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If the first step to recovery is to admit you have a problem, maybe there's hope yet for Europe's telecom industry. Last week the Spanish phone company Telefónica and its Finnish counterpart Sonera suspended their Group 3G joint venture, each writing off more than €4 billion on their investment in new "third-generation" mobile networks for Germany and elsewhere. Like nearly all the big European operators, they paid a lot for 3G because they expected a lot: tapping into higher bandwidth, 3G mobiles were supposed to offer everything from high-speed Internet access to streaming video, allowing telecoms to keep revenues flowing even after the market for plain old phone calls became saturated. But the technology has been slow to develop, and operators have lost investor support for their once-lavish spending. It's a measure of how few people believe in the 3G dream anymore that beaten-down telecom shares rose sharply the day Telefónica finally said "No más."

The future just isn't what it used to be. Investors and consumers alike have gotten the message: Forget all that stuff about "the Internet in the palm of your hand" — mobile phones are for talking, and maybe some short texting on the side. Those vaunted wap handsets turned out to be an unusually complicated and slow way to get a football score. And for most of us, GPRS — the data-friendly wireless system the boffins call 2.5G — remains just another acronym. (The consultancy Analysys reckons only one-third of people with GPRS phones use the new services.) "Even though we've had these mobile data networks up for a couple of years," admits Kent Thexton, chief marketing and data officer at the British network mmO2, "there hasn't been that much to do on them."

The operators want badly to change this, 3G or no. Gearing up for Christmas, the wireless industry has begun a big push on a new range of whizzy phones that can take, send, and receive color digital photos. Holiday snaps don't sound especially revolutionary, but to hear the networkers talk, multimedia messaging is just about the biggest thing since rechargeable batteries. mmO2 chief executive Peter Erskine even tempts fate by invoking that dreadful New Economy buzzword, killer app.

Pure hype? Maybe not. Wireless operators are looking hopefully to Japan, where Vodafone's subsidiary J-Phone already has more than 40% of its subscribers using camera phones. And this wasn't the result of any giveaway subsidies on the handsets. "We made them among the most expensive phones in Japan," says a Vodafone spokesman. Of course, not all Japanese technology crazes can travel west — think electronic toilets — but once you get a well-designed camera phone like Nokia's 7650 in your hands, it's easy to understand the appeal.

Unlike the old WAP, which did things you could also do on the Internet and mostly did them poorly, picture messaging is genuinely new and seems to work well. But the more important point is that for the first time, it's possible to see cell phones as a really visual medium. The novelty value of being able to take a picture of yourself and send it to your grandmother via e-mail might wear off quickly. But the wireless operators aren't really out to turn people onto photography. They want to get us used to the idea of downloading, swapping, and paying for images — and, not long after, short streaming video clips — on our phones. Harris Jones, chief executive of Deutsche Telekom's T-Mobile U.K., which in June became the first British operator to launch multimedia messaging, expects that picture viewing capability will be nearly universal in new phones by spring.


So what, exactly, will people really want to see on a portable 5-cm screen? "Lingerie," suggests T-Mobile's Tube station ads. That may just be a bit of mildly naughty fun, but a 2001 survey of users of i-mode, the popular Japanese wireless Web service, found that 77% of those aged 20 to 40 received e-mail from porn sites on their phones. Already in the U.K., Playboy has been busy putting together deals with networks to provide, ahem, content. "In the early days on the content side, I think [sex] will be a big, big driver," says Orange executive vice president Richard Brennan. Operators are quick to insist that parents can block kids' access to this stuff, but as with the Internet, there's a lot the networks can't control.

Of course, multimedia GPRS isn't just about porn; it's games and gambling and news and, yes, even business applications. But even if the next wave of phones does live up to these flashy promises, will it be enough to revive the wireless sector's business performance? On the hardware side, Nokia and Ericsson need GPRS applications like camera phones to catch on, or there may never be a demand for the even greater data capacity of 3G networks, for which they sell the infrastructure equipment. Both companies will probably do well selling camera phones. But they are also going to face a lot more competition in the handset market, predicts T-Mobile's Jones. We'll spare you the technical details, but the point about GPRS is that it makes handsets, in terms of receiving data, less like phones and more like computers. "PC players, PDA players, games makers — all these guys suddenly have the same underlying technology," says Jones. Already, low-cost Asian manufacturers are getting in on high-end fare, like color screens.

For the operators, the question is whether the market can grow fast enough to get the data (as opposed to the relatively cheap voice) business up to their targets of around 25% of revenues by 2005 or 2006. (Even with the mass success of text messaging at 15¢ a pop, most get just 10% to 15% of sales from data.) This may prove harder than they hope; at the moment, a camera-ready Ericsson from T-Mobile runs ?317, with a ?32 monthly subscription for multimedia services on top of the usual bill for voice minutes. In an uncertain economy, how many people will pay that much? Prices will almost surely have to come down to bring mobile multimedia to the masses, and with four or five competitors in many European markets, operators may find they have little more pricing power in data than they do in voice. "[Multimedia messaging] may prove popular, but I think people are going to take it for granted," says Iain Daly, an analyst at Charles Stanley in London. The operators are convinced they've got something that people will both want and pay a premium for, and they'd better be right. Because if this doesn't work, 3G really is dead.

• PAT REGNIER/London
• Europe's wireless players look to camera phones and multimedia messaging.