Among world-changing technologies, third-generation wireless (3G) will be listed alongside the electric light bulb, automobile, personal computer, and the Internet. 3G wireless will allow video, data, and speech transmission over a mobile phone at speeds over two megabits per second -- fast enough for full-motion video. Thousands of services will be available through 3G that we could never even dream of. The 3G wireless network has been expected to be in place by 2003, but I'm here to tell you it won't happen that soon (except maybe in Japan).
A few days ago there was a news article posted on Yahoo! that few people saw. But I assure you it has a lot of hidden meanings in reference to the future of 3G. Here is the article:
Swiss Delays Phone License Auction -- November 13, 2000
Basically, the wireless service providers are broke and they've reached the point where they cannot afford to spend anymore money. Who are these service providers, or SPs? The top five are Deutsche Telekom (NYSE: DT), Vodafone (NYSE: VOD), AT&T Wireless (NYSE: AWE), Nippon Telegraph (NYSE: NTT), and France Telecom (NYSE: FTE). SPs have little differentiation among their wireless calling plans and are thus forced to compete largely on price, which makes for slim (and sometimes non-existent) profit margins. The whole idea that they spent billions of dollars just bidding for licenses makes me nervous, but what makes me afraid is that I can't figure out how the SPs are going to finance the completion of these networks.
Over the last six months this problem has only shown signs of worsening, even as we draw closer to the scheduled 3G arrival in 2003. Many in the industry believe that the governments are to blame for this whole mess. But the governments themselves cannot be blamed, for if someone offers you $5 million for the house that you paid $200,000 for just a few years back, you would not only be stupid but also crazy to turn it down.
The blame for this whole thing should go to the questionable decisions made by the management teams of the SPs. If early on they had just balked at the outrageous license prices, then the governments would have had no choice but to sell them for less. But let's not cry over spilled milk. What's done is done. Let's concentrate on what I believe to be the future and the current game plan for companies like Nokia (NYSE: NOK), who I assure you knows that trouble is coming.
Due to the inability to raise cash for these auctions, it seems obvious to me that these same SPs will not have sufficient funds to finance the 3G networks that are needed. I have heard estimates that it will cost billions of dollars to build out these new networks. I have also heard that these same SPs will go to companies like Nokia and Ericsson (Nasdaq: ERICY) and ask to borrow the money to build the new networks. Nokia for its part has said that it would not do that. As for Ericsson, I don't know, but it seems to me that neither company wants to become a banker to the SPs. It's a no win situation for there are just too many SPs out there. No company can offer such deals and stay very profitable for long.
Another thing that disturbs me is that these SPs are some of the most unprofitable companies in the world. By and large, they're all losing a ton of money. That, of course, necessitates increasing amounts of debt. But considering Wall Street's negative attitude towards this industry, I for one cannot see how they are going to issue any more bonds. (If someone can go on the Wireless World board and tell me how they will I would truly appreciate it.)
As for the possibility of new stock issuances, I don't think so. The prices of these equities are already near their 52-week lows. Just look at the stock of the best run out of all these, Sonera (Nasdaq: SNRA). Prior to this 3G auction nightmare, I thought this stock would be the ultimate telecom. They have an amazing management team and are one of the most profitable of the SPs. They are, after all, the service provider for Finland, the Holy Land of Wireless.
Now let us get to what my opinion is on the various companies that will supply the networks and phones to these SPs. On Nokia's recent earnings conference call, CEO Jorma Ollila spoke very frankly about 3G in saying that the industry is creating itself day by day and no one knows what will really happen. But from what I have seen and from his statement that Nokia has no plans to finance 3G networks, I'm led to believe that CEO Ollila has known 3G will roll out in an unpredictable manner.
You don't hear Nokia talking much about 3G, but rather about their many new handset models. The way Nokia is hedging their bets and playing the smart card is by concentrating on being the best 2G-handset provider and controlling GPRS (General Packet Radio Service). GPRS is just a network laid onto an existing GSM (Global System for Mobile) network, but allowing faster data transmissions resulting in more potential services. The costs for GPRS are minimal for the SPs.
Nokia also is on a rampage to gain the most global market share that it can. While Motorola (NYSE: MOT) and Ericsson are getting ready to sell the 3G networks, Nokia is concentrating on the dominant existing 2G standards: GSM, TDMA, and CDMA. Nokia knows that trouble is coming and is not willing to sacrifice much real estate to 3G at the moment.
Ericsson, as a network infrastructure company, will be hurt for it will either have to finance these networks for the SPs or not do any business. Nokia will be hurt when 2003 rolls around but since some 75% of its business is in handsets, it will not be hurt as badly as, say, Ericsson which has 80% of its business in networks.
Qualcomm (Nasdaq: QCOM) -- I hate to say it -- might be hurt as well. I say this because Wall Street is factoring in the royalty stream from expected 3G sales into the stock price. Since 3G is CDMA and all networks and phones sold for 3G will pay a royalty to Qualcomm, then I can see no way for them to avoid being hurt, for if the 3G networks get delayed Qualcomm's royalty payments on the networks and phones will also be delayed.
This article is not meant to be a prediction of doom and gloom, but the facts that are being presented to us in the news articles on 3G are not very promising. Third generation will be huge and I will continue to hold my position in Nokia, but the thing I am trying to get across is that we should not expect 3G to be ready when the analysts have suggested. In the U.S.A., I would not expect 3G until 2005 at the earliest. I am in Nokia for the long haul -- not two years, not five years, but a minimum of ten years. I hope to put my kids through college just from a percentage of my shares of Nokia.
I continue to be very bullish on wireless, but very bearish on 3G.
- TMF MYCROFT
