There hasn't been much good news from the wireless communications industry recently. Shares of handset makers, equipment suppliers, and many service providers have suffered along with the rest of the market. Projected worldwide handset sales for 2001 have been slowly but surely ratcheted down. And wireless leader NTT DoCoMo (OTC: NTDMY) announced late last month that its highly anticipated rollout of "3G," or third-generation, wireless service would be delayed from this month until October of this year (a very small test service will still be introduced in May).
These and other trends have helped bring the wireless sector back down to earth, after expectations (and many companies' stock prices) got wildly inflated in the preceding 18 months.
Despite all this, in the next several years some companies are going to make a lot of money thanks to next-generation wireless services, and interested investors should take note. This will make a difference to the bottom lines of many companies, including a few well-known businesses that you may already own.
What is 3G?
If you've read much of the financial press in recent years, you almost certainly have come across references to "3G," the next generation of wireless technology (1G was analog cell phones, 2G was digital phones). The initial hype surrounding 3G was that it would enable wireless data transmission of up to 2 megabits per second (Mbps), equivalent to (if not faster than) broadband connections over cable or DSL. (Current wireless data speeds are in the 9 kilobits per second (Kbps) range; dial-up modems transmit data at 56Kbps.) The buzz over 3G was that soon, perhaps as early as next year, we'd all be able to watch TV on our mobile handsets, download audio files, and even conduct videoconferences.
Reality has since set in, and it is clear that 2Mbps for wireless data is unlikely for at least two years, if not four or five. As a result, wireless carriers in the U.S. are now referring to networks that may reach 144Kbps as "3G," but even if they are initially one-half or one-quarter that fast, they'll still enable additional applications for wireless phones.
And that's what's important: not the whiz-bang technologies, but the potential applications and services that will result -- services for which users will pay extra.
In short, regardless of all the techno mumbo-jumbo, when you hear the term "3G wireless," think "wireless data." Ignore all the talk about the "wireless Web," which is silly and misleading, since few people will surf the web with a wireless device the way we do on a PC. Instead, ask yourself whether mobile phones will only be used for voice communication, or will wireless networks begin to see more and more data traffic, just as wireline networks have?
What you can do with your phone
Wireless data services are not all pie-in-the-sky possibilities: plenty are being tested or are in use right now. For example, in Finland and other European countries, motorists in some large cities can pay for parking with their mobile phones by wirelessly transferring funds from an online account.
In the U.S., a vending company announced last week that it was introducing a service to enable mobile phone users to dial a number posted on a vending machine and buy drinks or snacks, which will then be added to the user's cell phone bill. Virgin Mobile has unveiled a similar service in the U.K. Last month, Motorola (NYSE: MOT), Domino's Pizza, and Verizon Wireless (jointly owned by Vodafone (NYSE: VOD) and Verizon Communications (NYSE: VZ)) announced that they will test a wireless pizza-ordering service in Las Vegas.
In addition, text messaging over cell phones has taken off, particularly in Europe, where it is referred to as "short messaging service," or SMS. By the end of next year, 100 billion SMS messages are expected to be sent monthly.
Much of this may be driven by chatty teens, but it still adds up to real money. Some European service providers are already deriving 10% of their revenue from text messaging. In the U.K., a company called mTicket is selling movie and nightclub tickets in a few London locations over SMS, and a German church is experimenting with delivering a much-abbreviated version of its religious services over SMS.
Another greatly-anticipated benefit of high-speed wireless networks is "location-based" services, which would enable a restaurant, for example, to beam discount coupons to nearby mobile phone users, who would then be alerted by their phones of the potential deal. These have been slower to develop, since the technology is difficult, but here in the U.S., there is a strong incentive: for emergency-services reasons, the FCC is pressuring wireless service providers to improve their ability to locate cell phone users. There will almost certainly be commercial benefits to this technology.
Next-gen networks
Most of this stuff, such as SMS, is occurring over current networks. What will users do with greater bandwidth? Will those same club-goers buying tickets with their cell phones send each other pictures over their handsets, or perhaps music? Almost certainly.
Estimates vary for when higher-capacity networks will be complete, with U.S. carriers such as Sprint (NYSE: PCS) and Cingular (the SBC Communications (NYSE: SBC)-BellSouth (NYSE: BLS) joint venture) promising they'll have 3G networks in place this winter, though by "3G" they're referring to the 144Kbps kind. (Cingular's service will be a limited rollout in California, Nevada, and Washington.)
In Europe, several providers are also planning to introduce 3G services later this year. Spain's Airtel, aiming for the third quarter, may be the first (not counting British Telecom's (NYSE: BTY) planned rollout of 3G services for the Isle of Man later this month). All of this could be delayed, of course, but it will happen, just as NTT DoCoMo will introduce its 3G services, even if later than initially intended.
Who will benefit?
The tough part of all this is actually figuring out which companies will make money from it. There are three sub-sectors to consider: the handset and equipment makers, such as Nokia (NYSE: NOK), Ericsson (Nasdaq: ERICY), Motorola, Nortel Networks (NYSE: NT), Lucent Technologies (NYSE: LU), chip designer Qualcomm (Nasdaq: QCOM), and Siemens (Nasdaq: SMAWY), among many others; the service providers, which in the U.S. include AT&T Wireless (NYSE: AWE) as well as Sprint, Verizon Wireless, and Cingular; and finally, the software companies such as Aether Systems (Nasdaq: AETH) and Openwave (Nasdaq: OPWV).
All these sectors have had their problems recently, particularly the handset and equipment makers. Nevertheless, at least some companies -- perhaps just from one or two of these groups -- will benefit from increasing usage of wireless data services. As investors, it's worth following 3G developments to figure out which ones they will be.
Chris Rugaber owns shares of SBC Communications, which you'd know if you clicked here. The Motley Fool's disclosure policy is awesome -- check it out.
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