Status Report

It's been an interesting couple of years for PCS providers. Many A- and B-block, and even several C-block, providers are bringing new service options to wireless users. But as those carriers are finding, PCS' market share and future hinge on the ability to distinguish itself from cellular. Carriers are implementing new tactics such as per-second billing, first incoming minute free and no contracts to differentiate themselves.

Meanwhile, all PCS licensees are setting plans and proceeding with network build-out, although some are farther along than others. And many C-block providers are finding that paying for licenses is nothing compared to financing build-out.

Regardless of the challenges associated with entering a duoply market, PCS providers are pushing forward as they bring networks on-line and introduce new marketing strategies to the wireless industry.

NEW KIDS ON THE BLOCK The upside of being wildly ambitious is that you attract a lot of attention. What is the downside? You attract a lot of attention.

PCS originally was touted as a high-tech, user-friendly alternative to cellular. As a new service, it could do whatever it wanted, and, in several key respects, it has. "First incoming minute free" was a strategy that paid off by balancing the inbound-outbound ratio and getting users to leave their phones on.

The promise of one number, one phone also is being fulfilled, albeit slowly. In July, US West debuted its Advanced PCS, which allows users to route calls to their homes and office numbers to their wireless phones. That's an important ability because it attracts many demographics, including small-business owners who live and die by their phones and people who juggle work and family and can't wait by one landline phone.

How PCS positions itself is key to its future because each carrier is born into a world that's already saturated with pagers, landline and cellular. PCS' success is key to wireless' future, too, because a single phone number helps blur the distinction between landline and wireless much like the PHS did in Japan. US West's Advanced PCS also provides a dial tone, which could attract non-users who would be more comfortable with wireless the more it sounds like landline.

PCS also is emphasizing its clarity and security.

"When you talk about PCS, you need to follow it up with 'all-digital network' and things that distinguish it from analog," said US West spokesperson Janine Liscic. "People who use cellular phones understand it. They know the problems with analog because they've dealt with it."

But in order for calls to find subscribers, PCS needs seamless nationwide coverage, which appears years off. Reliability is another issue. Network capacity reportedly is showing signs of being stretched thin in some markets, and dropped and blocked calls are problems that weren't supposed to afflict PCS.

"I've heard from many people, 'Yeah right, one phone. I need it to work more reliably if it's going to be my one phone,'" said Phil Asmundson, Deloitte & Touche analyst. "Now I think they are trying to scramble to say, 'Wait a minute. We need to be much better at customer service. We need to be much better at reliability.'"

Technology isn't the only way PCS is trying to distinguish itself. Rates lower than cellular's, per-second billing, first incoming minute free and bundled features such as voice mail and caller ID helped avoid cellular's stigma of nickel-and-diming subscribers.

The attraction of a lower-priced service has definitely gone in its favor, said Brian Cotton, Frost & Sullivan research director for wireless and telecom transmission. Other analysts say PCS must go further still with aggressive dime-a-minute-type marketing. According to Asmudson, PCS is cheap, and they haven't brought that out.

Customer service also is key.

"People have really learned to hate their cellular company almost as much as their cable company," said Michael Penn, director of sales and marketing at C-block carrier Enterprise Communications. "At least with cellular, they had two choices. They hate them both equally, but there's nowhere else to go."

PCS' goal is to give them a place to go.

"We have to provide better customer service than anyone else," Penn said. "Everyone says that, but no one does it. We've got to be one of the first that actually does it, and being a smaller company, it's easier for us to do it than the big mega giant."

US West was emphasizing customer service long before its launch. Because the carrier is usually the fifth or sixth provider in a market, Liscic said it did a lot of research to ask customers what they want.

PCS' growing market share has forced cellular to play catch-up.

"The incumbents had a little bit of hubris by thinking they were entrenched and the other people have to play the game by our rules," Cotton said. "The PCS carriers have shown we can do this our way."

But doing things the PCS way means PCS must live up to its promises and avoid falling prey to its own hubris.

"The expectations were so high," Cotton said. "The misstep of the PCS carriers was that in their rush to be competitive with cellular, they overpromised too soon what they could deliver."

AFTER THE GOLD RUSH Digital is about ones and zeros, but for most PCS licensees, it has been mainly about the zeros. Defaults, bankruptcies and the prospect of slim profit margins in a cutthroat wireless market could make securing financing for build-out difficult.

That's not to say the C block isn't without its success stories. One licensee that's graduating to carrier is Enterprise Communications, which launches this fall in two Georgia and Alabama markets. What did Enterprise do right? For one, it didn't get caught up in the exuberant auctions.

"Most of the failures you see are folks who bit off way more than they could chew," said Michael Penn, director of sales and marketing. "They bid the prices up to where they were unaffordable.

"When we purchased our license, we set a limit and stuck by it. Our partners had predetermined what markets they wanted and said, 'This is all we're willing to pay. This is all we can afford. This is all that makes business sense.' And they stuck to their guns. Whereas some of the big boys said, 'We need these markets no matter what we pay for them.'"

It is anyone's guess whether licensees such as NextWave can get a better deal from bankruptcy courts than the FCC. What is clear is that the debate has the potential to drag on for years. Worse, any decision could face challenges from those who either bailed out when bidding got too high or abided by the rules and paid for their licenses.

The issue for NextWave and Pocket isn't government debt; it is the financing and backing to build out the network, which is going to cost more than the licenses they paid for, said Deloite & Touche's Asmundson.

"So, where is that going to come from? Right now, we're speculating about how they're going to restructure their debt for their license," he said. "Well, their license is worthless unless they're able to build out a network. And that's going to cost more than the license."

Another question is whether the C block's cloudy future has soured Wall Street, which appears unconvinced that there are significant profits in a crowded wireless marketplace. The market is skeptical of a scenario of six PCS players and two cellular players, Asmundson said.

The C block's unusually high-price per POP is another deterrent.

"The exorbitant prices they paid for the licenses rule out any debt financing," said Brian Cotton, Frost & Sullivan research director for wireless and telecom transmission. "It would be hard to get a loan for that. "

What's clear is that licensees must act quickly to secure capital. For one, Wall Street won't remain a bull market forever. For another, an aggressive build-out ensures that supply can meet demand, and carriers can't afford to lose subscribers because of dropped and blocked calls. Reliability also benefits the entire wireless industry, which needs to prove it can be a viable alternative to landline. Convincing Wall Street that it is makes it easier to pitch the investment as an opportunity to get in on the ground floor of a growth industry.

"You need investors to say, 'We do see a wireless future,'" Asmundson said. "There's a real opportunity to use an E- or F-block license for WLL applications. I think the key is showing investors that wireless can compete on the same level with wireline, and I think that's what some of the investment community is looking for right now."

Private investment and partnerships are two ways to get a quick infusion of capital. You need to find someone who can access the financial markets, Asmundson added. Possible suitors include electric utilities looking for additional revenue streams as deregulation approaches and new-wave telecom companies such as Level 3. Less likely, but viable nonetheless, are RBOCs that don't already offer wireless service in the same markets. The removal of the 25% limit on foreign ownership also creates a wider array of financing sources.

Another possibility is media companies such as CNN and Bloomberg, which might see PCS as a way to target upscale demographics when handsets get smarter and networks become more robust.

"As people start to use their PCS phones as an appliance, then the content is going to become important," Cotton said.

But such scenarios are years off, and licensees need capital now. According to Asmundson, we need to get that spectrum developed.

"Those in the markets first reap the biggest and best rewards," he said. "Those who come in later are the ones fighting over the niche markets and/or new niche services."