It has been less than 20 years since the first commercial cellular phone call was completed in the United States.
The date was Oct. 13, 1983. Bob Barnett, then president of Ameritech Mobile Communications Inc., placed a call from a Chrysler convertible at Soldier Field stadium in Chicago to the grandson of Alexander Graham Bell, who was living in Germany at the time.
First-year sales in the market were projected to total between 7,000 and 10,000 subscribers, but within a week of the launch, an estimated 4,000 to 5,000 customers had already placed orders for the service.
American Radio Telephone Service Inc. quickly followed with the country’s second commercial cellular launch in Washington, D.C./Baltimore on Dec. 16, 1983.
Cellular was off to the races.
Long history
In the 17-plus years since then, the wireless industry has done nothing more consistently than continually surprise those who try to predict it. During its infancy, the cellular industry was expected to be a viable business in only the largest 40 markets in the United States. Early on, analysts predicted U.S. cellular subscribers would number only a few million by 1995.
But the industry reported nearly 100,000 subscribers within 15 months of the Chicago launch, according to the Cellular Telecommunications & Internet Association. In October 1987, just four years after its first commercial launch, the cellular industry hit the 1-million subscriber milestone. It grew to 50 million just 10 years later, and today the industry boasts more than 100 million U.S. wireless subscribers.
Not bad for an industry still in its teens.
But the wireless industry spent many years in its embryonic stages before reaching its high-flying commercial success of today. As early as the 1940s, mobile telephone service was available, although the systems were channel-restricted, allowing only a handful of users to make calls simultaneously. In 1947, AT&T engineers hatched an idea that would give life to today’s wireless industry-the idea of splitting a market into cells and re-using frequencies by handing off calls as users moved around.
The complex technological challenges were hammered out over the subsequent 30 years, but the industry still had a long road ahead before commercial cellular service would become a widespread reality.
Decision for duopoly
The Federal Communications Commission was busy in the 1970s trying to decide how much spectrum should be allocated to cellular phone service and who should get it. Some believed AT&T should be the sole licensee because it was an experienced telecom operator and because it had developed the cellular idea. Therefore, the thinking went, Ma Bell deserved to profit from its innovations. Motorola also had been developing technology for cellular and was largely aligned with paging carriers and radio common carriers that advocated a competitive marketplace.
Bill Adler, who served as chief of the FCC’s mobile services division in the early 1980s, said the commission struggled with how to allocate the spectrum. Too many competitors meant too little spectrum for each player, but too few meant competition suffered.
In 1977, the commission authorized two experimental licenses-one to AT&T in Chicago and the other to Motorola Inc. and American Radio Telephone Service in Baltimore/Washington-which would become the first systems launched commercially in 1983.
In April 1981, the FCC settled on a structure for the cellular industry-40 megahertz of spectrum in the 825 MHz-845 MHz and 870 MHz-890 MHz bands would be divided between two carriers, with one license going to a wireline operator (B-side) and the other to a nonwireline operator (A-side).
“It was very controversial at the time for the FCC to just give wirelines half the licenses,” said Adler. “But it was the dynamic of the commission at the time.
“The decision was ultimately made that the best balance between having competition and having spectrum available for the various services was to take 40 megahertz and divide it,” he said. “It was a negotiation-a give and take.”
Interest high
In 1981, Adler was tasked with devising the best way to award the cellular licenses. Drawing on several years of licensing experience he gained at the Civil Aeronautics Board, Adler proposed a narrow version of the FCC’s broadcast comparative hearings. The cellular comparative hearings eliminated many of the time-consuming elements associated with the broadcast hearings, such as discovery and testimony, and evaluated applicants on a handful of comparative points, coverage being prime among them.
“We tried to make it as constrained as possible,” said Adler, who is now an officer at Globalstar L.P.
Complicating the process, however, was the amount of interest in the licenses, particularly on the nonwireline side. The commission received nearly 200 wireline and nonwireline applications for the top 30 markets, more than 350 for markets 31-60 and more than 550 for markets 61-90.
“The commission almost immediately strongly urged the parties to settle,” said Adler. “The number of applications kept accelerating. The smaller the markets got, the more applications we received because it was a gold rush.”
Another challenge was the enormous size of the applications. Some applicants submitted as many as five 3-inch-thick notebooks. One company bidding in all 30 markets submitted 240 cartons of binders, he said. The weight of the applications broke more than one shelf at the commission.
After the first round of applications were received, Adler tried to keep morale up among his overwhelmed staff by releasing a comic press release handing out awards such as the “Penny-Wise, Pound-Foolish Award for Worst-Quality Binders,” and the “Georgia-Pacific Fallen Tree Award for the Largest Single Application.”
Elizabeth Maxfield, who was deputy director of the FCC’s Office of Public Affairs from 1979 to 1981 and later was an attorney in a law firm that was involved in several comparative-hearing applications, recalls scads of lawyers running around Washington D.C., wearing T-shirts that said “I survived round one.” In another lighthearted moment, Maxfield said the president of BellSouth sent a birthday card to the company’s applications at the commission a year after they had been submitted.
Maxfield went on to help build CTIA from scratch into one of the most powerful trade associations in the nation’s capital. She now is vice president for external affairs at Aeris.net.
Comparative Hearings
But despite some of the good-natured jabs, the stakes were high and the players took it seriously. By some estimates, the comparative-hearing process cost applicants several hundred thousand dollars and often took more than a year to be decided. Some markets were held up in appeals and litigation until well into the 1990s.
“The criteria were so minuscule and so unimportant,” said Jim Dwyer, who was active in challenging the FCC to open the cellular market to competition in the 1970s and later was a founder of CTIA. “Each party had put in such a massive case, including market studies and engineering studies.
“It could have been a toss-up on any of them,” said Dwyer, recalling stories of certain markets being awarded on the difference of one cell site. “These hearings were a tremendous burden on the FCC and turned on very obscure points.”
“You had to go out and actually find locations and landlords willing to sign letters of intent,” said Dominic Villecco, who worked for Jubon Engineering, a company that worked on several cellular applications in the early 1980s. “You had to prove that you had a site and a reasonable level of certainty that you could go back and build what you were proposing.”
Villecco, who is now president of engineering firm V-Comm, also recalled stories of markets being awarded based on one company providing slightly more coverage than another.
“Basically it was anybody’s guess what
would be the pivotal factors even though the FCC had told people the criteria,” said Lou Gurman, who was lead FCC counsel to McCaw Cellular Communications Inc. in four top-30 cellular comparative hearings. Gurman now is a partner at Morrison & Foerster, concentrating on the firm’s wireless communications practice.
“Our view at the time-because it was new and no one knew which factors would be crucial-was that our best bet was coverage, and we would have the engineers design a system that blanketed the area. It proved to be correct.
“I do remember that the process of preparing the top-30 applications was a grueling time,” said Gurman, whose firm represented several different applicants in the top-30 market hearings. “People were pulling all-nighters. There was a constant stream of vendors coming into the office to talk to clients. The stakes were enormous.
“It was a unique time in my life.”
The move to lotteries
In many cases, particularly on the wireline side, the various parties applying for a market formed settlement agreements. On the nonwireline side, however, settlements were more difficult because the number of applicants in each market was much higher. Many believe wireline carriers benefited from a time-to-market advantage because of this.
“Typically there was only one applicant for the wireline licenses, and to their credit, if there was more than one, the dominant company usually reached an agreement,” said Tom Stroup, a former president of the Personal Communications Industry Association and now president of GroupServe. “Wireline definitely had a head start because nonwirelines had up to eight applicants and were not able to reach agreements as quickly. It was more contentious.”
In the majority of cases, wireline carriers were able to beat nonwirelines to commercial launch. However, the nonwireline carrier in Indianapolis scored a victory when it turned up the first non-experimental license in February 1984, three months ahead of its wireline counterpart.
Struggling to keep up with the amount of applicants and with the ever-present objective of getting cellular service to consumers as quickly as possible, the FCC in May 1984 decided to switch to a lottery system to award licenses beyond the top 30 markets. Markets 91-120 were the first markets for which applicants filed knowing the licenses would be awarded by lottery. The commission received more than 5,100 applications for that round and interest continued to grow. In 1986, the FCC accepted more than 37,000 applications for the final round of metropolitan service area (MSA) markets.
Although the FCC solved some of the problems of inefficiency and high costs associated with comparative hearings, lotteries opened up a new set of problems. With the barriers to entry substantially diminished, some people saw cellular lotteries as a chance to make a quick buck for a relatively small investment.
Stories abound about people winning licenses-including a plumber, an accountant, a real estate broker and a welder-who had no intention of building out the markets. The result was a private-market auction, which made rich the winners, who had received their license for free.
Complicating matters were so-called application mills, which essentially duplicated completed applications for thousands of applicants. In addition, applicants would often form coalitions to increase their chances of winning. The agreements provided that the winner would own a majority stake in the market, while sometimes hundreds of other coalition members would own minority interests. With each lottery, applicants pushed the edge of the envelope insofar as FCC rules were concerned.
It was an administrative nightmare and a legal mess. The lottery system that was supposed to provide the efficiencies that comparative hearings lacked itself turned out to be a bust. Lotteries were fertile ground for mischief and abuse.
“I think there was a lot of frustration for the FCC,” said Gurman. “Each time they tried to tighten up the rules, new problems emerged.”
In a letter to Sen. John Danforth in May 1985, then FCC chairman Mark Fowler, requested that Congress grant auction authority to the FCC. “We are seeing more and more of the drawbacks (of the lottery process) every day. … It appears that many applicants viewed this lottery as a sweepstakes. They submitted applications only to obtain a chance to resell a winning application or to be bought out prior to the drawing.”
“The dilemma with the lotteries was that the carriers who really wanted to build systems weren’t guaranteed a license,” said Maxfield. “Some carriers got out because they said they couldn’t plan for it. It meant that capital costs were very high.
“But the government wasn’t getting the money,” she said. “The capital was going into the pockets of random Americans.”
Licensing legacies
Late in the 1980s, the FCC was looking to make another shift in its licensing procedures. This time the idea of auctions gained credibility.
“With the auctions, it was just a question of who was conducting the auction,” said Stroup. “The commission figured there was no reason to give away an asset just so the winners could turn around and make a quick profit.”
Auctions brought with them their own set of problems. While lotteries catered to the idea of entrepreneurship, auctions were distinctly for those with deep pockets, although the commission attempted to mitigate that with preferences for small businesses.
“Anybody who has been in the industry knows it’s not a business for the weak of heart or those with shallow pockets,” said Stroup. “From my perspective, you need to be a well-funded player.”
Did the delays hurt?
Looking back, many feel the FCC’s long and labored decision-making process that spanned more than a decade harmed the U.S. cellular industry by delaying the initial launch of service.
“There was a tremendous delay,” said Dwyer, who has led several wireless companies, most recently Wireless One Network, which was bought by AT&T last year. “It had a tremendous impact on America’s position in the industry worldwide.”
Although cellular was a technology pioneered in the United States, Japan was the first to launch cellular in 1979. Sweden, Finland, Denmark and Norway all followed in 1981.
Dwyer said while it is difficult to measure, he believes the delay in the United States may have impacted U.S. equipment vendors while aiding the likes of Nokia and Ericsson, which are based in a region that introduced cellular before the United States did.
Some contend the delay may have cost the industry millions in revenues and put the United States behind other countries in terms of cellular penetration.
But others believe the U.S. cellular industry eventually would have gotten to the same point.
“If the process had started 15 years earlier, I’m not sure the technology would have been there,” said Villecco. “The market was more right than anybody realized.”
Despite the winding road it took to get here, the cellular industry can only be called a success story, and the small circle of men and women who were its pioneers look back with pride at what they accomplished.
“Every year I look back and say every day has been fun,” said Dwyer. “It’s a great way to spend a career.”
