Economist.com | Mobile telecoms

AT LAST, some good news for Europe's ailing wireless industry: Mobilkom, an Austrian operator, this week launched its third-generation (3G) service. 3G is faster than existing 2G technology, with the potential to offer whizzy new services such as sending video by phone. Hutchison 3G will launch in Britain next week. Is the 3G bandwagon finally starting to roll?

Well, not quite. In both cases, handsets are in very short supply. Sonera, Finland's national operator, was due to stage its 3G launch on September 26th, but postponed it until next year due to handset shortages. How embarrassing for Sonera, and for Nokia, the world's largest handset maker. The fact that the two firms cannot get 3G to work in their wireless-crazy Finnish homeland does not bode well.

Why the delay? European operators must, under the terms of their 3G licences (for which they paid over euro100 billion, or $90 billion), provide 3G service by particular deadlines, and do so using a technology known as W-CDMA (never mind what the letters stand for). Alas, W-CDMA does not work yet. Handsets made by one firm do not work properly with network equipment made by another, says Björn Krylander of UbiNetics, an equipment-testing company. Since operators prefer to use equipment from more than one supplier, 3G can only take off when this problem is solved, which could take a while. 3G seems unlikely to become widespread in Europe until 2004 at the earliest—and it will be several years before it turns a profit.

These technical problems, and the resulting delays, have far-reaching consequences. A number of European operators are backing out of their 3G commitments or trying to win concessions from regulators. In July, Sonera abandoned a euro9 billion joint venture with Telefonica Moviles, a Spanish operator, to launch 3G services in Germany. Orange, a multinational operator, has asked Sweden's regulator to postpone the 3G-rollout deadline until 2006. Tele2, a Swedish operator, is threatening to abandon its operations in Norway unless the licence terms are eased. And Spanish operators are lobbying for a refund of deposits paid for their 3G licences.

Back in the 1990s, the European Commission's decision to impose a single technology standard for second-generation (2G) phones, called GSM, on Europe's operators worked well. It allowed roaming from one country to another, and Europe's wireless firms, notably Nokia and Ericsson, rose to prominence as GSM became the dominant 2G standard worldwide.

Imposing W-CDMA as a single standard in 3G now looks like a big mistake. Far from reinforcing Europe's leadership in wireless, it has done the opposite. Morgan Stanley recently concluded that Asia now leads the world in the adoption of 3G, followed by America. Europe is last.

That is because as Europe struggles with W-CDMA, a rival 3G technology called CDMA2000 is working well elsewhere. Unlike W-CDMA, which is controlled by a huge industry consortium, CDMA2000 is controlled by a single American company, Qualcomm. Different vendors' equipment is compatible. Over 17m people in South Korea, Japan and America use a version of the standard called CDMA2000-1X (again, never mind). The industry is fiercely divided by a boring technical argument about whether CDMA2000-1X is really 3G or not. But ultimately the argument is irrelevant. CDMA2000-1X can do everything W-CDMA can; more, in fact, since it actually works. It is 3G in practice, even if not everyone agrees that it is 3G in theory.

In Japan, CDMA2000-1X and W-CDMA are competing head to head, and the results make grim reading for European operators. Japan's NTT DoCoMo launched the world's first commercial W-CDMA network in October 2001. Since then, it has signed up a mere 135,000 subscribers, far short of expectations.

Its rival KDDI, in contrast, launched a CDMA2000-1X service in April 2002, and has already signed up 2.3m customers. Half of those subscribers have camera-phones, which they use to zap pictures over the airwaves, spending an average of $11 per month more than subscribers with ordinary phones. DoCoMo's average monthly revenue from its 3G subscribers, meanwhile, is falling, the battery life of its 3G handsets is poor, and subscribers have to carry two phones if they want to stay in touch outside areas of 3G coverage.

No wonder operators everywhere that had planned to adopt W-CDMA are thinking again. The industry's consensus that W-CDMA will eventually grab 80% of the world market for 3G, and CDMA2000 just 20%, is being re-evaluated.

In South America, operators have abandoned or frozen plans to adopt W-CDMA. Telstra, in Australia, is leaning towards CDMA2000. Most important of all, in China, the world's largest mobile market, executives from China Mobile have given W-CDMA only a half-hearted endorsement. Adoption of the technology depends on it working properly, the company says, so a switch to CDMA2000 cannot be ruled out. “The question is, should you use the technology that is running today, or wait for one that may or may not run tomorrow?”, asks David Chamberlain, an analyst at Probe Research.

European operators, however, have no choice. At least one operator has established a task force to evaluate switching to CDMA2000, says Andrew Cole of Adventis, a telecoms consultancy, and others are no doubt doing the same. But as things stand, says Caroline Easter, a technology lawyer at Ashurst Morris Crisp, Europe's 3G licences are technology-specific, and any firm that adopted CDMA2000 would be in breach of the licence terms.

Even suggesting such a switch in public would have a dramatic effect on European equipment makers, which have signed lucrative contracts to supply operators with W-CDMA network equipment. Tellingly, however, a consortium of eight equipment makers—including Ericsson, Lucent, Nortel and Motorola—recently agreed to co-operate on building CDMA2000 equipment suitable for the European market.

It is not just the imposition of a single technology standard that should be reconsidered by regulators, argues Joe Nordgaard of Spectral Advantage, a consultancy. European operators are also barred from buying and selling their licences—they must simply give them back, with no refund, if they choose to abandon 3G.

Operators also have to adopt 3G in a new frequency band, rather than phase it in alongside existing 2G, as operators are doing with CDMA2000 elsewhere. But these market distortions, says Mr Nordgaard, “can be alleviated to some extent by allowing operators more freedom.”

Even if operators wanted it, however, Europe's regulators are unlikely to change the rules, even as they amend licence terms to extend 3G rollout deadlines. Defending the original policy, it seems, matters more than providing consumers and operators with a choice of technologies. Things might have been very different had Europe's operators not been trussed up in a technological straitjacket.