A market opportunity

Many PCS companies with licenses in the C, D, E and F blocks have yet to deploy wireless infrastructures. Once they start, they may find it difficult to follow in the footsteps of A and B block PCS license holders that are using digital systems based on IS-136 time division multiple access, upbanded IS-95 code division multiple access and North American GSM standards.

The key question is whether the marketplace will support so many wireless operators offering similar services and pricing structures. One unfolding market opportunity, based on new and evolving offerings, calls for PCS license holders to offer wireless services with metropolitan mobility but at pricing levels and subscriber densities suited for wireline substitution applications.

PCS license holders can provide mobile service using low- or high-tier cellular technology. High-tier technologies include GSM, TDMA and CDMA; low-tier technologies include personal access communication system (PACS), personal handy-phone system (PHS) and Supercordless.

The two types of technologies differ significantly in network deployment costs and coverage because they are based on different design philosophies. Low-tier cellular is designed to compete with wireline service and provide wireless services as inexpensively as possible. High-tier cellular is geared toward providing mobile service over as wide an area as possible at minimum cost.

High-tier cellular technology requires complex signal processing techniques to deal with the severe impairments that can occur on its transmission paths. Low-tier avoids these problems by limiting transmission distances so the impairments are less severe and can be addressed with simple signal processing.

To achieve wide area coverage, network planners deploy high-tier base station antennas at 30- to 40-meter heights. In contrast, low-tier base station antennas are placed at 10 meter heights that result in greater transmission propagation attenuation and smaller coverage areas.

The differences mean that high-tier base stations typically can cost 20 to 30 times as much as low-tier base stations.

>From a service perspective, the most significant difference is the limited coverage area that low-tier technologies provide. Because low-tier base stations have smaller coverage ranges than high-tier base stations, low-tier technologies require more base stations to cover a geographic area.

Because the number of channels per base station is similar for both technologies, greater subscriber densities are needed for low-tier systems to be cost-effective. Low-tier technologies are economic only in urban and surrounding suburban areas where public switched network subscriber densities are greater than several hundred per square kilometer.

High-tier technologies are economic for lower subscriber densities and therefore can cover wider areas (Table 1).

One scenario for a typical metropolitan area illustrates a low-tier opportunity for PCS license holders. It assumes that mobile services are being provided by two AMPS operators, and the A and B block PCS license holders are using high-tier cellular technology. A PCS license holder-C, D, E or F block-is considering entering the market using low-tier cellular technology. The network model lets high-tier cellular operators determine how their profitability varies as a function of the prices they charge for local calls.

A separate network model lets the low-tier cellular operator determine the local call pricing levels it needs to be profitable. The analysis is structured to evaluate the likely outcome of direct competition between high- and low-tier cellular operators (Table 2).

Using typical equipment vendor prices for low-tier and high-tier network elements, the network models show the investment levels required for low-tier and high-tier technology-based PCS operators in the metropolitan scenario.

Investments are determined for all wireless network elements, end office switching and operations support systems (OSSs) over a 10-year study period. Subscriber handset costs are not included in the analysis.

The cumulative investment required for low-tier cellular is much less than for high-tier cellular (Figure 1). The analysis shows that most of the higher investment for high-tier cellular is the result of higher costs for base stations and base station controllers.

Low-tier cellular requires more base stations during the early study years to provide the same coverage area, but because low-tier cellular base stations are less expensive, the overall result is sharply reduced network investment levels (Figure 2).

Investment in base stations and base station controllers is the most significant money item for high-tier cellular; for low-tier cellular, this investment is about equal to switching and OSS investments.

Head-to-head analysis A competitive analysis reviews the likely outcome of direct market competition between a low-tier and a high-tier cellular operator. A marketing model with detailed estimates of traffic and revenues is separated into local, long-distance and international categories.

Both operators are assumed to resell long-distance and international services at prevailing prices. Interconnection costs are included for local calls that terminate in the incumbent local exchange carrier network or other competitive LEC networks.

Operations costs are determined separately for the low- and high-tier operator. A financial analysis is completed to determine each operator's profitability. The analysis determines the net present value of the business and the internal rate of return measured over 10 years (Figures 3 and 4).

Both low- and high-tier operators are assumed to have a monthly fixed service tariff of about $15. Profitability for the high-tier operator was determined for a range of local call rates from 8.4 cents to 2.4 cents a minute. Profitability for the low-tier operator was determined for a single local call rate of 2.4 cents a minute.

The results clearly show that a low-tier cellular technology-based operator should find it easy to compete successfully against a high-tier cellular operator. The low-tier operator has a business with an internal rate of return of 31.4% and a net present value of $94.6 million measured over 10 years.

While the high-tier operator has a profitable business at local call rates of 8 cents a minute and higher, it quickly becomes unprofitable if it must decrease local call rates to compete with the low-tier operator.

Competitive advantages >From a customer perspective, one of the disadvantages of low-tier cellular service is the limited coverage area that it provides. Low-tier service initially could cover an urban area and eventually be expanded to include surrounding suburban areas. However, low-tier service would be more attractive if the service provider could offer high-tier/low-tier dual-mode operation.

With dual mode, users would have portable handsets that could operate with both the low-tier cellular network and with one of the high-tier cellular networks that serve the customer's area. Customer handsets automatically would select the less expensive low-tier service wherever available and fall back to the more expensive high-tier service in areas not covered by low-tier service. The low-tier service operator would need to establish a business agreement with one or more high-tier operators to provide such a service.

An important aspect of low-tier cellular technologies is that their inexpensive network cost structure makes them competitive with wireline service. As a result, low-tier cellular operators can compete not only for mobile users, but with the incumbent LEC for fixed station public network users.

Low-tier cellular operators will have a much larger potential market compared with high-tier operators because local mobile call rates can be established that are only slightly more expensive than local wireline call rates. Many fixed station public network users would become mobile users if the premium for doing so were small.

In contrast, local call rates for high-tier service typically are 10 times larger than wireline access rates, which will sharply limit the number of fixed station users willing to convert to mobile service.

Low-tier technology-based service providers should find that market share can be acquired quickly and without the burden of expensive marketing and sales campaigns, all of which should let the new operator become profitable in less time.