Wireless and Wideband: Saviors During the Downturns

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Louis Ross (Managing Director, Global Emerging Technology Institute)

Everyone is still betting on mobile wireless and wireless wideband (W&W) these days. Every firm in the IT food chain revised R&D budgets and business plans in order to attempt to position themselves for the next technology boom that most likely will feed off of growth in W&W in various ways. The first internet boom was restricted to fixed lines, and the next, the one that will have real substance, will be wireless and this will happen within the next decade. The growth rates experienced up until now have been restricted due to technical limitations that will eventually be overcome. The wireless device in its many forms will be as essential to the individual as a regular telephone, but much more functional, mobile and entertaining, like a television and a personal computer.

The U.S. press recently jumped on the bandwagon to tout a coming wireless boom that would follow the several years of slump the global economy has been in. This has been one of the two key areas of growth in technology for the economy, the other associated with military technologies developed to help fight the war against terrorism. The global technology sector continues to struggle, both in the real world and on the world's major bourses as firms turn in disappointing earnings results and negative restatements. The restriction of U.S. consumer confidence has led to a continued decrease in business investment. Orders for capital goods and business equipment fell significantly over the past year. Companies are very cautious in expanding their operations and corporate debt levels are approaching dangerous levels. It is expected that the U.S. economy will not revive for at least another year and that recent rallies are short-term in nature. The market will be flat for 2003 and even a 10-20% gain will most likely be difficult to maintain and the impact of President Bush's new economic stimulus package will not be felt in the immediate future. There is also substantial political risk as the war on terrorism continues and preparations to confront Iraq and North Korea continue. All of the above will have a tremendous impact on the Japanese and collective Asian economies. In Japan, the deflationary trend continues, the market is approaching new lows and the financial system continues to nurture, what many believe, is an ominous ticking debt time bomb. The sentiment in the investment community throughout the world is quite dark and has been for some time.

Though it may be a big question of whether or not the macro economic trend can continue, growth in wireless and wideband markets continue to carry the technology sector and, as a result, R&D activity and investment focus in the area continues to be fairly strong. The bleak macro-economic picture painted above has had relatively little impact on W&W growth considering that the associated trends are strongly believed to be very long-term in nature. Therefore, private equity investment in venture companies, a leading indicator of the commercialization potential for emerging technologies, continues to be strong in the wireless area. For example, venture investment in chipset and related semiconductor infrastructure was strong over the past year, moving away from investing in conventional wireless s providers only. Investments in chipsets, security and WLAN solutions, including device software and multimedia applications, were seen as promising as venture companies worked with wireless carriers closely. There has been a strong focus on investing not in service providers but companies that provide technology equipment or software to enable new types of services/ reduce carrier's capital and operating expenses. This means investment in the enhancement of existing systems. During the first half of 2002, infrastructure and chipset companies garnered 36% of the total investment into wireless technologies. Foreign companies provided key financing for venture companies catering to the above. For example, Sanyo Semiconductor was sole investor in Magis ($40m in B round), a firm developing chipsets for 802.11a networks. The WLAN market is expected to grow by 200% over the next 2 years and $3.5b in sales of WLAN equip is expected per year by 2005. WLANs and the use of "hot spots" in the U.S. and Europe is an economical response to the costs involved in developing true 3G mobile wireless networks. A dispute in the wireless community exists between what should be considered 3G (144kbps or 384kbps). Some people believe that only systems that can go 384kbps and beyond should be labeled 3G. WLANs provide the necessary (often greater) speed at lower costs, but mobility is limited since one must be in a "hot spot" in order to acquire service. Carriers do not (and cannot) make the infrastructure investments at this time to enable ubiquitous high-speed wireless data services. At the same time, demand for these services is not going to take off until they exist. In the meantime, expect the proliferation of WLANs to fill in the gap for now as mobile wireless systems fail to come even close to the 144kbps speed that many carriers advertise.

Many analysts believe that we will see an upswing and widespread adoption of next-gen mobile wireless and even more advanced fixed wireless technologies by 2004-5 and then, some 5-7 years later, most likely before that time, we will push into the era of "4G." In the U.S., new high-speed, next-gen voice and data networks where introduced to the mass market this past year coupled with better, more functional and attractive handsets. This has come about in large part to the introduction of handsets from Japanese and other foreign companies. Interestingly enough, many of the standard applications that have earned revenue for Japanese carriers for many years now (such as the downloading of ring tones, and music) have also recently been introduced into the U.S. Existing U.S. networks, though not true 3G in the strict sense, can handle these applications and the fact that they are being offered clearly shows that there is a market for them. American carriers -- like many of their counterparts overseas -- have almost completely converged on two wireless standards, GSM and CDMA. Since its much clearer now where standards are heading, the U.S. market has become more attractive to foreign firms. A few years ago, the U.S. market was too confusing and uncertain. Carriers built up competing standards and networks, and phones still needed to be compatible with the old analog signals. Japanese phone makers avoided the U.S. market to concentrate their efforts on other markets and, most importantly, the Japanese market. As three major U.S. carriers- Cingular, AT&T Wireless and T-Mobile -- offer GSM in the U.S. now, Japanese firms and JVs such as Panasonic and Sony Ericsson can sell their European phones in the US. The popularity of CDMA in Japan, especially regarding next-gen, will lead to the introduction of more phones by other firms such as Kyocera in the U.S. These firms can now tap the U.S. market as it matures and accepts more advanced technologies, including those that have been utilized in Japan for some time now.

Japanese electronics firms have suffered a great deal over the past several years. The global IT meltdown led to huge losses and desperate attempts to cut costs and restructure.

The macro economy and an impending crisis in the financial sector will most certainly lead to broad scale changes in how these firms do business at home and overseas, how they manage their assets and how the allocate resources in order to build up strong product pipelines that will contribute to future earnings. These firms will attempt to bolster profitability by entering markets that are expected to grow and the US is expected to be one of them.

In general, most of the growth since 2000 has come from participating in the wireless and wideband markets for these firms. Increased demand for next-generation handsets continues to aid new growth for components companies, OEMs and IC suppliers. According to the study, "3G/Cellular Integrated Circuits," the total available cellular integrated circuit (CIC) market will double from $13.9 billion in 2001 to $26.4 billion in 2006. The market will continue to be lucrative for component manufacturers. The bill of materials for 3G phones will warrant a 79% increase from today's basic GSM model. Additionally, the semiconductor value is estimated to be 49% greater than that of 2.5G devices. Semiconductor manufacturers and research institutes throughout the world have advanced packaging and integrated wireless chip technologies on their development list. Semiconductor content for all cellular standards, from 2G to 2.5G and 3G standards of GPRS, 1XRTT, EDGE and WCDMA should expand within cellular subsystems.

No wonder that major Japanese electronics firms and semiconductor companies have been paying so much more attention to the wireless and broadband communications market. Their R&D activities and commitment to certain key emerging technologies such as MEMS show that they do not plan to change this focus any time soon. The success of current investments will be the key to the independent survival of a number of firms in the U.S., Japan, Europe and Asia. Investments will continue but the hurdle rate for these investments internally will no doubt be raised. The trend leading Japanese away from building equipment only for the Japanese market and increasingly provide cutting edge technology and services to other markets will continue at an accelerated pace. Sanyo is proud to be the first wireless phone manufacturer to deliver a built-in camera phone to the U.S. market. Toshiba's wireless router and service infrastructure Working Wild is the designated Premiere Hotspot Operator for the deployment of Toshiba's Wireless Broadband Hot Spot solution.

Arguably, firms like Docomo and NEC made a mistake by entering under-developed foreign markets too early, wasting hard earned cash made in the strong Japanese market. For Docomo, this coincided with a weak introduction of its 3G FOMA service as its competitor KDDI blew past it in terms of 3G subscribers. Docomo's difficulty in starting up its 3G business is understandable—it was the first one of its kind in the world and it should be expected to have problems in the beginning. Currently, KDDI Corp.'s "cdma2000 1x," which has adopted Qualcomm's cdma2000 format, is leading the 3G mobile phone market. The launch of the service was on April 1, 2002, six months later than that of Docomo's FOMA, which uses the W-CDMA format (started on Oct. 1, 2001). KDDI added 493,000 subscribers to its cdma2000 1X network in July to take its total 3G customer base to more than 1.64 million. DoCoMo, meanwhile, signed up just 12,900 subscribers last month, to give it a total of 127,400. KDDI's success with next-gen services has been attributed to the fact that it offers roaming between its 2G and 3G networks on the same handset, while DoCoMo customers have had to carry a separate handset for 3G calls. KDDI's subscriber numbers have recently been boosted by geographic positioning system (GPS)-enabled services. Most impressive is the introduction of a little electromagnetic compass component in the handset that determines the geomagnetic direction of the phone, so adjusting the orientation of on-screen maps as you turn a corner, for example. Qualcomm's cdma2000 technology is now deployed in 18 commercial networks in Asia, Europe and the Americas and is used by more than 17 million subscribers, with some reports that subscriber growth is close to 1m per month. The more widespread adoption of this technology will obviously help KDDI to further its lead over Docomo in the 3G race in the future unless Docomo goes on the offensive after having done the exact opposite over the past two years. Expect the company to meet the challenge. Docomo's 3G service offers data transmission of 384 kpbs, 2.6 times faster than KDDI's 3G service, and allows face-to-face real-time communication. This year, the company plans to introduce video conferencing between cell phones and computers. This application should prove to be popular in the market. NEC is also moving to meet the needs of wireless carriers overseas as they slowly adopt 3G technologies. The main supplier of NTT and its subsidiary Docomo, NEC is in a strong position to capitalize on any future global growth of next-generation wireless networks.

Japanese carriers and electronics manufacturers will turn out better end-user hardware and innovative technologies that should increase subscriber numbers. The key to success has been the continuous introduction of new features to handsets, and the demand for these handsets continues to be insatiable in the market and as long as the technology incrementally advances, there is a good possibility that you will have continuous waves of migration to newer handsets on more advanced, faster networks that offer richer applications. Most likely, within the next 10 years people's lives will nearly completely revolve around interacting with a comprehensive wireless device that performs a variety of personal and business functions. However, at this point, these companies would be wise to spend money in markets that matter, and those start with the most advanced with the largest subscription list that have high per capita incomes (U.S., Europe, Japan and South Korea) and those that show a lot of potential but are not capable of high ARPUs for 5-10 years or so (China, India). Japanese carriers and electronics firms were a little too early in their desire to cultivate foreign wireless markets a few years ago. The foreign carriers do not have the money to take chances and quickly build up real 3G networks and continue to show some apprehension. There also is an incredible amount of anti-3G propaganda in the western press, though it is starting to slowly but cautiously subside. They have been talking about "leap-frogging", whatever that means, 3G ever since people started reporting on it several years ago. There is always a possibility that new innovations in the wireless area may trump 3G. However, the weak market also means less money to develop new technologies that do not lead to immediate payouts. How many foreign carriers will fund something that would lead to the immediate destruction of existing networks in the U.S. and Europe? Not many. Macro-economic conditions will hand-cuff these firms for a little while. In that case, expect the introduction of new products in the U.S. to certainly pick up as existing networks develop the ability to service them and foreign companies approach the U.S. with a better game plan. It is clear that 3G networks will take time to develop, but why this appears to be a surprise to many commentators is a mystery. The comments appear more to be derived from the frustration that the U.S. still lags behind this key potential growth area. At least now many analysts are beginning to see the huge potential and some are embracing the potential, though many more are focusing on fixed wireless (WLANs) as a short- and even medium-term solution. It will take several years for the global telecoms industry to recover, and many of the promises of next-generation services may not be met until 2010. This date, 2010, also appears to be the time when the U.S. market will finally embrace next-generation wireless and its market has the potential to become one of the largest, at least according to UMTS Forum, an industry group. According to the Forum, the U.S. is expected to have more 3G mobile subscribers than any other single territory. Forum chairman Bernd Eylert has been quoted as stating that China and India would trail the U.S. in terms of the number of 3G users in 2010, with Germany and the U.K. taking the fourth and fifth spots. Though it makes sense that the U.S. might increase its subscriber numbers substantially, its hard to believe in the likelihood that the other four listed countries, especially the U.K., will have more subscribers than Japan or South Korea. As for China and India, it's hard to believe that a subscriber base with ARPU's similar to the U.S., Japan or South Korea, will suddenly appear. These markets may be decent test beds for introducing new technology, but, as previously mentioned, they will not be the most profitable in the near future.