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Cingular, SBC Adopt GSM Technology,
Breathing New Life Into U.S. Market
By DENNIS K. BERMAN, EDWARD HARRIS and PUI-WING TAM
Staff Reporters of THE WALL STREET JOURNAL
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For years, U.S. wireless companies watched as much of the rest of the world designed its mobile networks, technologies and even cellphones based on a standard known as the global system for mobile communications, or GSM.
Now two of the biggest U.S. players are following suit. Cingular Wireless, the nation's second-largest wireless carrier, announced last week that it is converting its network to GSM, the leading standard in about two-thirds of the world's mobile systems. The move by Cingular, a joint venture of SBC Communications Inc. and BellSouth Corp., follows similar plans by AT&T Wireless Services Inc., the nation's third-largest wireless company.
The change is injecting a new round of debate into the fractious U.S. wireless industry, which has a tradition of competing technologies that many agree has stymied the development of its wireless system.
Keith Bachman, a wireless-industry analyst at ABN Amro, says GSM momentum won't improve overall wireless service in the U.S. With the nation's carriers already heavily invested in competing standards, it remains nearly impossible for one standard to prevail, unlike in Europe. "There are still two camps," Mr. Bachman says.
But with expensive GSM conversions taking place in two of the networks of the nation's top four wireless carriers, North America's already struggling equipment vendors will feel some effects. Lucent Technologies Inc., Nortel Networks Corp. and Motorola Inc. now find a host of European companies trodding their territory. Three European companies -- Finland's Nokia Corp., Telefon AB L.M. Ericsson of Sweden and Germany's Siemens AG -- will handle the deal with Cingular, which could cost as much as $3 billion.
To compound matters, sales growth across the telecommunications industry is stagnant, which means fewer contracts to be won. So the Europeans' gain is the North Americans' loss.
"For the North American telecom vendors, their home turf is not as safe as it once was," says Jason Chapman, an analyst at Gartner Group in London.
Until now, GSM largely was marginalized in North America as carriers argued the merits between a more popular domestic technical standard, called CDMA (code-division multiple access), and TDMA (time-division multiple access), which AT&T and Cingular are both abandoning.
Just 7% of U.S. mobile users were on the GSM standard in 2000, a number expected to grow to 33% by 2007, according to Strategis Group, a telecom-research group based in Washington. Granted, that still falls short of CDMA usage rates, which are expected to surge to 49% of mobile customers, up from 27% last year. But it still represents a turnabout for GSM.
That said, CDMA's proponents say the Cingular deal doesn't signal trouble for the carriers that use CDMA networks. Verizon Wireless, the joint venture of Verizon Communications and Britain's Vodafone Group PLC that is the largest wireless provider in the U.S., remains committed to CDMA technology, as does the No. 4 carrier, Sprint Corp.'s PCS Group.
The technology has made inroads in the world's fastest-growing market, China, and also in South Korea. CDMA advocates also point out that the holy grail of wireless service -- the super-high-speed third-generation, or "3G" standards -- are based on CDMA, not existing GSM, technology.
"When Cingular gets done changing out, they'll provide a grade of service that is no better than what our customers get today, and in many cases not as good," says Dick Lynch, chief technology officer of Verizon Wireless.
Such charges are "clearly not true," says Cingular spokesman Clay Owen, adding that the GSM technology will allow for wider geographic coverage for Cingular customers, particularly in rural areas. The company also will have high-speed capacity in most of its markets by the end of 2003. "We'll start almost immediately," he says.
Such exchanges underscore the terms of the debate. Wireless service has become a commodity, with the grueling price competition to prove it. So providers are turning to technology to help differentiate themselves and improve profit margins. In that, the split between GSM and CDMA shows two different visions on how carriers will make their pitches.
The move to GSM positions Cingular to take advantage of a range of lower-cost technologies, according to Dave Williams, the company's vice president of strategic planning. As the most common wireless technology in the world, both GSM-based handsets and infrastructure technology will be cheaper for the company to maintain.
Mr. Williams predicts that Cingular's phones could be priced at $15 less than comparable CDMA models. And with global GSM development, the company will tap into a broader range of innovations.
Lower costs are an important way to attract customers, say AT&T officials. "When an industry consolidates around a standard, you see the lowest unit costs and the highest level of innovation," says Rod Nelson, chief technology officer for AT&T Wireless, of Redmond, Wash.
Critics of the 10-year-old GSM technology say its path to high-speed data services is a bumpy one. To reach 3G data speeds, GSM operators will have to go through at least two more technology transitions. "There are so many steps, so many capital expenses. This puts them further behind, not further ahead," says Irwin Jacobs, chief executive of San Diego-based Qualcomm Inc., a competitor in CDMA technology and intellectual property.
Some analysts who track Qualcomm agree, and say Cingular's GSM decision won't necessarily hurt Qualcomm. The company's stock dropped on the news but has since recovered.
Mark Roberts, an analyst at First Union Securities, says Cingular had long expressed its intent to move to GSM. Mr. Roberts argues Qualcomm will ultimately be a winner because carriers eventually will move to 3G networks, and "all 3G is based on some form of CDMA."
One hiccup could be just how fast GSM players move there. Both Cingular and AT&T say they are developing an intermediate technology, EDGE, for enhanced data rates for global evolution, that could postpone their eventual migration to 3G.
Cingular's Mr. Owen says the first upgrade will require "minimal" changes. He concedes, however, that the final step to 3G data speeds is a "different kettle of fish."
Indeed, CDMA operators are banking on a quick rollout of high-speed data services as a way to lure high-margin customers. For example, Sprint PCS, of Westwood, Kan., says it will have ubiquitous high-speed service by the middle of next year. The technology, based on an early version of CDMA's 3G technology, will allow for wireless data speeds of as much as 144 kilobits per second, or about twice the speed of standard dial-up modems.
In addition, CDMA operators boast that the standard requires less wireless spectrum than GSM at 3G speeds. "AT&T and Cingular must go to auction when 3G spectrum becomes available. And they must win it," says Andrew Seybold, editor of Andrew Seybold's Wireless Outlook newsletter.
Either way, some say the shifts to GSM represent a pivotal moment for the U.S. wireless industry.
"GSM long established its pre-eminence outside the U.S., and now the U.S. is won over too," AT&T Wireless's Mr. Nelson says. "As far as the long-term volume battle, this is going to be drawn out." |
