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Fast Learners And Slow Developers

By Maurie Dobbin

Despite a couple of hiccups Asia has once again proven to be a powerhouse for cdmaOne growth with the region gaining over 13 million new customers during 1999 and helping to bringing global numbers to more than 50 million. The region has also led in innovation with Korea and Japan launching a range of innovative new services based on higher transmission speeds and Australia pushing the boundaries of digital mobile phone coverage.

The CDMA Development Group (CDG) reported that Asia Pacific added 3.2 million cdmaOne customers in the quarter ending December 1999 compared with 3.6 million in North America and two million in the Caribbean and South America. This still left Asia Pacific well in the lead with almost 56 percent of the world market ahead of America with 33 percent.

Breakneck speeds
The Korean market grew at breakneck speeds during 1998 and the early part of 1999 due largely to heavy handset subsidies by the PCS carriers. According to Korea's Ministry of Information and Communications (MIC) the number of mobile phone users in Korea reached 26.1 million at the end of March, accounting for about 57 percent of the country's population.

However, the subsidies have caused concern among policymakers. MIC issued an edict in March last year that handset subsidies were to be reduced to not more than W150,000 ($1 = W1,110) per new subscriber and that new handsets were not to be sold for less than W150,000. This direction resulted in growth being brought almost to a standstill in April and May last year, forcing MIC to relax its subsidy rules.

One of the principal beneficiaries of MIC's stop-start policy has been SK Telecom which, after dropping its subsidies to W80,000 in April and May, had raised them back to W210,000 by July.

During 1998 Korea's PCS operators had aggressively marketed their services with KT Freetel (KTF) gaining the largest share: 28.1 percent of additional mobile subscribers and 42.3 percent of additional PCS subscribers. But in 1999 the company ceded first place to SK Telecom principally because of its decision to keep the handset subsidy to more manageable levels. Nevertheless, KTF maintained its ranking against its PCS competitors achieving 20.3 percent share of incremental additions in 1999, well ahead of Hansol in third place at 14.1 percent.

The cost of network development and the heavy handset subsidies have placed pressure on operator financing and caused companies to look for new equities or alliances. The biggest development in 1999 was the move by SK Telecom to gain control of its 800MHz competitor Shinsegi. The deal, announced on 20 December 1999, saw SK Telecom acquire a 51 percent stake in Shinsegi Telecom financed through a cash and share offer.

The advantages for SK Telecom and Shinsegi were fourfold. Firstly, with SKT and Shinsegi sharing the 25MHz allocated to both companies there would be more efficient use of the spectrum and greater capacity to support predicted high data rate usage. Currently, due to a 3MHz guard band that separates the frequencies allocated to each company, SKT only utilizes 22MHz of that bandwidth (13.5MHz for SKT and 8.5MHz for Shinsegi).

Secondly, SKT's market share would instantly be boosted from 43 percent to 57 percent, a factor which may be particularly important if growth starts to slacken now that the 50 percent penetration figure has been passed.

Also, the companies can expect to achieve significant capex savings through sharing of infrastructure for their current and future generation networks, savings estimated as between five and 15 percent of future upgrades to IS95-C and IMT-2000.

Greater pressure
Finally they would be able to exert greater pressure on handset suppliers to reduce prices. This would be particularly helpful for Shinsegi which has been estimated to be paying W40,000 more than SKT for the same handset.

The Korean Fair Trade Commission was to rule on the merger in March but the decision was delayed with SK Telecom requested to submit additional materials to justify the cost savings that, it has been claimed, will result from the deal. Conditional approval was finally granted on 27 April subject to both companies agreeing to reduce their combined market share to less than 50 percent by June 2001. Once met, however, this condition will not be imposed again leaving the merged entity free to pursue market dominance. "We decided to approve the deal as we believe it has more pluses than minuses for the telecom industry", a commission official told Reuters.

Following the SKT/Shinsegi deal, speculation is now growing that KTF and Hansol could be considering some form of merger. The two companies already co-operate outside the metropolitan areas with an infrastructure-sharing arrangement. A merged KTF-Hansol business would have had a 30 percent market share as of end-1999 and, like the SK Telecom/Shinsegi deal, would benefit from an additional 10MHz of spectrum to handle data traffic.

Korea Telecom, the largest telecom operator in Korea, holds a 38.7 percent stake in KTF but in November 1999 the operator gained a significant injection of capital and strategic partners thanks to a US$600 million investment by Microsoft, Qualcomm and CDPQ (a Canadian investment company). This was the largest foreign investment in the history of the country's telecommunications sector and, more importantly, it gave KTF access to two pioneers in CDMA and Internet technology.

Since introducing the world's first IS-95B system in September 1999 KTF has seen demand for wireless voice and data connectivity grow rapidly. Marketed as PersNet, KTF's personal networking service employs Microsoft's m-HTML language to host applications similar to that of DoCoMo's i-Mode service. In December 1999 KFT claimed 602,000 subscribers for PersNet.

Qualcomm is also working with KTF to trial its High Data Rate (HDR) technology. HDR is claimed to be capable of providing a spectrally efficient 2.4 Mbps peak rate in a standard 1.25MHz channel. Optimized for packet data services, HDR incorporates a flexible architecture based on standard Internet Protocols (IP). According to Qualcomm, mixing voice and data can cause contention problems whereas adopting a data-only HDR carrier can allow the optimization of delays resulting in more users per radio and lower cost implementation.

Analysts SalomonSmithBarney have forecast that data/VAS revenues for KTF will increase from a modest 1.7 percent of voice revenues in 2000 to 10 percent by 2002 and 25 percent by 2005. Credit Suisse First Boston (CSFB) is equally bullish about the wireless data prospects for SK Telecom following the launch of the company's WAP-based n-Top service in early December. SK Telecom claims that it will have 1.25 million users by the end of this year. CSFB believes that by 2001 wireless data revenue will represent more than eight percent of the company's revenues.

Japan is another country where wireless data usage has begun to take off. Much of the publicity so far has gone to DoCoMo's i-Mode service but DDI Cellular, the TU-KA Group and IDO launched their own Internet connection service under the name EZaccess using WAP protocol in April last year. This service has enjoyed a recent surge of growth with over 600,000 customers added in the first two months of 2000.

DDI has attributed this increase in subscribers to the group's introduction of high-speed packet-based access from their cdmaOne phones using IS-95B technology provided by Motorola. Motorola claims that its NSS high-speed wireless Internet access provides unique benefits to Japanese subscribers because it incorporates a 'dormant' mode feature that ensures that customers will only be billed for the active portion of packet data calls. In addition consumers would benefit from extended battery life. "No other commercial cellular system in Japan can match these data rates which rival ISDN for wireless users," says Satoshi Nakagawa, IDO Corp. president.

Supporting the service are mobile phones from Toshiba, Hitachi, Casio, Sanyo and Sony all equipped with the UP.Browser able to access nearly 200 content sites including news, stock market, weather forecasts, travel, sports and foreign information.

During April reports began to surface about problems that i-Mode is having in meeting demand, problems that EZaccess may be able to exploit by offering a better quality and higher-speed alternative. According to a Reuters report, DoCoMo has suffered 16 disruptions to its fast-growing Internet service since it was launched last year casting doubt over its ability to accommodate the estimated 10 million i-Mode subscribers expected by year end.

By early April DoCoMo could boast more than 5.7 million i-Mode subscribers able to access more than 9,000 voluntary web sites, making it the largest Internet service provider in Japan. At that time these users were increasing by around 40,000 per day while the number of web sites accessible to i-Mode customers were growing by 40 to 50 per day.

This rapid growth has stretched the DoCoMo network. As a result, on April 19, DoCoMo announced that it might limit sales of its i-Mode service while it takes action to improve system capacity. The success of i-Mode has demonstrated the attraction of high-speed wire-free access to the Web and augurs well for the future of the EZaccess service. The DDI Group has already announced that it is aiming to attract five million subscribers to EZaccess by March 2001, or around 50 percent of the 10 million cdmaOne customers that the group has forecast by that time.

IDO and the TU-KA Group have announced that later this year they will finally close down their analog TACS-based service after a decade of operation. The service had some 63,000 subscribers at the end of February but in September the remaining customers will be asked to switch to the digital service and will be entitled to a free cellular phone. The entire frequency band allocated to the TACS service will then be available for expansion of the cdmaOne-based digital cellular service.

Last barriers
The cdmaOne carriers are also planning to remove one of the last barriers for international travelers to Japan with the imminent introduction of 'Global Passport', an international roaming service. Global Passport will initially allow roaming between the networks of Shinsegi in Korea and Hutchison in Hong Kong but this will be expanded to include the United States from mid-2000 and Australia from September. Under the Global Passport tariffs users will be charged 250 yen ($1 = Y109) to make a call from Korea back to Japan or 50 yen per minute for a call within Korea. Users will be charged a flat fee of 180 yen per minute to receive incoming calls regardless of the location of the caller.

But China may be one market that will not appear as a roaming destination as soon as the CDG would like. Unfortunately the brave vision of China Unicom's Executive Vice President Wang Jianzhou expressed at last year's CDMA World Congress has been derailed by politics. Wang had wanted to have built a cdmaOne network capable of supporting 10 million customers by the end of this year but Unicom has been unable to let the contract because of what has been described as 'bureaucratic red tape'. In fact it appears that the contract has become a bargaining chip in the negotiation for China's entry into the World Trade Organization (WTO). The cdmaOne network was to be the cornerstone of China Unicom's plans for a multi-billion dollar initial public offering planned for Hong Kong, and possibly New York, later this year.

News of the suspension of the contract negotiations came just a week after Qualcomm signed a CDMA Intellectual Property Rights framework agreement in Beijing. The agreement defined the guidelines and procedures in the licensing of Qualcomm's intellectual property for the manufacturing and sale of CDMA wireless equipment by domestic Chinese manufacturers.

By March the issue had escalated to the level of China's premier, with Zhu Rongji issuing a statement affirming that China would go ahead with CDMA and dismissing as untrue reports that there would be a permanent ban imposed.

According to Zhu, the purchase by Unicom required "more co-ordination with the Ministry of Information Industry and the State Development Planning Commission". He also suggested that Unicom had failed to follow procedures before accepting bids from CDMA equipment vendors.

The CDG remained positive that the matter would be resolved quickly with executive director Perry LaForge issuing a statement that CDMA progress in China would proceed. "As is the case with all business transactions, delays occur", said LaForge. "Although we were disappointed to learn that the rollout in China had been delayed for various reasons, the progress that the CDG has made and the commitments and increasing demand for CDMA by leading Chinese operators remain the same."

In April the continuing delay became the subject of a discussion between US Commerce Secretary William Daley and Premier Zhu during broader talks aimed at underscoring White House determination to push through key trade legislation that supports Beijing's entry to the WTO. "Zhu promised that he would encourage the ministry to move forward," Daley told Reuters.

In the meantime, the position of the CDMA telephone operations run by the Chinese People's Liberation Army would appear to have been clarified with news that a new company, Century Mobile Communications Corp., would be permitted to operate a third mobile telephone network. China Telecommunications Broadcasting Satellite Corporation will be the biggest shareholder in the company that will also include Beijing Zhongguancun Science and Technology Development Company.

By contrast there is no brake on the rollout of CDMA networks DownUnder with Telstra announcing an acceleration of its plans to cover 95 percent of the Australian population. Telstra will have more than 2,100 base stations in operation nationally at the end of July compared with only 1,360 in the old analog network. That network will close in all areas of New South Wales, Victoria and Tasmania by June 30 and in some areas of the other states. Full closure of the network will occur by the end of 2000.

Telstra claims to have created a new record in designing and building a A$600 million ($1 = A$1.7) cdmaOne network across Australia in less than two years. This compared with almost six years for the construction of the GSM and analog networks. Telstra's cdmaOne network commenced operation late last year with the objective of providing at least the coverage of the AMPS mobile phone network it was replacing. With Telstra pushing CDMA under the acronym Coverage Delivered to More of Australia the business strategy is clearly different from that in most other markets in Asia where cdmaOne networks have primarily been aimed at relieving congestion. To achieve this objective Telstra's contractor Nortel has developed so-called 'boomer' cells that have been proven to extend coverage to almost 130 km given the right geographic location for the base station. Unfortunately not all the analog customers were impressed with the initial performance of Telstra's new network with a number of complaints that they had lost coverage after analog's closure. As a result of pressure from rural electorates, the Australian Communications Authority established an inquiry to examine whether the complaints were justified and to specify test procedures to verify whether Telstra was delivering the equivalent coverage demanded by the Government.

"The ACA wants to make sure that any risks of future coverage and usage problems occurring are minimized," said the ACA's Chairman Tony Shaw. "The ACA will examine Telstra's plans for the next phase of the CDMA rollout to assess whether Telstra is taking all possible steps to avoid the problems which have arisen this time," he added. Shaw said that he was satisfied that Telstra was actively addressing the many problems which have arisen since the analog closure in metropolitan and major regional areas took place.

While Telstra has been pushing to deliver its cdmaOne service as early as possible, another new cdmaOne operator Hutchison Telecommunications has taken a more considered approach. Hutchison holds 800MHz spectrum only in the major capital cities of Sydney and Melbourne and has announced a strategy based initially around providing a second phone in the home.

The Orange One service was launched on a trial basis last year in the lower North Shore area of Sydney with Hutchison's managing director claiming that the initial response had been very encouraging despite the fact that full mobility services were not yet available.

Domestic requirements
Hutchison invested A$133 million on its CDMA project in 1999 most of which was spent with its vendor Samsung. Unfortunately for Samsung, the company was unable to rack up a double with defeat snatched from the jaws of victory on its bid to win business from AAPT.

Telecom New Zealand secured control over AAPT last year and insisted that bids for its CDMA network should be reopened and that the scope of work should be combined with Telecom New Zealand's domestic requirements. When that was done Lucent slipped in front of Samsung with a bid based on the same financing package that they had used to win business from GSM carrier One.Tel.

AAPT has since ruled itself out of bidding from 3G spectrum in Australia claiming that it had a A$70 million option from Lucent to upgrade its 800MHz network to give it 3G capabilities.