The competition convention

When attendees stoppeed discussing the happenings on Bourbon Street from the night before, Wireless '99 got down to business. This year's show generateed feelings of confidence-despit the tough time wireless has experienced in the financial markets. Manu operators have achieved a major portion of their network buildouts and are now ready to move on to better marketing and new technologies that will help them differentiate their services. The opening sessions focused on the positive effects of competition and the real occurrence-though minimal-of wireless replacement of wireline. For the most part, technology discussions rarely hit on third generation developments but instead focused on real data possibilities and an evolution to IP-based networks.

Wireless has achieved significant degrees of competition in the three years since the Telecommunications Act of 1996 was passed-so much competition that Tom Wheeler, CEO and president of the Cellular Telecommunications Industry Association, dubbed the gathering in New Orleans the "competition convention." He said that 48% of consumers today can choose from five carriers, and 10% can choose from six.

Although competition has led to increasing usage and penetration, support from the FCC might help the wireless industry achieve even better results, said Wheeler. "Wireless is the first fully competitive segment of telecommunications, and as a result we are trailblazers," he said. As trailblazers, wireless participants hold the unique position of defining the relationship between their competitive markets and policy.

Wheeler set out a number of goals aimed at pushing the regulatory environment in favor of wireless. He began by asking the regulatory bodies to respond more quickly to the needs of the wireless industry. With competition, the FCC asked wireless operators to change the way they operate. "Now we have to tell the government it's time to change the way you do business," he said. Rather than regulatory parity, Wheeler asked that regulators recognize the differences in the segments of telecommunications. "Treating all segments alike is inherently uncompetitive," he said.

Wheeler and others also asked the government to begin treating the wireless industry like the Internet. The government has gone out of its way to encourage growth in Internet use, Wheeler said, which has resulted in 70 million Internet users today. Wireless' 60 million subscribers deserve the same encouragement.

Meanwhile, policy-makers said they want to allow the wireless industry to flourish on its own. "Regulations can only handcuff the invisible hands of competition," said FCC Chairman William Kennard during Tuesday's opening session.

Cutting ties Competition in the wireless industry clearly exists, though, and it has led to many successes, the most apparent of which may be the evidence that wireless is beginning to replace wireline. In some markets, wireless replacement poses a significant threat to wireline services. "We found PCS players in Louisiana are serious competitors for BellSouth's wireline business," said Earle Mauldin, president of BellSouth Enterprises. BellSouth closely studies competition in its markets as it strives to gain access to long-distance markets.

Mauldin's research indicates that 25% of PCS customers in Louisiana use wireless service as their primary phone. Those users may not rely on that phone as their only phone, but 15% of those users have actually disconnected their wireline phones.

According to Mauldin, the concept of disconnecting wireline phones primarily attracts two groups of customers: low-end users that are typically not interested in long-distance, and upper-end customers that are heavy roamers and use high volumes of long-distance. In between those segments is a large middle market. "Our experience is [that] in that broad middle group there's not as great an interest in substitution," Mauldin said.

Despite these high percentages of customers who are already substituting wireless for wireline, Mauldin doesn't see a more widespread occurrence for some time. That's because wireline will continue to offer a superior connection for data use. "Broadband access will be primarily wired for as long as I can imagine," he said.

Mauldin's colleagues that also have both wireless and wireline properties agree. Despite AT&T's advertisements for its Digital One Rate plans, which suggest to customers that they turn to wireless as their only phones, that replacement won't happen significantly any time soon, said Dan Hesse, president and CEO of AT&T Wireless Services. He cited a recent Yankee Group study that showed wireless replacing wireline when the pricing premium drops to three-to-one. In the U.S., pricing for wireless still holds a six-to-one premium over wireline, he said.

So instead of targeting potential wireline replacers, AT&T aims for a different group of users. "Our target market is the second line," Hesse said. AT&T's recent introduction of the Personal Network, which bundles wireless with long-distance service, aims to target that market. "The highest wireline users are also wireless users," he said.

Wheeler pointed to a study in which 38% of respondents expressed much or some interest in replacing their wireline phones with wireless. The majority of those users would be upper-income, heavy business users.

Not everyone agrees with that finding.

"I don't believe it," said Ivan Seidenberg, chairman and CEO of Bell Atlantic. He pointed out that the same users have fax lines and PCs in their homes. Those Internet and faxing needs will still be best served by wireline offerings, he said. The growth of his network proves the point: Bell Atlantic has added 16 million DSL-equivalent lines. "We haven't seen as great a growth in the core network facility in 15 years," Seidenberg said.

However, Seidenberg's colleague Dick Lynch, chief technology officer for Bell Atlantic Mobile, believes that wireline replacement is "something that is already occurring."

Now it's the operators' responsibility to study that demand and create services and products that encourage it, Lynch said. Some users might be interested in "cutting the cord" and completely getting rid of their landline services, but only if wireless can offer certain features. Users might prefer to use speakerphones on their wired phones, something not really available in the wireless world. "There are function and form issues," Lynch said.

Pricing plan revolution Driving the possibility of wireline replacement is the emergence of pricing plans that include large numbers of minutes at low prices. The proliferation of One Rate-type plans will fuel a wholesale market, Hesse said. AT&T uses an intelligent roaming database that instructs roaming phones on which network to log onto in a specific area. AT&T designates that network because it offers the lowest prices. Operators are eager to carry AT&T's roaming traffic because they can earn significant profits from those minutes-and because they are wholesaling airtime. They don't have any costs associated with it such as customer care or acquisition costs attached to their own customers. Hesse said he is seeing a rivalry in that market for AT&T's roaming minutes.

The introduction of AT&T's Digital One Rate plan has also led to a perceived need by some operators and industry followers to operate a national network. A national network isn't all that important, though, said Bell Atlantic's Seidenberg. "National coverage is interesting and a good idea," but scale is more important, he said. Bell Atlantic's acquisition of Nynex and pending acquisition of GTE are about achieving scale. Scale allows for purchasing economies, which in turn allows Bell Atlantic to invest in technology. While Seidenberg acknowledged that low rates are important and that Bell Atlantic matches competitors' low rates, over the long term, value will be most important and continued investment in technology will yield valuable service.

AT&T Wireless may hope it's on a roll with successful pricing plans because of One Rate, Hesse said. Through an experiment in Plano, Texas, AT&T is chasing the second-line market by creating pricing plans to mimic typical local exchange carrier plans. Its plans include unlimited local calling and a bucket for other areas. Hesse isn't all that supportive of the idea because he believes the key to successful pricing plans is simplicity.

"Pricing plans now are the name of the game," BAM's Lynch said. The technology battles are over for consumers who are now primarily interested in price. Lynch said that throughout this year price plans will continue to evolve. Then they will stabilize and consumers will grow more interested in valuable features. "The customer doesn't care yet," he said.

Small towns As operators are building out and a growing number of competitors launch in the larger markets (see sidebar on page 28), some operators are turning to the smaller cities. Western Wireless sees rural areas as viable markets. "They need this product not just for mobility. They need it more intensely than others," said John Stanton, chairman and CEO of Western Wireless. Many people have assumed that rural markets wouldn't be competitive, but he disagrees. "The incumbent often isn't as responsive as [customers] want it to be," he said. If the larger cities have competition, smaller towns should, too.

There is, hopefully, a financial benefit to reaching those rural markets. Western Wireless is one of the only wireless operators working with the FCC and state commissions to be eligible for universal service funding. Western Wireless recently launched fixed, local competitive service in Regent, N.D. Four days after launch the local incumbent shut off interconnection for Western Wireless. "It's reminiscent of the days before the breakup of AT&T," Stanton said. "We discovered the regulatory issue was the largest issue." Service was restored, but Western Wireless is still battling the state.

If Western Wireless does become eligible for local service compensation, however, it can receive $200 per customer per month in Regent. In other rural towns in North Dakota, operators are sometimes eligible for more than $1000 per customer. Western Wireless views Regent as a test market but is interested in targeting other rural areas.

The decisions operators are making today regarding the shape of their businesses-whether it's to pursue tiny towns or the globe-will likely determine the makeup of the wireless market that we see in the future. Dataquest envisions five national service providers that could potentially form through mergers, including Sprint PCS, AT&T, Nextel, SBC/BellSouth and Bell Atlantic/GTE/AirTouch. Other regional bundled service providers such as Alltel and U S West will survive as will niche players such as Centennial and WirelessNorth. The GSM service providers will likely combine and possibly team up with a foreign service provider.

This year's Wireless '99 show offered a glimpse of the wireless industry on the verge of significant change, with wireless potentially encroaching on wireline business and individual operators striving to carve a niche in a competitive marketplace. By next year's show, the industry will likely look quite different.

Vodafone's recent acquisition of Airtouch has placed international roaming in the spotlight. Most operators recognize that it's a small niche market of international travelers, which not everyone believes is worth chasing.

Iridium hopes to be the partner operators are looking for to offer international roaming. Edward Staiano, chairman and CEO of Iridium, went out of his way again to reassure the audience of terrestrial mobile phone operators at Wireless '99 that Iridium can't compete with them.

He pointed first to the energy limitations of satellites. "There are no electrical outlets in space," he said. In addition, each satellite has a 2000-mile footprint that can support only 750 concurrent calls. "That's not likely a competitive challenge," he said.

Nonetheless, a clear market exists for travelers and business people who will use Iridium service, now and in the future. Iridium is on schedule to upgrade its system to handle 3G-like services along the same timeframe as the terrestrial operators. In addition, Staiano anticipates significant technology advancements in Iridium handsets. In four to five years he expects to offer an Iridium handset the size of a current StarTac phone that includes seamless roaming across varied networks.

Sprint PCS has signed up to offer Iridium service exclusively in the U.S. "It fills a need for us," said Keith Paglusch, senior vice president of technical services and network operations for Sprint PCS. Leaders from Bell Atlantic and BellSouth aren't so eager to jump on the satellite-service bandwagon. Both companies said they might be interested in a service such as Iridium's at some point as long as it doesn't compete.