Gear Suppliers Know the Way To Make Money From the Internet By DAVID PRINGLE WSJ.COM How do you make money out of the Internet? You build it. Cisco Systems Inc., the world's leading supplier of Internet equipment, has seen its market value grow to more than $400 billion -- the third-largest in the world. With the Web now going wireless, the race is on to become the Cisco of the mobile world. Mobile-phone operators around the globe are about to lay out tens of billions of dollars to upgrade their systems and the leading suppliers of mobile-phone networks and handsets -- Sweden's Telefon AB L.M. Ericsson, Nokia Corp. of Finland and U.S.-based Motorola Inc. -- are gunning hard for a big slice of that pie. Motorola has even teamed up with Cisco to give it an edge in Internet technology. Glossary: Don't know your WCDMA from your CDMA2000? You're not alone. Here's a guide to wireless-Internet abbreviations. But major technological and geographical shifts are propelling companies outside this long-established trio, such as Nortel Networks Corp. of Canada, NEC Corp. of Japan and Samsung Corp. of South Korea, into the limelight. Significantly, Asia rather than Europe will be home to the first of a new generation of wireless networks that will be able to carry data at very high speeds. "It's going to be a new ball game," says Bertrand Bidaud, director of Asian-Pacific telecom research with Gartner Group in Singapore. "The beauty of it is that you don't know who is going to be the winner yet," he adds. Ericsson's Edge But there is a clear front-runner. Ericsson appears to have skillfully navigated a changing technological tide, which had threatened to undermine its longstanding position as market-leader. Against the odds, the global shift to a new technology seems to actually be strengthening the Swedish giant's position, particularly in Asia. Still, the potentially massive U.S. wireless market remains hard to call and it is too early to proclaim Ericsson the ultimate global winner. Much is at stake. The number of people with access to the wireless Web is expected to outstrip the number with fixed connections within five years. Mobile-phone operators will have to spend huge sums building networks that can cope with that demand. For example, Deutsche Telekom AG's T-Mobil unit expects to spend 7.5 billion marks ($3.6 billion or 3.8 billion euros) building a third-generation network in Germany. Salomon Smith Barney estimates that operators world-wide will spend $80 billion from 2001 through 2003 preparing existing networks for high-speed data traffic or building third-generation networks. In the meantime, the arrival of a third generation of wireless technologies is breaking down the technological barriers between different regional markets. Four different second-generation standards are in widespread use today, but mobile-phone operators around the world are now homing in on just two third-generation technologies. That means competition in the infrastructure market will become increasingly fierce. Third-generation networks should be fast enough for operators to offer high-speed Internet access, multimedia services and even video over a wireless connection, whereas second-generation technology is only really suitable for text-based services. Generational Shifts The prospect of these fancy -- and lucrative -- third-generation services is creating huge technological upheaval. Neither of the two main third-generation technologies are based on the leading second-generation standard -- GSM, or global system for mobile communications. In fact, both third-generation alternatives have evolved from CDMA, or code division multiple access, technology, which is only widely used in the U.S. and South Korea. That plays to the strengths of well-established suppliers of CDMA technology, such as Lucent Technologies Inc., Nortel, Samsung and Motorola. Cisco also supplies wireless Internet software and equipment, but doesn't build mobile networks itself. Qualcomm Inc. of the U.S. also will be a key beneficiary. The San Diego intellectual-property company, which first commercialized CDMA technology, has developed a third-generation version called CDMA2000 that it has licensed to the likes of Lucent and Samsung. But the rise of CDMA technology hasn't delivered a knockout blow to infrastructure suppliers with their roots in the GSM standard. Far from it. Anticipating this technological change in the mid-1990s, Nokia and Ericsson have been longtime backers of an alternative third-generation technology -- wide-band CDMA, or WCDMA, which is often referred to as UMTS. The two Nordic companies teamed up with the Japanese mobile operator NTT DoCoMo Inc., among others, to commercialize WCDMA and they have already had considerable success in persuading their existing GSM customers to use the technology. Talkin' Bout Third Generation Third-generation services* are expected around the globe within five years. Country Anticipated 3G launch Australia 2001/2002 China 2004 Hong Kong 2002 India 2005 Indonesia 2005 Japan 2001 Malaysia 2004 New Zealand 2001/2002 Philippines 2004 Singapore 2002 South Korea 2002 Taiwan 2002/2003 Thailand 2005 Western Europe 2002 U.S. 2002/2003 *A 3G service is defined as being able to offer data speed of more than 384kb/s. Sources: Network operators, Merrill Lynch, Lehman Brothers, WSJ.com reporting Like CDMA2000, WCDMA is based on CDMA technology and Qualcomm charges royalties on both third-generation standards. But Qualcomm favors CDMA2000, saying the technology is easier and cheaper to deploy, particularly for operators with existing CDMA networks. But significantly, the three leading South Korean operators -- SK Telecom Co., Korea Telecom Corp. and LG Telecom Co., all of which currently have CDMA second-generation networks -- are strongly considering adopting WCDMA because they expect it to be more popular globally than CDMA2000. Moreover, Japan Telecom Co., has opted to use WCDMA, along with rival DoCoMo. Ericsson is a primary supplier for DoCoMo, while Japan Telecom is using both Nokia and Ericsson. Head Start in Japan These contracts could prove to be crucial for the infrastructure suppliers, because the Japanese operators will have third-generation services up and running in 2001 -- before their counterparts elsewhere around the world. That should mean that the Nordic companies will gain valuable early experience and customer references. By the same token, Asian handset and infrastructure suppliers, such as NEC, Matsushita Communication Industrial Co., Fujitsu Ltd., LG Group and Samsung Electronics Co., which have longstanding relationships with local operators, also stand to benefit from the early adoption of third-generation technologies in Japan and South Korea, which plans to have new networks up and running in early 2002. Still, the enormous cost of building new networks means that operators in the poorer Asian countries may not move to third-generation systems for several years. And that time lag will give Nokia and Ericsson's rivals in the infrastructure market a chance to fight back. The U.S. market is even more wide open because most American mobile-phone operators are still concentrating on developing the voice market and have yet to really focus on offering data services. Even so, one thing is clear: Ericsson and Nokia will find the U.S. market much tougher to crack than the rest of the world. The U.S. is a CDMA stronghold and many of the operators are expected to opt for CDMA2000 networks supplied by North American concerns. And Nokia lacks a significant customer base in the U.S., analysts say, while Ericsson lags behind Lucent and Nortel in terms of market share. Although Nokia claims to have a "solid market position in the GSM field" in North America, GSM accounts for just 20% of the U.S. market. The relatively weak position of the Nordic giants in the U.S. is in stark contrast to their stranglehold on their home market, where WCDMA is set to rule the roost to the almost total exclusion of CDMA2000. In Europe, both Ericsson and Nokia have already picked up more than 10 contracts apiece to upgrade second-generation networks to provide faster "always on" Internet connections. And Ericsson has won an important third-generation contract in the U.K. from Vodafone AirTouch PLC, the world's largest mobile phone operator. But the big surprise in Europe has been the performance of Nortel, which won a WCDMA contract from British Telecommunications PLC at the expense of longstanding supplier Motorola. Nortel largely missed out on the GSM market, but analysts believe the Canadian company's expertise in fixed Internet networks could help it to become a major supplier of third-generation systems in Europe as well as the U.S. "Our market share is quite small in second generation in Europe," says Todd Etchieson, senior marketing manager at Nortel. But he is optimistic in the light of the BT contract win. "It is a stamp of credibility," Mr. Etchieson says. -- Connie Ling in Hong Kong contributed to this report.