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Commentary: Nokia glitch not a killer

The bug hampers upgrading to higher-speed networks, but users buying phones now will be ready to replace them by the time they can get enhanced services.

From a technical perspective, Nokia's cell phone software glitch--which the company says could cause connection problems for up to 10 percent of cell phones sold in the United States when carriers upgrade to higher-speed networks later this year--poses a minimal problem.

First, the glitch affects only services based on the CDMA (Code Division Multiple Access) service. European systems use GSM (Global System for Mobile communications) rather than CDMA. In the United States, only Sprint uses CDMA exclusively, and Verizon is considering using that standard for its 3G network. Other carriers are not affected. AT&T, notably, uses multiple standards but plans to implement a GSM/GPRS 2.5G upgrade to its cellular service starting this year.

More important, real 3G service is at least three years away--probably longer than that--for a number of reasons that have nothing to do with Nokia, including the time it takes to build out the infrastructure, the lack of allocated spectrum and the huge cost. In the meantime, we will see some lower-bandwidth 2.5G enhanced services appear, but even when these do come out, it is unclear how quickly people will start using them.

The next issue is one of timing. While the carriers are planning to start rolling out 2.5G enhanced services later this year, those services will be available only in limited areas initially. Most users will not have access to them until sometime next year at the earliest, and it is unclear how quickly they will adapt to these more expensive services.

This entire timetable could be pushed back, however, particularly if the present economic slowdown deepens. The carriers are all struggling under huge debt loads incurred in large part from the still incomplete buildout of the present cellular infrastructure, and they have limited resources to devote to enhancing that infrastructure.

3G in three years? Not likely
That is one main reason why we believe that promises of 3G service in North America within three years are overly optimistic at best.

See news story:
Nokia glitch could crimp 3G plans
Even users buying phones today will probably be ready to replace them by the time they are able to move to enhanced cellular services.

As higher-bandwidth services become more common in the United States, users will likely need more advanced phones to take advantage of those services. People have been buying cell phones mainly on the basis of price rather than extra features. However, when they move to enhanced data services such as wireless e-mail, they will need phones with larger screens, more memory and processing power, and, probably, attachable keyboards.

Since each network upgrade usually requires a new handset in any case, users probably will be required to buy new handsets with these features to use the new networks. In any event, the life cycle for most cell phones is typically 18 to 24 months, so most people who subscribe to new enhanced services will be using new phones, not the older Nokia models that have this glitch.

However, while this may not be a major technical problem for Nokia, it is a PR black eye and marketing problem, particularly because Nokia must develop its software expertise if it is to continue to dominate the handset market in next-generation networks. Otherwise, it risks becoming a commodity hardware manufacturer competing solely on price.

As phones become more data oriented, the software on the phone will become the feature that users identify with. This is analogous to the current situation in the PC industry: When users select a PC, they focus on the operating system (such as Mac vs. Windows) and programs rather than on hardware (for example, Gateway vs. Dell). In the future, users won't care who makes the phone, but they will care what software they can use on it. A platform like Microsoft's Stinger, which will be used by multiple phone manufacturers, has the potential to make the phone hardware irrelevant.

If Nokia's software problem turns out to be more serious than the company now admits, that could hurt its relationship with the U.S. carriers that market its phones. Nokia has stated that this problem does not extend to its latest top-line phone, implying that it has eliminated the problem from its product line going forward.

Replacement value
Overall, users should not be too concerned with this problem. Other handset manufacturers, notably Motorola, have also had quality problems. To address PR concerns, we expect Nokia and the carriers involved to offer a replacement policy to users when the new services come out. Users should also use this event as a learning experience. To the extent that they buy handsets in anticipation of using enhanced services, they should ask for a guarantee from the carrier that it will replace the handsets if they do not work with the service.

However, users would be even wiser to wait until they are actually ready to put those enhanced services to use before buying a handset to use with them. Handsets are going through a rapid technical and form-factor evolution to support wireless data services. As a result, the handsets available in a year will have much greater data capabilities than those on sale today.

By waiting as long as possible--and possibly extending the life of their present handsets--users will be able to take advantage of this rapid evolution to get a handset that more closely matches their wireless-service needs.

Meta Group analysts Dale Kutnick, Peter Firstbrook, David Cearley, William Zachmann and Jack Gold contributed to this article.

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