Cutting the wireline

One of the more interesting market questions in telecommunications is whether the wireless revolution will result in the death of wired voice communications. Despite some of the statistics and many anecdotes, including the the stated strategy of the wireless industry to cut the cord, the trend seems to be toward a competitive coexistence.

Like the Internet, the growth of wireless communications will not only continue to influence how business is conducted, but also-perhaps toa greater extent-change people's lifestyles. Today, more than 60 million Americans-approximately a quarter of the population-use wireless phones. Estimates are that approximately 45% use wireless exclusively for business calls. The number of wireless users is predicted to roughly double by 2004.

Debate has not centered on the inevitable growth of wireless in an increasingly mobile society, but rather on the extent to which wireless customers will abandon the wired network. Wireline displacement is estimated to be about 25% to 35% within five years.

However, predictions of displacement cannot be trended merely from global adoption rates. In countries with inaccessible or lower-quality wired networks, the rate of pure wireless substitution is relatively high. Cambodia, for example, has a wireless penetration rate of 60%. But these statistics alone are not cause for celebration or alarm on the part of wireless and wireline companies.

The better analogies are highly industrialized nations such as the United Kingdom, Japan and Sweden where, despite strong penetration, the cost of wireless calls continues to make landline disconnection prohibitively expensive, albeit more common than in the U.S. However, several interesting observations can be made in examining the displacement activity in these and other foreign countries.

First, not surprisingly, there is a strong correlation between wireless pricing-specifically the wireless "premium" price over normal wireline calls-and the potential rate of displacement. In the U.S., wireless rates, although decreasing, are still five to seven times the price of fixed network calls, stemming substitution. But according to The Yankee Group, in Denmark and Australia, where the wireless premium is approximately 3-to-1, the wireless penetration is more than 25%, resulting in increased displacement of wireline traffic. Additionally in Europe, movement toward calling party pays has been a strong stimulus for wireless use.

Another driver has been the aggressive marketing of mobile communications beyond the business customer niche and into the teenage market, particularly in Europe and Japan. An estimated 7 million teens in Japan are active wireless customers. Because most of their calls appear to be between 10 p.m. and 1 a.m., when the network would otherwise be underused, these are profitable customers.

The third driver, at least in Europe, is the technology that supports virtual, seamless roaming with no interruption of service and access to features such as voice mail.

Wireless competitors can be expected to seek even greater share of the market by:

* Continuing to offer lower flat-rate structures for local and long-distance, supporting calling party pays and prepaid calling.

* Increasing incoming traffic by restructuring pricing, such as giving the first two minutes free, to attract users concerned with cost.

* Continuing to create value-added services that go beyond the basics, including voice mail and caller ID.

* Improving signal quality with technology now available for echo cancellation, full-duplex and digital noise suppression.

However, it is too early to place a bet on the demise of the wired network.

The combination of a mobile society, advances in quality, unique wireless features and lower prices will inevitably lead to displacement of some voice traffic. However, the wireline business has its own competitive pricing and product strategies to protect and increase traffic among the "less mobile" niches. Wireline companies also have a clear edge in achieving high customer penetration with high-speed data services and ready access to attractive content and electronic transactions. Early wireless data products have shown little market acceptance. It will take years to develop technology to compete with ADSL and ISDN.