3G: Another technology cycle
By
Mark Beaumont
General Manager
Mobile Systems
Ericsson
A historical view of the innovation cycle
and an analysis of the business fundamentals
behind third-generation communications
Ericsson Australia
March 2002
1 — 3G:Another technology cycle
The Pendulum Has Swung Too Far
There is a great deal of scepticism about the prospects for third-generation mobile – or
3G – services. Several criticisms in particular are being levelled at 3G – that it requires a
heavy investment, that the technology is unproven, that the benefits are hard to identify.
Although understandable, these comments overlook the most important point of all: that
3G will generate substantial benefits over the long term. After all, the 3G technology
cycle has only just begun.
Some of the doubts surrounding 3G grew loudest during the auctions for 3G wireless
spectrum in Europe and Asia, when telecommunications companies placed very high
valuations on some of the spectrum. Other doubts arose as a reaction to some of the oversimplified explanations of the new technology’s capabilities. Expectations ran so high for
a while that some observers were certain to be disappointed by reality.
This is exactly the kind of technology cycle we’ve seen before. It follows four common
steps:
1. Researchers create a new technology
2. Industry challenges the concept
3. Early adopters explore the potential
4. Consumers accept the reality and experience the benefits
We saw this cycle with the introduction of the first mobile phones in Australia in the
1980s. Many challenged the concept of consumer mobile communications, partly because
the first analogue phones seemed so large and unwieldy. Some challenged the
introduction of digital mobile phones soon afterwards. Despite the scepticism, consumers
embraced both technologies with enthusiasm.
3G is just another technology. It already displays the signs of the technology cycles of the
past.
The collapse of many untested technology companies in recent times demonstrated the
wisdom of a prudent approach to technology investments. The general economic
downturn added to the overall sense of caution. As a result, the world has witnessed a
massive correction to the hype involved in the technology boom.
Still, it is now fair to question whether the pendulum has swung too far towards doubt
and uncertainty. It is worth considering that while general market opinion can swing
wildly, business fundamentals do not.
2 — 3G:Another technology cycle
Like any new innovation, 3G benefits from vigorous industry debate. Ericsson welcomes
the debate and puts forward this paper to offer a specific perspective on the discussion.
Ericsson has been investing in new technology for over 100 years. Our work ranges from
network infrastructure to consumer devices and enterprise solutions – a breadth of
innovation and sustained success that few other technology companies could claim. This
experience is the foundation of our approach to 3G, where we focus on the long-term
industry impact and social benefits rather than the short-term uncertainty.
Our approach is to introduce a strong historical perspective to the issue. After all, 3G is
just another technology cycle.
Figure 1: Ericsson – a rich history of technology innovation
The Technology Cycle – A Historical Perspective
Technology innovations have always produced major shifts in society. Consider, for
example, the impact of the refrigerator, printing press or automobile. Few observers
predicted the ubiquity of telephony services or the impact of computing on so much of
our business and personal lives.
By their very nature, technology innovations have proven to be both disruptive and
unexpected. Consider Thomas Watson’s famous comment on the computer:
“I think there is a world market for maybe five computers.”
Thomas Watson, chairman of IBM, 1943
3 — 3G:Another technology cycle
Similarly, many rejected the predictions of David Sarnoff, who pioneered the
commercialisation of radio in the US:
“The wireless music box has no imaginable commercial value.
Who would pay for a message sent to nobody in particular?”
David Sarnoff’s associates in response to his urgings
for investment in radio in the 1920s.
New technology is rarely adopted smoothly and market acceptance always takes time.
This is a typical aspect of any technology cycle.
Ericsson has constructed a three-phased cyclical framework to analyse technology trends.
This approach is based on Kondratiev cycles of economic trends and can provide insight
into the current debate surrounding 3G.
Figure 2: The technology cycle
4 — 3G:Another technology cycle
The early investment phase causes the market to swing between hype and doubt as
observers debate the likely market potential of the innovation. This is both healthy and
normal for any project requiring large investment, such as 3G. A focus on long term
business fundamentals is absolutely key to making the right choices at this stage.
The growth phase is characterised by profitable growth and broad-based market
acceptance. Businesses focus on understanding and further educating the customer. The
concerns of the investment period are quickly left behind as the technology becomes
proven.
The consolidation phase sees a focus on costs and profitability. Economies of scale
become increasingly important and the market begins to look for the ‘next big thing’. The
technology becomes a part of everyday life where its value is not questioned. The past
decade has seen a perfect example of this in the market acceptance of the mobile phone.
The Telecommunications Industry
These same phases in technology evolution are at work in the telecommunications
industry. Even the telephone took time to gain market acceptance:
“This ‘telephone’ has too many shortcomings to be seriously considered as a
means of communication. The device is inherently of no value to us.”
Western Union internal memo, 1876
In the mobile cellular industry this kind of technology evolution has historically had a
ten-year timeframe. Analogue mobile networks began being developed in the 1970s and
were launched in the 1980s. Research on GSM commenced in the early 1980s with the
launch of commercial services in the early 1990s. Work commenced on 3G in the 1990s
and deployment is under way now.
5 — 3G:Another technology cycle
Figure 3: The cellular technology cycle is typically ten years long
At each new phase in the mobile cellular industry we witnessed fierce industry debate.
We also heard misguided predictions that the new cellular technology would fail to
realise its promise. Today, of course, no-one questions the value of digital mobile phone
networks or the business and social benefits delivered by mobile technology.
“Work on tiny mobile telephones is already well under way…The system will be
restricted to hand-held “walkie talkies” and mobile phones in cars and boats for the time
being. But Telecom hopes to develop it for use of pocket telephones which are still figments
of the future.”
The Australian, 24 November 1986
“Telecom’s new cellular mobile telephone service starts in Sydney in February with
10 companies planning to offer various vehicle-mounted and briefcase-sized personal
telephone handsets. Telecom expects to have 150,000 users over the eight years.”
The Australian, 1 December 1986
The pocket telephone, a “figment of the future” in 1986, is now a proven success. Eight
years later after introduction Australia had 1,125,000 mobile subscribers, largely
outstripping even the most optimistic industry forecasts.
Telecommunications has undergone many technology cycles and continues to change
rapidly. Yesterday’s innovations quickly become commonplace. The trends in the
wireless industry are consistent with this broader cycle.
6 — 3G:Another technology cycle
3G Business Fundamentals – A Sound Investment
Of course, not all technologies succeed. In some cases, early scepticism has been well
justified. Like today’s investors, Ericsson is constantly faced with many technology
choices competing for the same investment dollar.
Faced with these choices, we base our approach on fundamental questions. Does the
technology deliver sound business benefits? Does the technology address an attractive
market? Is the technology competitively unique?
Ericsson believes that 3G offers a clear answer to these questions. The market is
enormous, the benefits are substantial and the technology represents a unique evolution
and will play a central role in the mobile industry moving forward.
1. Attractive Market
In Autumn 2001, the Australian Communications Authority reported in its Consumer
Bulletin that “Australians have taken to mobile phone technology in a very short space of
time and they are now an everyday part of both our work and social life. For the first time
since mobile phones were introduced in the early 1980s, there are now more mobile
phones than fixed-line phones in Australia.”
Mobile telephony has stimulated considerable shifts in consumer behaviour over the last
two decades. For many, the mobile phone is essential for business, personal security and
communication. Even markets like Australia, where per capita mobile use is already high,
we continue to see growth in mobile subscriptions and the use of mobile voice and data
services.
Consider for a moment the potential growth in mobile voice usage. While most
Australians now own a mobile phone, it is worth remembering that most phone calls are
still conducted on the fixed network. In the future, widespread migration of voice calls to
the mobile environment could result in a 300% increase in mobile voice traffic.
Ericsson expects consumer behaviour to continue to evolve. The youth-inspired adoption
of short message service (SMS) highlights the continued emergence of a new,
technology-reliant generation. It also hints at the considerable potential for mass-market
mobile data services.
Demand for mobile services continues to grow as consumers embrace the benefits of
mobility. This leads to one basic conclusion: today's mobile network capacity will not be
sufficient for the future.
3G was developed to address future consumer demand and will support the mobile
industry through its next period of growth. It will make mobile communications easier
and more affordable and provide a comprehensive platform for stimulating and growing
7 — 3G:Another technology cycle
the mobile market. This is comparable to the way in which 2G advancements in network
capacity, security and economies of scale ensured the mobile industry was well prepared
for explosive growth during the 1990s.
2. Sound Business Benefits
3G is designed specifically to meet the requirements of advanced voice and data usage –
not only in terms of features but also cost. The technology is the most cost-effective way
of delivering mobile voice and data, enabling network operators to introduce new
services at the same time they streamline their cost structures.
Consider the fact that less than a decade after the introduction of 2G, very few 1G
networks exist anywhere in the world. When a new technology introduces long-term
efficiency gains, initial investment can be rationalised accordingly.
3G also introduces considerable upside. In fact, many of these growth opportunities can
be easy to overlook. 3G delivers the capability for enhanced data services that are not
possible on 2 or 2.5G networks – examples including video conferencing.
More importantly, 3G technology will enable the introduction of new services that are
still difficult to predict – just as earlier mobile services sometimes took experts by
surprise. Consider the transition to 2G, which introduced a new service capability called
SMS. Few analysts predicted the success of SMS and few operators made their 2G
investment decisions based on predicted SMS revenues. The GSM Association recently
announced that over 23 billion messages were sent around the globe in September, 2001.
Hindsight shows the value in being exposed to new revenue opportunities.
There is no doubt that investments in 3G are amply rewarded by long-term efficiency
gains and the discovery of new revenue streams.
3. Competitively Unique
The success of 1G and 2G leveraged the inherent advantages provided by global
standards and industry volumes. Following this, various competing technologies
attempted to challenge the mainstream mobile business. 3G emerged from this process as
the only open and truly global standard for the next phase of mobile communications.
This is not only important for the development of the technology. Because it involves
consolidation of so many worldwide standards, 3G is creating unparalleled economies of
scale. Already, an industry-wide commitment to standardised network and terminal
production is producing a truly mass-market technology.
8 — 3G:Another technology cycle
Clarifying the 3G Debate
It’s now time to reassess the market realities surrounding 3G. It seems likely that the
pendulum of market sentiment has swung too wildly towards scepticism and doubt even
though the business fundamentals of 3G remain as strong as ever.
Ericsson believes there is a sound business case for 3G investments in Australia,
especially when the communications industry remembers the lessons of the past. Market
debate is a healthy reaction to any new technology, but we should not allow the energy in
the debate to cloud the sound business fundamentals that underlie 3G technology.
After all, 3G is just another technology cycle.
9 — 3G:Another technology cycle