Telstra out to ruin Hutchison's 3G party

The much-touted data-transfer speeds of 3G, or third generation, technology will set Hutchison's 3 network apart when it is launched in the first quarter of next year, unless the present networks can claim to provide similar services.

An upgrade to Telstra's CDMA network could produce a service with speeds so close to 3G that the difference will easily be lost in the marketing.

The No. 2 player, Optus, is researching a method for deploying mobile video on its current General Packet Radio Service network. Video is the main claim to 3G's fame. If Optus can make its GPRS-based video experience worthwhile, it will dampen much of the excitement surrounding 3G.

Meanwhile, as part of an international strategy, Vodafone has repackaged consumer GPRS services including picture messaging, games and ring tones. Vodafone Live! has launched throughout Europe and the campaign is expected to reach Australia and New Zealand in the new year.

"The carriers will be watching what Hutchison is doing quite closely. They don't believe the demand is there for high-bandwidth communications, so they'll try in the meantime, before Hutchison launches, to make their products more visible," says analyst Mark Higgins, principal at AT Kearney.

Telstra Mobile's managing director of wireless data services, Craig Cameron, said the telco could deploy a CDMA network upgrade quickly, if necessary.

"We have a trial today. There are 29 external businesses and a number of internal people in Telstra. We have had it running for a very short time," Cameron said last month. "We could selectively employ it if we wished. The trial we have going today in Melbourne is just in one part of the city."

Telstra's finger may be poised on the switch but its gaze is glued on Hutchison, which will launch early next year with a critical mission to gain customers, having spent about $18 billion globally and up to $3 billion locally on the network construction and support services.

The problem for rivals is that there are few new mobile customers to be found.

"Hutchison, to build its customer base, will have to take customers from the others," Higgins says. ``It needs a strong-value proposition to do this. They have a major customer acquisition challenge and must consider leveraging price. Nobody wants a price war. The others must mitigate or manage the risk of Hutchison's entry into the market."

Higgins says the rival carriers are in the midst of campaigns to manage public perception.

"They're all launching picture messaging even though no one has a phone yet," he says.

There are only two handsets capable of picture messaging, or Multimedia Messaging Service (MMS), in the Australian market at present and supplies are depleted.

The other carriers scoff at the money being spent by Hutchison and the fact that the company seems to be bucking the trends of telcos around the world, but at the same time the rivals can't be seen as taking any chances with their precious customer bases. They simply can't afford a price war.

"The market has settled since One.Tel's demise into a cosy tactical situation and Hutchison is destabilising that," says Higgins.

"In Europe, most carriers who have invested in 3G spectrum have pushed back their launch dates. Hutchison is the exception. They are going for it. They sold all their 2G assets and are in play to create this market on their own."

Reports in Britain, where a commercial service is imminent, suggest Hutchison's 3 network will heavily discount voice calls before hooking customers on data services.

That scenario has local carriers worried, according to one industry source who asked not to be named.

"The other carriers don't want to take the threat seriously, but they know Hutchison has deep pockets and can hurt them," the source said.

That is why the market is hearing more about network upgrades, video and multimedia applications, he said.

Telstra has been evaluating a technology called CDMA 1xRTT, often shortened to just 1x, for some time.

It is a technology on the upgrade path from Telstra's CDMA investment - the network that replaced Australia's old analogue mobile system and its coverage of regional areas. It is also the technological rival to the 3G flavour chosen by Hutchison (on the upgrade path from GSM networks).

"The only thing that can come close to 3G is 1x and 1x will blur (any distinction) and it will hurt Hutchison," says the source. ``Everyone is betting on December."

Even if the upgrade doesn't go national, a limited upgrade could take some of the sting out 3's launch.

Telstra would have at least communicated a ``me too" message, suggesting to the market that its own version of 3G is available, if necessary.

"They want to make this kind of noise so that customers won't think 3 is so amazing," the source says.

Experts might nitpick between different technologies but customers probably won't.

Higgins says: ``1x has slightly quicker download speeds. The increments are big enough for people to claim this is a 3G type of service.

"Telstra could take the opportunity and claim their network was going 3G."

Indeed, Cameron says that ``1xRTT is a third-generation network". He says Telstra could also upgrade the GSM network to 3G but the carrier is not ready to decide.

"Our base of knowledge is growing, but we don't have enough to say when we will roll out in one (or the other network). We are in the fortunate position to be able to have the decision," Cameron says.

"Seventy to 80 per cent of the deployment of 3G in the world is 1x. Korea is leading deployment. In China, most operators are committing to 1x."

Higgins says the different upgrade paths all lead to the same destination. The game that counts is who gets there with the most customers.

The Japanese experience could provide a helpful lesson.

``NTT DoCoMo launched 3G and had quite a lot of difficulties," Higgins says.

``So far it is the only true 3G network in the world and it has failed to excite customers so far. A competitor, J-Phone, which uses 1x for picture messaging and little moving images, has increased its market share."

For Telstra, the choice may be as simple as money and timing.

``A CDMA upgrade would require both software and hardware, but a step to 1x is less expensive than to step to UMTS (Universal Mobile Telecommunications System, the GSM upgrade), so there is a cost benefit," Cameron says. ``We could do 1x quicker. UMTS would require more base stations.

"While we do have a choice, we haven't made the call. We will when we can see a return on investment, value for consumers and businesses and applications that they will pay for that will benefit from high performance."

Telstra has launched the Microsoft Pocket PC phone edition 2002 with the xdc device but will wait until the first quarter to launch Microsoft's other phone OS, Smartphone.

"We're waiting for a handset and services to be built to utilise handsets with the operating system," says Cameron.

However, this delay is not a clue to the timing of a network upgrade. Any 3G upgrade would be an independent move, Cameron says.

Hutchison's entry would be a more likely catalyst, although Telstra would rather frame the decision differently.

"We're competitive and we'll watch what they do. However, first and foremost, it will be a business decision for us," Cameron says.

The challenge for Hutchison will be to prove to potential customers that its service really is different from the rest of Australia's networks.

"They'd be poor competitors if they didn't try to push (their networks) as far as they can," says Hutchison's director of stakeholder relations, Steve Wright. ``We're simply noting that 3G will be a noticeably different experience, which we do not think you can emulate with lesser technologies."

And the proof will be highly visible, he argues.

"1x won't give (Telstra) video streaming. They'd have to spend more money. They've put so much effort into undermining what we are doing, when they put it to the board they might find the directors asking, `So this is going to give us video, is it?' "

That question is yet to be answered fully, according to Cameron, who describes mobile video as a ``performance-level" issue for the small screen.

"You could technically deliver it, but the demand is extremely low," he says.

Optus has bypassed the high-speed haggling, at least for now. Even without an upgrade, the telco is experimenting with mobile video over its existing GPRS network.

The Optus video trials are damaging to the 3G case, even though it is not yet clear how people will use a lower-quality video application.

"I would be interested to see a trial of moving pictures over that bandwidth," says Higgins.

"I imagine they would struggle to deliver a satisfactory user experience, whereas 3G should be able to deliver it.

"It is a threat. Most of what consumers want can be delivered over 2.5G and if they can claim to get even some sort of moving image, that will be a challenge for Hutchison. The more the carriers can start to bridge the gap, the harder it will be for Hutchison."

If Optus could make video work over 2.5G it would ``blow Hutch out of the water", according to the anonymous source.

"It would remove one of the major selling points. When you try to explain what 3G is, it usually comes down to video," he said.

Hutchison will counter any confusion by showing customers the difference, says Wright.

"What we are delivering will be significantly different to what is currently available on networks or interim technologies such as GPRS or the other technologies being talked about by carriers. If you are going to deliver video, graphics, voice and data simultaneously on the move, you need more than 2G or 2.5G."

Interestingly, Hutchison is not promoting 3 as Internet-on-a-phone. Instead, its service will include access to a ``walled garden" of Web content.

"We're not going to have open Web interaction - that's more the domain of the wireless PC - because it does have to be re-purposed for the small screen. We're going to take some of the content from popular areas and repackage that," Wright says.

Until Hutchison announces its fees, talk of network upgrades, new services and an impending price war is likely to continue. There is also speculation that 3G handsets will be too expensive for most.

"Detractors say the price of handsets will be prohibitive but . . . we're part of a global venture with supreme purchasing power. We have NEC and Motorola already lined up. We doubled our original order with NEC from one million to two million handsets," Wright says.

"It may suit (the others) to raise that kind of spectre, because they will do whatever they can do to undermine the product in any way.

"The market has invested in these various companies and doesn't like the idea of a price war.

"The perception of one might encourage certain investor behaviour. That's nothing to do with how consumers would react - they'd probably love a price war," Wright says.

"Our service will be judged on its quality and difference in the marketplace. The background of commentary will have little effect on the behaviour or individual decisions of the customers in the shopping malls."