T's entire thesis regarding their ability to compete is a gamble that what works for NTT in Japan will work in the US as well.
In Japan, with a population whose near-exclusive internet experience has been with handsets, and specifically the "slower, more modest" I-Mode technology, I-Mode provides sufficient utility and amusement.
How will sophisticated US customers - both adult and adolescent - with extensive Internet experience and expectations - and within a culture where faster and more is always not just better, but desired, respond to a "slower, more modest" service approach?
How will children choose when choosing between SMS with cartoon graphics or networked games using GPS, or surfing the net at speeds better than at home? How will adults choose in a culture where the fastest, the newest, the most advanced are sexy and symbols of achievement and status?
The US ain't Japan. And I-Mode will find New York a tougher sell than Tokyo.
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AT&T Drops Bombshell on Motorola
By Tero Kuittinen
Special to TheStreet.com
11/30/00 6:05 PM ET
A storyline that is every bit as complex as that unfolding in Seminole County, Fla.,
comes from the boardrooms of wireless phone operators across the Americas. On
Thursday, AT&T (T:NYSE - news - boards) finally announced its plans for future
mobile-network upgrades -- and it's a step away from the CDMA camp favored by
Motorola (MOT:NYSE - news - boards) and Qualcomm (QCOM:Nasdaq - news -
boards) and toward the global standard for mobile communications that reigns
everywhere else in the world.
Among the wireless-equipment vendors, the immediate winners are Ericsson
(ERICY:Nasdaq ADR - news - boards) and Nokia (NOK:NYSE ADR - news - boards).
The immediate losers are Motorola -- which was off more than 5% on the news
Thursday, and to a lesser extent Qualcomm (more about it later).
It's worth noting that the wireless operators using the original time division multiple
access standard in North America and South America are the hottest current
battleground of the equipment vendors. The leading TDMA-based providers are AT&T
and Cingular, a joint venture between SBC Communications (SBC:NYSE - news -
boards) (which owns 60%) and BellSouth (BLS:NYSE - news - boards) (which owns
40%). This combination is already the second-largest U.S. provider of wireless
services. On the second tier, there are smaller players from Canada to Mexico and
through South America.
Until now, these time division multiple access operators, stuck in an antiquated
technology standard, have seemed hesitant about their upgrade plans and unwilling to
commit to any long-term strategy.
Meanwhile, competitors using the other two dominant global standards -- CDMA and
GSM -- threaten to get a leg up in the race to provide new third-generation standards,
offering fast wireless Web connections.
Those using the CDMA standard (Sprint PCS (PCS:NYSE - news - boards) and
Verizon (VZ:NYSE - news - boards)) are adopting an upgrade called CDMA2000. The
operators using the GSM are adopting, as a half-step, a mobile Internet technology
called global packet radio service, and then plan to move to a third-generation solution
called W-CDMA.
But until this year, the solution for upgrading time division multiple access to
third-generation standards has been up for grabs. This has resulted in speculation. For
a couple of months, a rumor mill has been working overtime to divine the intentions of
both major TDMA-based operators, AT&T and Cingular.
Until Thursday, both were thought to be considering a new third-generation-based
technology standard known as 1xRTT as their upgrade technology of choice. This
would have been a clear victory for the CDMA2000 camp -- notably Qualcomm,
Lucent (LU:NYSE - news - boards), Motorola and Nortel (NT:NYSE - news - boards).
Joining Forces
A recent decision by Brazilian authorities to open the door for GSM in the biggest
South American market increased confusion about the situation. American telecom
operators have designs on South America, and a shared future upgrade path in both
continents would suit them well. But the resurgence of the GSM standard in South
America has upset the TDMA/CDMA division of this market.
How to achieve harmony among three competing digital standards? How to ensure
that U.S. TDMA operators can find common upgrade ground with some other digital
standard -- be it GSM or CDMA?
AT&T's solution -- which is going to create controversy -- is to combine GSM and its
GPRS upgrade with the existing TDMA properties of AT&T. This is a major decision --
largely because it seems to freeze the CDMA favorite 1xRTT out of the company's
future plans.
This in turn means that Cingular very likely will adopt a similar TDMA-GSM-GPRS
hybrid solution; otherwise, neither operator could get meaningful economies of scale
and variety for the unique handsets the combination would require. The North
American TDMA operators, AT&T and Cingular, are probably joined at the hip when it
comes to future standardization plans. If they choose different paths, they will badly
fragment what's left of the TDMA market.
Toppling Dominos?
And so we get to the domino theory that will most likely start playing out in the
coming months. Canadian TDMA networks will likely follow AT&T's lead. Once the
TDMA operators in the U.S. and Canada are united behind a TDMA-GSM-GPRS
unification program, Brazilian TDMA networks will have a compelling reason to start
thinking about common ground with the arriving GSM networks.
TDMA operators of North America and South America are going to top 100 million
subscribers within two years. This year's shocker among global mobile trends was the
emergence of TDMA as the fastest-growing digital standard. The global base now
consists of nearly 55 million subscribers, and South American TDMA operators are
adding new subscribers at an annual pace of 120%.
Many mobile-equipment vendors are taken aback by this surge, because TDMA had
been largely dismissed as a has-been standard.
In Third Place, but Growing Fast
TDMA is a distant third as a wireless standard, but
fast-growing Latin markets may change that soon.
Source: EMC World Cellular Database
TDMA has been overshadowed by the CDMA subscriber growth of 1995-99 and the
gigantic GSM customer base, which currently tops 400 million. The resurgent TDMA
growth is one reason why the equipment-vendor wrangling over AT&T and Cingular has
been so bitter. The stakes are suddenly a lot higher than anyone expected in 1998.
The recently upgraded pool of projected TDMA subscribers is big enough to create a
real market for future TDMA phones with advanced features. But it's probably not big
enough to splinter -- it's still dwarfed by the size of the GSM market, which dominates
the global handset manufacturing industry.
The best chance for TDMA operators to keep handset prices and features abreast of
those in the hyper-competitive GSM-based market is to create a single, unified TDMA
market. The TDMA operators in places like Argentina and Mexico will have little
choice but to follow the lead of the biggest operators.
By co-opting GPRS as a mobile-data upgrade, AT&T is hoping to hitch its wagon to
the massive GSM research and development efforts in this arena -- and thus offer
relatively modestly priced mobile Internet technology with, unfortunately, relatively
modest data-transfer speeds (around 40 kbps initially).
Lowering Expectations
The surrounding controversy lies in the fact that the 1xRTT standard AT&T spurned
would have offered potentially superior performance at lower initial network build-up
costs. But the market size for 1xRTT products seems far smaller than the market for
general packet radio service products -- driven by the mammoth GSM market. So
AT&T decided to put its trust in economies of scale -- and ensured product
development effort of major phone vendors -- rather than trust a more technologically
advanced, but commercially riskier 1xRTT.
The smash success of NTT-DoCoMo's iMode program -- which offers pared-down
Web access -- may have been what ultimately persuaded AT&T to go with GPRS.
iMode turned into a mass-market phenomenon even though it has a very low
data-transfer speed. Easy, rapid, packet-swiched access to the Internet turned out to
be the most compelling feature of iMode -- the severely limited data-transfer speed has
not hampered its triumphant advance.
In a sense, AT&T's decision reflects a sentiment of change among operators. Few
seem interested in hyping hyperfast Internet access, which has been the most widely
touted feature of the third-generation technologies arriving in 2001-02. Instead, the
slower, more modest technologies like GPRS are gathering steam.
These will not offer video streaming in full color, but they aim to duplicate the success
of the technologically modest but commercially proven appeal of iMode. Right now,
cheap 40 kbps mobile Internet access seems to be triumphing over the much faster,
but commercially riskier, 200 kbps mobile Internet access.
The AT&T news also means that Cingular is now turning into a titanic battleground. It
is the last line of defense for the 1xRTT camp. If it flips for a GSM-GPRS upgrade, the
rest of the time division multiple access market will likely follow.
Cingular might be persuaded to go with the 1xRTT standard, thus splintering the
TDMA market -- but AT&T has probably guaranteed that economies of scale will favor
the GSM-GPRS approach. Cingular is now going to be inundated by enormous
financial sweeteners to woo it into the 1xRTT camp -- it is now those vendors' last
opportunity to crack the TDMA market.
The Revenge of the TDMA Operators
The big loser among equipment vendors is Motorola, which is strong in 1xRTT but will
probably be more or less shut out of TDMA upgrades following the AT&T model. An
ominous sign here is that AT&T's first batch of orders also expanded its pool of
infrastructure vendors to include Nokia (along with the current providers Lucent, Nortel
and Ericsson). Siemens made the handset partner list, boosting the number of
AT&T's primary orders to European phone developers to three.
Ericsson has been losing AT&T's infrastructure orders heavily to Lucent and Nortel.
Will this decision reverse that trend? This is a key dilemma of the AT&T order that is
not immediately clear. Follow-up news on the exact allocation of AT&T's upgrade
orders will be carefully dissected.
AT&T's decision is a nasty public relations setback for Qualcomm, whose fans have
been busy predicting AT&T's imminent switch to 1xRTT. Last year, AT&T was
expected to follow the GPRS pathway -- but the strong code division multiple access
rumor mill managed to persuade many investors that the operator was up for grabs,
thus turning AT&T's decision into a cliffhanger.
However, AT&T's decision clearly names W-CDMA as the ultimate upgrade target --
so Qualcomm will get licensing fees in the future from W-CDMA products that AT&T
will start purchasing at the later date. So, in a sense, AT&T's new road map confirms
that it will end up with a standard that will benefit Qualcomm in the long term.
But during the next two to three years, it appears the decision will be a clear victory
for Ericsson and Nokia, which lobbied heavily in its favor. Ericsson sure needed relief
for its faltering handset division -- and this is it; a guaranteed customer in a new
product class. In advanced, complex handsets, Ericsson's blindness to consumer
trends won't be as big a handicap as in the teen market.
Lucent and Nortel may be able to handle the TDMA-GSM approach just as nimbly as
1xRTT. But this can't be seen as anything but a major setback for Motorola, as well
as for the Korean and Japanese handset manufacturers, which could have used 1xRTT
as an entry to the TDMA phone market.
Earlier neglect of TDMA product development may come to haunt the equipment
vendors who relied on faulty subscriber growth models. TDMA operators can now
exact revenge on companies that wrote them off when it came to supporting their
standard in handset development in the late 1990s. |
