On a recent trip across Europe to visit some of the major operators and manufacturers of the blossoming cellular industry there, I was asked to describe the state of the industry in the United States. Of course I spoke of the great advancements we were making, but in comparison to the Europeans, one could see the United States is a few years behind.
This is especially true if one looks at the three essential ingredients for commercial wireless growth anywhere in the world-adequate coverage, reasonable pricing and the advancement of quality service.
If a country were attempting to create an emerging industry, the existing U.S. commercial wireless industry would be a good model of what not to do to bring new and exciting services to market quickly and efficiently. Start by not selecting a single technology standard, but rather a cadre of proprietary radio technologies-then foster a standards competition so fierce that some call it a “holy war” and speculate which one will “win” the battle, thereby wasting a tremendous amount of industry resources to address the problem.
Next add a regulatory process that takes more than five years just to identify the market structure and related available spectrum. Add a touch of suspicion-from the most consumer-oriented populace in the world-that there are health hazards associated with the service. Finally, throw in the cost of buying the spectrum at auction after most potential players have completed extended business cases that already include extraordinary costs like relocating thousands of microwave links from the designated spectrum, or having accelerated build-out requirements. This formula certainly makes it more difficult to reach the dream of bringing personal communication services to the mass market.
In spite of all that, I believe the commercial wireless market in the United States is bountiful with opportunities for those with the properly prepared business plan, as long as there is no further use of the poor marketing and operational practices widespread within the industry today. The market strategy must have as its eventual goal the residential or consumer market. By the end of the decade, many changes must be in place to foster these opportunities.
Repetition of the existing business-focused cellular market model of high prices, poor technical and operational processes and a marketing process that is more margin-added than value-added must be avoided, no matter how attractive the margin or market share might be initially.
Price reduction should be real and not merely a reflection of lower usage. The price per minute should truly come down. Prices should range from $40 for rudimentary service (essentially the cost of local wireline service plus a modest premium for mobility) to $100 for feature-rich, business-oriented, wide area service, as a total monthly cost.
Unsubsidized handsets should start at $150 with added functionality at a higher price. Coverage should be on a national scale, starting in urban and suburban areas together, followed by rural systems. For a pricing example, look at Bell Atlantic’s recently introduced TalkAlong service priced at $14.99 per month and $.39 per minute within a local zone.
The new marketing model must reflect the efficiencies of other successful, consumer-oriented industries. The increased use of major retailers (e.g., Radio Shack, Kmart, etc.), product fulfillment houses offering simple, easy-to-use directions facilitating immediate use of both the service and handheld devices, telemarketing and direct mail over direct sales, and finally, a revamped customer billing service that focuses on customer needs and wants including itemized billing and caller pays.
With the emergence of telecom giants like AT&T Corp., Sprint Corp., cable companies and others in wireless, expect to see packaging of long-distance, cable and local wireless services with considerable discounts for each. However, also expect the “slamming” or stealing of customers-much like the current long-distance wars. National promotions will be the norm.
The types of wireless products and services will eventually mirror what is available in the wireline world to a large degree. Home services with a home base station and handset allowing mobility up to a couple of miles from home will find a market. Wide area services with regional, then national roaming are probably the first area where operators will focus their attentions. Finally, in-building services that cover single buildings only, numbers of buildings, or connect to wide area services will be in demand. In fact, connectivity between these sets of services will offer some differentiation between operators.
More product differentiation will come from enhanced service features such as personal numbering, ubiquitous and integrated wireless data with voice, tiered pricing and other intelligent network services allowing controlled accessibility of calls. Voice mail, electronic mail and information services are growing additional enhancements to what will be a commodity service by the year 2000 if stripped of these attributes as pricing becomes a non-issue.
The digital vision
The vision service for PCS will be the vision service for all digital cellular and PCS networks-whether at 800 MHz or 1900 MHz. By the end of the decade, people will not be able to differentiate between a cellular company of today and a PCS company of tomorrow because although they will have different frequencies, the driving technology will be digital and the subsequent services will be robust and the service differentiated by features and functions. They will offer the same set of services, price points and coverage. Dataquest Inc.’s PCS vision for the year 2000 includes:
inexpensive pocket phones starting at $140
phones weighing less than 1/2 pound
low power (less than 1 watt)
battery life of at least eight hours talk time and 24 hours standby
secure and private service
personal numbering
near wireline transmission quality and price for basic service starting at $40 per month, total
integrated data capabilities at speeds of at least 64 kilobits per second
interoperability with the public switched telephone network and other major wireless networks.
Digital cellular and PCS are the future for commercial wireless communications in the United States. Next-generation digital cellular systems provide the solution to the limited channel capacity of the analog systems and enable the creation of new voice and data services.
Analog cellular
In the American cellular operations of today, American Mobile Phone System, or AMPS, has been the dominant standard-but an analog standard is not where the tremendous future growth lies. Digital technologies offer too many additional quality attributes and features.
An example of this is in Japan where the Japanese Minister of Post and Telecommunications will progressively ban new analog cellular phone subscriptions starting in April 1996, while doubling the capacity of digital cellular formats starting this October. There apparently is the prospect of forcing the 3.45 million existing analog users in Japan to digital sometime in the future. Dataquest believes that any arbitrary mandate will not work in the United States, but market forces will approximate the same trend toward digital technology.
On the other hand, analog cellular will continue to exist in the United States past the millennium. Much of today’s analog cellular networks infrastructure will continue to have a place in the future, either as the primary service in rural service areas where capacity is not a problem and may never be; or a backbone system for niche subsegments of the market such as vehicle location, or as Motorola Inc.’s Jack Scanlon stated recently at an industry analysts meeting-“the future `poor man’s cellular’.”
Service operators
I look for four to five large, national operators-each with either a PCS-only or a combined cell
ular (800 MHz) and PCS (1900 MHz) nationwide footprint and a portfolio of services and price plans directed at multiple markets. Winners in this market must have characteristics that enable long payback periods and can combat fierce competition. The following attributes are necessary to compete: large-scale financial ability, wireless technical and operations expertise; large existing customer bases; existing network infrastructure to leverage from; and finally, national branding and marketing assets. There will be at least four national operators with competing services. The following three will definitely be contenders:
AT&T Wireless Services
AT&T Wireless has all these attributes in abundance. I see it as the eventual top winner in the service market in the United States by the year 2000. It adds to its McCaw Cellular Communications Inc. properties (with more than 16 percent of the U.S. cellular market) by getting 21 of the new wireless PCS licenses. The AT&T Wireless footprint extends to most major cities across the country and will sell services under the AT&T brand, the best in the business. The PCS licenses alone have a potential population of 107 million people.
Sprint Telecommunications Venture (STV)
Sprint and three cable companies, Tele-Communications Inc., Comcast Corp. and Cox Cable Communications Inc. formed a new venture called WirelessCo. WirelessCo led all PCS auction bidding by winning 29 out of 51 licenses. It will serve a population of 150 million people. Add its affiliations with pioneer’s preference winners American Personal Communications and Cox Cable and it has 31 licenses nationwide. They have selected Code Division Multiple Access as their technology choice for the PCS operations, with the exception of APC which chose a PCS 1900 solution. Sprint is divesting its cellular operations due to severe overlapping with new PCS license serving areas.
I still have concerns about a traditional long-distance carrier culture working with the faster moving and heavily criticized cable television culture. So far there seems to have been the right compromises between them-especially the choice of CDMA, a better technology for cable networks. Additional cable partner agreements should strengthen STV’s potential universe of cable households to well more than 40 percent.
PCS PrimeCo L.P.
PCS PrimeCo-the Bell Atlantic Corp., Nynex Corp., AirTouch Communications Inc. and U S West Inc. venture-is a marketing and service provision partnership. The entities will retain control over their cellular businesses, but will coordinate all product development, marketing and branding activities through a central management company called Tomcom, of which each company will own 25 percent. The goals of the alliance are to:
1) develop a strong national partnership for wireless services;
2) establish a national brand with seamless coverage;
3) improve speed of products to market;
4) enable the economies of scale necessary to compete on a national level in both cellular and PCS; and
5) bid on PCS licenses to fill national coverage gaps.
The partnership will combine 108 million pops, 4 million subscribers and 15 out of the top 20 markets in the United States. In addition, PCS PrimeCo won 11 licenses covering 57 million people to add to its cellular properties. PCS PrimeCo spent $1.1 billion in the PCS auctions.
Unlike some other recent joint ventures that have soured, I think this one will work because the goals are the same and the heritage is similar. With all the companies coming from a regional Bell operating company origin, they speak the same language plus they share a cellular company culture. However, they will have to work hard to achieve a national brand that will compete against AT&T Wireless and other potential players.
Besides these three major players there will probably be two more national operators. A Global System for Mobile communications-based marketing partnership is a possibility. Omnipoint Corp. and PacBell Mobile’s declaration to create a way for their customers in New York and California to roam in each other’s territory could be the start of a GSM partnership. Staying regional in this marketing arena is a death knell. Just as likely will be a CDMA-based consortium of designated entity licenses. More than five national operators will not be economically feasible. Look for smaller players to align with one of the big players mentioned above.
Selecting a multiple access standard in the United States has become a nationalism-driven battle between the emerging U.S. market and the established European market.
As elsewhere in the world, in order to be a big winner in commercial wireless services in the United States, an operator must have a national presence. To achieve this, the operator must have large volumes of easy-to-use handsets with comparable technology availability from a variety of sources. The simplest way to reach this goal is to have a single technology standard, much like the GSM advocates have in Europe and elsewhere. However, this will not happen in the United States.
The Federal Communications Commission in 1990 formally introduced the debate over multiple access technologies in the form of a Notice of Inquiry for docket 90.314, the personal communications services docket. Since that time there have been more than 250 FCC-sanctioned experiments of these technologies by telcos, cable companies, interexchange carriers, cellular companies, entrepreneurs and others. Early in the process I began speaking with leading, world-recognized radio technologists about their thoughts regarding these common air interface standards. If there is one thing that I have continually believed since 1990, it is that there will be more than two mainstream multiple access technologies for two-way commercial radio services in the United States-with TDMA and CDMA leading the pack.
Let’s be clear on something else. CDMA will prove itself commercially as a viable multiple access standard in the United States and elsewhere during the next year or so and it will grow to be one of a few dominant standards in the country by 2000. CDMA should be incorporated into the future design considerations of most American wireless operators either as a primary use vehicle or to be addressed as an interoperability issue to be resolved when roaming across networks that are not CDMA. The markets will continue to drive the need for a technical/operational solution. Once PrimeCo/Tomcom, Sprint TV, GTE Corp. and others chose CDMA for their cellular and PCS networks, it became a fixture.
Given AT&T Wireless’ decision to use the North American TDMA standard (IS-54/136) for its cellular/PCS national footprint, it too became established. It will be around for as long as AT&T Wireless is behind it, starting with more than one million subscribers by end of 1995.
Digital cellular telephones based on Global System for Mobile communications technology represent the large majority of digital cellular handsets on a worldwide basis. GSM is the world leader today with more than 138 members of the Memorandum of Understanding (MOU) worldwide. PCS 1900 is the upbanded GSM solution picked by a few big regional players to date.
Standards bodies, the FCC and CEOs take heed, it is time to resolve the interoperability concerns around a multiple standard environment, or the entities you work for won’t need your services as they fail to survive the crush of competition!
Dataquest recently studied U.S. suppliers of cellular infrastructure. Table 2 shows the revenue market share for the top players, as well as the standards they support.
Looking ahead
Going from the theoretical to the practical, the next steps for the cellular/PCS operators are to build out their networks and create efficient marketing organizations. Acquisition is a key word as they seek to acquire additional financing, cell sites, agreements for infrastructure equipment and handsets, new phone numbers, and finally
, new customers.
I have a major concern as we move closer to the marketplace with cellular/PCS. As stated above, many of these current and new licensees have had to add extraordinary costs to the business cases they prepared during the past five years. Costs like microwave relocation, auctioned spectrum and the creation of revamped marketing operations. Conversely, they must hit low price points of less than $40 per month to penetrate a demanding American consumer market while meeting the vision of personal communications to a large degree.
My question is: Can any but the four or five national operators ofthe like of AT&T and Sprint survive what re likely to be seven to 10 year payback periods?
Even by addressing the avove market and technical challenges early, I think some players will fail as the competition gets rough. The smart ones will focus on what the identified consumer wants and needs. The smart ones will thrive.
John Ledahl is director and principal analyst of Wireless Programs and Personal Communications North America at Dataquest Inc.
