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Change of Direction?

By Maurie Dobbin

As far as the mobile communications community is concerned, 1999 may be remembered as the year that Ericsson finally decided to join the rest of the international telecommunications community in offering a cdmaOne product.

This was certainly a seminal event—but it was also a sound business decision in the light of significant events in Ericsson’s key Asia Pacific markets.

The first of these was the decision by Australia’s leading mobile player Telstra to roll out cdmaOne rather than Ericsson’s D-AMPS/TDMA offering. While it is certainly disappointing to lose a contract in a market of this size, the significance of the decision had more to do with the reasons why Telstra chose cdmaOne over its North American competitor. Simply put, Telstra wanted a network which could match the coverage capabilities of AMPS—and cdmaOne was the only second generation digital standard that fitted the bill. This hitherto unsung capability of cdmaOne has major implications for other markets in the Asia Pacific region once operators want to move out of the cities into the countryside.

The second significant event was the decision by Beijing to bow to pressure from the US and allow CDMA networks to be deployed in China, the world’s largest GSM market and a key market for Ericsson’s mobile products. US trade negotiators had been pushing hard for the last few months to break down the doors for cdmaOne suppliers, using China’s desire to enter the World Trade Organization (WTO) as a battering ram. In fact, trials of cdmaOne networks had been going on for some time in China but there was significant resistance to the entry of the technology as it was aligned with forces competitive to China Telecom, the dominant mobile player and a staunch GSM adherent.

Just weeks before the change of heart the Wall Street Journal carried a story claiming that China had banned cdmaOne because it feared that it might become obsolete. But the US stepped up the pressure with US Commerce Secretary William Daley lobbying Prime Minister Zhu Rongji to reverse the decision and allow cdmaOne into potentially the world’s largest mobile market. This has now happened.

Markets at Stake
With significant markets at stake and facing increasing pressure from their customers anxious to resolve the deadlock over 3G standards, Ericsson may well have needed not only a face-saving decision but perhaps also one which could give the company a running start into the cdmaOne business. This, it seems, was the basis of the decision to cross-license the vital CDMA patents and take over Qualcomm’s loss-making infrastructure division. With the patent dispute resolved and its hands on an established cdmaOne product line, Ericsson is able to fill a vital gap in its inventory. Already there are reports that Ericsson has entered into talks with Chinese operators aimed at gaining cdmaOne contracts that would otherwise have been lost business.

No doubt Ericsson Australia would have liked the move to have been made 12 months ago. At that time Telstra, driven by a government-imposed deadline, needed to find a digital solution which would provide a service that met the minister’s definition of ‘reasonable equivalence’ (to the coverage offered by Telstra’s old AMPS network which it would replace), and Ericsson was faced with convincing Telstra that its IS-136-based technology was the best solution.

The government had been under fire from lobby groups incensed at the perceived failure of the three GSM networks to provide coverage equivalent to that previously offered by their analog phones. In response, the government had guaranteed that it would not allow the AMPS network to be shut down until a ‘reasonably equivalent’ service was available. A government study carried out in mid 1998 showed that, of the three second generation technologies, only cdmaOne was theoretically capable of achieving similar coverage to AMPS.

In March 1998 Telstra spent A$121m (US$78.4 million) to acquire nationally the AMPS B Band in the country’s 800/1800 MHz auctions, thus ensuring that it would have the spectrum to offer a new service. Following this success and the approval of its board for the business case, Telstra initiated its own expression of interest (EOI) with manufacturers aimed at finding a solution to its dilemma.

Concerned
The EOI invited bids for both IS-136-based networks and cdmaOne technologies. Ericsson Australia was particularly concerned with this move, as the company was the sole supplier of mobile communications equipment to Telstra for both its analog and GSM networks. Without a cdmaOne offering Ericsson stood a good chance of being sidelined—which is exactly what happened. The beneficiary in this case was Nortel Networks which held out against competition from Motorola and Lucent to win the plum US$240 million contract.

Tony Bundrock, general manager customer strategy products and marketing, told delegates to IIR’s First Australian CDMA Congress in Sydney (15-16 March 1999) that a critical aspect of the decision in favor of cdmaOne was modeling which showed a significant marginal cost advantage for the technology over GSM900/1800. Based on the 15-year term of its spectrum license Telstra expected that the CAPEX/Erlang advantage over GSM could be as high as 8:1 in favor of cdmaOne.

Telstra has indicated that it intends to position cdmaOne as a premium network on a par with GSM but suited to customers that have a need for greater regional coverage. Whilst no tariff details have been released yet, Telstra has stated that it intends to launch the network in all capital cities and in some regional areas by October 1999. Telstra claims to already have some 100 cdmaOne base station sites on the air and intends to have 1,000 by September 1999 including 2,700 cells.

Quandary
Australia’s two other GSM operators, Optus and Vodafone, have been placed in a quandary over Telstra’s positioning of cdmaOne. By promoting cdmaOne as a premium network with better coverage than GSM, Telstra has thrown down the gauntlet to its competitors.

Optus has already indicated that it will follow the example of analog AMPS and resell the Telstra service. Vodafone, which pointedly refused to enter into a resale agreement with Telstra on AMPS, may be forced to follow suit.

Before long, Optus and Vodafone can expect to have even more cdmaOne competitors as three other companies were successful in acquiring the AMPS A band spectrum, Hutchison Telecommunications, AAPT Wireless and OzPhone (Leap Wireless).

Hutchison Telecommunications has already announced the award of a contract to Korean supplier Samsung to begin constructing cdmaOne networks in Australia’s two largest cities, Sydney and Melbourne. AAPT Wireless, with the backing of Singapore Telecom, is also understood to be actively planning its network and looking for additional partners. All of this action in Australia has started to have repercussions across the Tasman Sea; Telecom New Zealand (TCNZ) is beginning to show concern that it may become isolated in the future with its commitment to IS-136 technology. Consequently in late 1998 TCNZ embarked on a ‘Digital Mobile Transition Project’ aimed at evaluating the best path towards third generation (3G) technology. With the majority of TCNZ’s customers still using its analog AMPS network, the company has an important decision to make which could include throwing away its TDMA investment in favor of cdmaOne.

Meanwhile, the first trickle of cdmaOne contracts has begun in China with Motorola and Lucent announcing that they have finalized contracts worth US$20 million to expand their trial networks on the mainland. Xinhua news agency has reported that the Beijing Posts and Telecommunications Administration is to buy an additional 35 cdmaOne base stations for improved coverage in the capital. Lucent is also reported to have signed draft contracts with Guangdong Cellular Telecom, a subsidiary of China Telecom, to expand the number of cdmaOne base stations in southern Guangdong. This followed the announcement that China Unicom intended to buy a cdmaOne network capable of supporting five million subscribers later this year.

"We will roll out phase one of CDMA systems this fall", Liu Zhenyuan, director and chief Shanghai representative of Unicom told the news service Inside China Today. While Unicom has not decided on a supplier, Liu indicated that the contract would be worth hundreds of millions of dollars and would be focused on Shanghai.

Largest market
The opening of the China market to cdmaOne suppliers is potentially worth billions of dollars. China has more than 23 million mobile phone subscribers and the Ministry of Information Industry (MII) projects nearly 40 million by the end of 1999. As of the end of April more than 18 million of the current mobile subscribers used GSM technology, making it the largest GSM market in the world.

Four trial cdmaOne networks had been constructed in Beijing, Shanghai, Xian and Guangzhou by local venture Great Wall Mobile Communications. By all reports these trials were highly successful and were seen as a means of relieving the pressure on existing networks. But their expansion was stymied due to their alignment with the competitors to China Telecom and the influence of one man in particular, Wu Jichuan, the head of MII and former head of China Telecom.

Wu has been portrayed by both his domestic and foreign critics as a hawkish advocate of the continued existence of China Telecom as a near monopoly. Now, with the announcement of plans to break China Telecom up into separate operating units to comply with WTO guidelines, a more moderate view is prevailing. Some reports even suggest a change at the top. The South China Morning Post reported that analyst Peter Lovelock of Hong Kong research company Big Brains believed that Mr. Wu would depart by May although he was unable to identify his successor. But it was Wu that confirmed the breakthrough for cdmaOne, according to US Commerce Secretary William Daley.

"During our meeting, Minister Wu confirmed the news of what we had heard from Premier Zhu (Rongji) and State Councilor Wu (Yi) regarding CDMA", Daley was reported as saying by Inside China Today following a meeting in early April. "China will allow companies to introduce CDMA networks across China," he said. "He (Wu) was very emphatic to us that this should occur sooner rather than later but he did not give a timetable".

China Telecom is not the only dominant telecom operator that is likely to be hit by a surge of cdmaOne services. Japan’s NTT Mobile Communications Network (NTT DoCoMo) has admitted that it expected to lose market share in the Tokyo region to IDO’s cdmaOne network. cdmaOne networks began operating in Japan last July when commercial services were introduced by IDO’s partner DDI in Osaka, Kobe, Kyoto and Nagasaki.

In March this year the networks were extended into the regions of Shikoku, Hokuriku and Chugoku, which include more than 500 cities and embrace more than 15 million inhabitants. The final element of a nationwide cdmaOne network was due to be completed during April when IDO was to launch its network in Tokyo and the twelve prefectures in the Kanto-Koshinetsu-Tokai areas in central Japan. IDO has already stated that its aim will be to acquire one million subscribers in the first year of operation. The CDMA Development Group (CDG) reported in February that DDI had gained 400,000 cdmaOne customers at the end of 1998 with 140,000 added in December alone. At the end of February there were 40.5 million cellular phone users in Japan, a number which represents 32 per cent of the population.

DDI has featured film star Leonardo DiCaprio of Titanic fame in its advertising campaign in a bid to gain instant brand name recognition with the promotion emphasizing the superior voice quality of cdmaOne and its ability to support high-speed data transmission. The campaign is obviously hitting its mark as Japan’s TU-KA Cellular group has announced that it intends to improve the voice quality of its PDC cellular phones by making noise suppression standard on all phone models released after April.

The greater availability of cdmaOne phones emerging on the market, not to mention more competitive pricing, is spurring of the more established networks to improve quality and capacity. Hutchison’s cdmaOne network in Hong Kong is to get a facelift, increasing capacity and improving voice quality with the latest technology from Motorola under a US$75 million expansion contract. The Hutchison cdmaOne network currently supports more than 460,000 subscribers but has been targeted at the low end of the market. Now Hutchison has stated that it will participate in an international joint venture aimed at the ‘Achilles heel’ of cdmaOne—international roaming.

Agreement
Along with DDI and IDO of Japan and Shinsegi Telecom of Korea, Hutchison has signed an agreement aimed at providing cdmaOne customers with a global roaming service. Under the agreement, roaming subscribers will be able to use a single handset and mobile number to make calls on cdmaOne networks in Hong Kong, Korea and Japan as well as other Asian countries, the United States and Canada.

The achievement of this plan will of course require the use of multi-band phones. Such phones are commonly found in the GSM world, but there has been no need to replicate this for cdmaOne until roaming looked like becoming a reality. One market where such roaming facilities would be particularly useful is Korea which is still the leading CDMA market. In fact, the Asian economic crisis, which hit Korea particularly badly, has had no visible impact on the growth of the mobile communications market in the country.

Analysts Credit Suisse First Boston (CSFB) called 1998 Korea’s year of handset subsidization with the total number of subscribers doubling to 14 million and penetration reaching over 30 per cent. PCS operators virtually gave away their handsets at subsidies of W300,000 (US$250.6) to W400,000 per unit forcing established cellular players SK Telecom and Shinsegi Telecom to follow.

But the mad scramble for customers at any cost is about to come to a close after the Ministry of Information and Communications’ announced a W150,000 cap on handset subsidies which became effective from 1 April 1999. In addition, the five operators have agreed to end the practice of insisting on fixed term contracts in an effort to refocus their strategies around service quality rather than ‘handcuffs’ as a means of limiting churn. However, in a virtual stampede before these restrictions came into force, the number of subscribers in Korea jumped to 16.5 million by the end of February.

This cutthroat competition is widely expected to claim some casualties. Bahn Youngone at Ssangyong Securities recently predicted that there was likely to be a consolidation reducing the current five players to just three. He thought that the survivors would be Korea Telecom, LG and SK Telecom (SKT). Shinsegi Telecom in particular needed a huge infusion of cash, he said, due to debts measuring 11 times the company’s capital. Speculation is mounting that Vodafone, which holds 10.7 per cent of the company, may increase its stake as the Korean shareholders Pohang Iron and Steel and Kolon Group are unlikely to be able to invest further funds.

The one major setback for cdmaOne in 1999 was the decision by Singapore Telecom to abandon plans to build a cdmaOne network. The decision, announced in January, followed an extensive evaluation of cdmaOne by a team of SingTel engineers and months of effort on the part of potential vendors. The reasons given at the time were concerns over slowing growth in Singapore and difficulties with an upgrade path to third generation systems. Tay Soo Meng, SingTel Mobile’s senior director of mobile technology told the Singapore Business Times that its GSM network had a capacity of 1.1 million lines that he believed was more than adequate to serve future needs.

But Mr Tay was at pains to point out that the decision was not a question of SingTel abandoning CDMA technology but rather a question of when and which CDMA system would be installed. During February SingTel announced that it would conduct a joint field trial using W-CDMA technology in conjunction with the Center for Wireless Communications at the National University of Singapore. The trial, which is expected to last two years, aims to evaluate and understand the performance and service capabilities of W-CDMA in the Singapore environment. NTT DoCoMo is responsible for the design and the setting up of the experimental system.

This leaves MobileOne (M1) as the sole cdmaOne operator in Singapore. The network, launched in June 1998, has languished due to M1’s preference for pushing its GSM offering and as a consequence has only 10,500 customers today compared with 300,000 GSM subscribers. Peter Thornton, senior manager, CDMA switch planning at M1 blamed the network’s limited impact on a paucity of cdmaOne handsets and the difficulty of promoting the technology in a GSM-centric market.

The latest cdmaOne operator in the Asian region is Pacific Bangladesh Telecom (PBTL) which launched its service in Dhaka at the end of March. The commercial launch in Dhaka is the first of two launches of a US$22 million 800 MHz network supplied by Motorola and capable of serving 50,000 subscribers. A second network capable of supporting an additional 50,000 subscribers is to be launched in the city of Chittagong in April.

There is no doubt that the tide has turned in favor of cdmaOne in many Asia Pacific markets. The stranglehold that GSM has held in many of those markets is now being loosened and customers will be free to make a choice on the basis of the service that delivers the most value according to their needs.