Prepare for the third age of the mobile network. First came analogue systems, then digital networks. Now, after a seemingly endless amount of controversy and hype, the reality of the third generation (3G) of the wireless industry – the high-speed mobile data network – is almost upon us.

The first 3G services offered by major operators are due to be rolled out in Europe in time for the expected Christmas 2002 rush for handsets. Early adopters include Sonera, the dominant phone company in Finland, which is due to launch commercial services on 26 September 2002 – the same day as Nokia releases its long-awaited first 3G device. Another key early launch will be in the UK, where the Hutchison Whampoa-controlled Hutchison 3G is likely to launch services in November 2002.

These and other imminent service rollouts represent a delay of almost a year beyond the European Commission's deadline for the launch of 3G services in all member states of 1 January 2002. That the industry has made it even this far, this soon, however, has come as a surprise to Europe's growing band of 3G sceptics.

European 3G contests mostly took place at the peak of the telecommunications bubble – creating a spirit of irrational exuberance that drove executives to bid up to EU9 billion for a single licence. This almost crippled not only the wireless sector but the wider technology industry as well.

Undaunted, vendors and operators remain cautiously upbeat about 3G. The guarded optimism extends even as far as Redmond, Washington: "I am certain that 3G will be positive for the PC industry," Microsoft chairman Bill Gates said recently. In fact, the long-awaited launch of 3G could benefit the IT markets for applications, operating systems, hardware, middleware and outsourcing as much as the wireless sector itself.

Global 3G revenues

Users of 3G services worldwide will generate a total of $322 billion (EU334bn) in annual revenues by 2010, according to the UMTS Forum, a 3G industry pressure group. Around one-third of the world will use mobile services by then. Of these, 28% will be 3G users. Each month, they will spend on average $12 (EU12.38) on voice calls and $30 (EU31) on 3G data services, making a total of $42 (EU43.34). Currently, most users spend about $30 (EU31) on voice and data services.

How this cash will be divided among network operators, wireless equipment suppliers, content providers, IT suppliers and mobile Internet portals remains 3G's greatest unresolved issue. Each party is equally determined to occupy a place as high up the 3G value chain as possible.

The major vendors

Nokia: Europe's biggest technology company is also the world's biggest handset supplier and a leading network vendor. The company is well placed to carry the domination it secured in the cellular industry’s first generation into the third.

Ericsson: The Swedish champion is the world's biggest network vendor. But it has struggled for years to draw profits from its handset unit, eventually outsourcing device manufacturing to Flextronics and penning a design-to-marketing joint venture with Sony. Its core strength could increasingly be managing as well as supplying networks for carriers.

Motorola: The US electronics giant, one of the top four handset suppliers, has had mixed fortunes securing network supply contracts in Europe, despite a W-CDMA partnership with Cisco that seemed a significant agreement when it was struck about two years ago. Over-stretched itself in financing clients and desperately needs the rival CDMA2000 system, which it supports, to do well.

Siemens: The German vendor is outsourcing the manufacture of 3G handsets to US rival Motorola. The phones will not go on sale until 2004 – possibly two years after Nokia and Ericsson's first 3G devices. The company has done well, however, in winning a number of 3G supply contracts, usually as part of a bidding consortium.

Alcatel: Alcatel is seemingly fated to be a permanent fixture in the second tier of handset makers. The company has done better in winning some of Europe's bigger 3G network contracts, however, including some outside its home market of France.

Lucent: This embattled US vendor has failed to make a significant breakthrough in 3G networks. Like many of its debt-laden peers, Lucent has to be careful not to overstretch itself by aggressively acquiring market share.

Nortel: Ontario's one-time stock market darling has been hit harder than most by the bursting of the telecoms bubble. The company made less impact on the European 3G market than expected, despite aggressive vendor financing offers.

Cause for hope

Not all market analysts are downbeat about 3G's prospects. A 2002 study in Europe by Coleago Research concluded that the financial position of many operators will improve dramatically by 2004 as they stop competing with each for new customers. The group researched the fortunes of 50 European carriers. It found that, in some cases, subscriber acquisition costs had reached almost a quarter of all operating expenses. But now, as penetration rates reach saturation point, operators have no need to spend cash to sign up subscribers. Perhaps the money saved will be pumped into discovering the much-coveted 3G 'killer application'.

Risk takers

The extraordinary sums paid out for 3G licences – in Germany, the UK, Italy and France in particular – came close to bankrupting the industry’s biggest service providers. As their clients suffer under ballooning debts, suppliers have increasingly been forced into risky financing arrangements. Banking regulators across Europe, meanwhile, have consistently warned financial institutions in the last two years of the risk of heavy lending to suppliers and operators.

While Nokia and Ericsson have tended to pursue fairly conservative 3G deals, some of the second-tier vendors are understood to have been providing more than 100% financing – in other words, they not only lend the equipment but also cash to invest in handsets and services. In particular, Motorola's enthusiasm for vendor financing has done its balance sheet no good in the recent downturn.

Glossary

GPRS: Before 3G comes 2.5G, or to give it its technical name, general packet radio services. GPRS is a relatively cheap hardware and software package that increases the efficiency of a network and adds Internet Protocol characteristics, such as 'always-on' connectivity and packet-based billing. Data speeds are roughly equivalent to a narrowband PC connection.

W-CDMA: The preferred 3G standard for European and most Asian governments, including Japan, wideband code-division multiple access (W-CDMA, also known as UMTS) offers data speeds of up to 384kbit/sec and is chiefly backed by Nokia and Ericsson. It appears to be gaining some support in the key markets of China and the US.

CDMA2000: A 3G technology developed by US technology giant Qualcomm, code-division multiple access 2000 (CDMA2000) is said by supporters to offer slightly faster data transfer than W-CDMA. It is backed by all the big US suppliers, such as Lucent and Motorola.

EDGE: An official 3G technology, the somewhat clumsily-titled enhanced data rates for GSM evolution (EDGE) has had little vendor backing until recently, when some US carriers including AT&T Wireless indicated their desire to roll out EDGE services in 2003. EDGE offers similar data speeds to W-CDMA, but its use of 2G frequencies could create bottlenecks.

W-LAN: Of all the investment risks of 3G, surely the biggest comes from wireless local area networks (W-LANs), which continue to spring up in coffee shops, hotels and airport lounges across Europe, Asia and North America. W-LAN offers genuine broadband connections of 2Mbit/sec (and more) and has a potentially decisive head start on 3G.

Dual-mode: Handsets capable of switching seamlessly between 2G and 3G networks are called 'dual-mode' handsets. The first 3G devices in Japan are only compatible with 3G systems, meaning users have to carry two phones with them. There are fears that technological challenges created by roaming between 2G, 2.5G and 3G may not be solved for several years.

4G: The fourth generation of wireless is due around 2010. An experimental system is being tested in Japan today. It uses variable spreading factor (VSF) and orthogonal frequency code division multiplexing (OFCDM) technologies to create a massive-capacity network capable of delivering data at more than 100Mbit/sec.