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Mobile telephones, the 1st generation of which were introduced in the mid-1980's, have been constantly evolving since their inception. Today, over 2B mobile phones are in usage and around 80% of the world's population is within reach of a mobile phone signal). Mobile phones have traditionally been used for voice communications, but today can serve as the platform for a variety of communication outputs -- including data and video. 3G is the third-generation of mobile phone technology standards. The typical services associated with 3G include wireless voice telephony and broadband wireless data, all in a mobile environment. However, with the capability for high-speed wireless data transfer, 3G has enhanced or made possible a myriad of additional applications such as mobile video, secure mobile ecommerce, location-based services, mobile gaming and audio on demand. For example, using 2.5G (or a slightly better version of second-generation wireless) a three-minute song takes between six and nine minutes to download. Using 3G, it can download in 11 to 90 seconds.

There are currently almost 100 million 3G wireless subscribers worldwide. The US, with over 200 million mobile subscribers, crossed the 10% mark for 3G penetration for the first time in 2006, while Japan stayed in the lead with over 50% of its subscribers using 3G phones. As 3G adoption accelerates, 3G carriers, handset manufacturing, infrastructure equipment makers, semiconductor OEM's, and 3G application providers stand to gain. Wireless Internet Service Providers (WISP's), carriers without the wherewithal or financial resources to upgrade their networks, and companies that provide services which are standard under 3G (i.e., email access), will be in a position to lose.

While the 3G market may be definitely gaining traction, the industry is rapidly approaching a crossroads, where the needs of different market segments can vary substantially, and the potential rewards (and losses) for the different technology vendors and mobile communications operators could be substantial.

Drivers of 3G Adoption

  • Consumer demand for more robust wireless data services: Declining voice revenues have pushed carriers to consider alternative revenue generating opportunities, and they are responding by offering more data services made possible by 3G technology. Mobile video, music downloads, e-mail, messaging, location-based services and Internet surfing are just a sample of the many new applications users will have access to. Each time a mobile customer uses one of these applications, mobile carriers typically get a cut of fees. For example, in Japan, the untapped market for data services which will be further tapped with increased 3G adoption--where there is 50% 3G penetration--almost 30% of the average revenue per user (ARPU) is generated from data services, with the remaining 70% from voice. Compare that to the US--with about 10% 3G penetration--which on average has 12% data service ARPU. This shows that there is still action.
  • Upgrading infrastructure investment: The faster 3G networks are deployed, the faster 3G adoption rates will rise. Upgrading legacy networks to accommodate 3G technology is very costly. In the United States alone, Verizon Wireless, Sprint Nextel (S) and Cingular have spent a combined $10 billion on building their 3G networks. The carriers that can spend this kind of money will gain a competitive advantage over those that can't.
  • 3G spectrum licensing fees: Spectrum is the specific frequency used by carriers to transmit data wirelessly. To own and run a proprietary network, a wireless carrier has to rent the frequencies from the government. Recently, mobile operators have had to pay phenomenal rents in auctions for 3G spectrum licenses. High license acquisition costs are limiting the number of carriers that can participate in 3G.
  • Technology maturity: The maturity (or immaturity) of underlying 3G technology is a critical factor that ultimately determines when and how, not to mention if, the technology is widely adopted. The key to investors, therefore, is to understand and appreciate the complexities of each 3G technology and the progress that the various companies are making towards mainstream adoption. Be it W-CDMA, UMTS, HSPA, or EV-DO -- different carriers are deploying different technologies at various stages of maturity. Understanding technology nuances will help investors predict 3G winners.
  • Growth of mobile in China and India: India's mobile base is about 127 million, meaning that only about 13% of the Indian population currently uses a mobile phones. International markets, such as China and India, can greatly drive adoption of 3G services as these regions continue to see the highest growth rates in mobile adoption.

Who Stands to Gain from 3G Adoption

Ericsson (ERIC), Alcatel-Lucent (ALU), Nokia (NOK), and Siemens AG (SI) are network infrastructure manufacturers that combined, dominate more than 70% of the worldwide mobile backbone equipment market. As 3G networks are deployed and expanded, so will the demand for their products.

AT&T (T), Sprint Nextel (S), T-mobile USA, Hutchison Whampoa Ltd, and Verizon Communications (VZ) are network operators who are evolving networks from the second generation of technologies to the third generation technologies, could see network usage (and hence, revenues) skyrocket with accelerated 3G adoption. About 210 cellular carriers worldwide have either deployed 3G or will do so very shortly. This market is filled with players, who vary widely across the globe.

Samsung and Motorola (MOT) are mobile handset manufacturers that will see demand increase as consumers buy 3G-compliant handsets and accessories. Most users will be required to upgrade their current mobile phones if they want to take advantage of the data services 3G can offer. 3G phones, as a result of their enhanced capabilities, are more expensive than their predecessors. Higher phone costs give OEM's an additional revenue opportunity.

Broadcom (BRCM) and QUALCOMM (QCOM) are semiconductor OEMs which manufacturer 3G-compliant chipsets. Demand for their products will surge with increased 3G handset penetration.

Yahoo! (YHOO) and Apple (AAPL) are 3G application partners that play an integral role in the 3G service value chain, as they partner with carriers to offer content (i.e. movie trailers) and content delivery platforms (iTunes music store) to end users. Electronic Arts (ERTS), which sells mobile games in a 38 million-person mobile gaming market,could benefit with increased customer demand because of the higher gaming speeds allowed by 3G.

The convergence of entertainment, telecommunications, software, and data services is all happening at the mobile device and the various stakeholders in each of those ecosystems stand to gain.

Who Stands to Lose from 3G Adoption

EarthLink (ELNK) is a wireless Internet service provider (WISP) that operates hotspots. Such companies could see demand for their services decrease if 3G enabled EV-DO, a substitute technology for Internet access, continues to see accelerated adoption.

Research in Motion (RIMM) is a 2G-based service provider that may not be able to successfully make the transition to 3G and keep their business models in tact. RIMM, the maker of the popular Blackberry email service could become less valuable if all 3G devices can speedily access email via the Internet (which was previously not the case). Note: Blackberry has incorporated 3g technology as fast or even faster than rival handset makers. They are actually the leader in providing 3G and pre 4G data services for the business community.

Nortel Networks (NT) - Provides companies with networking solutions. Nortel has invested heavily in 4G technology. The continued growth of 3G may significantly delay the wide spread adoption of 4G. Smaller Carriers, who may not be able to absorb the high network upgrade costs associated with 3G will be at a competitive disadvantage as larger operator's networks become more advanced. If an increasing number of customers begin to adopt 3G, than these companies could see their businesses disrupted.

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