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 Groups 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.
"Weve 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 Sprints 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.
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 cant say theyre pounding on us to get it done," says LaForge.
Given their early successes in pursuing a mass market, consumer-oriented strategy, CDMA operators dont feel much urgency in this direction, agrees George Cope, president of Clearnet Communications, Inc., which holds PCS licenses across Canada. Cope says: "Weve seen what works in the U.S. and weve followed suit, with early results that show it works in Canada as well."
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 OShaughnessy, 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 were finding its 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 Groups 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.
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 Sprints 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 CDMAs 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."
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: "Ive been a little
surprised some of the larger companies didnt push as
aggressively on roaming as I thought they would."
"By July were 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.
Theres 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. "Im not aware of any remaining contentious issues that would impede the process at this point."
RANGE OF 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. "Wed 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 wont 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, youll 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."
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. "Theres 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 Consultings Taylor. "Data will be a big part of that integration, given what were seeing in corporate use of intranets and other forms of data communications."
As wireless, like the laptop PC, moves from being an individual users 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. "Its not clear when well need to make use of more capacity, given what were 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.
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 theres enough capacity in Clearnets 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, "Were seeing market trials getting under way where operators are attempting to better understand what the customer wants."
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.
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 Lucents 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 customers premises.
"We see the U.S. market moving toward more portability
between the untethered in-home and mobile services,"
says Bill Gorden. "Weve done a lot of research
and have received a lot of positive feedback on support for
what were calling a neighborhood cordless capability
in our base stations."
"The technology defines the zones for lower-rate landline-like service and for full mobility," says Gorden.
With the cornucopia of benefits surrounding CDMA, its
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?
Thats the point at which the return on investment starts to go out the window, according to the Yankee Groups 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.