A Tale of Three Standards
By Francis MacDermot
Latin America has been fertile ground for cdmaOne. It's a situation brought about in large part by the decision of most governments to follow the example of the US, allocating spectrum at 800MHz for cellular and at 1.9GHz for PCS and allowing 'free' technology choices. Thus cdmaOne has not had to battle GSM for cellular contracts and it is fighting on its home turf-1.9GHz-for PCS contracts.
It seemed this advantage might be carried through in all future PCS licensing in the region-at least, until Brazil decided to open the issue of PCS spectrum to public consultation at the end of 1999.
The ITU and the big European GSM vendors argue that a 1.8GHz allocation will synchronize Brazil with Europe and Asia. This will leave a clearer path to IMT2000 and allow Brazil to enjoy massive economies of scale in 3G.
The incumbent cdmaOne and TDMA vendors disagree strongly. "1900MHz [for PCS] allows a free technology choice to vendors and operators. If they allocate 1800MHz it suits only one technology [GSM] and they will still need to decide how to clear the 1900MHz spectrum, some of which has been allocated for WLL," says Joe Lourenço, a director at Lucent Technologies in Brazil.
So loaded has the issue become that Anatel, Brazil's regulator, will only announce its decision after the World Radiocommunications Conference in Istanbul. As this issue goes to press an announcement is imminent. The cdmaOne interest groups will be sweating on the decision; they have already seen some surprisingly vigorous competition from IS-136 TDMA. At the end of 1999, 73 percent of digital subscribers in the region were using TDMA networks. This is partly because of Ericsson. First, the Swedish supplier, which has a 41 percent share of the region's cellular and PCS infrastructure market according to Pyramid Research, was remarkably successful in migrating its legacy AMPS customers to its TDMA system. Then, as these incumbent operators won PCS licenses, most of them chose to continue with TDMA and Ericsson. "Originally we expected all the PCS networks to be either GSM or cdmaOne because there were cost advantages but TDMA has been surprisingly strong because of Ericsson," says Leslie Arathoon of Pyramid Research. But TDMA was also seen as a trouble-free solution at a crucial time in the development of cellular, and was adopted by nine of the ten Brazilian B-Band networks that launched in 1998 and 1999. TDMA's reliability is still selling the technology to analog operators who are going digital for the first time and to some smaller PCS start-ups. That said, cdmaOne is winning many of the big contracts. In Mexico, Nortel is building a nationwide cdmaOne PCS network for Unefón in a contract worth $480 million. It will compete with Pegaso, which has a nationwide PCS license and is already operating with equipment supplied by Ericsson CDMA Systems and Alcatel. Pegaso, which has a $1 billion investment plan, has been boosted since Sprint PCS took a stake. Meanwhile in Brazil, Nortel, Lucent and Ericsson cdmaOne are the three beneficiaries of the $1.17 billion in contracts awarded by Vésper for wireless local loop equipment to operate in the 1.9GHz range.
In Argentina, Lucent has picked up the contracts for turnkey PCS networks recently awarded by CTI Móvil (controlled by GTE) and Móvicom/BellSouth. A handful of new cdmaOne contracts have also been awarded in Central America.
Several factors are contributing to cdmaOne's success. Firstly, a sufficient number of operators digitalized using cdmaOne to give the technology economies of scale in infrastructure and handsets. BellSouth's Telcel in Venezuela, Telefonica Celular and Portugal Telecom's Telesp Celular (both Brazil) were three cdmaOne networks which added a million subscribers each in 1999. This growth has led to large-scale manufacturing investments by cdmaOne vendors, particularly in Brazil and Mexico.
Secondly, in a prepay world cdmaOne's capacity advantage is telling. The introduction of prepay has sparked some fantastic growth, particularly in the major cities. Telcel in Venezuela, for example, achieved 100 percent growth last year, despite a major recession. With these sorts of pressures, operators want the faster capacity expansion that cdmaOne can offer. "It is really a lot easier to add radios to a base station than it is to build new cells by cell splitting," comments Brian Bolliger, director of global wireless strategies at Lucent Technologies.
A third advantage is cdmaOne's coverage capabilities. The same arguments that led Australia's Telstra to choose cdmaOne in Australia are hard at work in Latin America, where population centers are often separated by hundreds of miles of highway. "Using repeaters to build out highway networks, cdmaOne operators can get away with fewer sites," says Lucent's Bolliger. But the parameters of the debate may be changing. On the one hand, market liberalization is a reality in Argentina, Chile and Mexico and is imminent in Venezuela, Brazil and Peru. On the other, prepay growth has ensured that wireless connections will soon overtake copper wire as the principal means of accessing the public network in most countries by 2003, as has already happened in Venezuela and Paraguay.
All new wireless operators are therefore looking to be able to use their networks both for fixed and wireless applications. Pegaso in Mexico, for example, has started with a mobile service but plans eventually to use the same network to offer fixed wireless access. Unefón, its rival, aims to start with fixed wireless and then add mobile. cdmaOne again has some built-in advantages here. "From a business case point of view the ability to switch services is important and cdmaOne, with its greater capacity, gives operators greater flexibility to combine fixed and wireless subscribers," says Jim Edson of Ericsson CDMA Systems. cdmaOne vendors are also promoting the technology's ability to handle both voice and IP data traffic-vital if wireless lines are to be used for full or scaled-down Internet access.
These arguments are pushing even the big regional operators towards cdmaOne. Telefónica, the powerhouse of the region, has a mixed bag of TDMA and cdmaOne networks in countries where it has a share of the wireline market. But in Central America, where it is pursuing a strategy of entering the market through wireless, it is commissioning cdmaOne networks. Similarly BellSouth, the operator with the widest footprint in Latin America and once a staunch supporter of TDMA, seems to be edging towards cdmaOne for new networks: Móvicom/BellSouth in Argentina has opted for the technology and there are reports that it will be employed in Guatemala, despite the fact that the license was won by BellSouth's joint venture company in Panama which uses a 100 percent TDMA network.
The rewards from cdmaOne network contracts are not being spread evenly amongst infrastructure vendors: Lucent Technologies and Nortel are rampant but Motorola and NEC do Brasil, once eager challengers, are looking tired. Ironically, Motorola and NEC are the specialists, while Lucent and Nortel also support TDMA and GSM. Meanwhile, Ericsson CDMA Systems, having taken over Qualcomm's infrastructure arm, and with it the PCS contracts for Chilesat/Smartcom in Chile and Pegaso in Mexico, should soon begin to feature strongly.
Lucent and Nortel's success is founded on being able to supply what operators need. First and foremost this means vendor financing, which is particularly important for new arrivals, says Arathoon of Pyramid: "When operators who are not backed by one of the big groups come into the market they are less interested in the vendor and the standard than they are in vendor financing for the infrastructure".
Thus Nortel won Unefon's contract in Mexico with a financing deal which included infrastructure worth $480 million and operating cash to the tune of $120 million. Nortel and Lucent together took the lion's share of the turnkey contracts for Vésper and Vésper Sao Paulo, the two 'mirror' WLL companies in Brazil that are led by Bell Canada International. Ericsson and Harris also picked up smaller parts The total vendor financing package for Vésper was ultimately worth $1.8 billion.
But wireless operators want much more than equipment delivered to their doorstep. Choosing a vendor is "as much a partner and affiliation decision as a technology decision," says Bolliger. This partnership aspect is vital to new operators with little experience. Mexico's Unefón, for example, included years of ongoing training as part of its turnkey contract with Nortel. But partnership is also vital to some bigger wireless operators who are looking ahead to the day when they become integrated service providers. Lucent, Nortel and Ericsson (now that it can offer the cdmaOne platform) have the advantage here over Motorola.
Motorola's problems reveal much about the Latin American market. The company has repeatedly seen its legacy AMPS customers upgrade to digital with TDMA systems or choose other cdmaOne suppliers. Its market share has fallen to eight percent of shipments, according to Pyramid Research. In some cases Motorola lost contracts despite holding a stake in the operator; Movicom/BellSouth, for example, awarded major contracts for digital cellular and PCS to Lucent Technologies, despite being 25 percent owned by Motorola. As for contracts from new entrants, it has only secured one, from Global Telecom in Brazil, in which it has a stake.
Motorola's problems can be traced first to an inability to offer sufficient vendor financing. Secondly, it has often been unable to match the low prices of TDMA vendors for smaller digital networks. This appeared to be the case when it lost out to Ericsson in the bidding for four of Millicom International Cellular's networks in the region. But its main weakness has been its inability to partner operators into a liberalized telecoms future. "Wireless operators will want help going into the fixed market and this is something Motorola cannot give them" observes Leslie Arathoon of Pyramid.
NEC do Brasil's problems are probably less severe. Having been strong in Brazil's analog market, it failed to persuade any of the new Band B operators to use its cdmaOne offering. But it did manage to secure the two biggest urban markets for cdmaOne by bidding some shockingly low prices for the first phase digitalization of Telesp Celular (São Paulo) and Telerj Celular (Rio de Janeiro) before privatization. Since then it has suffered from mounting debts and lack of support from NEC in Japan, both factors which have made it difficult to finance further sales. It expects to fare better now that the company's Brazilian partners have sold their 51 percent stake to NEC. "With the new situation, NEC do Brasil is sure to expand its vendor financing structure," says João Miguel de Rocha Filho, manager of the system solutions division. One potential weakness, though, is lack of scale; in contrast to its competitors it restricts its operations to Brazil.
cdmaOne's fortunes, then, will be carried forward mainly by Lucent, Nortel and Ericsson. With very few digitalization contracts left, attention will be focused on PCS and WLL contracts. Here cdmaOne vendors will have to persuade new operators that the technology can provide a quick and reliable return on investment. Problems, however, could arise over the perceived sophistication of cdmaOne. This perception came originally from the problems some operators had-and are still having-with digital cellular overlays. Dropped calls were often cited as a problem when big analog networks such as Telesp Celular's in Sao Paulo and Telcel's in Venezuela started to digitalize with cdmaOne.
Most vendors believe this is a temporary problem. Joe Lourenço of Lucent says it is mostly an effect of having to squeeze the spectrum that was being used by analog. Brian Bolliger points out that there are "some issues of interference with analog but generally after a year things get better". He adds that demand often catches operators by surprise: "Some of these networks go from no subscribers to a million in 10 months".
But with this growth comes a vision of seamlessness that is likely to be a powerful force in shaping the market. One aspect of this, already mentioned above, is a vision of integrated services in a telecoms market where wireless lines will dominate. "The winners will be those who can offer a bundle of services and make them seamless," says Brian Bolliger of Lucent Technologies.
If the prophecy is true, cdmaOne's capacity advantages and data capabilities should favor its development, particularly now that operators can go straight to 1XRTT switching. The clear migration path to 3G services should also count strongly with new operators. But much still depends on the spectrum choice in Brazil, where 40 percent of the region's mobile subscribers live. The regulator's announcement in June will be a tense affair.