Welcome to the 3G World Update, an in-depth look at the proliferation of 3G around the globe.

The content of this special market supplement provides a comprehensive analysis of the cost considerations, revenue opportunities and competitive implications of 3G network and service deployment by mobile operators worldwide.

The numbers are what truly tell the 3G story: 3G network infrastructure will continue to lead the market in sales throughout this decade and beyond. Shipments of 3G handsets will outstrip those of other technology options, and offer lower costs per unit. 3G subscribers number in the hundreds of millions and will grow by tens of millions every quarter, in developed and emerging markets all over the globe.

We hope you find this report to be an informative and insightful resource for tracking the inevitable migration to 3G.

— Perry LaForge, Executive Director, CDMA Development Group

Everyone wants a good deal—including mobile operators. The biggest considerations for operators around the world are the economics associated with network rollouts and the ability to satisfy the needs of customers, especially when the next worldwide subscriber growth surge is expected to come from emerging markets.

This razor-sharp focus on cost means operators want equipment that brings with it economies of scale, feature-rich services, low-cost handsets and a future-proof evolution to the next generation of services. The question is: Do they buy the cheapest equipment they can find to address their concerns now, or invest more and view their purchase from a total-cost-of-ownership perspective to better their long-term position in the marketplace?

This dilemma is really history repeating itself. Operators in the early and mid-1990s had to choose between continued investments in analog technology—which already had an appealingly low capital expense—or new digital technologies such as cdmaOne, GSM and TDMA that were more expensive but offered better voice quality, improved capacity and more efficient use of scarce radio spectrum.

Visionary operators chose digital technology to maximize their earnings, and those that continued to buy less expensive suffered when it came to long-term cost of ownership, revenue opportunities and competitive position in the market as digital 2G technologies matured. These decisions to stay with the status quo also slowed down the emergence of better performing technologies; it wasn’t until 1997 that the number of digital 2G subscribers finally surpassed the number of analog subscribers.

The Handset Equation
With a large base of networks and users, CDMA2000 already offers substantial economies of scale, resulting in a noteworthy impact on device pricing.

“CDMA2000 is redefining the entire low-tier handset market by not only increasing teledensity but introducing the Internet for the very first time to most people around the world,” said Perry LaForge, executive director of the CDMA Development Group (CDG).

“Entry-level CDMA2000 handsets are approaching price parity with GSM handsets,” said Xiaoyu Tong, general manager of China Unicom’s value added service department.

India, where GSM and CDMA2000 compete head-to-head, provides a real example of a competitive market. The price gap between imported 2G GSM low-end handsets and 3G CDMA2000 low-end handsets has narrowed to around $5 USD. In fact, when considering all of the available devices, from low-end to high-end, CDMA2000 devices have a notably lower average selling price (ASP) than 2G devices across the entire product portfolio in the region.

Compared with WCDMA, declining ASP trends also tip in favor of CDMA2000. In a recent study, Signals Research Group predicted that the average price of entry-level CDMA2000 handsets would approach $33 by 2009 (some will be priced much lower than that), and that the average price for an entry-level WCDMA handset would fall to around $83 in the same timeframe.

A lower lifetime cost of operation and the ability to offer affordable handset prices and tariffs for consumers are some of the economic reasons why many developing countries are moving towards CDMA2000 today.

Fast-forward to today: Operators are choosing between investments in 15-year-old GSM technology or newer 3G technologies like CDMA2000 1X, 1xEV-DO Revision A, WCDMA, and HSDPA, which offer greater network capacity and a lower cost to deliver voice, multimedia and broadband data.

This time around, however, a large number of operators are not making the same mistakes of the past. The bulk of wireless infrastructure purchases today are in fact for 3G systems.

“Around the globe, in developed as well as emerging markets, operators will eventually have to deploy 3G technology to support the increased demand for voice and high-speed data services for consumers, enterprises and public service applications,” remarked Perry LaForge, executive director of the CDMA Development Group (CDG). “These services will require large amounts of bandwidth to ensure sufficient capacity, data throughput and a satisfactory end-user experience.”

“Operators throughout the world have been upgrading to 3G during the past six years to create a large return on investment on 3G data applications, and also for voice capacity enhancements that allow operators to look at 3G as the next logical step for affordable voice communications for the masses,” said Larry Swasey, senior analyst for Visant Strategies. “By 2007 or 2008 it will not be surprising to see most larger operators well on their way to blanketing their markets with some type of 3G technology, such as CDMA2000 1X, EV-DO Rev A, B or C, WCDMA and HSDPA, and even possibly HSUPA.”

Gartner Dataquest forecasts that 54% of all spending this year is going to CDMA2000 and WCDMA infra–structure. By 2007, the firm expects spending to jump to 61% for 3G infrastructure, as spending on 2G technologies like GSM continues to decline. Strategy Analytics also predicts that more than half of the global spending for 3G wireless infrastructure will go to CDMA2000 and WCDMA during 2006, and that 2G technology investments will continue to decline.

3G now has 350 million subscribers worldwide, and more than 30 million are added every quarter. Analysts estimate that by 2010, the two dominant 3G technologies, CDMA2000 and WCDMA, will account for 1.2 billion subscribers, representing 41% of the global subscriber base. Meanwhile, the world’s once large GSM subscriber base is expected to begin its steady decline in 2008.

“Forward-looking operators around the world are replacing their 2G networks with more robust and flexible 3G technologies,” said the CDG’s Perry LaForge. “In the past six years, nearly 300 operators worldwide have deployed 3G systems. Close to 200 operators, including 28 GSM operators, have deployed or are deploying CDMA2000 technologies. We expect this trend to continue well into the next decade.”

Indeed, CDMA2000 has a clear lead in the 3G market and today maintains an 80% share of the global market for all 3G subscribers. With 166 operators running CDMA2000 networks worldwide in 73 countries and adding about 8.5 million new users each month, CDMA2000 is on track to reach 350 million subscribers this year. Analysts predict that CDMA2000 users will reach close to 500 million by 2010.

The number of total 3G subscribers is expected to surpass 2G subscribers in a matter of 10 years from 3G’s inception. This is five years less than it took 2G to overtake analog networks. This phenomenon has already occurred in Japan, Korea and the U.S., with other countries and regions quickly following their lead. Western Europe will be the next region to witness the inevitable cross-over of having more 3G subscribers than 2G subscribers.

Two years after Korea’s operators rolled out CDMA2000 technology, operators counted more 3G subscribers on their networks than 2G subscribers. Today, nearly 100% of the country’s subscriber base uses CDMA2000. More than 40% of these subscribers have upgraded their devices to take advantage of the mobile broadband services enabled by EV-DO, known in Korea as walking DSL.

In Japan, 3G subscribers represent more than 60% of the entire subscriber base today. In the case of KDDI, it took less than two years to migrate most 2G subscribers to 3G; it took NTT DoCoMo less than five years to do the same.

KDDI and NTT DoCoMo compete head-to-head on net subscriber adds every quarter. Since July 2005, KDDI has gained more net subscribers per month than any of its competitors. As of June 2006, it had 9.46 million EV-DO wireless broadband users, representing 40% of KDDI’s total subscriber base. Average revenue per user is an impressive $30 per month.

Recently, KDDI announced that it would invest $1.73 billion over the next three years to upgrade its EV-DO network to Rev A, which will boost its network speeds and let the company offer symmetric and delayed sensitive services such as voice over internet protocol (VoIP), push-to-talk, video telephony and multiplayer online gaming. NTT DoCoMo is rolling-out its HSDPA mobile broadband data network.

“With Release 0 and now Rev A, KDDI has a clear competitive advantage in the marketplace where CDMA and UMTS are competing head to head as 3G technologies and in the eyes of our customers,” said Dr. Hideo Okinaka, vice president and general manager of the Technical Standards and Spectrum Division of KDDI.

The Performance Edge
CDMA2000 1xEV-DO Rev 0 has made its market around the globe as the dominant 3G technology offering tangible benefits in terms of increased ARPU, spectral efficiency and enhanced network capacity. EV-DO Rev 0 is now deployed or in the process of being deployed by 85 operators in more than 50 countries, and several forward-looking operators such as Sprint Nextel, Verizon, KDDI, Leap Wireless and Telecom New Zealand already have aggressive plans for the next evolution: EV-DO Rev A.

EV-DO Rev A will boost network speeds by roughly ten fold, allowing downloads up to 3.6 Mbps and uploads up to 3.1 Mbps and enable operators to operate in an all-IP environment. This is happening just as GSM operators are trying to reach parity with EV-DO Release 0 by leapfrogging past their lower-performing WCDMA networks and introducing High Speed Data Access (HSDPA) technology. Indeed, the evolution of EV-DO is forcing a healthy dose of competition—and the customer ends up winning.

Enhancements to both EV-DO and HSDPA will accelerate downlink and uplink speeds, allowing carriers to penetrate deeper into the broadband market. But EV-DO continues to hold the first-to-market advantage.

The Third-Generation Partnership Project (3GPP2), which sets standards for CDMA2000, has already completed a Technology Evolution Framework (TEF) that outlines the evolution strategy for CDMA2000 beyond the 2010 timeframe and deals with end-to-end system capabilities. That means EV-DO is on a solid path toward the future, providing operators with a cost-effective, efficient and orderly network evolution since the bulk of the upgrades will consist of software and channel-card upgrades.

With EV-DO Rev A making its appearance this year, EV-DO Rev B is following close behind in 2007, and Rev C will begin deploying in 2008. Once again, operators will see data throughput speeds dramatically increase—from full-mobility downloads up to 3.1 Mbps with Rev A in 1.25 MHz of bandwidth, to hundreds of Mbps wih Rev C in 20 MHz of bandwidth.

In North America, 3G users are expected to outnumber 2G users by the end of 2006. Thanks to the aggressiveness of Verizon Wireless, Sprint Nextel and other CDMA2000 operators that have rolled out EV-DO and are planning to upgrade to Rev A, the U.S. market is expected to become one of the most dynamic and competitive markets for advanced wireless services. Cingular Wireless, the largest U.S. mobile operator as a result of its merger in 2004 with AT&T Wireless, has adopted an aggressive 3G deployment strategy to compete against the CDMA2000 operators.

“To compete with the new Verizon and Sprint Nextel offerings, Cingular and [AT&T Wireless Services] must deploy a technology that permits data transmission speeds at comparable speeds,” Cingular said in a Federal Communications Commission public-interest statement in 2004.

The rate at which businesses were embracing Verizon’s 3G Broadband Access service prompted Cingular to pin its hopes on HSDPA, the next-generation of WCDMA technology that promises higher data rates.

This heated competition will only continue, as enhancements to both EV-DO and HSDPA accelerate, allowing carriers to penetrate deeper into the broadband market. EV-DO Rev A, which will become available in 2006, delivers a higher-speed reverse link, improved latency and better capacity, with the ability to support carrier grade voice-over-IP services. Meanwhile, HSUPA (High Speed Uplink Packet Access) increases the uplink speed of WCDMA and is expected to be available in 2007.

“In terms of services and applications, CDMA2000’s migration path offers a very compelling package to subscribers,” said Bruce Stone, senior vice president of Motorola. “The advanced capabilities of Rev A will deliver a new generation of wireless data services faster and more efficiently than ever before, providing users more choices and an enhanced wireless experience.”



In Western Europe, WCDMA growth is accelerating. According to UMTS Forum Chairman Jean-Pierre Bienaimé, the contributions of GSM and WCDMA to total net subscriber additions were about equal in 2005. “Today, consumers don’t need much encouragement to pick WCDMA over GSM: they’re finding out for themselves that third generation is the only choice to meet their lifestyle needs,” Bienaimé said.

More than 35 million people are WCDMA subscribers in Western Europe, with around 12 million of them signing up for services in the first six months of 2006. Meanwhile, Norway, Denmark, and Sweden are joining other countries in Europe, including the Czech Republic, Belarus, Moldava, Poland, Romania and Russia in using CDMA2000 technology in the 450 MHz band. Strategy Analytics estimates that 3G subscribers in Western Europe are expected to surpass 2G subscribers in the region by 2008.

Whether they compete in developed countries or emerging markets, operators are finding their motivations for network spending have changed over the years, prompting investments in 3G technologies. According to ABI Research, the key motivators for capital expenditures in the past revolved around network capacity requirements and market-share growth through subscriber acquisition. Today, the motivation comes from the need for services that provide higher average revenue per user (ARPU) and reduced operational expenditures, as operators face saturated markets and falling voice ARPU.

Operators that have deployed 3G are already seeing their investments pay off. CDMA2000 operators around the world have reported data ARPU anywhere from 10% to 40% of total revenue per user on their 3G networks. In a matter of a few years, 3G operators hold a distinct competitive advantage against those operators that have opted to continue to compete with 2G GSM technology. The high revenue-generating enterprise users are increasingly adopting 3G.

According to Iain Gillott, founder and president of the consultancy iGR, “84% of survey respondents from Fortune 100 companies said they were interested or very interested in laptops with embedded high-speed 3G modems.”
“Overall, 3G business users continue to prove themselves to be lucrative customers for U.S. mobile carriers, with reported monthly spending of nearly $90 per user, which is approximately double that of the ARPU reported by 2G carriers,” said In-Stat analyst David Chamberlain.

3G technologies are also well positioned to help operators capture the next wave of growth in voice services that is expected to come from emerging markets. For those operators looking to take on a large number of users and will need high voice capacity, 3G makes it much more cost-effective in terms of capital and operating expenditures in the long run.

A recent report from Signals Research Group supports this fact. The firm made a thorough analysis of both capital and operating expenses for 2G and 3G networks over a 10-year period. Its conclusion: If an operator intends to migrate to 3G at any point in time during a 10-year period, it is more cost-effective to simply begin with a 3G network.

Signals Research Group concludes that for a number of different market scenarios, an operator can actually reduce its long-term network total cost of ownership (TCO) if it opts to deploy a 3G network instead of staying with a 2G strategy. The firm further discovered that these results can also occur in developing markets where the use of voice and data services on 2G networks is relatively high and growing.

“Although 3G radio infrastructure is generally considered to be expensive, other technology-independent cost drivers, such as site preparation and leasing costs, typically far exceed the cost of the actual hardware being deployed on the site,” said Michael Thelander, founder of Signals Research Group. “Thus, if an operator is able to reduce these costs by deploying a more spectrally efficient technology, such as 3G, the incremental higher costs associated with 3G can be offset by reductions in other areas of its capital expenditures.”

For Tata Teleservices, deploying low-cost CDMA2000 equipment is the key to reducing capital and operating costs for serving the sparsely populated rural markets of India.

“The innovative CDMA2000 outdoor base station design that we have been implementing is particularly well suited to the rural markets of India because it delivers improved coverage and performance while reducing establishment and operational costs,” said Greg Young, Tata’s chief officer of network, technology and value-added services.

Handset prices are also a key decision point for operators, especially in developing wireless markets. With 275 million subscribers, CDMA2000 already offers substantial economies of scale, resulting in a significant impact on device pricing.
In fact, CDMA2000 entry-level handsets have already approached price parity with GSM handsets. In the future, WCDMA is expected to achieve higher volumes and lower-priced handsets as well.

“We see virtually no difference in the cost of entry-level and high-end handsets between GSM and CDMA2000,” said Xiaoyu Tong, general manager of China Unicom’s value added service department. “Our strategic direction is to strengthen our competitive posture through the delivery of revenue generating next generation services using CDMA2000 devices and not rely solely on voice and short message service revenue from GSM devices.”

In India, some 22 CDMA2000 handsets are being offered for less than $50 wholesale from 10 different suppliers. That compares with 17 GSM handsets offered for less than $50 from 5 suppliers. Moreover, The Yankee Group concluded that CDMA2000 handsets that offer more value have accounted for about 60% of all entry-level handsets imported to India on a monthly basis.

In fact, one popular CDMA2000 handset, the ZTE C150 (known as the ACE), has outstripped the combined shipment volume of all GSM handsets specifically made for emerging markets since the devices were first introduced to the Indian market in early 2006. More than 1.6 million CDMA2000 ACE handsets have been imported into India to meet the demand for affordable communication, while less than 500,000 GSM emerging market handsets (EMH) have been manufactured in India for the same purpose.

“Consumers don’t necessarily want the cheapest phone,” said John Jackson, handset analyst with The Yankee Group. “The lowest-priced handsets may actually drive consumers away,” he said. “In markets such as India, where PC penetration is nominal, the data-capable CDMA2000 handset will define the Internet experience for a massive number of end users.”

While both CDMA2000/EV-DO and WCDMA/HSDPA hold a distinct advantage over 2G technologies, when comparing 2G to 3G migration paths, CDMA2000/EV-DO holds the greatest advantage when it comes to total cost of ownership. The CDMA2000 migration path requires significantly less investment than the GSM/GPRS/EDGE/WCDMA migration path because it fully leverages existing spectrum and infrastructure.

“Service providers need to be confident that their investment will be protected for years to come, and CDMA2000 provides that peace of mind by providing an evolution path that will help CDMA operators remain at the cutting edge of mobile communications,” said Mike Iandolo, president of Mobility Access Solutions for Lucent Technologies. “3G solutions such as CDMA2000 enable operators to produce revenue today via a high-quality voice and mobile high-speed data experience and can help them cost-effectively introduce new multimedia services that blend voice, data, video and other multimedia capabilities.”

More than 37 million EV-DO users worldwide have purchased one of more than 280 models of EV-DO devices. Declining 3G average selling price (ASP) trends and increased revenue opportunities only strengthen the EV-DO business case.
“CDMA2000 can be easily and cost effectively scaled, enabling Verizon Wireless to offer an incredibly robust set of services from a growing selection of devices that meet our customers’ evolving need for improving their lifestyle and productivity at compelling price points,” said Ed Salas, vice president of network planning with Verizon Wireless.

A Flexible Path Forward
CDMA2000 migration path offers a large degree of flexibility for operators, a factor that has a major impact on the ease and economics of rolling out 3G systems. As operators are faced with the need to upgrade their broadband capabilities to support new applications, they can do so incrementally with new revisions of EV-DO, while leveraging their existing investments. That means an operator can choose to deploy an enhanced version of EV-DO for selected geographical areas to serve densely populated hot spots, and leave 1X or a previous version of EV-DO in sparsely populated rural areas.

For instance, a high traffic urban core with EV-DO Rev A may be upgraded by adding additional carriers using a channel card and later upgrading to EV-DO Rev B with software to add even more throughput capacity. The surrounding lower density areas of suburban or rural areas may remain as a single carrier 1X or EV-DO, since the forward-compatible devices seamlessly transition between the network zones.

EV-DO devices can support multiple air interfaces, including Bluetooth, Wi-Fi, GSM, GPRS and GPS for location services. EV-DO technology also supports a wide variety of spectrum bandwidths, scalable between 1.25 MHz to 20 MHz, and frequency bands, including 450, 800, 1700, 1900 and 2100 MHz.

The CDMA2000 migration path also avoids one of the biggest costs of all—new spectrum. Operators can easily clear and deploy CDMA2000 technologies in existing spectrum using 1.25 MHz of bandwidth. Very few GSM operators have embarked on an in-band WCDMA deployment using the 900 MHz and 1800 MHz frequency bands because WCDMA networks require a minimum of 2x5 MHz of spectrum to operate.

In addition, all-IP core and transport networks will continue to emerge while EV-DO Rev A is being rolled out. This means CDMA2000 operators will have an early advantage in their ability to save up to 50 percent in transport costs because of the elimination of expensive circuit-switched network elements such as mobile switching centers. An all-IP core network capital expenditure can be 70 percent lower than circuit-switched implementations over a 10-year period.

CDMA2000/EV-DO’s cost advantages accelerate with future iterations of the technology, designed to provide even better performance and network efficiency in order to improve the end user experience, while reducing costs.

Not only is EV-DO faster, it offers lower latencies and less jitter to enable even richer applications and services such as videoconferencing, push-to-media, multicasting of TV programming, richly rendered 3D gaming with multiple players, and concurrent voice and multimedia communications.

“Customers will benefit from faster upload and download speeds, video, on-demand multimedia and push-to-talk,” said Barry Tishgart, director of product marketing with Sprint Nextel, which plans to begin commercially launching EV-DO Rev A in the fourth quarter of 2006 and reach more than 40 million potential users by year-end. “Ease of deployment, device backward compatibility and a range of valuable services makes EV-DO Rev A a win-win for Sprint Nextel and our customers.”

Rev A brings VoIP and an all-IP environment to a commercial reality—the Holy Grail for all telecom companies looking to dramatically lower their costs and increase the capacity and flexibility to transmit IP-based voice calls and data packets across multiple networks. In fact, the Signals Research Group study found that by offering VoIP over EV-DO Rev A an operator can significantly lower its total cost of ownership.

“Rev A will bring high-quality mobile VoIP to consumers and businesses years ahead of UMTS,” said Paul Callahan, vice president of business development with Airvana.

“The last couple of years have been ones of great progress not only for 3G infrastructure purchases, deployments and new commercial applications, but also for the mindset of the industry about going forward,” said Larry Swasey of Visant Strategies. “There is much more to come.”

CDMA2000 and WCDMA networks are capable of delivering new, revenue-generating voice, multimedia and broadband data services while at the same time delivering superior economics. GSM may offer a low-cost of entry, but it also represents a stranded investment. There is no question that 3G offers the most compelling long-term competitive and revenue-making opportunities, and those operators that think forward today will lead the market tomorrow.