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iPhone 5 Is Here: Now It’s Time to Sort Out G’s

Eventually, 2G and 3G will have to make way for 4G

Companies like Apple (NASDAQ:AAPL) and Samsung have become mobile powerhouses as their smartphones and tablets reach the point where they rival the capabilities of previous-generation PCs.

Faster CPUs, more memory and better displays aren’t the whole story, though; a big part of mobile’s rise has been the network, and that puts cellular providers in the spotlight. For the best overall mobile experience, you need not only the ultimate smartphone, but a network that fully supports it.

Based on the hype over the past year, we all pretty much know that 4G is wicked fast, but other than that, what’s the scoop? Well, here’s a quick history lesson on cellular networks:

  • 1G: The first generation of wireless networks, these were analog and primarily used for voice only. Had digital movies been available for download in the 1980s, a 2GB movie would have required more than three days to download using a 1G device.
  • 2G: In 1991, 2G brought digital communication to mobile, and a subsequent bump in speed.
  • 3G: Hitting the U.S. in 2001, 3G networks deliver peak mobile download speeds of 384 kbit/s, making that 2GB movie file a project that would take the better part of a day. Much better than 1G or 2G, but still not practical for high-bandwidth mobile data use.
  • 4G: The latest and greatest, often referred to as ultra-broadband since this standard is capable of data transmission at speeds rivaling home Wi-Fi and broadband networks. Smartphone 4G download speeds available through U.S. providers have been hitting close to 4 mbps in some areas, fast enough to download that 2GB movie in an hour or so. This is a huge leap in mobile performance. U.S. carriers began deploying 4G networks in 2008 — an effort that greatly accelerated last year.

What else do you need to know?

Of course, nothing is as simple as 1G to 4G; within each generation, there are competing standards. With 3G, there were EDGE, HSPA, EV-DO and others.

Then there are variations that boost speeds. In the 4G camp, the one that really counts in the U.S. is LTE, with Mobile WiMAXX and HSPA+ being the primary competing standards. Different countries use different bandwidths and standards as well, so the 4G iPhone 5 is incompatible with 4G services in parts of Europe.

History and technical jargon aside, what does all this mean for cellular providers?

For one thing, 4G is an expensive proposition. Verizon (NYSE:VZ), AT&T (NYSE:T), Sprint (NYSE:S) and T-Mobile have spent billions of dollars upgrading their networks to 4G capability, bringing the new high-speed mobile capability to an increasing number of markets. A 2011 Deloitte report pointed to ongoing investment of between $25 billion and $53 billion over the next four years as U.S. carriers continue to roll out 4G capability to more of the country.

Last year, 4G capability began to increasingly show up on smartphones, but the real push begins now, with the iPhone 5 — the first iPhone with 4G capability. Previous iPhone versions caused no end of technical headaches for AT&T, as Apple users loaded up on data and pushed the limits of its 3G network. The iPhone 4S introduced Siri, and reports said data use among iPhone users (already the biggest 3G data-hogs in the U.S.) was set to double.

When cellular networks are pushed to their capacity by multitudes of smartphone-wielding data consumers, this leads to dropped calls, slow service and frustration — one of the reasons why mobile carriers moved to end unlimited data plans earlier this year.

Apple’s adoption of 4G changes the equation for carriers.

The iPhone 5 will increase demand for 4G … but that’s a good thing because 4G is much more efficient that 2G and 3G for data transmission. Without unlimited data, iPhone 5 users shouldn’t be downloading much more than they did with their iPhone 4S, but the stress on networks should decrease thanks to that increased efficiency.

From that perspective, the more people off the old phones and onto 4G the better, but that requires much more widespread 4G coverage.

There’s a push to blanket the country with 4G, something that takes not only time and money, but wireless spectrum — and that’s available in limited quantity. To put overall coverage (not just the big metropolitan markets) in perspective, there are roughly 300,000 cell towers in the U.S. delivering 2G and 3G coverage, compared to just 50,000 that are capable of 4G LTE. Carriers can use those existing towers for 4G, but they need to be upgraded.

And that’s just infrastructure; it doesn’t solve the spectrum problem.

2G networks are now on the endangered list. To free up wireless spectrum for expanding 4G networks, companies are winding down their 2G services. AT&T has begun to shut down 2G service in New York, with plans for nationwide shutdown by 2017. Sprint announced it is killing its 2G Nextel network by June 30, 2013, using that spectrum to continue 4G rollouts. T-Mobile is now rushing to “repurpose” its 2G service to 4G.

Another option is consolidation. For example, AT&T tried to buy T-Mobile last year, primarily to gain access to its wireless spectrum. When that didn’t work, it ponied up for NextWave Wireless.

What happens to customers who don’t want to upgrade to new phones?

Some people still rock an original iPhone and see no reason to be pushed into an iPhone 5, but without 2G coverage, their first-generation smartphone eventually will be good for playing Angry Birds … and not much else. According to CNET, AT&T is taking a proactive approach to helping the 12% of its customer base currently using 2G phones onto a more modern platform. In other words, carriers eventually might have to buy (or at least discount) new phones for their holdout customers.

One plus for consumers is that there likely will be a sweet spot for those who hold onto their 3G smartphones for a while. As more users transition to 4G models, congestion on 3G networks should diminish, giving better connections and faster speeds.

Of course, this is only likely to last a few years before those 3G networks start shutting down to make room for more 4G (or, inevitably, 5G).

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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