3G is coming to Russia, but the telecom giants are unsure just how big a market exists here for high data-capacity communications technology.

Russia's mobile phone operators are gearing up to offer advanced third-generation (3G) services to their GSM customers, but real demand for the service may be too sluggish to insure profitable operations, industry players say.

With the Communications Ministry expected to announce a bid for 3G licenses later this year, Moscow mobile operators say the success or failure of the new standard in Russia will primarily depend on demand for the new service.

"It is difficult to estimate the market demand for 3G," said Sergei Avdeyev, vice president for network development at VimpelCom, Moscow's No. 2 cellular operator using the GSM standard.

He added that VimpelCom is currently running a trial 3G network, which does not require a license. "We're doing it to better understand the standard," he said.

Third-generation wireless promises data-transfer rates that would allow bringing CD-quality music, video-conferencing, or complicated business applications to mobile devices such as cellular phones.

But operators are unsure whether these services will be in demand on a mass scale.

"This technology is very expensive to introduce, and there should be significant market demand for operations to be profitable," said Kirill Barov, director for network maintenance and development at Moscow Cellular Communications. No market research is available at the moment because marketing specialists don't yet have sufficient knowledge of 3G services, he added.

"Some services are pretty straightforward, such as sending e-mail or Web-browsing on the phone," Barov said, "but others, such as multi-media or stream video, are not."

"There is no ‘killer' application for 3G, such as SMS is for traditional GSM," Avdeyev said.

Some operators are concerned that most 3G applications are designed primarily for fun and entertainment and may not generate substantial demand from corporate clients.

"For our company, the biggest revenues are generated from corporate clients," said VimpelCom's vice president for network development. "I am not sure that the business community is ready to pay just for fun," he added.

But if the market is still capable of generating significant demand for 3G, other obstacles, however significant they might seem at the moment, would be overcome, insiders say.

They are not discouraged by the lack of handsets for the new technology. "This has a precedent, because when GSM mobile services were being launched, there were no handsets either," said VimpelCom's Avdeyev. "They'll arrive soon, maybe by the end of this year or early next year at the latest."

Meanwhile, the Communications Ministry is considering 3G experience of other countries and is preparing to conduct research on trial 3G runs by Moscow operators within the next two months.

A decision on issuing 3G licenses is expected in March, according to Andrei Skorodumov, executive director of Russia's National Association of Third Generation Telecommunication Networks Operators.

"The Ministry should do a significant job preparing for 3G launch in Russia," he said, adding that another problem likely to arise in Russia is the shortage of frequencies. "This problem cannot be resolved in haste," he said.

So far, there have been no indications whether the licenses will be given on an auction basis or based on the results of a contest. Similarly, there have been no predictions as to how much a licensing fee might be.

Experts predict that the cost of building a 3G network in Moscow could total $150 million, and the existing operators could raise this sum without substantial outside investment.

"This is not beyond the capacities of the Russian telecom industry," said Charles Jonscher, president of Central Europe Trust Co. Ltd., an international investor in the telecom industry. "Moscow is a good prospective market." He added, however, that additional funds would be needed to build up 3G in Russia's regions.

Operators say the money could come from the stock exchange. "Russian operators have access to international financial resources," said VimpelCom's Avdeyev.

Industry insiders say that not only the license fee, but also the period over which the amount would have to be paid, would serve as a crucial determining factor, adding it is unlikely licenses might be issued for free as they had been in some countries.

"Operators understand that the state will need money to vacate frequencies for 3G operators and therefore licenses cannot be issued for free," Skorodumov said. Ideally, there should be a balance between the fee itself and the pay period, which could be extended to several years, he added.