CDMA IN KOREA FORETELLS SUCCESS FOR SPRINT PCS
The 2.5G Wireless service introduced in Korea has been a success, says Goldman Sachs. That bodes well for U.S. carriers like Sprint PCS (PCS,
$25, unch.) and Verizon Wireless, both of which use the same Code Division Multiple Access (CDMA) technology that South Korean operators use.
As reported in the Bull Market Report last week, the 2.5G Wireless service now offered in South Korea is the closest thing in the world to third
generation (3G) Wireless technology. So far the 2.5G services provided by Korean companies like SK Telecom have received mixed reviews, largely
because of lower-than-expected data transfer speeds for things like Wireless Internet surfing and because the handsets are clunky and expensive.
Still, Goldman Sachs points out that the 2.5G service in Korea, which uses Qualcomm’s (QCOM, $60, down 3) latest CDMA upgrade, has added
nearly 700,000 subscribers in its first three months. Handsets are selling well and average revenue per user (ARPU) for those customers is significantly
higher than for basic service. Just as important, says Goldman Sachs, is the fact that the new CDMA technology -- called cdma2000 1x -- seems to
dramatically increase a carrier’s voice capacity.
This could be very important for Wireless carriers battling in the spectrum-deprived U.S. Sprint PCS and Verizon are putting their CDMA networks
head-to-head with carriers using General Packet Radio Service (GPRS) technology in the race to 3G. Not only is CDMA proving to be easier to
implement, it now seems to offer the advantage of adding significant voice capacity to existing networks.
TODD’S TAKE: We’ve outlined the pitfalls Wireless carriers are facing on the path to 3G services, including the cost, competition, spectrum
shortage and the great unknown, consumer demand. We’ve also highlighted the advantages that CDMA users seem to have. But the fact that CDMA
should expand voice capacity adds another twist to this market, and it could nearly cover the risk carriers are taking by betting on 3G.
The move to 3G is a high-stakes gamble. For Wireless carriers, it represents a huge investment for an unproven technology that consumers and
businesses might or might not use. Worst of all, the longer it takes to build the 3G networks and discover whether it’s a winner or a loser, the lower a
firm’s chances of success (due to competitive threats). The development and deployment time at first seems mainly to rest on technological issues,
such as transfer rates and network upgrades. But in the U.S., the spectrum shortage throws a new wrench into the mix. A lack of spectrum could
seriously impede a carrier’s chance of success, no matter how solid their technology. And the problem is that (as we’ve noted in recent days) the
spectrum issue is growing more, not less, complex, especially with the resurrection of NextWave.
That’s why the ability of CDMA upgrades to increase voice capacity is so compelling. Wireless analysts say that CDMA upgrades could potentially
double the voice capacity of a Wireless network. We know already that voice is a killer application. So whether 3G services take off or not, a
doubling of voice capacity would mean that carriers like Sprint PCS could provide reliable voice service to twice as many potential customers (and at
a much lower per-user cost). Such a saving grace could prove more than enough to offset the costs of the whole 3G experiment.
Of course, CDMA technology is more than a safety net, meaning carriers employing it could gain significant first-mover advantages over non-CDMA
carriers. If 3G turns out to be the jackpot carriers are hoping for, first-movers are going to be the first -- and therefore maybe the only -- ones to cash
in.
Wireless clearly has its risks, and large risks they are. This is an industry breaking absolutely new ground in the hopes of discovering new sources of
huge revenue. This exploration into the unknown 3G world has some carriers really living on the edge. Time will tell who will survive and who won’t.
But one thing is for sure right now: Every turn in the road to 3G holds a new twist that can change a carrier’s chances of success. Investing in this
sector, therefore, requires special attention to the day-to-day business and technological developments of the companies involved here. At the Bull
Market Report we’re monitoring and evaluating both extremely closely. As we watch Wireless companies move into a new era of Wireless
communications, we’ll keep you posted on whether we think their stocks are worth the risk or not.>> |
