Coming to America

NTT DoCoMo acquires 16% of AT&T Wireless, offers i-mode in return

AT&T Wireless last week announced a strategic alliance with Japan's NTT DoCoMo and aggressive plans to deploy GSM technology - moves expected to help the carrier enter the high-speed wireless data market more quickly with expertise from the world's leader in wireless data.

The two plan to form a new wholly owned subsidiary to develop multimedia applications based on NTT DoCoMo's proprietary i-mode technology, a packet-based Web access technology that supports more than 15 million users in Japan.

NTT DoCoMo will invest about $9.8 billion for AT&T preferred stock, equivalent to 406 million shares - or 16% - of AT&T Wireless tracking stock. In addition, NTT DoCoMo will acquire five-year warrants to purchase an additional 41.7 million shares of AT&T Wireless tracking stock at $35 per share. The tracking stock held by NTT DoCoMo will convert to AT&T Wireless common stock when AT&T spins off the company.

"The proposition for this alliance is as straightforward as it is compelling," John Zeglis, chairman and CEO of AT&T Wireless Group, said in a conference call with analysts. "For no more than what we had always planned to spend, we have produced a plan that leapfrogs us over our competitors."

But the news didn't overly excite AT&T Wireless Number of mobile Internet users investors. The stock rose slightly following the announcement and closed on Thursday at $18, well below its IPO price.

AT&T Wireless' move resolves a big concern for analysts: the company's wireless data play. AT&T Wireless was waiting for enhanced data rates for GSM evolution (EDGE) technology by offering cellular digital packet data service, but coverage areas are sparse and sales disappointing. Waiting for EDGE technology meant AT&T Wireless would have commercially deployed high-speed data services later than the majority of its nationwide competitors - in 2003 or later.

It now plans to deploy a GSM network alongside its TDMA network. The 2.5G data strategy for GSM carriers is general packet radio service (GPRS), which should allow AT&T Wireless to deploy higher-speed packet data services by the end of 2001. AT&T Wireless' aggressive deployment plans call for 40% coverage in all its markets by the end of 2001, with 100% coverage in 2002. The company still plans to deploy EDGE technology at the end of 2001, with a move to the European standard universal mobile telecommunications system (UMTS) by 2004.

"It's important to know that we require little new spectrum," said Mohan Gyani, president and CEO of AT&T Wireless Services. "We're using our existing licenses and affiliates to build GPRS/EDGE in all major markets, without additional spectrum."

AT&T Wireless owns hundreds of 10 MHz licenses in the 1900 MHz band. It will use those to deploy GSM technology and, eventually, wideband CDMA (W-CDMA) technology. Dual-mode handsets that can operate on both TDMA and GSM systems will facilitate a seamless service. Ericsson, Lucent Technologies, Nokia and Nortel Networks each snagged a piece of the equipment contract.

"We'll continue to sell national service with TDMA phones, including PocketNet service," said Rod Nelson, chief technology officer for AT&T Wireless. "A key step is to introduce TDMA/GSM phones. We'll be selling GSM/GPRS-only devices for customers interested in local and regional plans and to those that want data form factors that are separate from the phone."

The move to GSM technology is important for porting i-mode services onto AT&T Wireless' network, according to analysts. NTT DoCoMo is working to export its i-mode and W-CDMA technology know-how into other markets through minority investments in operators in Europe and other parts of Asia, including a possible stake in an Australian operator.

"From a developer viewpoint, the TDMA camp was not big enough to warrant separate development," said David Kerr, vice president of wireless services for Strategy Analytics. "It's a pain to port over applications to TDMA."

It remains to be seen whether NTT DoCoMo can mimic the success i-mode has enjoyed in Japan, where it controls the market and can charge what it pleases, said Darryl Sterling, an associate with Mainspring, an Internet strategy consulting firm. And many question whether DoCoMo's core entertainment-oriented applications such as karaoke will appeal to U.S. consumers.

Another problem is that i-mode's wireless Internet language is incompatible with the Wireless Application Protocol (WAP) standard that is most popular in the U.S. AT&T Wireless plans to incorporate dual-mode browsers that can use both standards, but officials eventually expect WAP and i-mode to converge into one standard - possibly as a form of the xHTML language being developed by the World Wide Web Consortium.

AT&T Wireless is receiving NTT DoCoMo's brand and technology patents on an exclusive basis. No other operator in North America will have access to it, not even AT&T Wireless' affiliates. AT&T Wireless will offer its affiliates commercial access to its portal.

"There are a lot of key things that DoCoMo has done right that might work better than what anyone else has done here right now," said Charles Gerlach, director of eStrategy for Mainspring. "It is easy to develop sites, and end users are porting content services to i-mode.... It's starting to look like a model that's more familiar in terms of the wireline experience."

NTT DoCoMo, which reports that $12 of its average revenue per user comes from data services, claims it allows more than 1000 content providers to access its portal and supports about 23,000 Web sites. Developers are motivated to write applications for i-mode because NTT DoCoMo already developed the billing platform that allows them to charge subscribers for applications, said Wit SoundView wireless analyst Tim O'Neil. Determining what to charge and how to bill for wireless data services is a big thorn in the sides of U.S. operators.

"[NTT DoCoMo] does use a different pricing model," Zeglis said. "It's much more of a pay-as-you-go service and a la carte menu. We tried to jump-start the market by giving an all-you-can-eat pricing model. Digging into the Japanese market, the i-mode service disaggregates that decision."

Cingular contemplates more GSM deployments

AT&T Wireless' announcement to deploy GSM technology puts pressure on another TDMA operator, Cingular Wireless, to do the same, said analysts.

Cingular is entertaining the idea seriously. The carrier already operates GSM networks in California, Nevada and the Carolinas, and it is converting spectrum it swapped with VoiceStream Wireless in Washington state to GSM technology. It hasn't declared which technology it will use in the New York market it swapped with VoiceStream.

Cingular is heavily testing general packet radio service (GPRS) technology today.

"[We] are looking at GSM overlays and have been for quite some time," said Kris Rinne, vice president of product development and technology fulfillment for Cingular. "Right now, our path is toward EDGE.... We have maximum flexibility of our operations today, so if we choose to add that element, it's doable."

AT&T Wireless' primary reason for deploying GSM technology and its 2.5G GPRS alongside its TDMA network is to enter the data market faster. Commercial deployment schedules for enhanced data rates for GSM evolution (EDGE) are running in the late 2003 time frame.

But AT&T thinks it can get to at least 40% of its markets by the end of 2001, with full coverage by year-end 2002. It plans to offer GSM/GPRS data devices and PC cards on a local and regional basis, while TDMA/GSM handsets will facilitate a nationwide offering.

"We are working toward field trials in the fourth quarter 2001 of EDGE and major deployments in 2002," Rinne said. "I can't speak for my competitors, but with a GSM overlay today, I don't know if we would beat those dates significantly."

Analysts question how many vendors are dedicated to EDGE technology, even though AT&T Wireless said it will move to EDGE and eventually wideband CDMA (W-CDMA) technology after deploying GPRS services. Though EDGE technology also is a third generation evolution path for the GSM community, European carriers appear to be less enamored with it, eroding the economies of scale that U.S. TDMA operators sought by aligning themselves with the GSM community.

But Cingular's vendors are telling the company the same thing, yet its international carrier affiliates indicate they still are considering EDGE deployments, Rinne said.

"That's a potential risk, but we do have knowledge that European operators are looking at EDGE," she said. "As spectrum auctions continue to roll out in Europe, not everyone will be a winner. EDGE will be used as an alternative."

GPRS also will allow AT&T Wireless to deploy data on a channel-by-channel basis as demand for data services increase, while EDGE technology is a direct investment in an unproven data market. And because GSM technology is the most widely deployed technology worldwide, analysts note the economies of scale associated with it allow for cheaper equipment and a wider selection of handsets. AT&T Wireless' and its affiliates' commitment to GSM may hurt Cingular's economies of scale. That prospect remains to be seen, Rinne said, because TDMA and GSM in the GPRS and EDGE world have similar network backbones.

W-CDMA technology is also in Cingular's evolution path, but Cingular's deployment of the technology will be driven by spectrum needs and market demand, she said.