Andrew Seybold's October analysis of AT$T's choices.
JohnG
outlook.com
The Wireless Roadmap: A Fork In
The Road
October 2000
There are strong rumors that AT&T Wireless is about to make an
announcement that will impact all wireless service operators in the
U.S., and many in the rest of the world. If these rumors are
true—we are hearing them from many sources—the anticipated
announcement will be made in a matter of days if not weeks.
Setting the Stage
AT&T Wireless is one of two U.S. TDMA or D-AMPS wireless service
operators in the U.S. TDMA, GSM, and Nextel’s iDEN are based on
time-slot technologies with which a radio channel is divided into
time slots. Each slot is capable of one voice call and the number of
calls that can be handled on a channel is dependant upon the number
of time slots that are available.
When AT&T decided on TDMA as its digital technology, CDMA was
yet unproven, and no one made GSM equipment in the 800-MHz
band. TDMA is based on the same technology as GSM, but it is
sufficiently different that the two are not compatible.
AT&T began deploying TDMA, as did SBC, BellSouth, and a number of
wireless service operators in South America. This resulted in TDMA
emerging as a third “standard” for digital wireless systems. GSM is
the most prevalent worldwide. CDMA is used by Verizon, Sprint
PCS, and a number of wireless service operators in South America
and Asia.
From a technology perspective, the U.S. wireless service market
looks like this:
Carrier Ranking
Technology
Verizon
CDMA
Cingular Wireless
(SBC/BellSouth)
TDMA/GSM
AT&T Wireless
TDMA
Sprint PCS
CDMA
Nextel
iDEN
US Cellular
CDMA
VoiceStream
GSM
TDMA is ahead of CDMA by a few million users in the U.S., but this
is about to change!
The Rumor
AT&T Wireless has been struggling with two issues. The first is its
stock value, which has been far below the IPO price and stagnant.
The second is its migration path to high-speed data. AT&T has been
backing a technology called EDGE, which may, in fact, turn out to
be a technology that looks good in the lab but doesn’t work in the
real world. If AT&T’s stock is depressed, and its technology is at
risk, is there something it can do that would fix both problems?
Yes! It is rumored that AT&T is about to change technologies.
Changing Technologies
Our sources indicate that since EDGE won’t be available for a long
time, if ever, AT&T has been agonizing over how it might move to
a different technology for higher-speed data and voice usage.
There are many issues to be considered, the most important of
which concern customers. AT&T will have to maintain its current
level of service, replace customers’ handsets with handsets for the
new technology, and keep customers happy while changing out cell
sites to convert the network.
AT&T wouldn’t be the first to face these issues, but it would be the
first to face them in its entire coverage area. SBC/BellSouth
purchased some of Ameritech’s wireless system and is replacing the
CDMA technology with TDMA, but only in specific markets. AT&T
would have to replace TDMA over its entire coverage area—a task
that is daunting to say the least.
AT&T’s choices are to switch to CDMA, which has an easy migration
path to high-speed data, or to move to GSM, a sister technology to
TDMA. GSM offers several advantages in that it would enable AT&T
to deploy GPRS packet-data services at speeds of between 9.6 and
38.8 Kbps. It would also mean that AT&T would use the same
technology used by all of Europe and most of Asia. This would
facilitate a deal between BT and AT&T Wireless.
If AT&T Wireless were to announce a switch to CDMA, it would
indicate that AT&T had made the “wrong” technology choice in the
beginning. A decision to move to GSM could be couched in more
appealing terms for Wall Street and investors. It would also bring
AT&T in line with BT.
We believe that AT&T Wireless will announce a move to GSM for its
U.S. network in the near future. While it doesn’t make as much
sense for future systems growth, it does satisfy AT&T’s objective of
getting data services into the market, and there are many GSM
handset vendors, which is an important consideration.
At the same time, we expect AT&T to announce 3G plans to move
to WCDMA, the technology that will be used in Japan starting next
year. However, in order to build out a WCDMA system, AT&T would
need to win additional spectrum at one of the upcoming auctions. It
would be almost impossible to overlay WCDMA on top of TDMA or
GSM services within its existing pool of cellular spectrum. While
possible in its PCS coverage areas, AT&T will most likely follow the
model being used in Europe where they add GPRS packet data to
existing GSM systems and go to the auctions for “new” spectrum for
3G systems.
The Impact
AT&T’s anticipated change from TDMA to GSM will have worldwide
repercussions. This one announcement will have an impact on the
Deutsch Telecom acquisition of VoiceStream, Cingular Wireless’s
next moves, and handset and PDA product development.
Let’s start with VoiceStream. Deutsch Telecom paid $20,000 per
user for VoiceStream ($50.7 billion). The rationale was that
VoiceStream uses GSM technology and it will give DT an entry point
into the U.S. market. But VoiceStream’s footprint is not
nationwide, so the $50 billion buys only an entry point. AT&T’s
anticipated decision to jump ship and move to GSM would lower
VoiceStream’s value to DT. Since the VoiceStream acquisition is not
yet a done deal, we believe that DT would try to get out of this
purchase. The immediate effect would be to send VoiceStream
stock downward.
Cingular Wireless
Cingular Wireless would also have to change technologies. It could
not remain as the only TDMA carrier in the U.S. Handset vendors
wouldn’t be interested in building new handsets for a single
network, and Cingular would be the only U.S. service operator
without data capabilities. So where would Cingular go? This is an
unknown, although the following scenario would certainly work.
Cingular already has two of its coverage areas built out as GSM—all
of California, and the Carolinas. Cingular also has a coverage hole
on the east coast. Cingular could switch to GSM, and purchase
VoiceStream if DT decides to dump the deal. This would be an
interesting move because Cingular and AT&T would have the same
technology once again, and it would provide service into the
remainder of the east coast areas. It would also give Cingular
packet-data capability.
If these two players were to choose this approach, the wireless
landscape would look like this:
Carrier (Ranking)
Technology
Verizon
CDMA
Cingular
GSM
AT&T
GSM
Sprint PCS
CDMA
The number of GSM users would exceed the number of CDMA users
by a few million, and handset and PDA vendors would be more
inclined to build GSM capability into their next-generation handsets
and PDA's since a single platform could be used to provide devices
in the U.S., all of Europe, and parts of Asia.
Qualcomm
Meanwhile, Wall Street would see all of these changes as having a
negative impact on Qualcomm’s business model and Qualcomm’s
stock would take a hit. AT&T would probably enjoy an upsurge in its
stock price.
A better migration path would be for Cingular to move directly to
CDMA instead of GSM, but Cingular faces the same political issues as
AT&T Wireless. A move to CDMA would be seen as an admission that
the technologists at SBC and BellSouth had somehow made the
wrong choice.
Even so, Cingular should move to CDMA for the following reasons:
• Cingular could move to higher-speed data using its existing
spectrum and not have to spend $billions at auction for new
spectrum.
• This move would result in more CDMA users than GSM users in the
U.S. Devices would be developed for the GSM and CDMA platforms
at the same time. If Cingular were to move to GSM, GSM devices
would come first, followed by CDMA devices.
• The CDMA community recently announced that it would be
building handsets with both cdmaOne and WCDMA capabilities.
These handsets would permit almost universal roaming on a
worldwide basis as 3G systems are deployed.
• Cingular would be able to serve more customers on the same
spectrum because CDMA is more spectrum-efficient than GSM or
TDMA.
The Fun Begins
It will be interesting to see how this all shakes out. The implications
we have presented above are significant. As always, the final
decisions will not necessarily be based on a technological
assessment, but rather on internal politics and the anticipated
effects on stock prices. Technologists don’t want to be branded as
having made a mistake in their choice of technology, and they will
try to minimize this perception. Their management teams, also
averse to admitting a mistake, will most likely opt for the best
political decision over the best technology decision.
Qualcomm’s stock would take a hit for a few months, but hopefully
Wall Street would come to understand that the 3G end game is
CDMA. The folks at Qualcomm will still be smiling. They might miss
out on royalty revenue in the short term, but Qualcomm will
emerge a winner.
If AT&T and Cingular both opt for GSM, the good news for the
consumer is that we will have gone from four to three digital
technologies being used in the U.S. Handset prices would drop, as
would voice service prices. All U.S. networks would be capable of
delivering data, and this would benefit all of the companies
involved in delivering the “Wireless Internet” to users. All in all,
AT&T’s anticipated shift in technologies would have a long-term
positive impact on all of the wireless service operators, device
vendors, and information suppliers. End users would have more
products than ever before, at lower prices. |
