Europe's telecom sector, not long ago the industrial and economic leader of the global mobile revolution, has yet to shake a depression that appears almost certain to persist through most of this year. Many telecom operators here are still struggling to climb out of the financial holes into which they fell after committing exorbitant auction fees to pay for third-generation (3G) wireless-network licenses.

"Many telecom operators stopped investing-not gradually, but rather sharply," Didier Lombard, senior vice president of France Telecom, recently acknowledged. It's almost as if the operators "have stopped breathing."

That has meant a lack of orders for components and equipment in the telecom infrastructure markets, particularly in the wireless world. Spending on wireless infrastructure equipment is estimated to be down 10 to 15 percent on a global basis this year. That hurts both chip companies and equipment manufacturers catering to the comms market.

At some point Europe's operators "will have to start breathing again," Lombard said, "because the demand from consumers continues to grow." As the market waits for the telcos to exhale, the open questions are which segments are likely to see renewed investment, and how much.

But there are a few clues.

One bright spot in the European telecommunications market is consumers' growing appetite for high-speed Internet connectivity. Many European operators today "have decided to take a no-compromise approach" in making digital subscriber line connections available to as many consumers as possible, said Frederic Haine, general manager of Motorola's Networking and Computing Systems Group, Europe. Haine estimates a 50 percent growth in volume shipments for DSL equipment this year.

Indeed, ubiquitous availability of high-speed links is central to France Telecom's road map for recovery. "ADSL has been available in big cities and towns in France. But now we will take care of everybody, everywhere," promised Lombard.

As for its fixed-line network, where Lombard said France Telecom has "done nothing" of late in terms of investment, the company now is looking to build enough intelligence into the network infrastructure to allow seamless bridging between wireline and mobile nets.

Aside from building enough access nodes for DSL connections, operators are investing in incremental improvements in their service offerings. Examples of such evolutionary steps are services that allow consumers to receive Short Message Service text messages on fixed phone lines as well as mobile handsets or that let them transfer a contact list created on a handset to a fixed-line phone.

The key is "to offer simple services that require no intervention on the part of our customers," Lombard said. France Telecom plans to field video services, such as videoconferencing, starting in July.

"Telecom guys today are making much more tactical, focused investments on a quarterly basis, rather than strategic investments," observed Motorola's Haine.

That shift in investment strategies affects the way component and technology suppliers design products and manage their inventories. Because operators are placing orders for necessary equipment with particular features in a very short time span, equipment vendors are being asked to "serve the demand on the fly," said Haine.

Effectively, that makes it impossible for semiconductor companies to react to demand by developing ASICs, which require long turnaround times. So companies catering to the telecom market are resorting to programmable platforms based on DSPs and reconfigurable computing fabrics.

"You either take an order or lose an order," said Haine.

Europe's substantially slower transition to the 3G wireless network continues to disappoint both chip vendors and equipment suppliers. But many semiconductor companies claim that, with or without 3G, the silicon content in mobile handsets is on the rise. Jean-Philippe Dauvin, STMicroelectronics' chief economist, observed at the company's recent analysts' meeting that the bill of silicon materials for Nokia's 3650-equipped with a camera, Bluetooth module and multimedia processor-amounts to about $60. That compares with a bill of silicon materials of only about $24 for Nokia's 3410 basic handset.

Particularly in the areas of CMOS imaging sensors and multimedia application processors, the race is on among chip companies vying for design-in opportunities in new generations of multimedia-centric mobile handsets. A fast take-up in recent months on camera phones for European 2.5G networks has network operators and chip companies confident that they're on the right track in their pursuit of multimedia-centric solutions.

Meanwhile, Europe's 3G wireless networks remain in their infancy.

How many subscribers?

Ed Candy, technology director at Hutchison 3G, claimed that his company remains confident in its five-month-old 3G business but refused to disclose the number of subscribers for its service. Hutchison is building 3G networks from scratch in the United Kingdom, Italy, Sweden and Hong Kong and is the first commercial 3G-network operator across Europe.

"Unlike some in the industry who see the 3G business as somewhat of a gamble, we launched the [3G] network with a long-term business plan, driven by clear trends," said Candy.

Among the converging technologies enabled by 3G networks, he said, "video is the key. The thrill is in the immediacy." Although the 2G market growth so far has been driven by new handsets, it will take "both new phones and what's on the screen" to establish the 3G market, he said.

Asked what Hutchison has learned from its own 3G network rollout, Candy said, "Random access to the Internet does not create a pleasing experience to consumers with 3G mobile phones, just as, in TV's early days, showing an opera via a camera fixed on a stage was unacceptable to many TV viewers." For Hutchison, that means investing in construction of its own production facility to manage content; 3G content "needs to be specifically developed for 3G networks," Candy asserted.

Many in the industry agree that the transition from 2.5G to 3G networks is inevitable, because operators today are already reaching their capacity limit. But when the discussion turns to market demand for wireless-network infrastructure equipment, the industry appears to be on far shakier ground. After the initial installation of first-generation 3G basestations, deployment of second-generation equipment remains sporadic.