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THE SHOSTECK EMAIL BRIEFING
Issue #10
August, 1998
Herschel Shosteck Associates, Ltd.
shosteck.com
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This is a free monthly cellular/PCS industry briefing for clients and associates of
Herschel Shosteck Associates, Ltd. To be added to or removed from this list, send email
to: jzweig@shosteck.com . You may also sign up at our website.
In This Issue:
-- THE SLOWING CONSTRUCTION OF CDMA/IS-95 SYSTEMS AND THE
CONSEQUENCES FOR THE TERMINAL MARKET
-- STRATEGIC SEMINAR IN ISRAEL
-- THE RISKS OF WIRELESS APPLICATION PROTOCOL
-- Copyright notice and pass-along permission
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THE SLOWING CONSTRUCTION OF CDMA/IS-95 SYSTEMS AND THE
CONSEQUENCES FOR THE TERMINAL MARKET
A number of largely unforeseen economic and market conditions -- in particular, the
Southeast Asian "melt down" have slowed CDMA market growth. As a consequence,
price competition among terminal manufacturers will be fierce, enabling only the
strongest to survive. A more constrained build-out of U.S. 1900 MHz systems is driving
a universal need for "tri-mode" terminals. Manufacturers which recognize this will
profit; those which do not will lose, regardless of the quality of their products.
In late 1997, we had concluded that -- notwithstanding higher priced infrastructure and
terminals -- CDMA/IS-95 had overcome many of its early operational limitations and
would plausibly pull even with TDMA/IS-136 in market share.
Over the short term this may be happening. Over the longer term, CDMA/IS-95 will be
challenged to maintain its current growth momentum. Deterioration of the Korean
economy aside, at least five external economic and market conditions have emerged
which are blocking CDMA from the market position which it otherwise may have
reached. While elements of these conditions could be seen earlier, their total effect
could not.
These conditions include:
-- Slower than expected construction of U.S. 1900 MHz systems, -- Slower than expected
transition to CDMA by U.S. 800 MHz carriers, -- Erosion of the Latin American
potential, -- The fading Chinese potential, and -- The Japanese economic crisis.
Elements of some of these conditions have been discernable earlier, in particular, the
potential impact of capital costs on the build-out of 1900 MHz U.S. systems. Others,
such as the drift of Japan's economy from chronic malaise to impending crisis have only
recently become apparent. Regardless, the collective impact of these conditions were
unforeseen six months ago.
THE SLOWER THAN EXPECTED CONSTRUCTION OF U.S. 1900 MHz SYSTEMS
After rapid early launches, construction of some U.S. 1900 MHz systems is slowing.
New systems, regardless of RF interface, are capital intensive. Because of these costs,
PCS carriers are now more cautious in constructing systems than was the case during
1997.
In late 1997, Sprint PCS "restructured" its field engineering offices. While Sprint stated
that it has no plans for slowing its network expansion, this restructuring reduced its
engineering staff by 25 percent. At least in part, it reflected disenchantment of Sprint's
three cable TV partners -- Tele-Communications Inc., Cox Communications Inc., and
Comcast Corp -- at the high costs and limited returns of the PCS venture. It also
reflected a paucity of roaming agreements and, due to that, slower subscriber and
revenue growth than anticipated.
In April, 1998, Sprint Corporation announced its First Quarter 1998 financial results.
Net income fell by 27 percent from that of First Quarter 1997. Sprint attributed this
primarily to its PCS build out. Sprint is continuing to build its network. However, it is
focusing more on increasing capacity in areas which it already serves rather than
expanding coverage. The loss in CDMA subscribers stemming from construction delays
and/or refocusing by operating carriers are compound by the losses from carriers which
may never launch. Nextwave, the highest bidder in the C Band PCS auctions, has
declared bankruptcy. This has shattered its plans for a nationwide CDMA system and
the subscribers that would have drawn.
THE SLOWER THAN EXPECTED TRANSITION TO CDMA BY 800 MHz U.S.
CARRIERS
While 1900 MHz carriers have faced the high costs of system construction, 800 MHz
CDMA carriers have faced the high cost of terminals. As of March, 1998, these
averaged $125 to $150 more than TDMA/IS-136 equivalents. To compete against other
digital technologies, CDMA carriers feel compelled to subsidize this cost difference.
This has motivated them to defer wide-scale digital promotion for as long as possible.
In addition, some 800 MHz carriers are decreasing subscriber acquisition and system
investment in order to raise revenues and cash flow. During the First Quarter of 1998,
360o Communications recorded a net gain of 61,460 new subscribers. This marked a 51
percent decline from customer additions during the First Quarter of 1997. However,
aided by reduced customer acquisition costs, 360o enjoyed a more than fourfold increase
in net income, from $9.4 million during the First Quarter of 1997 to $44.1 million during
the First Quarter of 1998.
Concern over high priced terminals is not unique to the U.S. In Singapore, M1, which
launched service on June 1, subsidizes each CDMA/IS-95 terminal by more than S$400
($229). In addition, CEO Neil Montefiore points out that CDMA battery life is one to
two hours versus six to seven for GSM. He also notes that CDMA cannot yet deliver
short messaging, a feature widely embraced by GSM subscribers. "For the consumer,
CDMA handsets are still a generation behind their GSM equivalents."
EROSION OF THE LATIN AMERICAN POTENTIAL
Erosion of CDMA's market growth in the U.S. has been paralleled by erosion abroad.
Two years ago, CDMA was viewed as the wave of Latin America's digital future.
This has changed. Without question, CDMA is experiencing success in Latin America.
In February, Mexico's Iusacell awarded a $200 million contract to Lucent Technologies
for CDMA infrastructure. In a first phase to be completed by February 1999, Iusacell
will make CDMA "widely available" in a service area which covers 66 million people.
This represents 70 percent of Mexico's population. In May, the CDMA Development
Group publicized that NEC do Brazil would supply A band cellular licensees, Telesp
Cellular and Telerj Cellular, with CDMA/IS-95 (cdmaOne) infrastructure. This will
serve Sao Paulo and Rio de Janeiro, the country's two largest metropolitan markets.
However, most of B band licensees have opted for TDMA. To the extent that European
carriers are buying into the Brazilian market, they would more plausibly be favorable to
TDMA than CDMA.
On balance, in most cases, Latin America has been a TDMA/IS-136 story. As of
December, 1997, 19 digital systems were operating in 14 Latin American and Caribbean
countries. Together, they served 1,574,000 subscribers. Centennial Cellular of Puerto
Rico had 50,000 CDMA/IS-95 subscribers; Ameris of the French West Indies reported
27,000 GSM subscribers.
The remaining 17 systems reported 1,497,000 TDMA/IS-136 subscribers -- 94.1 percent
of the digital total. By June 15, CDMA/IS-95 subscribers in Central and South America,
spurred by new systems launches, had increased to 130,000.
In sum, CDMA/IS-136 will gain a meaningful presence in Latin America. However, the
evidence to date points to TDMA/IS-136 gaining most of the market.
THE FADING CHINESE POTENTIAL
In March, 1997, Motorola began construction in Beijing of the first and largest
CDMA/IS-95 system in China. Operated by Beijing Telecom Greatwall Mobile
Communications Co., Ltd. (BTG), this was one of four similar "trial" systems. In
November, Motorola announced completion of the system with more than 30 based
stations and a capacity of 43,000 subscribers. This raised the expectation, that CDMA
was gaining a meaningful foothold in the Chinese market.
However, as of August, 1998, none of the four systems were as yet in commercial
operation. This delay stemmed from the reluctance of the Ministry of Posts and
Telecommunication to grant interconnection. Informed sources at Motorola believed
that the interconnection issue would be resolved shortly as of May, 1998, but so far it
has not. It has already delayed launch of commercial service by nine months.
Not to be forgotten, the continual expansion of the Chinese market -- and with that the
expansion of wireless subscribers -- now seems in question. Through 1997, under the
hand of Prime Minister Zhu Rongji, China looked likely to avoid the financial crisis
which was sweeping Southeast Asia. This is becoming less likely. China's banks look
increasingly precarious. Deflation, slowing exports to the rest of Asia, and growing
unemployment all point to recession -- or, at a minimum, a slowing in China's economic
growth. With either, the growth in wireless subscribers will slow and with that the market
position of CDMA.
THE JAPANESE ECONOMIC CRISIS
As China may be moving toward recession, Japan may be moving toward depression.
After eight years of stable malaise, the Japanese economy is drifting into crisis. With
this, the hailed Japanese adoption of CDMA/IS-95 looks increasingly problematic.
Exports, historically a primary economic prop, have been slashed by the Southeast
Asian financial collapse. Southeast Asia had accounted for 40 percent of Japan's trade.
Its financial collapse has thrown Japanese manufacturing into recession. Since
November, 1997, Japanese industrial production has dropped below the levels of 12
months earlier.
At the same time, Japanese consumer spending is falling. Unemployment is creeping up.
Most ominously, banks, a second primary economic prop, are teetering on insolvency.
With that, cheap money to fund corporate investment is disappearing.
As an outcome, we cannot envision either IDO or DDI, the two Japanese carriers
committed to building CDMA systems, proceeding with as vigorous a build out as
originally planned when they announced their CDMA commitment in early 1997. We
have no reason to doubt that DDI will launch service on July 14, as announced. DDI's
postponement of its originally scheduled launch centered on limited handset choices, not
a lack of commitment. However, we surmise that it is likely that DDI, as well as IDO,
will direct more infrastructure resources to enhancing the capacity of their current PDC
(Personal Digital Cellular) systems than either they or Motorola, their major contractor,
had envisioned a year ago. Our surmise has been inferentially supported by others.
THE PROFIT IMPERATIVES FOR TERMINAL MANUFACTURERS
CDMA's diminishing market position will have two effects on terminal manufacturers.
Those which ignore them do so at their competitive peril.
First, it will compel Samsung to compete even more relentlessly than otherwise would
have been the case. In contrast to Motorola and Nokia, CDMA/IS-95 is the only digital
technology that Samsung has. Given the Korean won's devaluation, and having no other
options than telecommunications, Samsung will price at any level needed to increase its
market share. Samsung's low pricing eventually will destroy whatever chances smaller
terminal manufacturers may have had to compete successfully.
Second, the slower build-out of 1900 MHz CDMA systems, particularly in the U.S., will
accelerate demand for "tri-mode" (dual-mode/dual-band) terminals. With less coverage,
all 1900 MHz CDMA carriers will be driven to distribute tri-mode terminals. PrimeCo
recognizes this. As of May, Sprint contended that they "will not be selling or supporting
tri-mode." However, as we have noted, their construction indicates only partial
build-out. Given this, they can only compete fully against the wider coverage of
established 800 MHz carriers by offering their subscribers tri-mode terminals. AT&T
Wireless Services, a proponent of TDMA/IS-136, recognizes this well. It has centered
its entire market position on its "tri-mode strategy."
This means that manufacturers which introduce tri-mode CDMA terminals early will
gain market advantage. Those which do not will lose, regardless of the quality of their
products. For terminal manufacturers and their silicon suppliers, tri-mode is now an
imperative.
[This analysis is drawn from our continuing observations of the international economy,
world wireless markets, and discussions with key industry sources.]
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Herschel Shosteck Associates, Ltd. announces its first Israel program:
"STRATEGIC WIRELESS COMMUNICATIONS SEMINAR: MARKET AND
TECHNOLOGY PROFIT OPPORTUNITIES"
8 November, 1998 -- Sheraton Tel Aviv -- Tel Aviv, Israel
A One-Day Seminar for Israel's Telecom High Tech Community Immediately prior to
Telecom Israel 1998
A Program Which Analyzes:
The Convergence of Wireless, Wireline, and the Internet, and Profit Opportunities for
Israel's High Tech Community
"The Israel Program" will evaluate emerging wireless telecommunications opportunities
world-wide. It will enable Israeli companies to focus their R&D on the most profitable
markets. It will enable non-Israeli companies to meet Israeli strategic partners.
Herschel Shosteck Associates, Ltd. provides:
-- An analysis and integration of long range, economic, market, and technology trends
facing wireless communications software and component suppliers, equipment
manufacturers and network operators
-- A forecast of market size and related technology transition issues through 2002
-- An analysis of the enabling technologies and strategic alliances which companies must
embrace to profit in the wireless world of the Twenty First Century
-- An independent, third party perspective detached from vendor, network operator, or
government interests.
The Israeli wireless marketplace ranks among the most competitive in the world.
Average cellular talk time in Israel is among the highest in the world. Wireless is
replacing wireline. Israeli companies are leading developments in wireless Internet and
satellite access. As such, the Israeli market and Israeli companies can serve as a model
for the world.
To compete successfully, Israeli companies must continue their efforts to transfer
technology from defense to commercial profitability. The Israel Program analyzes the
profit opportunities for Israeli companies in markets outside of Israel. It provides a
venue for non-Israeli companies to meet Israeli companies for strategic cooperation
and/or acquisition.
This program is designed for companies seeking to improve their competitive and profit
positions inside and outside of Israel.
Since 1981, Herschel Shosteck Associates, Ltd. have specialized in measuring,
analyzing, and forecasting cellular, PCS, and related wireless markets and technology
adoption. They are known internationally for their in-depth market and technology
research studies and for their strategic wireless communications seminars. In 1998,
under contract to the Israel Ministry of Communications, they analyzed and compared
the proposals submitted to the Ministry for the third Israeli cellular license. Mr. Ehud
Neiger, their Israeli associate, collaborated in this analysis.
This program will be presented by Dr Herschel Shosteck, President, Ms Jane Zweig,
Senior Vice President, Herschel Shosteck Associates, Ltd; and Geoff Varrall of RTT
Systems Ltd.
The course fee is $695 (plus $122 VAT). This includes course notes, breakfast,
luncheon, and an evening reception. To reserve your place at this seminar, please fill out
our online booking form at shosteck.com
For more information, please contact: Jane Zweig Senior Vice President of Marketing
Herschel Shosteck Associates, Ltd. Tel: 1 301 589 2259 Fax: 1 301 588 3311 email:
jzweig@shosteck.com shosteck.com
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HERSCHEL SHOSTECK ASSOCIATES, LTD. ANNOUNCES ...
"THE RISKS AND IMPLICATIONS OF WIRELESS APPLICATION PROTOCOL
(WAP)" A White Paper
This 44-page white paper examines the proposed Wireless Application Protocol (WAP),
which is an industry effort to create uniform protocols and languages for wireless
telephones which access the Internet and data services. The paper explains how WAP
works, the technological limitations of WAP, which organizations stand to benefit or
suffer as a result of its acceptance, and what overall effect it will have on the wireless
industry (including network operators, terminal manufacturers, and content developers)
if accepted.
The key value of this paper is to explain to the reader the real issues behind the WAP
proposal, where it fits in the coming spectrum of wireless data offerings, and to help
defuse much of the confusing hype that has been distributed regarding WAP.
Two sections analyze WAP in depth: "The Case for WAP," and "The Case Against
WAP," and a final section gives strategies for key wireless industry segments to
succeed in the coming Internet-influenced marketplace.
The paper is available for $500. You may order online via our website at
shosteck.com or contact Jane Zweig at
jzweig@shosteck.com, or call +1-301-589-2259, or fax +1-301-588-3311
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Ms. Jane Zweig Senior Vice President Herschel Shosteck Associates, Ltd. Tel: 1 301
589 2259 Fax: 1 301 588 3311 mailto: jzweig@shosteck.com ------------------------------- (c)
1998 Herschel Shosteck Associates, Ltd. This message may be reproduced without
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