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Survival Of The Fittest

By Fred Dawson

North America's CDMA-based wireless operators, having gained a firm market footing more quickly than even they anticipated, now face crucial choices over how to use their platforms to maximum advantage in the brutal competitive struggles that lie ahead.

After 18 months’ worth of market roll-outs, digital cellular and PCS service providers have amply demonstrated the power of CDMA technology to support a marketing strategy based on low prices and better performance in key areas such as voice quality, system reliability and phone life. According to the CDMA Development Group (CDG), the market base for IS-95 platform providers has grown from only 200,000 customers a year ago to around 1.5 million.

These figures track closely with those issued by the Yankee Group two months earlier, assuming that the growth rate of about 125,000 per month recorded by the consulting organization through much of ’97 continued into January.

At the time of the Yankee Group’s tabulation in November, CDMA systems had around 1.14 million subscribers. This compares to one million for GSM systems and 4.2 million for TDMA, which have been in operation at least 3 years longer than CDMA systems.

"We’ve completely changed the mobile phone world by offering consumers clarity, simplicity and value," says Andrew Sukawaty, CEO of Sprint PCS. Sprint PCS is the leader in CDMA network deployments with service up and running in 134 metropolitan markets throughout the U.S. By the end of 1998 or early 1999, Sprint intends to be pushing that value proposition in all of the top 100 metro markets and thousands of other cities as well, becoming "the United States’ first truly national wireless network," according to Sukawaty.

Few doubt Sprint’s ability to follow through on completion of its initial build-out across the 260 million POPs it has obtained through aggressive license acquisitions in the PCS auctions. The question faced by everyone in the crowded mobile voice business is how long they can survive in a market where ever lower prices become the key differentiators as distinctions in quality and performance among competing platforms begin to even out.
"CDMA providers have done a pretty good job differentiating their services on the basis of quality, but over time the various platforms will hit equilibrium," says Perry LaForge, executive director of the CDG. "At some point everybody copies everybody else, and you’re dealing with a kind of commodity situation."

This presents executives with a tough strategic challenge in a business where pressing issues attending early market expansion leave little time for thinking about where to go once the cost and quality advantages dissipate. "I think some people are beginning to recognize the need to add value through expanded features, but I can’t say they’re pounding on us to get it done," says LaForge.

Given their early successes in pursuing a mass market, consumer-oriented strategy, CDMA operators don’t feel much urgency in this direction, agrees George Cope, president of Clearnet Communications, Inc., which holds PCS licenses across Canada. Cope says: "We’ve seen what works in the U.S. and we’ve followed suit, with early results that show it works in Canada as well."

NEW SIGN-UPS
Clearnet, which also operates a nationwide 800MHz, enhanced, specialized mobile service, signed up 51,600 customers in its first 75 days of offering PCS at the end of 1997. Canada’s CDMA-based carriers appear to be outpacing the competition with new sign-ups by a considerable margin. Industry figures showed that, for the fourth quarter, cellular giant Cantel added 60,000 customers on analog and digital TDMA platforms nationwide, while GSM operator Microcell’s entire customer base after one year of operations stood at 60,000.

Meanwhile, Clearnet and Bell Mobility, the two CDMA providers just getting under way in the fourth quarter, signed up close to 100,000 customers over much smaller market bases.

Bell Mobility, operating in Ontario and Quebec as part of a national consortium of cellular operators licensed for PCS as "Mobility Canada," was unprepared for the overwhelming market response, says Brian O’Shaughnessy, vice president of technology development for the company: "Every single phone we had sold out right away. There have been no surprises for us in using CDMA technology, other than the fact that we’re finding it’s not as difficult to deploy as we thought it would be."

One of the big factors driving early successes in PCS has been pricing (where PCS prices have run in the neighborhood of 20% below cellular rates), according to research conducted by the Yankee Group. This has produced a paradigm shift "from a subscriber acquisition-driven model towards a minutes of use-driven model," says Mark Lowenstein, vice president of the Yankee Group’s Wireless/Mobile Communications practice. "PCS operators are developing price plans to encourage wireless usage among all subscriber segments."

Clearnet, for example, with prices discounted 15 to 30% below traditional cellular rates, believes it can make a go of the business as a mass consumer product based on rising usage levels.

"We believe lower prices will drive elasticity of usage to where people will be using their phones in excess of 100 minutes per month," Cope says.
PCS providers are further aiding cost-conscious consumers by giving them more control over spending and means of payment. One case in point is PrimeCo Personal Communications L.P. It is now offering CDMA PCS services in all 11 of its markets, representing 61 million POPs, and has found far more demand for its special pricing and billing information features than it anticipated, according to Craig Farrill. Farrill is vice president for strategic technology at AirTouch Communications Inc., the West Coast cellular carrier that is partnered with Bell Atlantic and US West in PrimeCo.

COST CONTROL
"The ability of customers to use short messaging to check on the status of their bills has been one of the most compelling features of the PCS service," Farrill says. Not only does this help people control their costs; it also supports use of the service by cash customers by letting them know when their pre-paid usage is about to run out.

Cellular operators are responding aggressively to the PCS challenge by lowering rates, offering handsets at little or no cost to the user and implementing some of the same features and payment innovations that have helped drive early PCS penetration. Overall, wireless rates have dropped by an average of 25% in markets where at least one new PCS competitor has launched service, Lowenstein says.

Price trends are still in flux, of course, with some markets showing virtual parity between cellular and PCS and some showing significantly higher costs for cellular. Using bundled price per minute (BPPM) as a comparative gauge, which includes monthly access and package minutes as well as average usage above those levels, the Yankee Group finds the BPPMs running the whole gamut. Rates vary from as little as 25 cents to well above 50 cents.

Cellular carriers’ digital responses to the PCS challenge vary, with some carriers such as AirTouch targeting their higher end business users with premium-level pricing and features. Others, such as AT&T Wireless and Bell Atlantic Mobile, price digital at a considerable discount to analog, but overall the trend is towards ever lower rates.

CDMA providers believe they have a strong advantage in pushing the market to the minutes-of-use model, given the longevity of CDMA handset battery life and the higher quality of the voice signal. "With the higher quality we offer in combination with lower prices, people are using mobile phones in ways they never did before, even to the point of making their personal calls at home," says Sprint’s Sukawaty.

A recent analysis of wireless platform performance by the Washington D.C.-based consumer group, the Telecommunications Research and Action Center (TRAC), found that CDMA came out ahead of other digital and analog technologies on nearly every parameter, including signal security, quality, power needs and reliability. Analog, of course, won-out in availability, while all three digital services were rated equally over analog with regard to enhanced service features.

The TRAC study found CDMA to be superior in signal security and voice quality over the other digital air interfaces. It was CDMA’s superiority in power and reliability, however, that, in the opinion of TRAC, made this technology a better choice for consumers. Lower power consumption enables CDMA handsets to support up to four hours of talk time or 48 hours of standby time on a single charge. Researchers also found that the soft hand-off characteristics of CDMA lead to fewer dropped calls than you get with GSM and TDMA.

One possible drawback for some CDMA customers is lack of roaming capabilities. The TRAC report notes: "Until digital systems are more widely established, a dual-mode phone that switches back and forth between digital and analog cellular services may be the right choice for most consumers."
Some PCS companies with cellular affiliates are indeed supporting dual-mode phones roaming between the CDMA and analog platforms. In Canada, cellular carriers are required to enter into roaming agreements with PCS suppliers, which means that every Clearnet customer gets a dual-mode phone and the ability to roam nationwide and in the U.S (where roaming agreements have been secured). "We waited to launch our services until the dual-mode phones were available and it’s really paid off," says Clearnet’s Cope.

But in the U.S., where no such mandatory roaming agreements exist, the CDMA carriers have been slow to secure deals with each other. LaForge observes: "I’ve been a little surprised some of the larger companies didn’t push as aggressively on roaming as I thought they would."
This, along with a lack of urgency behind the development of advanced features, is another testament to the confidence operators are displaying in their ability to beat the competition on price, reliability and quality. However, there are many reasons to believe the sense of urgency won’t be long in coming.

"By July we’re going to see people beginning to pay more attention to ways they can use the CDMA platform to greater advantage," says Perry LaForge. "People will have gone through building market share by competing on business strategies and pricing and will begin to recognize the need to add value as a way to ensure continued growth."

One of the biggest threats PCS operators face as price competition intensifies is churn, which has reached "epidemic" proportions at 30% in the U.S., says Stuart Taylor, senior manager in the communications strategy group at Andersen Consulting.

So far, PCS providers, with their aggressive pricing and marketing tactics, have been the beneficiaries rather than the victims of the escalating churn. Nevertheless, says Taylor, they do recognize that the market responses of their competitors will inevitably infect them with the churn disease too.
"PCS providers see what’s happening in cellular and they want to be more proactive in avoiding the same fate," he says. With churn rates of 30% plus, a carrier’s customer base turns over completely within three years.
"When operators pay $300 to $500 to acquire each customer, counting things like handset subsidies and dealer payments as well as all the marketing costs, there’s no way to recoup those costs over such short terms."
Clearly, the time will soon be at hand when CDMA operators have to go further in exploiting the enhanced service potential of their platform. Still, the odds are stacked in the CDMA community’s favor. With advantages such as data and wireless local loop, competitors will have a hard time keeping up should operators choose to move in these directions.

There’s been much talk of so-called Third Generation data capabilities, where PCS providers will be able to compete with wireline at high access speeds.

The sleeper for the CDMA sector, however, is an interim data capability that promises to open up a 64 kilobit-per-second feed over the existing infrastructure within the next year or so. "The 64kbit/s data channel part of the IS-95B revised standard should be issued in approved form by March or April," says Graham Haddock, vice president and general manager of personal communications division at Motorola Corp. "I’m not aware of any remaining contentious issues that would impede the process at this point."

RANGE OF SERVICES
AirTouch, for one, looks on data as a vital part of its long-term strategy. "We’ve been driving the standard pretty hard," Farrill says, noting that the company will start out offering 14.4kbit/s around the end of the year before moving to 64kbit/s in mid-1999. "We’re looking at providing a range of service categories, such as Internet access, intranet for businesses, multimedia entertainment, business transactions and telemetry. People don’t ask for data access; they ask for specific services."

The IS-95B standard is extremely flexible, enabling providers to allocate data in increments of 8kbit/s within the 1.25 MHz CDMA channel based on how they configure software downloaded to already installed network controllers. This means operators can implement return data speeds at rates much lower than 64kbit/s, ensuring much lower power consumption in handsets than would be the case at a full 64kbit/s return rate. "We’d rather stay with the long battery life we have now," Farrill says.

While operators in the GSM and TDMA sectors are taking steps to ensure they won’t be left behind as data becomes a factor, CDMA appears to have a clear edge in its ability to go to relatively high speeds over existing infrastructure.

"Initially, you’ll see GSM and IS-136 (TDMA) at 13kbit/s," says Bo Piekarski, vice president for business development and strategic marketing within the wireless communications division of Ericsson, Inc. "Then things get more complex with the ability to assign specific time slots to data, which raises the level to anywhere from 28.8 to 56kbit/s."
Sometime next year it may be possible for the GSM and TDMA providers to evolve their systems from real-time circuit-switched implementations of data at 13kbit/s to a general radio packet service at 115kbit/s, according to Piekarski.

This approach may require hardware upgrades along with improvements in the software, depending on how the standard evolves and how manufacturers configure current generation base stations.

To avoid upgrades later, the time-division-based operators will have to begin deploying next-generation DSP (digital signal processor) technology now. With enhanced gear going into the field at an early stage, they can accommodate a jump to 115kbit/s when the software is available, without requiring further hardware changes. "There’s an incentive to use these chips as soon as possible because they allow you to perform much more processing within a given space at less power consumption than is possible with current-generation chips," says David Cooley, wireless applications manager for Lucent Technologies’ microelectronics group.

Even if GSM and TDMA operators begin making use of such technology immediately as they continue to expand infrastructure, they still have to retrofit existing infrastructure. Inevitably, there will be a broader base of CDMA facilities that are software upgradeable to IS-95B. This suggests that 64kbit/s will be the benchmark for data services in most markets until third generation systems offering much higher data rates over all platforms come into play towards the middle of the next decade. As LaForge says, "CDMA has a clear advantage in this area."

While data over mobile networks has been a non-starter in the past, there is plenty of reason to assume the market is ready to embrace services that can be easily used at low cost. "One of the major trends we see is that companies are trying to integrate wireless communications more into their overall operations," says Andersen Consulting’s Taylor. "Data will be a big part of that integration, given what we’re seeing in corporate use of intranets and other forms of data communications."

As wireless, like the laptop PC, moves from being an individual user’s purchasing choice to becoming a requisite of the workplace, the purchasing decision will move to the company, just as it has with the laptop, Taylor says. "Carriers will have a strong incentive to provide the features industry is looking for, because these purchases will greatly reduce the churn that comes with individual purchases."

The opportunity to use the CDMA platform to add a fixed service feature represents a complementary advantage for operators on the consumer side of their marketing efforts. According to Sukawaty, technical advances have reached the point where it is now feasible for operators to begin adding this component.

"The technology works now, but the terminal economics are the touchy part," he says. "Given the value of large volume purchases to the suppliers coming into this market, we think we can see a way to do this pretty early on."

Sprint PCS expects to use only a third of the 30 MHz of spectrum it holds to support mobile service for a considerable period of time, Sukawaty says. "It’s not clear when we’ll need to make use of more capacity, given what we’re seeing in the spectral efficiency of CDMA."

With ample spectrum to provide a fixed service on top of mobile, the company is exploring use of terminals that would be able to shift the handset between fixed and mobile service, depending on where the user is.
"The universal handset would serve as a cordless phone in the home and a mobile handheld outside," says Sukawaty.

Clearnet, too, is considering the possibilities of fixed service. "We anticipate getting some substitution for the local loop from customers using our mobile service, but you can look at the concept of fixed service as a standalone market opportunity that might be worth pursuing as well," Cope says.

Clearnet is finding CDMA offers seven to nine times the capacity of analog, which means there’s enough capacity in Clearnet’s 30 MHz of spectrum alone to serve the entire Canadian mobile market now and into the future. Cope adds, "I think we have ample capacity to work with if we choose to go to fixed services."

Motorola Corp., which introduced an IS-95 compliant WLL system for PCS and cellular frequencies with a 13kbit/s vocoder in June, is working with several stateside customers. Bill Gorden, senior product manager for Motorola Corp.’s wireless access systems division, observes, "We’re seeing market trials getting under way where operators are attempting to better understand what the customer wants."

VERSATILITY
Base station versatility has become a hallmark of WLL and related developments now underway among many manufacturers, which are striving to make their systems flexible enough to allow service providers to differentiate their uses of spectrum however they see fit.

Lucent Technologies, for instance, recently demonstrated the interoperability of its IS-95 base station with new WLL premises units offered by several manufacturers, including Motorola, Sony Corp. and Qualcomm Inc.
These manufacturers’ WLL modules, rather than being mounted on walls, are compact, tetherless terminals cradling handsets that look like cordless phones. They even sound a dial tone when they go off hook, although there’s a two-second delay before the actual connection is made with the network.

In the demonstration, all the terminals were linked with the Lucent base station, operating over the same frequencies that would be used to support mobile users. "The base station can be programmed so that, in the WLL mode, the customer receives landline-type calling features through the home terminal, with a shift to mobile on the pocket handset outside the home," explains John Linder, a member of Lucent’s wireless systems engineering group. Operators can also opt to segment frequencies for mobile and WLL uses.

Another feature under scrutiny by CDMA operators stops short of being a full fixed service, but offers many of the same benefits. Motorola, responding to rising carrier confidence in the appeal of mobile/cordless "one-number" service, is developing a PCS base station that can support such an offering without requiring special equipment at the customer’s premises.

"We see the U.S. market moving toward more portability between the untethered in-home and mobile services," says Bill Gorden. "We’ve done a lot of research and have received a lot of positive feedback on support for what we’re calling a neighborhood cordless capability in our base stations."
The handful of carriers supplying such services require customers to use premises "base stations" that become the point of connection for their handsets when they’re in the immediate vicinity of their homes or offices. Motorola’s plan is to equip external network base stations with the ability to automatically transfer the customer from a fixed cordless service to a mobile service, based on the carrier’s pre-defined line of demarcation.

"The technology defines the zones for lower-rate landline-like service and for full mobility," says Gorden.

With the cornucopia of benefits surrounding CDMA, it’s clear that operators using this platform have every opportunity to grow the business once the commodity-based strategy begins to lose its luster. The question is, when should they get serious about bringing these new capabilities to market?
"Carriers have told us they don’t want to get into an all-out price war," says David Berndt, a telecommunications analyst for the Yankee Group. "So they have no choice but to begin differentiating themselves by offering enhanced services. We’re starting to see some carriers backing away from the price battle, and we think there’ll be a lot more doing that as the per-minute usage rate gets down to around 20 cents."

That’s the point at which the return on investment starts to go out the window, according to the Yankee Group’s calculations. With several markets hovering in the 25 cent range for BPPM, operators are running out of time to come up with new ways to differentiate their services.