solve when launching 3G back in 2001 were the same operators are facing worldwide: coverage (especially indoor due to the reduced penetration of high frequencies), handsets’ price, battery life and design when at first there are no significant market nor economies of scale to motivate manufacturers.

Though those issues have been now largely solved with W-CDMA and partly with CDMA 1x, the brand new TD-SCDMA will surely bump into. It took 3 years to NTT DoCoMo before the networks and handsets were mature enough to compare well with their 2G offering, how long might it take in China?

NTT DoCoMo’s efforts in pushing 3G forced its manufacturers to work on a technology with which they found no return before years. This largely contributed on them missing out on the opportunity to enter foreign markets despite their incredibly innovative devices. How come a leading market like Japan with a dozen local makers (NEC, Panasonic, Toshiba, Sharp, etc.), and where neither Nokia, Motorola nor Samsung could make a dent, only has one maker (Sony-Ericsson) in the world’s top 10? Our understanding is that the local market was so competitive and the operators so demanding that local manufacturers exhausted their development capacities to serve a low margin cut-throat market. More, NTT DoCoMo’s leading supplier NEC lost the top spot to Sharp, who focused on camera phones and quality screens rather than 3G!

Back in the years, Korea was committed to the more modern CDMA (“It’s made in the US of A!”), which backfired and slowed down exports for Samsung and LG as the global market was turning to GSM and W-CDMA. Now even SK Telecom, Korea’s largest mobile operator, is migrating to W-CDMA, claiming GSM and W-CDMA cover 80% of the world.

In China, some of the TD-SCDMA chip makers have closed their operations, and the manufacturing side looks gloomy – will the homegrown standard support or weaken local companies?

3G is about lifestyle, not content

TD-SCDMA sometimes sounds like a large-scale technical and political experiment, but as the Chinese 3G juggernaut is in motion, there is little choice but to think about how to make it work. From Japan’s experience, the key driver for adoption (once the above-mentioned problems were solved) has been the combination of offering a variety of attractive services supported by limited or full flat-rate data plans.

Interestingly, the “attractive services” have not at all been the ones operators expected: video calls are still almost not used despite the large number of compatible phones in the market, mobile video remains a niche usage, mobile TV broadcast… is not 3G, and suffers from intricate content politics and lack of business models.

Mobile music was a first trigger, but what really opened the market is how flat rate drove users to explore more and made viable mobile advertising, marketing and social networks. Surprisingly, the most successful services are not the ones needing fast network to transmit large amounts of data, but rather services accessing the network many times for small data transfers such as auctions, social networks, browsing and instant messaging. Even more surprising is that Internet leaders will not necessarily be the leaders on mobile, as the company DeNa proved in Japan by introducing both a hugely popular mobile auction and mobile community service, beating Yahoo Auctions and Mixi in the mobile field.

When the mobile and network infrastructure will be ready, we will see the market shift from pure mobile content to what DoCoMo calls a “lifestyle infrastructure”. As an illustration of this, the mobile commerce market in Japan was already worth over 6 billion USD in 2007 – almost as much as China’s online commerce market!

China’s road to 3G has already been a “Long March” and this is only the beginning!

Visit Slideshare to download our presentations on “Dogs and Demons in telecom” (presentation at the Wireless Developers Conference in Beijing in 2007.11) and “Dogs and Demons in mobile” (presentation at the World Congress on IT @ Kuala Lumpur in 2008.05 jointly held with the Mobile Monday Global Summit).