3G: When Will It Be the Next Generation Earnings Generator?

- Summary -

Louis Ross (Global Emerging Technology Institute)

There is now exceedingly more buzz about next-generation 3G wireless in the U.S. after years of serious doubts as to whether it would, or when it would, actually take off. Many felt the boom in wireless growth in Japan and the success of NTT Docomo's I-Mode somewhat of a special case. 3G pessimists in the U.S. still abound, however, and its understandable in a way considering the user interface offerings— especially the phones-that Americans have to play with. They still sell relatively large, featureless, mono-colored, Jurassic phones in the U.S., and the voice quality and reliability is something to be desired. Its surprising to see how happy people are with anything that is slightly better in terms of functionality and an attractive package. I am convinced that once suitable hardware arrives in the U.S., the growth potential is enormous in both business applications and entertainment for high-speed wireless. The pessimism simply has to do with a lack of attractive offerings, and its been that way for years.

As 3G wireless systems give mobile users access to more attractive, inter-active content through innovative applications, the market will surely grow. Either the market moves in this direction or people continue to be ignorant and content with what they have. If the relatively dull Blackberry could become so popular in the U.S., imagine what will happen when you have the same type of selection in Manhatten that you do in Tokyo. How many U.S. teens would enjoy a communications device that would permit them to download and play MP3s and music videos? I will bet that U.S. teens would feel the same way about wireless devices as Japanese do if they only had the right devices to play with.

In Japan, 3G is being tested, as the world's first commercial 3G wireless systems, developed by Docomo and KDDI, run through their live trials conducted by Japanese consumers. Many electronics firms, from semiconductor manufacturers to raw materials providers are focused on developing products for next generation wireless. 3G and beyond not only can provide significant earnings growth for companies in the future, but it also may be the catalyst for the next IT spending boom. The switch from 2G to 3G and beyond takes time, especially when many firms are saddled with debt and must focus on restructuring as well as building out new, expensive networks. However, growth can be counted on as an inevitability, and should be factored into a firm's value and carefully monitored.

Docomo`s recent decision to license W-CDMA 3G technology to the rest of the world may help spur the global development of advanced systems which may help to revive the global IT sector. Docomo seeks to spur development of more W-CDMA networks across the globe, drawing from its success in Japan. Qualcomm, which holds certain patents in CDMA and is the main promoter of the other competing 3G system based on their cdma2000 standard, will also gain from all 3G rollouts. Like Qualcomm, people should expect that even though U.S. wireless networks and cell phones are primitive in comparison with what is offered in Japan, Korea and in Europe, US companies, including innovative venture companies that provide key technologies, software and innovative content, will help build up the foreign systems. Their participation in the growth of these more advanced foreign markets will provide substantive experience for these firms when their own domestic market finally develops into a more mature one.

The future success of 3G will rest on a number of factors, as mentioned above, but the most important will be the integration of key emerging technologies into existing and new network systems, cell phones and other devices.. For example, as high-speed wireless systems give mobile users access to more applications, the need for increased storage capacity will explode and developing an appropriate power source will be a challenge. This is apparent in Japan's latest 3G phones which are known to run out of power as quickly as regular U.S. phones do. Advanced MEMS and nano-technology manufacturing techniques will go a long way toward improving the likelihood of long-term growth for high-speed mobile wireless networks. These technologies will be relevant in regard to the production of new mobile-oriented semiconductors and their packaging, including system-on-a-chip technologies and miniature battery technology, including advanced fuel cells. They also will be relevant in regard to improving audio quality, increasing storage capabilities, and will be used to produce a variety of other components. More storage, less power consumption and an attractive screen paired with an easy-to-use interface will trigger high growth rates, and in order to get there the potential of these emerging technologies must be exploited.

Japanese company strengths in MEMS and nano-technology fabrication will be paired with expertise acquired by operating in the world's most advanced mobile wireless market. Though Japanese electronics firms have suffered recently and announced record breaking losses, part of the news deals directly with the reason why they will arguably be the best positioned to take advantage of the next potential IT boom. This foresight has put Japanese industry on track to take advantage of the current technology-integration trend related to next generation high-speed wireless networks. These firms will come out of their restructuring relatively mean and lean and more responsive to shareholder concerns.

Arguably, Japanese electronics manufacturers are the best positioned for the mobile wireless convergence trend which is taking shape and promises to extend into the distant future. In this area, Japanese firms are innovators, they excel at design, producing and pricing products that people demand and they maintain cutting edge, high-value added manufacturing skills. They also have a history of collaboration and cooperation, which is essential for developing the capabilities for producing and packaging advanced `converged` technologies on a mass scale and be first to market them. The costs and risks are evident, but, one needs to value Japanese companies relative to their foreign competitors. A user base of over 50 million 2G-2.5G subscribers in Japan certainly helps their cause and growth potential. Financial analysts usually do not know enough about a firm's R&D activities in order to develop a detailed picture of a firm's prospects and modeling such an intangible as R&D is difficult.

Restructuring will breed very lean and competitive firms over the next several years. Investors should keep their eyes on what is in the pipes for R&D, especially related to next-generation wireless activities, and how these firms control costs in the meantime. Also, investing in next-generation wireless for Japanese firms overseas may not necessarily be a good idea at this time. Some markets outside of Japan simply need to bake a bit further before making more significant investments. Arguably, they would be much better off focusing on Japan and preparing to enter the U.S. market toward the end of 2003. It is highly unlikely that U.S. operators will offer reliable service before that time.

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