After the flurry of high profile auctions of third generation spectrum across Europe in 2000, 3G is about to hit the headlines once again. 3G services are already a reality for some users in Japan and Korea and later this year 3G networks will start being switched on by operators in Europe.

Sonera, the Finnish operator, is the first European operator to have set a formal date with the launch of its service on September 26. A number of other operators, most notably Vodafone and Hutchison 3G, have scheduled roll-outs in some of their key markets in the second half of this year with more planned early next year.

But exactly what a 3G launch means is still far from clear. Operators are tight-lipped about how extensive their network coverage will be on day one out of fear of revealing too much to competitors. Those that are rolling out their networks are concentrating on urban areas in a bid to achieve maximum population coverage with minimum cost outlay.

However, there are growing fears that any significant roll-out of 3G services could be delayed well into next year and perhaps beyond as operators stall the build out of their networks, preferring to rein in spending and deliver shareholders much coveted extra free cashflow.

For some, this could prove a costly decision as new entrants such as Hutchison 3G, desperate to make their mark, seek to snatch market share. According to companies such as Nokia which are building the 3G networks for operators, it is the new entrants such as Hutchison 3G which are being most aggressive in rolling-out their networks.

But many, such as MMO, the mobile operator which was spun off by BT Group last year, are holding off their 3G launches until the middle of next year, arguing that the crucial 3G-compatible handsets will fail to materialise in any great numbers before then.

While some 3G handsets will be delivered this year the numbers are likely to be insignificant, most market analysts argue.

Ben Wood, senior analyst at Gartner, the technology research house, predicts 3G handsets will start emerging in "major numbers" only in 2004. Gartner is predicting 50m 3G compatible handsets will be sold in 2005, accounting for around 10 per cent of all handsets sold.

Widespread sales of 3G-compatible handsets are essential in driving take-up of 3G services, not least because many of the key services on to be marketed by operators will require users to know someone else with a compatible phone.

Across Europe, data revenues today account for around 10 per cent of average revenues per user although most operators hope to increase this to 25 per cent by 2004. Multimedia messaging (MMS), which will allow users to send still pictures and eventually moving video clips between phones, is expected to account for much of this growth.

Handset manufacturers say their MMS phones will be able to send messages to the handsets of rival operators. But there are concerns in some quarters that different handsets of assorted manufacturers will not be able to communicate with each other.

Eli Reifman, chief executive officer of Emblaze, which develops technology designed to enable video delivery on mobile phones, believes handset manufacturers have a lot further to go on multi-media messaging. "Interoperability between handsets is not there yet," he says. It could take another two years before multi-media messaging will work flawlessly, he predicts. Such technological problems could delay take-up of data services and therefore force analysts to put back further the date when they expect 3G services to start having a meaningful impact on revenues.

Competing 3G technologies such as wide-band CDMA (W-CDMA), the favourite technology for Europe, and CDMA2000, the preferred US technology, also risk confusing consumers. In the short-term at least - until suitable dual band phones are launched - some travellers will need two handsets to access 3G services when overseas.

Such teething problems have led many operators and analysts to scale back their expectations for the early success of 3G. The UMTS Forum, the umbrella organisation that represents most of the global telecoms operators and handset manufacturers, recently cut its short-term revenue generated by 3G services by 17 per cent through to 2004 - a total reduction of $10bn.

Others are also scaling back their short-term ambitions. Sonera recently delayed by a year its expectations of any significant revenues from 3G, to 2004. Indicative of the challenge facing operators and handset manufacturers, Goldman Sachs has also lowered its expectations for the mass market take-up of 3G services at Vodafone. It now expects these to have a meaningful impact on revenues only in 2005.

Early signs of popularity of 3G services in markets where 3G networks are already up and running are hardly more encouraging. In Japan, where 3G services were launched by DoCoMo late last year, the number of 3G subscribers has only just passed the 100,000 mark partly, many analysts believe, because Japan's 3G network, focused on five key cities, only offers limited national network coverage. Meanwhile i-mode, its internet service which runs on an older network, has been a runaway success.

The lessons, according to analysts, are that consumers are less excited about technology and far more interested in what they can actually do with their phones. This has led many operators to de-emphasise the importance of 3G technology and instead led them to focus attention on services. Behind the scenes, mobile operators are said to be busy negotiating content deals, fearing a repeat of the fiasco over wireless application protocol, (Wap, the wireless internet standard which ran on 2G networks). This failed to take off, mainly due to limited content and slow access speeds.

But this time around, mobile operators - some of which such as Vodafone spent close to £15bn in acquiring 3G licences - desperately need 3G services to work. A failure could mean they never regain their status as growth stocks.

As the key mobile markets globally reach saturation point, there is limited upside for operators to generate growth by adding new subscribers. And while voice calls on mobiles may still be growing as calls continue to migrate from fixed-line networks, increasing competition means that revenues from voice are at best likely to remain flat, according to most analysts. Indeed, the UMTS Forum predicts average voice revenues per user will total just $12 a month by 2010 down from current levels of $30.

Yet one of the mobile phone industry's biggest problems is that is has been guilty in the past of raising both consumer and investor expectations too high. This factor is undermining investor confidence in management's view of the future.

Over the long-term, few doubt that 3G services will take off. Despite lowering its short-term predictions, the UMTS Forum still $233bn will be generated by new 3G services in 2010. "This is a long term business, it will not happen overnight says Bernd Eylert, chairman of the UMTS Forum. A similar projection, made last year by US-based Telecompetition, appears in the chart, see left.

The question for investors is how long they are willing to wait. With little near-term visibility on revenues from 3G services, many investors are assuming the worst predicting minimal uptake of 3G services over the next few years. Investors will probably demand much stronger evidence that consumers are willing to pay for 3G services before they are willing to give back mobile operators their crowns as growth stocks.

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