Ericsson : the 3G radio access network

The total investment to provide third-generation mobile networks in Europe alone was estimated at € 300 billion – or roughly € 1000 for every man, woman and child on the continent. Here’s Ericsson’s pitch for a piece of the action.

As the saying goes, it is tricky to make predictions, especially about the future.

In the early 1980s the US telecom giant AT&T reputedly asked management consultants McKinsey & Co to estimate the potential market for the new-fangled cellular telephones that were beginning to appear on the market.

The consultants scratched their heads. The cellphones of the day were briefcase-sized, shoulder-wrenchingly heavy, had absurdly short battery lives and were hideously expensive to use.

On the basis of the available data, McKinsey projected that by the turn of the millennium, perhaps 900,000 people would be proud owners of a cellphone.

McKinsey’s projection persuaded AT&T that the market wasn’t viable. And so it pulled out.

As we all know, McKinsey’s projections were somewhat wide of the mark. By 2000, the world’s mobile phone networks were adding 900,000 subscribers every three days.

By 2000 it seemed that no one had any doubts about the potential of the mobile communications business. Vodafone, which had begun life in the 1980s as a subsidiary of the rather dull and low-profile British electronics firm Racal, had become Britain’s most valuable company. It had just concluded Europe’s biggest-ever hostile takeover, of German mobile operator Mannesmann.

The spring of 2000 saw perhaps the biggest – certainly the most expensive – vote of confidence in the future of mobile communications. In a carefully staged auction that continued over several weeks, the British government sold off five slices of radio spectrum, each of them carrying a licence to operate a new, third-generation (3G) network – using a technology called Wideband Code Division Multiple Access, or WCDMA.

The auction was designed rather like a poker game. Bidding rounds would continue until the number of players matched the number of available licences; players raised their bids until the others folded.

As the auction progressed it became clear that bidders saw a 3G licence as a licence to print money. At the start, most experts agreed that the licences would fetch a maximum of about £1.5 billion each, or £7.5 billion in total.

The same experts watched astonished as the prices on the auction website climbed, with two rounds of bidding per day. When bidding finally ended in April, the five successful bidders had agreed to hand over £22.5 billion for their licences.

This extraordinary result marked a turning point for the mobile communications industry. As the operators woke up, no doubt with aching heads, dry throats and empty wallets from their marathon poker session, they resolved to be more careful with their money in future.

Further auctions of 3G spectrum and licences in other countries failed to deliver the spectacular results of the British one. And the stockmarket value of network operators fell, as investors wondered whether the costs of 3G networks (which, including equipment and construction costs as well as licences, were projected to top € 300 billion) would ever be recouped. The figure, after all, corresponded to roughly € 1,000 for every man, woman and child in Europe.

The massive vote of confidence began to look instead like a massive leap of faith.

So had the mobile communications industry got its predictions wildly wrong … once again?

As all this was going on, Fraser & Bilder Communications was commissioned to help Ericsson market a crucial part of its 3G network offering: the radio access network (RAN). The RAN comprises the radio transmitters and associated network equipment that actually connects mobile devices to the network.

The starting point was an international conference that brought together Ericsson’s most experienced product managers, marketing specialists and sales staff.

Ericsson already had a long and distinguished history in providing RANs for the previous generation (2G) networks – principally TDMA in the Americas, and GSM in Europe and the rest of the world. The quality of Ericsson’s RAN equipment was well known; it was one of the main reasons why Ericsson’s overall market share in mobile networking was so high. (The other reason was Ericsson’s AXE switch, which unlike many of its competitors was easily scalable to cope with the sort of rapid growth that AT&T and McKinsey had so spectacularly failed to predict.)

Most of the operators with 3G licences were already in the mobile communications business; for them, a 3G licence was in effect a mandatory licence to stay in business in the longer term. And the majority of them were already doing business with Ericsson. These existing 2G customers were the top priority for 3G sales.

One of the conclusions of Ericsson’s RAN conference was that what we needed to sell was not the physical bits of kit out of which the radio network was built. Indeed, much of the hardware and software was only at the prototype stage. If we wanted to show customers a 3G base station, for instance, we only had illustrations. Photographs were unavailable because the equipment didn’t exist yet.

Ericsson’s 2G reputation was useful here. It meant that operators were likely to trust that the equipment would do what its specifications said, and that it would be delivered on time.

One very important factor for the operators was time to market. In this case, it wouldn’t be particularly important for an operator to be the first to the market with 3G services (consumers are generally wary of trying new products or services until they can see them being offered by a number of suppliers) – but it would be vital not to be last.

Time to market depended on the industrialization of the RAN equipment. But it also depended on a number of other factors. For instance, could you overlay an existing 2G network with 3G equipment, and gradually move from 2G to 3G services in line with increasing demand? (You could.)

How could you be sure of coverage and service quality? Because it operated at different radio frequencies than 2G, the laws of physics dictated that 3G networks would require more base stations than 2G.

Ericsson’s network planning and optimization tools were important here; and equally important was another kind of network: Ericsson’s pool of 3,000 engineers working in 3G development – two-thirds of them specializing in RAN systems. The largest concentration of expertise in the world, according to Ericsson.

And what would the 3G networks actually do? Which services would actually become popular and make money for the operators, and which would turn out to be duds? Different services would have varying consequences for traffic patterns, and thus for the design and configuration of the network.

How would the operators cope if they had to change strategies mid-way through building their networks? How could their suppliers help?

Despite the industry’s blind faith that 3G would make money, no one had any real idea of how. This meant that as far as possible, the networks had to be ready for anything.

What emerged from all of these considerations was the realization that the operators needed to have their hands held at all stages of the process: planning, building, operating, fine-tuning, maintaining and expanding their networks.

Fraser & Bilder distilled the conclusions of this conference, and the discussions that followed, into a 16-page brochure with the zippy title: How to maximize your profits from third-generation mobile networks.

The brochure deliberately focused on commercial considerations, relegating technological aspects – and illustrations of hardware – to the back pages. For Ericsson, WCDMA didn’t stand for Wideband Code Division Multiple Access. Instead it stood for We Can Deliver More Advantages – the core message of the brochure.

The brochure was followed by a comprehensive set of PowerPoint presentations, with complete speaker texts, for both internal and external use. Again, it played to Ericsson’s proven strengths in the mobile field, while projecting a vision of the new revenue-generating services to come.

The realization that technology was becoming less important than services and partnership was, in retrospect, a major turning point for Ericsson.

Today, Ericsson’s fastest-growing business is in “managed services” contracts with operators, where Ericsson takes over complete responsibility for the smooth running of the network from its owner – in many cases transferring technicians from the operator’s payroll to Ericsson’s own.

Managed services contracts are basically about transferring risk. If the network doesn’t perform, Ericsson doesn’t get paid.