Mobile operators have lost over a quarter trillion dollars in market value since the UK third generation (3G) mobile license auction. The telecoms debt market has dried up. Are the capital markets overreacting, or is 3G reaching an extinction level even for mobile operators? For some, it clearly will. The 1990s saw the proliferation of second generation (2G) mobile operators. This was driven by deregulation, the adoption of a common GSM technology standard, but most importantly, by ready access to receptive public debt and equity markets.

But after all this investment, is anyone making any money? In a capital-intensive, heavily fixed-cost business such as wireless, profitability is heavily driven by utilisation, and superior industry profitability by market share leadership. Given these economics, it is not surprising only a limited minority of the 50 plus mobile operators in Asia are making money. Few operators other than the market leaders and near followers will earn positive long-term returns on capital.

A win for a new entrant thus requires growing faster than the incumbent. For example, Optus Mobile's profitable growth in Australia has been powered by a mix of branding, innovative tariffing, and superior channel management that has aggressively taken share from Telstra MobileNet, shifting its relative marketshare from 50%-70%. But chasing share can be a hollow victory if improperly measured. While Hutchison has displaced the former HKT mobile business in subscriber marketshare in Hong Kong, it has been chasing some of the least valuable customers. Its revenue and profits remain below those of its rival.

But the economics of network-based mobile operators in 3G are likely to be even more challenging than in 2G. Building a 3G network will be up to 50% more expensive than a 2G network, and more fixed-cost in nature due to higher spectrum costs, the need for more base stations, and a high base station unit cost. As a result, 3G operator's breakeven will be higher than that of 2G, potentially as high as 25%-30% marketshare.

There are some dramatic implications. There is room for two-at a stretch, three-profitable 3G network operators in most national markets. As a result, leadership becomes paramount for a network-based operator.

In the race for 3G leadership, an existing scale 2G network operator with an established customer base, brand and distribution channels is significantly advantaged. Conversely, a greenfield 3G operator will be severely challenged. It was not irrational that markets went south when participants bid billions of dollars for each of six 3G licenses in Germany.

In this context, successful mobile operators will be those who seek to redefine their economics by reconfiguring their entire business model. The key design principles are: deconstruction and focus. The next few years will see considerable vertical and horizontal deconstruction of the traditional mobile operator.The size of 3G investments, their technology risks and resulting higher minimum efficient scale of a mobile network will drive the separation of traditional mobile operators into asset-intensive network companies and more nimble customer relationship companies. In some markets, this is already emerging with the entry of so-called "virtual mobile network operators" or MVNOs.

Operators will also consider further horizontal specialisation in the customer facing business. With over 13 million primarily young subscribers exchanging e-mails, downloading music and ring tones, and playing interactive games on the Web, NTT DoCoMo's iMode has dominated the mass market Internet in Japan. Other operators will potentially focus on the higher usage and high revenue generating business and corporate customers. Japan's No. 2 mobile operator KDDI is tapping this segment. KDDI's customer base spends more per subscriber than NTT DoCoMo's, even with the additional data revenues generated by iMode.

The economics of 3G suggest that while the capital markets response has been directionally correct, it has been precisely wrong.There will be real casualties of the 2G and 3G war, but the ultimate market leaders remain undervalued. It is up to mobile operator management teams to develop and execute on the increasingly differential strategies necessary to keep them on the right side of this divide.