Seventy years ago, the mobile radio industry was born when the Detroit Police Department installed the first one-way radios in their squad cars. Today there are approximately 19 million two-way radios in use in the United States, including 3.1 million specialized mobile radio units.
Cellular telephone companies, by comparison, are the new kids on the block, having only been in business for 25 years. The success of cellular service is undeniable as the industry surpassed 55 million subscribers by the end of 1997.
While these two wireless technologies serve different markets with different applications, neither one exists in a vacuum. Over the past decade, the fast-paced cellular industry has influenced mobile radio products and services across the board-especially when it comes to handset size. Since the first portable cellular handsets appeared in 1990, cellular telephone manufacturers have reduced dramatically the size of the phone and battery to create pocket-sized phones.
Yet as recently as 1996, the majority of two-way radios sold were vehicle-mounted units. High-performance portable units took the lead last year, accounting for more than 60 percent of new radios sold.
The popularity of cellular telephone service also compelled many SMR operators to offer interconnected mobile services and pricing plans. Following cellular’s example, the interconnected service is billed on an airtime basis, in contrast to the flat monthly rate traditional SMR carriers charge.
However, in 1997 SMR operators struck back with a combined dispatch and telephony service, demonstrating the new kid on the block may need to learn one very old trick to thrive in the competitive wireless environment.
The rise of Nextel
Until 1997, the SMR industry remained more of a follower than a leader. No mobile radio operator emulated the cellular model more closely than Nextel, the largest U.S. SMR operator. Founded in 1987 under the name Fleet Call, the company operated traditional analog radio systems in the 800 MHz band.
To differentiate its service, Fleet Call filed for a waiver before the Federal Communications Commission to enable the company to build and operate low-power (i.e. cellular) base stations within the footprint of existing SMR licenses. After the waiver was granted in 1991, Fleet Call aggressively began acquiring independent SMR operators across the United States, establishing the broadest footprint among any wireless operators.
Under the new name of Nextel Communications Inc., in 1993 the company introduced the first commercial digital U.S. mobile radio service. Although Nextel’s initial service offering was premature-the network reliability and voice quality proved unacceptable-the company’s fortune changed in 1996 with the introduction of Motorola Inc.’s “reconfigured iDEN” (integrated Digtial Enhanced Network)*technology.
In 1997, the number of Nextel’s digital subscribers skyrocketed, rising from 300,000 to nearly 1.3 million. With more than 370,000 new subscribers added in the first quarter of 1998, this remarkable growth has continued.
Nextel’s digital service represents a significant departure from traditional SMR service. The handsets look and perform much like digital cellular or [personal communications services] phones, and Nextel’s spectrum holdings allow the company to offer wireless service across most metropolitan areas. By comparison, most SMR operators typically offer dispatch services in a single market.
Virtually all of Nextel’s digital customers use the mobile telephone service, compared with only 15 percent interconnect use among the analog SMR user base. Nextel’s calling plans are distinguished from other wireless carrier plans by the lack of roaming fees between markets and by the size of their respective bundles of minutes.
Nextel’s competitive edge
To distinguish itself from cellular and PCS operators, Nextel implemented its “Direct Connect” feature, which is simply a digital version of “push-to-talk” dispatch-the service that mobile radio operators have provided for many years.
Nextel’s Direct Connect calls are circuit-switched simplex calls routed through Nextel’s switched network, thus avoiding landline charges and providing the company with added pricing flexibility. Since most service plans include unlimited Direct Connect airtime, new users are learning to reduce their wireless service bills by replacing cellular calls with Direct Connect calls. Thus customers are using the Nextel phone much like a wireless intercom for internal communications purposes.
Washington, D.C.-based The Strategis Group estimates that while only about one-third of Nextel’s users have a mobile-radio background, Direct Connect calls accounted for more than two-thirds of Nextel’s digital network traffic in 1997.
Nextel’s tremendous customer growth in the past 18 months demonstrates the newer cellular and PCS carriers may need to offer dispatch services. More than half of Nextel’s digital customers are former cellular telephone users, and to compound the damage, Nextel’s service has attracted the most profitable and stable segment of the wireless market-business customers.
The Strategis Group defines business customers as wireless users who report that more than 60 percent of their calls are business-related. The cost advantage of Nextel’s service to business users can be substantial. Last year, Nextel generated average monthly revenues per subscriber of $66, compared with $103 for business users of cellular telephone services.
Cellular/PCS reaction
Nextel’s example has convinced several cellular/PCS carriers and equipment manufacturers that dispatch communications has broad appeal, particularly for heavy wireless users. These carriers have responded with a steady drum beat of new product and service pricing announcements:
In May, AT&T Wireless Services Inc. launched a highly publicized “Digital One Rate” plan, which eliminated separate roaming and long-distance charges. With prices starting at $90 per month for 600 minutes, these plans offer large buckets of minutes at a flat rate and are aimed at attracting and retaining business users.
In March, Bell Atlantic Corp. introduced a new calling plan that offers subscribers unlimited mobile-to-mobile calls for a flat surcharge of $10 per month.
Comcast Cellular Communications Inc.’s “GroupTalk” and SNET Mobility Inc.’s “SNET Dispatch Service” both allow customers to establish closed work groups and to make one-to-one calls within those workgroups at a discounted price.
In March, L.M. Ericsson introduced “GSM Pro,” a product that permits dispatch communications over Global System for Mobile communications networks for use by European cellular operators.
These initiatives, while designed to reduce Nextel’s pricing advantage, do not address the quick connection time and the one-button convenience of Direct Connect. Nevertheless, the changes are designed to stem the erosion of the high-value business customers from cellular to Nextel. Time will tell if these pricing changes are effective in helping carriers retain high-end business customers, or are merely stop-gap measures.
Nextel’s successful effort to broaden the appeal of dispatch communications has far-reaching implications. From a regulatory standpoint, cellular operators have been permitted to offer dispatch communications services since 1994, but no “push-to-talk” dispatch offering has emerged from these carriers.
Support for cellular dispatch, however, is gaining ground quickly, and a new dispatch service could be introduced as early as 2000.
Today’s battle for customers is being waged in the high-end business segment, but The Strategis Group believes a similar clash could occur in the consumer market. Under this scenario, dispatched work groups are replaced by families, study groups and social circles. With
the future of the wireless market at stake, new cellular and PCS operators will be required to offer dispatch and mobi
le telephony services.
Stephen A. Virostek is director of messaging and dispatch and Stephan H. Beckert is a consultant at Washington, D.C.-based The Strategis Group.
