The wireless world tour

When the World Trade Organization met in February, some 70 nations signed their allegiance to a pact that would open domestic telephone service to foreign competition in mobile, satellite, paging, data and other wireless transmissions. It was a welcome sign to U.S. companies treading the unpredictable international waters that had left some adrift without a lifeline.

Dramatic growth potential has lured U.S. cellular interests abroad since the late 1980s. Today's narrowing domestic margins make international ventures even more tantalizing (Table 1).

At the end of 1996, there were roughly 140 million cellular and personal communication services customers worldwide, according to The Strategis Group. By 2002, that number is expected to surpass the 450 million mark, producing $40 billion annually in handset sales alone.

With U.S. penetration rates maturing to around 17%, the worldwide average penetration of a mere 3% appears to have plenty of room for growth. But wireless globetrotters don't set afloat without some measure of trepidation, especially if they've read the stories that have haunted earlier attempts.

Postcards from the edge Latin America is considered one of the most fertile areas for wireless growth. The average penetration rate for its five largest countries hovers around 1%. In Brazil alone, there's a waiting list of 3 million people for wireless service and a staggering 10 million for wireline. If you're looking to develop a telecom company, those numbers would be difficult to ignore.

Bell Atlantic didn't ignore them. In 1993, the carrier invested $1 billion for a 42% stake in Grupo Iusacell S.A. de C.V., a Mexican cellular operator that sought to compete with the incumbent carrier Telmex for fixed and mobile service. The deal began to crumble when President Carlos Salinas de Gortari left office and the Mexican communications and transport ministry reportedly could find no record of the assurances Iusacell had been given to expand its network and compete against Telmex.

The situation worsened with the subsequent passage of a telecom law that changed the way licenses are granted in Mexico and could have nullified the Bell Atlantic venture. Questions about funds that an Iusacell official allegedly paid to a member of the Salinas family further exasperated the experience south of the border.

But Bell Atlantic stood firm. The question about payment of funds was resolved, and the company committed an additional $50 million in Iusacell stock to capture majority interest of the board. Now with management control, Bell Atlantic plans to use its experience in five other international markets to turn around the deal. In its favor is a Mexican economy that Morgan Stanley predicts will see lower inflation and an improved gross national product in 1997.

China, likewise, has proved to be an unpredictable business climate.

"A deal in China is always an interactive process. You are always moving in one direction or the other," says Keith Grinstein, president and chief executive officer of McCaw International, a wholly owned subsidiary of Nextel. "In developing countries, their legal system operates much differently. They don't really have a commercial law code. So they operate largely through relationship and by contract that is very difficult to enforce in a court of law-if indeed we could actually determine what would be the correct court of law. Disputes have to be negotiated constantly.

McCaw International had its first taste of these negotiations last year when it entered a GSM venture to provide the second wireless system in Shanghai. Because the Chinese government does not allow foreigners to directly operate its telecom systems, McCaw joined as a passive investor-what the Chinese refer to as a mother-in-law. The American company can voice its opinion, but the operation is not required to follow the advice.

McCaw took the plunge with a $22 million investment to build out the GSM system in Shanghai and its suburbs. In return, it was to receive 25% of the net proceeds. The Chinese government then decided to expand the network and asked McCaw for an additional $80 million. "We said, 'No. We have put our flag in China. We want to stick it out, but we are not interested in advancing the amount of money that we have invested,'" Grinstein recalls.

The Chinese responded by looking for another partner and notified McCaw that its share of the net proceeds would be reduced proportionately. McCaw did not walk away.

"We're not going to increase our investment. We're not going to decrease our investment. We're going to hold firm and see if the China tree grows," says Grinstein.

Cosmic appeal The China syndrome did not sour McCaw International's taste for global expansion. Far from it. The company has garnered a nationwide specialized mobile radio (SMR) license in the Philippines to complement its paging license in that island country, where it also hopes to be awarded a PCS license. It's the largest SMR provider in Brazil and in Mexico, and it holds the most SMR channels in Argentina.

Perhaps its most far-reaching link still awaits. Teledesic, owned in part by Craig McCaw and Bill Gates, is preparing to launch a broadband satellite system that's a natural match for the terrestrial wireless company.

"One of our great dreams would be that when we get a license in a country, we won't have to spend 50% of our time worrying about our ability to get interconnect because that is the lifeblood of a system," Grinstein says. "If you don't have interconnect, you really don't have a system. Teledesic offers universal access to the public network. So in the future, we could in essence not worry about microwave or fiber to our switch but simply put an antenna at our cell sites and gain broadband access to the public network via Teledesic." If the Teledesic birds fly as expected in 2002, they'll likely be aloft with an array of other satellite selections. One novel approach already in commercial operation is Comsat Corp.'s asynchronous transfer mode service that runs over its satellite network. The geostationary offering runs as fast as 45 Mb/s to simultaneously support voice, data, video, multimedia and Internet access (Figure 1).

Like other satellite companies, Comsat enjoys a global audience because it can make any number of connections around the world and do so in about 45 days from the set up of an earth station to full network operation. Compared with laying fiber to support ATM, the Comsat option is a fraction of the cost.

"The large telephony carriers, the Internet service providers and the multinational corporations are probably the three biggest markets that we are addressing where we see a real ATM-via-satellite need," says Susan Miller, director of advanced business applications at Comsat.

"There has been a great deal of interest in the broadcast community, not just to deliver television to people but for the broadcast companies themselves to do production and distribution of content," she says.

AirTouch Communications makes satellite part of its global plan with a stake in Globalstar, a joint venture with Qualcomm, Loral Space and Communications and others to deploy low-earth-orbit satellites. The AirTouch strategy uses satellite coverage as an extension of an existing cellular system or in place of a nascent landline network.

But the company's roots are also firmly planted in the development of cellular. It partnered with German manufacturing conglomerate Mannesmann AG to launch in 1992 Mobilfunk, the world's first commercial GSM system. Its international collaborations span seven European countries and three in Asia.

Most notable is the alliance in South Korea that turned up a code division multiple access (CDMA) cellular system a year ago. The country was intent on building out a CDMA system and awarded AirTouch a coveted nationwide license. Eight months later, 290,000 subscribers were on-line, and 75% of the South Korean population had system coverage.

While its rate of subscriber growth on the international side last year eclipsed that of its domestic operations, AirTouch is actually cooling its expansion and beefing up its existing investments. Increasingly, licenses are auctioned and not awarded, which makes turning a profit a much longer undertaking. Domestic obligations, such as the PrimeCo Personal Communications partnership, are financially demanding.

Rather than enter many new markets, AirTouch increased its holding in Mobilfunk from around 23% to 35%. It also increased ownership in Italy's Omnitel-Pronto Italia and took a majority position in Portugal's Telecel. With competition looming on all fronts, the introspective approach is popular in many wireless camps.

"The competitive climate is changing, and you see the need for the Bell companies to focus on their core business, defend their local market share and expand into long-distance," says Stephanie Comfort, principal equity researcher for Morgan Stanley. "It behooves them to focus in the United States because they are going to be under attack. These companies are streamlining, trying to reduce their cost. Yet, to operate business overseas, it demands a lot of resources, a lot of management time and focus on education on issues that they're not familiar with. All of that drags down the core. I think they will stay more U.S.-centric for the next three to five years to work through the competitive issues." The cellular roadshow BellSouth International was one of the first U.S. wireless companies to hit the international scene. The subsidiary formed in 1985, and its inaugural overseas network was deployed in Argentina four years later. Typical for the time, cellular was an easier sell to governing bodies that sought to protect the incumbent monopoly than landline services would have been.

"In the early stages of the process, governments recognized the economic potential of stimulating the telecommunications business," says Marshall Criser, vice president of strategic initiatives at BellSouth International. "In international environments, they also viewed cellular as something that was not as directly in competition with the traditional or core telephone business, and therefore, they were willing to open the markets up in that area. They understood that allowing competition was a way to attract investment in the telecommunications sector, which would contribute to other social objectives in terms of economic health and their ability to fund other programs.

The Atlanta-based carrier blazed a wireless trail throughout much of Latin America, Europe and Asia to give it a presence today in numerous countries outside the United States. In many of those markets, BellSouth's market share is larger in terms of wireless customers than the resident PTT system. Last year, its customer base nearly doubled.

"But the incumbent carriers are also recognizing record earnings, record growth and record strength as a result of competition," Criser adds. "The total market has been stimulated, particularly when you're dealing in markets where there was a great deal of underdevelopment of infrastructure. It's a very different scenario than in the United States. It's almost a reverse. In some countries where only 20% of the potential market is being served, there is greater opportunity for both incumbent and new competitors to realize market growth compared with a country where you may see a much greater development of infrastructure before competition begins.

Wireless options still abound in many pockets throughout the world. But jumping into the international scene is not a move for the fainthearted who are unwilling to wade through a sea of bureaucratic muck without the promise of a reward that balances the risk. To take advantage of that opportunity, carriers must ask, "What measure of political, regulatory and financial risk can we and our shareholders stomach?" Pat Blake is a freelance writer based in Cedar Rapids, Iowa. Her e-mail address is B814@aol.com.