Asia's Roaming Bulls

Pssst, here's a secret: the "wireless superhighway" is here. For years the world's big telecom companies have been racing to offer the first high-speed third-generation (3G) mobile-phone service. Now the race is over--and until recently not even the winner recognized the achievement. Last October South Korea's SK Telecom unveiled an upgraded digital wireless network that it had described as an incremental step between second- and third-generation technology, or 2.5G. The South Korean government, which has nurtured leading industries with paternal pride, concurred with that technical assessment. Around the same time, it sold both SK Telecom and KT Freetel, the wireless unit of state-owned Korea Telecom, licenses to build real 3G networks, for $1 billion each.

Then a curious thing happened. Officials at both SK Telecom and the South Korean government discovered that they'd underestimated the system. The transmission speed of the SK Telecom network is 144 kilobits per second. That makes it not only the speediest wireless network in the world at the moment--but also fast enough to qualify (just barely) as 3G, under standards set by the International Telecommunications Union. "After some debate, we've concluded that our new telecom service is 3G," says Suh Long Suk, a director at South Korea's Ministry of Information and Communication. Based on a technology known as CDMA2000, the SK Telecom system is significantly quicker than Europe's fastest networks, which have a maximum speed of 115Kbps. Though most other nations in the race envision launching 3G systems that are nearly three times faster than SK Telecom's, the U.S. company that pioneered the CDMA standard says Seoul's victory is legitimate. "Korea can rightfully claim it is offering 3G telecom service for the first time in the world," says Johan Lodenius, a senior vice president at the San Diego-based Qualcomm.

Korea's 3G victory--probably not coincidentally--smacks of technological revisionism. But it's also a smart strategy for avoiding the kind of 3G mess unfolding in Europe. Instead of racing to build a costly new 3G network of towers and relay stations, why not improve what you have and call off the frantic race? South Korean officials admit their system still lacks much by way of mobile- data services, but eventually it will offer transmission speeds of up to 2 megabits per second--and all the small-screen audio and video entertainment any customer could want. The bottom line: SK Telecom alone will save $2 billion by forgoing the cost of building a new 3G system. Says Yoon Kyung Keun, a senior manager of KT Freetel, "At this point, it is much more economical to just upgrade the 2G system than to start the expensive 3G system. Our upgraded 2G service can offer all the fabulous functions of 3G."

Asia has not entirely avoided the mistakes of haste and hype that fed 3G mania in Europe. Singapore had hoped for a Euro-style windfall from a 3G auction, but canceled the bidding in April when only three companies bid for the four licenses. DoCoMo, the rich and ambitious Japanese giant, has delayed its 3G launch until October, citing software bugs in new switches and handsets. Australia decided to delay the introduction of its 3G networks until October 2002 to give the industry time to develop cheap and efficient hardware, as there is little available. The New South Wales Police Service had hoped to use 3G to turn squad cars into virtual mobile police stations, complete with the capability of analyzing fingerprints. Now those plans are on hold. Louise Ingram, spokeswoman for the Australian telecom Optus, says the region is in a 3G "doubting stage."

Still, Asian wireless operators have not suffered terrible financial damage. They've got debt, but not the debilitating burdens of some European carriers. Asian operators didn't bid themselves into trouble to win spectrum licenses for 3G in state-run auctions. Japan's government simply gave away three 3G licenses; in South Korea, wireless operators paid a total of just over $2 billion for licenses, compared with $46 billion in Germany. Asia has learned from European mistakes. The Hong Kong auction, now scheduled for September, will be "much more subdued than it would have been a year ago," says Martin Kralik, Hong Kong-based analyst at the Asia research firm Strategic Intelligence. "Asian markets are very fortunate that the tech markets came down before their licensing was done."

It shows. Earlier this month DoCoMo announced that its net profit in fiscal year 2001 jumped 45 percent (to $3 billion). What's more, its wireless subscriber base rose by 23 percent (to 36 million). "Japan's communication market is resilient even in this depressed market," crowed DoCoMo president Keiji Tachikawa.

With Europe hobbled, Japan and South Korea are solidifying their role as bellwethers of the 3G market. An April report from the Gartner Group consultants says that Asia's low licensing costs will enable the region to lead the wayinto a 3G world, crude though it may be for now. SK Telecom's "newly discovered" 3G network has 70,000 customers, but handsets are still inadequate and in short supply. Most customers are using what experts call a "primitive" 2.5G phone with a black-and-white screen. Video downloads won't be possible until better handsets are available. That problem may have been solved just last week, when Samsung introduced what it claims is the world's first true 3G phone, with a two-inch color screen and a price tag of $600.

Japan is still thinking big. No company is more emblematic of 3G fervor than DoCoMo, the wireless unit of NTT. DoCoMo sees 3G as a natural follow-up to the phenomenal success of its i-mode service, which offers rudimentary e-mail, Internet access and a variety of other bells and whistles. I-mode has pulled in 22 million Japanese customers since its introduction two years ago--and the network on which it runs is not even very fast. The success of i-mode was a major contributor to 3G euphoria around the world, because it proved that fun new services could attract a big market. So there was dismay last month when DoCoMo said its 3G network--which promises the data-speed equivalent of Japan's bullet trains--would be delayed until October. "That shocked a lot of people," says Terry Yen, a Beijing-based official for an American telecom-industry group. "DoCoMo just doesn't miss its deadlines."

Compared with the carnage in Europe, DoCoMo's four-month delay seems a modest retreat. In fact, this month DoCoMo will start a test of its virtual Ferrari: a 384Kbps system dubbed FOMA (for freedom of mobile multimedia access) involving 4,000 people in Tokyo, Yokohama and Kawasaki. Come fall, the company plans to expand it to full-fledged service in the Kanto region with such additional attractions as image clipping. DoCoMo alone will spend $8 billion on 3G base stations and equipment over the next three years, and figures the service will be profitable by 2005. Targeted initially at corporate customers, DoCoMo claims the new service will be powerful enough to send and receive big audio and video files, take and transmit digital pictures, and access corporate intranets and applications like PowerPoint and Excel. DoCoMo predicts it will attract 150,000 Japanese subscribers by next March, 6 million by 2004.

The company's next move may be global. While many observers argue that DoCoMo's mobile-Internet success is a distinctly Japanese phenomenon, due in part to Japan's relatively low number of home PCs, DoCoMo sees export potential. It has explored expanding its mobile presence in the United States, perhaps by providing 3G services in partnership with America Online. The company also has major investments in European operators, including KPN Mobile (the Netherlands) and Hutchison 3G UK, whose value has plunged due to the financial crisis in the European market. It may have to take hefty write-offs.

Still, Asia may be the telecom industry's best hope for a comeback. Industry surveys suggest that Asia and Europe will be the fastest-growing 3G regions, followed by North America and (in distant third) Latin America. China is the world's fastest-growing national market and, with 85.3 million mobile subscribers, will soon be the world's largest (overtaking the United States). Beijing just announced that it would be buying CDMA equipment from Samsung. Japan and South Korea are broadband zealots. Jun Nakai, senior vice president of the consultancy Japan Communications, says that market projections for wireless subscribers have always been too low. He estimates that by 2005, there will be 1.4 billion cellular subscribers worldwide (compared with about 530 million now)--and that 300 million will be 3G subscribers. Says Nakai: "It will be a gradual but not explosive process."

The price competition is expected to be brutal everywhere. Japanese now pay relatively high prices for mobile service--about $75 a month. New 3G attractions will cost more, of course, but operators know they can't charge too much. Analysts in Japan expect the 3G price premium over regular wireless to be less than $20 a month. Kazunori Ishii, a spokesman for KDDI, Japan's No. 2 mobile operator, says the beauty of 3G is the cost efficiency of data transmission, which should help control prices--and sustain profits.

The rest of the world will be watching. Analyst Kralik calls Japan "a wonderful laboratory for mobile-communications technology." DoCoMo's clever i-mode service has created the first established mobile-Internet market, which is attracting the interest of foreign contenders, eager to test their ideas. When a financially wounded British Telecom recently put up its 20 percent stake in Japan Telecom for sale, a buyer wasted no time coming forward. It was none other than Vodafone, BT's archrival, which laid out a hefty $5.3 billion and now has a 45 percent stake in Japan Telecom. That deal shows that the Europeans haven't lost all their nerve, or all their money. It also shows that the most plausible 3G future is unfolding in Asia.