The blurred vision of 3G: Video phones haven't caught on. So what's next? Voice calls

The bosses of the world's largest mobile phone companies will gather in Barcelona this week for the annual industry shindig, the 3GSM conference. But this time, what one analyst calls the "usual mutual back slapping" won't hide their growing vulnerability.

Subscriber growth rates are stalling and markets are becoming saturated. Everything the industry can think of has been done before, be it clamshell-design handsets, thin phones or "moc croc" leather cases. "It says something when the biggest thing to happen in the industry last year was Motorola's launch of the Pink Razr [clamshell] phone," says Ben Wood, an analyst from research group Gartner. "It is the equivalent of adding a body kit and alloy wheels to increase the sales life of a Ford Mondeo."

That may be too harsh on the well-regarded designers at Motorola, but he has a point. Most new handsets are no different from existing models, so branding is now as important as functionality. Marketing campaigns for new phones are becoming more extravagant - and sometimes bizarre - as manufacturers try to differentiate their products. BenQ Mobile, which bought Siemens Mobile last year, recently launched its new "sqound" phones (that's traditional oblong phones with curved edges, to you and me).

Now more than ever, companies are pining their hopes on 3G to provide the next killer application. But this technology has promised so much in the past yet failed to deliver, while other handheld devices, such as iPods, have soared in popularity. Mobile phone executives swear that this time, 3G will take off. Are they right?

Five network operators - mmO ₂ (now O ₂), Vodafone, T-Mobile, Hutchison 3G and Orange - spent a total of £22.5bn in 2000 to buy the third-generation mobile phone licences auctioned by the Government. Switching from 2G - the second- generation technology launched in the 1990s - to 3G is the equivalent of upgrading a dial-up internet connection to broadband. Offering around 10 times more bandwidth, 3G phones have the capacity to download and play video. This, and video calling, was supposed to be the next big thing.

But it took longer than expected to upgrade the networks and to develop 3G- enabled handsets. Finally, most operators launched their 3G services in Britain towards the end of 2004 ("3", owned by Hutchison Whampoa, was the first in 2003). In the last quarter of 2004, just under 4 per cent of mobile users had 3G phones, says research firm Wireless Intelligence. A year later, this figure had risen to just over 7 per cent.

Many of these people rarely use the extra services - vital for the operators to recoup their huge outlay. Survey findings from M:Metrics, another research firm, show that in the last quarter of 2005, around one in 10 3G users watched a short video clip on their phones. Under one in five sent a video clip to a friend.

Statistics from the operators promoting 3G can be misleading, warns John Delaney from Ovum, a technology consultancy. "You have to be circumspect. It's only when they start from a large base that 3G growth rates become meaningful."

So why hasn't 3G taken off yet? Mr Delaney says the network operators did not pay enough attention to what customers would want from it. "Up to now, the operators have been led by technology, in determining what services they could offer. For example, just because 3G networks can do video calling doesn't mean it's actually something people want to do."

The perception of 3G was not helped by the teething problems that followed the arrival of the first new phones. " '3' did a lot of damage to the 3G cause when it launched in 2003 because the network, phones and services were not ready and the customer service was bad," says Mr Wood at Gartner. "The industry was probably set back about 18 months."

Watching television on mobile phones is being touted as the next big thing for 3G. O ₂, which has just been bought by Spanish giant Telefonica, is running a trial for a service in Oxford where participants are watching, on average, three hours of TV on normal- sized phone screens each week. The average clip length is 25 minutes. Dave Williams, O ₂'s chief technology officer, says younger people are far more prepared to watch TV on mobile phones than many older people - including mobile phone executives - realise.

But the mobile phone companies face competition from the likes of Apple and Google, which are developing handheld devices that show television. As with music, consumers are downloading programmes to their PCs and transferring them to portable devices such as iPods.

Mr Williams denies that Apple is a threat. "It is helping to create the market. Maybe the iPod will be around in a few years' time; maybe it won't. Everything is possible."

Portable devices such as iPods cannot directly download music or TV programmes. And if Apple wants to develop that ability, piggybacking on the 3G network is the only practical option. Mr Delaney says: "More specialised mobile devices are likely to dominate activities such as listening to music or playing games." But he adds: "The network operators will still have a big role to play in providing those devices with connectivity."

Network operators realise they need internet companies to drive take-up by providing content. Some Nokia users, for example, can access Yahoo! Go, software which incorporates Yahoo!'s messenger service, diary and search engine, all hooked up to the user's home PC. Christian Lindholm, the vice-president of global mobile products at Yahoo! says: "The phone is evolving into a mobile computer. Yahoo! and other big branded internet services will enter further into the mobile space this year."

No one is writing off 3G. Far from it. It's just that the business case has changed. And given that the licences last 20 years, it is likely the business case will change again. Network operators have realised that the payback period will be longer than expected, and that the hoped-for cash cows of video calling and music downloads will not cover the huge outlay for 3G alone. Operators will have to look at business models where not all the revenues come from the mobile phone user, says Mr Delaney.

O ₂, for example, has high hopes for its new i-mode handsets, which work well with 2G but could provide a model for 3G services. Users can get a selection of news, shopping, music and gaming websites on their phones, paying the access charges to O ₂. For any content, such as games downloads, that they subscribe to, O ₂ takes a 15 per cent cut from the content provider. Advertising will also play a part in boosting network operators' revenues.

But there could be a simpler use for 3G capacity. In densely populated areas, many networks are becoming overloaded, says Mr Wood. Extra bandwidth from 3G could be freed up to solve these coverage problems. Ironically, ordinary voice calling and texting may be the answer.

MOBILE JARGON: HOW TO TELL YOUR KBPS FROM YOUR HSDPA

Kbps: Stands for kilobits per second (thousands of bits per second), indicating the amount of data that can flow in a given time. Mbps stands for millions of bits per second.

1G: The first mass-market mobile phones became popular in the 1980s. The analogue phones started off the size of a small briefcase but slimmed down to the size of a brick. Used only for voice calls.

2G: The "second generation" phones were introduced in the early 1990s. The GSM (global system for mobile communication)standard is prevalent in Europe, CDMA (code-division multiple access) in the US. Stronger signals and data services such as texting and limited internet access. Capacity of about 10Kbps.

2.5G: Introduced in 2001. Carries 2G-enhanced technologies such as GPRS (general packet radio service), a souped-up 2G standard. Data speeds up to between 56Kbps and144Kbps.

3G: Mostly introduced in 2004. The third generation of mobiles carries standards such as UMTS (universal mobile telecommunications system). Offers speeds up to 2Mbps, enhanced multimedia and streaming video.

HSDPA: An enhancement for 3G UMTS networks, High Speed Downlink Packet Access promises speeds of up to 14.4Mbps, compared to a mere 2Mbps for UMTS.

4G: Coming soon, possibly this year, offering mind-boggling speeds of up to 40Mbps.

WAP: Wireless Application Protocol. WAP is the software that allows users to access mini browsers on portable devices such as pagers and mobile phones.