3G: Which Comes First, the Handsets or the Services?

The old blame game surfaced at the 3GSM World Congress when Vodafone CEO Arun Sarin claimed it was all the handset manufacturers' fault. The networks are ready and raring to go with 3G just as soon as handsets that are as good as the current 2.5G ones exi

The old blame game surfaced at the 3GSM World Congress when Vodafone CEO Arun Sarin claimed it was all the handset manufacturers fault. The networks are ready and raring to go with 3G just as soon as handsets that are as good as the current 2.5G ones exist, but as they largely dont yet exist, the whole shooting match is stalled.

This may be true--up to a point. A little prior to this lash-out, Sarin had been the supporting act at a Nokia 3G handset presentation, and yes indeed, it is Vodafones intention to use Nokia 3G handsets. There is a subtext to this relationship that actually has nothing much to do with 3G. Over the past couple of years Nokia has been viewed as too demanding by the networks. Nokia, for example, often declined to cooperate in network efforts to brand their own handsets and services and insisted that it is Nokia that should be the brand. A very Microsoft-like way, to be sure.

Vodafone has been in the forefront of efforts to take The Mighty N down a peg or two, running its own heavily-branded Vodafone Live service with Sharp handsets. So, Sarins embracing of Nokia for 3G indicates that some form of meeting of minds has been achieved, although the two companies united front didnt prevent Sarin from showing pictures of Sharp phones in Vodafone livery at the Nokia announcement. Its not entirely clear who won though, because some phone manufacturers are now claiming that the networks are coming round to the view that the handset manufacturers brands can be an asset.

It makes sense. The consumers familiarity with the handset manufacturers products is an asset than can be leveraged. While allowing a handset brand to entirely eclipse their own network and service brand names clearly isnt in the carriers best interest, throwing that asset away doesnt make sense either. So, a compromise ought to be arrived at, and perhaps this is happening.

But back to those unacceptable 3G handsets. The reality is that there are working 3G handsets available in volume--from Motorola. Theyre maybe not what youd call pretty, but they work, and Motorola doesnt have the handover problems that have plagued some other manufacturers. So whats Sarins beef?

The trouble is that you can never please some networks. Motorola is well-aware that it currently occupies a special position, and therefore feels it can cut the deals accordingly. The networks most certainly do not want to get themselves into a position where theyre entirely dependent on just the one manufacturer, so theyre not going to take the brakes off until they have two or three that are going to compete with one another. Motorola, which is historically good at the radio bit but not so good at the design bit, could at this point be overtaken by the more svelte products of the opposition. Motorola is certainly trying to make improvements on the design front these days, but theres a lot of history to be overcome.

As regards the market itself, there are a number of metrics that are currently driving it. Its been one of those shows where veterans wisely intone that its all been a bit flat this year, but theres a lot going on under the covers. Notably, the largely underwhelming efforts put on by the alleged platform warriors Symbian and Microsoft really only apply to a very small slice of the market. Higher-priced smart phones account for only a tiny proportion of the total cake (this, incidentally, has usually been part of Microsofts why theres room for everybody pitch). Cheaper, lower-tier branded and ODM handsets account for a much bigger piece.

Do we therefore expect the continuing integration process to push more and more features into smart phones and drive down prices to mass-market levels? Or do we conclude that this process will simply make smart phones a lot more capable and attractive, but keep them at the same price point and market percentage?

Numerous observers see the platform war as a dead issue now. In the view of Trigenix, for example, there are not two, not three, but many hardware platforms, and the company is happily catering to them all. Venture capitalist Jean Schmitt, who backed Esmertec (itself one of several big names most people have never heard of), predicts that the drive for more features will result in high-ticket phone prices not coming down fast enough and that the networks will demand build prices below $200 and will favor devices with build price more like $100.

The consequence, in his view, will be that many of the advanced services a lot of people are betting on will be stalled until 2008, and that companies who need the revenue sooner in order to survive are going to starve. Esmertec has shipped 44 million Java virtual machines (JVMs) from a standing start, and does the JVM in the Sierra Wireless Vox, the Microsoft smart phone that was rolled out at the show. You could buy into Esmertec last year, but now you cant afford to, and its likely to do an IPO. We should listen to Schmitt.